September 15, 2003	Monday	Rajab 17, 1424

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ISLAMABAD, Sept 14: The World Bank has asked the government to make public billions of rupees worth of direct and contingent liabilities which pose a serious risk to the economy.

In a recent communication to the government, the bank also criticized the government for not providing it with the details of such liabilities despite repeated requests which, it said, was against the principles of transparency.

The government had not made any attempt to quantify its contingent liabilities in the event of performance default, the bank said.

The direct explicit (public debt) and implicit liabilities like pension and other long-term liabilities are well recognized by the government but the explicit and implicit contingent liabilities like obligations of state-owned institutions, insurance, foreign credit obligation and market failures are usually outside the government budgetary system. These also expose the government to risks in view of discounted bids in the privatization process.

The bank has identified 15 areas in the oil and gas sector where these contingent liabilities were unquantified and posed a threat to the national economy, and said four such areas have a financial impact of over Rs33 billion per annum.

It said the assumption of contingent liabilities had a number of nefarious consequences both in terms of public perception and economic impact as these lacked transparency, posed undue financial risk in relation to commercial outcomes and reduced efficiency incentives for investors.

There was very little appreciation for the level of contingent liabilities of the oil and gas sector, which easily ran in several billion rupees. There was, therefore, an urgent need to make a full inventory of these liabilities, including compilation of necessary documentation and legal documents, it added.

The bank communication said it would be important to quantify these liabilities along with an assessment of the probability of occurrence of different adverse events. Options for the discharge or liquidation of these liabilities were needed to be investigated and decisions taken thereupon, the bank said.

The World Bank also asked the government to refrain in future from providing guaranteed returns, or requiring state-owned entities to enter into non-commercial and non-competitive arrangement. It should also investigate avenues for phasing out such arrangements wherever these exist at present.

The bank said there was Rs8 billion direct annual subsidy to the Pak-Arab Refinery Limited, Rs2 billion in the shape of customs duty on four products, Rs9 billion in the shape of subsidised gas price for household consumers and Rs14 billion commitment on Mari gas prices.

The government has guaranteed at least four million tons of throughput with the Fauji Oil Terminal Company (Fotco) for 30 years up to 2022. It has also guaranteed 25 per cent return on equity to Parco up to 2008 which has a total paid-up capital of Rs9.44 billion.

Some other such contingent liabilities which have not been quantified in financial terms are as follows: 1.5 million tons of oil supply guarantee to Asia-Pipelines Limited for transport of furnace oil to Hubco at $12.12 per ton pipeline tariff up to 2019; a 4.5 million tons of throughput guarantee for two years and five million tons for the next six years with the white oil pipeline plan.

Similarly, government guarantees for meeting the Pakistan State Oil’s obligations on payment of pipeline tariff and pipeline reservation charge for fuel supplies to all the Independent Power Producers including the Kot Addu Power Company for up to 30 years have not been quantified.

Moreover, guaranteed return arrangements with the Mari Gas Company for 30-45 per cent return on shareholders funds, 17.5 per cent and 17 per cent guaranteed return on assets to the Sui Northern and the Sui Southern Gas companies, have not been quantified.

Non-commercial arrangements made by the government included a contract for transportation of imported crude oil between refineries and the Pakistan National Shipping Corporation, guaranteed and fixed bowzer tariff with the National Logistic Cell for domestic crude transport and reimbursement of the Attock Refinery Limited’s crude transport cost from freight pool and six to ten per cent customs duty protection on four petroleum products to National, Attock and Pakistan Refineries.

Similar potential environment clean-up and safety-related liabilities include potential cost of clean-up by OGDCL, PPL, Parco, NRL and MGCL in the event of enforcement of environmental standards on new and private sector owners, and potential damages to be claimed from PSO, SNGPL, SSGCL, Pakistan Railways and NLC in the event of a major mishap. The bank is of the view that the government should take immediate measures to ensure that state-owned entities comply with environmental and safety standards so that there is no liabilities in this respect when these companies are privatized.