The income of companies operating in the fuel and energy sector in Pakistan is invariably guaranteed by the government. Such companies are thus effectively immunized from the vagaries of market forces, enjoying the best of both worlds.

As far as the selling prices of their products are concerned, these benefit from the advantages of a market economy, being re-fixed periodically — in some cases every 15 days— in response to world market price changes. At the same time, they enjoy the security of a command economy insofar as their income is guaranteed at pre-determined levels, no matter how low their sales or how steep the decline in their selling prices

Most of these companies have obtained loans from the international finance institutions (IFI). Repayment of such loans is secured by the IFI through guarantee agreements executed with the government. Such agreements obligate the government, as guarantor, to fix and maintain energy prices at a sufficiently high level, one that enables these companies to earn the minimum return (before interest and taxation) guaranteed on their equity, or on their net fixed assets in operation. This is known popularly as EBIT i.e. earnings before interest and income taxes.

These companies are functioning in a highly protected environment. They can spend as much as they like, sell as little as they want, even neglect the increasing trend of line losses - secure in the knowledge that they will, at the end of the day, receive their minimum guaranteed return (MGR), no matter what. There still though exist avenues, even within this utopian dispensation, to maximise returns to shareholders, over and above the MGR, and thus enhance shareholder value.

The gas transmission and distribution companies in Pakistan are allowed an annual return (EBIT) of 17-17.5 per cent on their net fixed assets in operation. Out of this return these companies have to meet their interest expenses and the charge for income taxes. The balance is available for distribution among shareholders. Logically, any savings in interest and taxation charges will thus flow through directly to earnings available for distribution, and consequently enhance shareholders earnings correspondingly. Conversely any increase in these charges will have a directly adverse impact on earnings per share. Therefore the key to maximising shareholders’ returns and worth lies in the efficiency and innovation of the financial and treasury management of such concerns. However the bureaucracy’s ignorance of this basic truth of financial management led to substantial and recurring loss of earnings for the shareholders of both Sui Northern Gas Pipelines Ltd (SNGPL) and Sui Southern Gas Pipelines Ltd (SSGCL). Their sufferings were twofold. Not only did they fail to receive cash dividends throughout the better part of the nineties but, during this period, they also saw their share prices falling steadily to well below nominal values. How far were the bureaucrats in the ministry of petroleum and natural resources responsible for this dismal state of affairs?... Greatly and entirely.

A few days prior to vacating office in October 1993, the caretaker minister for petroleum & natural resources advised the director general, gas, (DGG) to improve bill delivery such that domestic consumers received their bills 3 to 4 days after their dispatch thereby allowing them 8 to 10 days for payment. Now there were several ways of achieving this objective. However the DGG chose the one that had the most damaging impact on not only the companies but also their shareholders the majority shareholder in both companies being the government itself.

However in his infinite wisdom the DGG directed both companies to increase the period allowed for payment of domestic bills from 15 to 21 days. Why he chose 21 days, and not 18 or 28 days is a mystery that has never been solved. Anyhow as a result of this decision not only did domestic bills become payable 6 days later but the issue of subsequent bills also was also delayed — by a further 6 days. Domestic receivables and sales thus had to be financed for an additional 12 days out of the companies’ own resources, since their gas suppliers had not allowed any corresponding extension in credit periods. This edict of the DGG led, not unsurprisingly, to liquidity problems for the companies as well as to an increase in financial charges.

The logical means of addressing the problem of bill delivery and achieving the objective specified by the caretaker minister would have been through the streamlining and improvement of the bill delivery process. Because of a lack of resources and an antediluvian system of working the postal authorities were becoming increasingly incapable of sorting and delivering the hundred of thousands of bills that were dumped every month at their doorsteps for express delivery. These factors combined with bureaucratic inertia and a general lack of commitment and efficiency on the part of postal employees led to serious and recurring delays in bill delivery. Very often bills were received by consumers 1 or 2 days before the due date, and sometimes even after the due date or not at all. From time to time one read newspaper reports of utility bills being found dumped in bulk in drains.

Utilities with enlightened management, able to resist bureaucratic pressures, had already tackled this problem by privatising bill delivery. The PTCL, was revitalised under the chairmanship of Naseem Mirza, a chartered accountant and former chairman of the ICI, During his tenure he introduced innovative measures that led not only to greater efficiency and consumer satisfaction but also to an increase in shareholder earnings. Among other things he privatized bill delivery.

Unfortunately the path chosen by the bureaucratic DGG had the opposite effect. Despite a 21 days credit period, consumers continued to receive bills one or two days before the due dates as in the past. On the other hand the shareholders were burdened with additional financial charges as a result of financing domestic accounts receivables and unbilled sales for an additional 12 days. When you consider that almost 50 per cent of the annual turnover of about Rs49 billion is accounted for by domestic consumers one can appreciate the magnitude of these additional financial charges.

During the mid to late nineties borrowing rates were extremely high. The government itself was accepting rates in excess of 17 per cent per annum in the periodic auctions of public debt. SNGPL was allowed to convert a short-term liability for development surcharge payable to the government into a medium-term loan carrying an interest rate of 17.5 per cent per annum. Short to medium term finance was being availed from banks and leasing companies at annual borrowing rates of up to 22 per cent.

Under such circumstances it was the height of folly to unilaterally extend the period of domestic credit. The energy companies were already caught in a vicious circular debt trap. The secretary, petroleum,would meet in monthly meetings of the heads of energy companies, where he would micro-manage the cash flows of these companies, deciding which company gets how much, from whom and when. The National Refinery would not have funds to clear import consignments because the PSO had not cleared its bills, while the PSO was illiquid owing to Wapda’s inability to pay. This merry-go-round of payables and receivables continued endlessly and frustratingly.

Some of the more enterprising companies took the matter into their own hands. The Pakistan Petroleum Ltd (PPL) and Pakistan Oilfields Ltd (POL) went to court seeking the liquidation of SNGPL on the grounds of its insolvency, in view of persistent default in settlement of bills running into hundreds of millions of rupees. However the government punished PPL for this perceived effrontery. It was nationalised. What greater punishment can there be than that? Therefore most companies preferred to depend on the delicate balancing act performed monthly by the secretary petroleum.

The additional financial burden borne annually by SNGPL and SSGCL as a result of the extension in domestic credit period was more than Rs50 million. In a rare display of initiative and resourcefulness, the SNGPL privatized bill delivery in late 1997. This led to dramatic improvements, enabling the credit period to be reduced from 21 days to 14 days. This had immediate and beneficial effects on the utility’s finances. Cash dividend payout resumed, and the price of the share recovered.

Some shareholders of the SNGPL pointed out the damage done by the ill-conceived decision of DGG imposed on the management of the SNGPL and the SSGCL, The chairman SNGPL acknowledged that this had resulted in loss of earning to shareholders but pleaded his helplessness in the face of instructions from the “competent authority.” By admitting so he was confirming what shareholders had all along suspected - that the board of directors of these public sector companies were mere rubber stamps.

The shareholders then took up the matter with the chairman, Securities and Exchange Commission (SECP). However he was even more bureaucratic preferring to seek refuge behind some archaic sets of rules and procedures. Where can the poor small shareholder go for redressal of grievances? The sooner these companies are privatized the better.