Supply-chain breakdown

Published January 19, 2015
People are seen using their precious time to stand in queues to buy petrol as they face shortage in the provincial capital. —Online
People are seen using their precious time to stand in queues to buy petrol as they face shortage in the provincial capital. —Online

The supply-chain breakdown in the fuel sector has a striking similarity with the one during the 1965 war, when India had blocked Pakistan’s oil import routes. The situation is unlikely to get normal in two months, except for some cyclical improvements.

Queues outside petrol pumps are long and sales are being rationed not only by retailers, but also by oil marketing companies (OMCs) and refineries.

Pakistan State Oil (PSO) has been flagging the looming crisis since last June on a monthly basis, and sometimes on a daily basis. There are monthly product review meetings where all oil companies and refineries and the ministry of petroleum are represented, and its deliberations are regularly shared with the finance minister and the prime minister’s secretariat. The prime minister and the finance minister have regularly been holding meetings on energy.

The crisis has developed slowly and over a period of months. The payment problems were there as circular debt emerged from early last year, but it could be true only in the case of furnace oil. The circular debt should not be blamed for drying out transport fuels or petroleum products other than furnace oil. The products are sold and purchased on cash and are mostly produced locally. Crude, too, is bought in long-term supply contracts.

Of the roughly 4m tonnes of petrol consumed per annum, almost 30pc is imported by PSO, and the rest is produced locally. And half of the 7m tonnes of diesel consumed is produced locally, and the remaining is imported.

Overall petrol consumption has increased by 18pc in the first six months of the current fiscal year over the same period last year, mainly because of non-availability of CNG in Punjab. Even if PSO failed to import petrol due to a cancellation of its letters of credit (LC), why didn’t the other companies and refineries keep pace with the growth in demand?


Now, all banks have stopped opening LCs for PSO


The fact is that all refineries, OMCs and retailers wanted to avoid inventory losses as international oil prices dropped.

Why didn’t anybody at the petroleum ministry, finance ministry or Ogra realise that the OMCs were in breach of their licencing obligation to maintain at least 21-35 days of mandatory reserves? What action has been taken for the breach? And the increase in margins and deemed duties since 2000 were linked to increased storage infrastructure. Where are the country’s strategic reserves?

With 67pc overall market share, PSO is at the centre of the problem right now.

Soon after coming into power, the PML-N replaced PSO’s managing director with Amjad Pervaiz Janjua as acting managing director for 90 days, from July 29, 2013. Mr Janjua had neither the experience nor the expertise to run an organisation of this magnitude. He was earlier rejected for a junior post in PSO, but continues to run the country’s largest company by revenue.

Since July 2013, the power sector’s circular debt has increased to Rs222bn from Rs49bn, while total receivables are standing at Rs235bn despite then Rs25bn payment a few days ago. Receivables from PIA have risen from Rs1bn to Rs13bn.

Meanwhile, the company is losing market share. In high speed diesel, it lost sales of 200,000 tonnes during July-December 2014 over the same period last year, and suffered a 10pc drop in market share. In petrol, it lost 2pc market share.

The company has defaulted on loans from local banks, and all banks have now stopped doing business with it. Its borrowing has touched a peak of Rs284bn. The non-receipt of funds resulted in defaults on local as well as international LC payments. Since October 2014, despite SOS calls, no effort was made to resolve the issue by the water and power, petroleum and finance ministries.

As a result, PSO defaulted on Rs19.6bn in October, Rs29.6bn in November and Rs46bn in December 2014. Once it did not have the money to pay, a Pakistani bank had to pay the LC advising bank (international bank). The local bank is charging exorbitant interest on the defaulted amount till it is cleared; the cost is to be absorbed by PSO.

Furthermore, local banks refuse to open LCs for PSO. So far, Citi Bank, NIB, Samba and Habib Metropolitan Bank (HMB) are reluctant to open LCs in favour of the OMC. Some of these banks are small and do not have the capacity to pay international banks when PSO is unable to pay them. Also, the banks, at times, resort to delaying tactics by raising trivial discrepancies.

Recently, PSO was unable to pay HMB, which raised minor discrepancies. Standard Chartered Singapore threatened to take the matter to international court. However, the situation was averted as PSO accepted those discrepancies and HMB was compelled to pay SCB Singapore.

PSO’s fuel stocks have already been exhausted and the next shipment is due on January 25. A repeat of the situation in the summer could be disastrous, and it could not be ruled out.

Published in Dawn, Economic & Business, January 19th , 2015

On a mobile phone? Get the Dawn Mobile App: Apple Store | Google Play

Opinion

Editorial

Judiciary’s SOS
Updated 28 Mar, 2024

Judiciary’s SOS

The ball is now in CJP Isa’s court, and he will feel pressure to take action.
Data protection
28 Mar, 2024

Data protection

WHAT do we want? Data protection laws. When do we want them? Immediately. Without delay, if we are to prevent ...
Selling humans
28 Mar, 2024

Selling humans

HUMAN traders feed off economic distress; they peddle promises of a better life to the impoverished who, mired in...
New terror wave
Updated 27 Mar, 2024

New terror wave

The time has come for decisive government action against militancy.
Development costs
27 Mar, 2024

Development costs

A HEFTY escalation of 30pc in the cost of ongoing federal development schemes is one of the many decisions where the...
Aitchison controversy
Updated 27 Mar, 2024

Aitchison controversy

It is hoped that higher authorities realise that politics and nepotism have no place in schools.