Gas sector shortcomings

On July 01, 2019, the first day of the fiscal year 2019-20, gas prices were raised by 198 percent, a prior action under the International Monetary Fund (IMF) programme as noted in the Letter of Intent (LoI) submitted by the economic team leaders Dr Hafeez Sheikh, Advisor to the Prime Minister on Finance and Dr Reza Baqir, Governor State Bank of Pakistan.

The LoI also committed the two gas utilities to prepare an 'Unaccounted for Gas' (UFG) reduction plan with the objective of bringing down the 13 percent commercial and technical losses, significantly above the benchmark, for approval by end September 2019 - plans that were to introduce 30 monitoring indicators, including those on theft control and compliance with industry standards. The objective of such a massive raise in rates, over and above what was recommended by Oil and Gas Regulatory Authority (Ogra), was to ensure that revenue would rise by 397 billion rupees, narrowing the shortfall to 144 billion rupees for 2019-20 given that total revenue requirement for the year were estimated at 541 billion rupees.

The plans were approved by the Economic Coordination Committee by October 2019 though only a couple of monitoring indicators were shared with the public including (i) SSGCL's UFG reduction target of 9.55 percent which in financial terms came to 20 billion rupees (1.87 percent in the current year, 2.46 percent next year and 2.87 percent in the third year). Additionally, SSGCL would introduce fixed billing gas tariff for Balochistan in 2020-21 which would help reduce the UFG losses by an additional 2.35 percent; and (ii) SNGPL target was to reduce the losses by 1.5 percent in the current year and by 1.25 percent for the next two years to increase revenue by 9 billion rupees in three years.

Mid-December 2019 Ogra recommended an increase in tariffs for gas consumers by up to 221 percent with effect from 1 January, 2020, to generate about 40 billion rupee additional revenue required by the two gas utilities - 13 percent raise for SSGCL consumers (82 rupees per unit) to generate 30 billion rupees and 8 percent for SNGPL consumers (57 rupees per unit) to generate 8 billion rupees. The government has yet to notify these recommended tariffs for political reasons though this deferral is clearly violative of the economic team leaders' pledge to the IMF under its ongoing programme that it would timely update gas tariffs.

Reports indicate that instead of raising rates, the government is considering reducing the rate of return on gas utilities from the existing 17.5 percent to 15 percent - a reduction that will without doubt speedily pile up arrears once again given the high cost of borrowing by the sector due to the prevailing discount rate of 13.25 percent. At the same time Gas Infrastructure Development Cess (GIDC), levied during the Zardari-led government to generate funds to meet gas supply and demand shortfall and for gas projects like Turkmenistan, Afghanistan, Pakistan and India (TAPI), Iran-Pakistan gas pipeline and other LNG projects; however, the matter remains under litigation. Be that as it may, some of the litigant companies collected GIDC but did not forward it to the treasury and the PTI administration reportedly agreed to waive off half of the 400 billion rupees collected by these companies - a decision that was withdrawn after public outrage as the companies had no legal right to retain GIDC.

The pledges made to the IMF remain unmet with respect to the gas sector and disturbingly there is little evidence of an improvement in governance which could have resolved the revenue shortfall of the two gas companies. Instead the options supported by the government remain the same as with previous administrations - raise rates and/or manipulate policies that would raise the circular debt of the sector thereby deferring the crisis to the next time Ogra recommends a tariff raise.