Total amount of circular debt has increased to Rs 115 billion as no major payments have been made by the government during the first quarter of year 2010. "Although the issue of circular debt had been once resolved by the government through issuance of terms finance certificates (TFCs) last year, the energy companies still face liquidity constraint, affecting their business operation", analysts said.
"Though, the oil price shock seen in 2008 has come to an end, its repercussions are still being felt within the energy sector companies of Pakistan in the shape of a huge circular debt", Farhan Mahmood, an analyst at Topline Securities said. According to annual accounts of different companies, the size of this debt was close to Rs 90 billion as of December 2009.
He said that major losers of circular debt issue are refining companies, which are mainly PARCO and exploration and production (E&P) companies. The term of circular debt is usually been referred to the situation where one company's funds are not released by the other party thereby resulting into non-payment to its creditors.
If a company's receivable is rising, it tries not to pay, causing payable to increase. This is what is happening amongst energy firms in Pakistan since last two years. Moreover, while calculating the circular debt, only overdue amount should be taken instead of total receivables.
Farhan said that the circular debt crisis is generated mainly from WAPDA, which is the largest generator and supplier of electricity in the country with its share of 52 percent. As per the latest energy statistics, WAPDA produces 24 percent of the electricity by using gas and 17 percent through furnace oil (FO) as fuel. SSGC and SNGPL mainly supply gas, whereas PSO and other OMCs supply furnace oil directly to WAPDA. Moreover Wapda also purchases costly power from IPPs (like Hubco, Kapco, and few small IPPs).
He said whenever Wapda delay payments, the entire energy chain gets affected. As at December 2009, overdue amount to be paid by Wapda to gas marketing companies' was Rs 5-6bn, Rs 20-22 billion to PSO on direct FO sales and Rs 58 billion to power plants including Hubco, Kapco while the remaining to small IPPs. As far as the sector wise impact is concerned, he said, OMCs and gas marketing companies mostly pass on their receivables to E&P companies.
According to the latest accounts, 65-67 percent circular debt is absorbed by E&P whereas only OGDC's overdue receivables stand at Rs 42 billion. Similarly, refineries specially Pak Arab Refinery (PARCO) and BYCO both which processes almost 92 percent imported crude oil are the major losers.
On the other hand, 22 percent decline in drilling activities of E&P companies and decline in refinery capacity utilisation to below 80 percent during last one year have already taken its toll on indigenous production of energy resources. Moreover, with 2500MW power plants expected in next few years, this issue needs to be resolved before it magnifies this debt, Farhan said.
On the positive side, with consistent increase in power rates under the IMF program, it is believed energy companies will get timely payments. This will reduce the risk of further piling up of circular debt at the same pace. "According to our estimates, the electricity subsidy has gone down to Rs 2-3 billion per month against Rs 14-15 billion per month few months back", he said. However, the only risk would be the addition of expensive electricity into the national grid once these rental power plants become operational, he added.