ISLAMABAD, March 8: The government is considering to empower oil and gas companies under the law to discontinue supplies to fuel consumers including power companies and utilities if they fail to make payments in time.

Official sources told Dawn the proposal has come from the World Bank in view of a continuous inter-corporate circular debt in the petroleum sector that kept balance sheets of various oil and gas companies in the red for over a decade now.

This not only hampered investment and expansion of these companies but was seen as major hurdle to the privatization of oil and gas units. Not only that huge sums were not being paid mainly by the power utilities, the oil and gas companies had to borrow short-term loans from the commercial banks to meet daily cash requirements that further eroded their liquidity due to higher interest rates.

The Bank has instructed the government that if it wanted to come to the rescue of defaulting consumers it should pay the price from its own budget and not to cut down on shareholder’s return and companies’ cash flow.

“If there is any implicit or explicit instruction from the government to maintain supplies to these entities despite non-payment, the government would have to make payments to the suppliers on behalf of the defaulting entities,” said the World Bank directive.

The inter-corporate debt at one stage was touching Rs100 billion mark but came down to around Rs30 billion early this year mainly through book adjustments, interest write-offs and money injection by the government.

Official sources said that a recent World Bank mission on petroleum sector had asked the government not to interfere into the commercial matters of the oil and gas companies and let them disconnect oil and gas supplies for default in payment. The mission visited Pakistan last month.

A commitment from the government is not enough but a law should be put in place that restrict all future governments from interference in view of the emerging private energy sector through corporatization and privatization process, said a senior government official.

Although the fuel supply agreements (FSAs) between the supplier and consumers have disconnection provisions, Wapda and KESC have been defaulting in payments, sometimes ranging Rs50-60 billion and fuel supply was never interrupted due to top level government intervention.

The bank has advised the government last month that “the question of arrears was purely a commercial matter which should be handled by the companies strictly in accordance with provisions of the supply contract,” an official said.

“In particular, if some entities are not paying for oil and gas supplies, there should be no bar on the suppliers from discontinuing supplies or disconnecting such consumers, including KESC and Wapda.”