DO a simple exercise. Go to the search bar of any major Pakistani newspaper and enter the search terms ‘PSO’ and ‘default’. A list of similar sounding headlines will come up.
If you do the exercise in this newspaper, for example, this is what you’ll find. “PSOs liquidity crunch deepens” is one headline in 2008. “Petrol shortage looms as PSO faces default” is another in 2010. “PSO faces default on Rs12bn LC” says a headline in 2009, and “PSO seeks Rs40bn to avoid default” in 2011. “Govt to dole out Rs60bn to avoid default” goes another in 2011, and “PSO again facing payment default” — this one from May 2013, only weeks before the new government was about to be sworn in.
Shortly after coming into power, the PML-N government conducted what was at the time the largest retirement of the circular debt ever done until then. In one go, they paid out close to Rs500bn to the power producers, and as the funds worked their way through the chain, something like Rs235bn landed up on the books of the state-owned oil marketing company, significantly easing its liquidity crisis and getting fuel imports started again.
The energy sector was running on empty at the start of the year even as the water & power ministry sought increases in fuel supplies to some plants.
Remember those days? The blackouts had become unbearable, even by Pakistan standards, exceeding 20 hours per day in major metropolitan centres as stocks of furnace oil ran dry and the interim government was unable to make decisions like diversion of gas to power plants to keep them running.
That lasted for little more than a year. In August of 2014, you’ll find the same headlines reappearing, and by October, the company was threatening to halt fuel deliveries to PIA because Rs12bn worth of payments on previous fuel deliveries was outstanding. Then in November, this headline appears “PSO receivables touch historic high” as the total amount outstanding begins to reach Rs238bn, higher than it has ever been before.
By December, the company lost all access to supplier credit and banks began to refuse all loans, meaning it became unable to open L/Cs to pay for oil shipments. All existing tenders were cancelled. “PSO has exhausted its borrowing limits, defaulted on payment of Rs46bn against the L/Cs and its L/C lines against Rs93bn have been consequently blocked” says a letter sent by the company’s managing director to the secretary petroleum on Dec 24. It ends by asking for urgent release of Rs68bn to “avoid an imminent supply chain breakdown”.
That supply chain breakdown came less than a week later. On Dec 30, the managing director again wrote to the secretary petroleum, saying the company’s receivables “now stand at Rs198bn, PSO has also incurred penalties of approx Rs 250mn (Oct to Dec 2014) on account of delayed payments of Rs50bn to banks, USD 1.8mn as demurrages (July to Nov 2014) and suppliers claims of about USD 6.4mn for damages. In view of the above situation PSO is not able to open further LCs as its credit limits stand exhausted and the LC lines of Rs110bn are blocked. PSO is therefore left with no option but to freeze its business with the power sector once current supplies have been exhausted”.
The company warned the secretaries petroleum, and water and power that existing tenders for cargoes of furnace oil “cannot be followed up”. On Jan 1, Reuters ran a report, quoting oil traders in Singapore, saying PSO has reduced its orders for low sulphur furnace oil deliveries in the February and March period to 120,000 tons, down from 715,000 tons in the same period last year. High sulphur deliveries, which are the mainstay of our power sector, were not placed at all for the first quarter. The current tender for December was deferred till January.
So the power sector was running on empty at the start of the new year, running down existing stocks even as the water and power ministry sought increases in fuel supplies to some plants. Kapco’s fuel shipments were requested to be taken from 1,500MT to 4,500MT per day, while Hubco was to be taken from 5,000MT to 7,000MT. At the enhanced supply level, stocks would last less than two weeks for both plants, the PSO MD warned on Dec 30.
Moreover, since the company “cannot selectively honour” only those payments related to retail fuels, such as petrol and diesel, while defaulting on payments of power sector fuels like furnace oil, the company further warned that continued default on its obligations “may attract the cross default clauses of our financing agreements”, leading to “further restrictions on PSO’s financing lines”.
Today, the resultant fuel shortages are already showing up at the pumps. Furnace oil stocks are still larger than those of retail fuels, so the power sector still has a few days left before large-scale shutdowns materialise. But default from the power sector is hampering the ability to arrange smooth supply of retail fuels as well, an example of how the circular debt can cross over into areas other than power and begin to shut the country down.
When the government retired the circular debt upon coming into power in 2013, they said that “we must do all that is needed to stop its recurrence in the future”. Those were the words of Finance Minister Ishaq Dar in his first budget speech, in which he described the retirement exercise as “a historic step”.
Well, it looks like history is repeating itself. Today, the total circular debt is approaching Rs600bn, higher than it was at that time. The State Bank says this will have to be retired before the end of the fiscal year, although it has not been budgeted for. The liquidity crisis within PSO, is worse than it was in the days leading up to the retirement exercise. It’s not clear to me what can be done now, but the party that prided itself on its economic credentials is proving far smaller than its own rhetoric.
The writer is a member of staff.
Published in Dawn, January 15th, 2015