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‘Unbundling of SSGC, SNGPL unviable’

Updated September 13, 2017

ISLAMABAD: Independent consultants have found the proposed unbundling of SSGC and SNGPL to negatively affect equity value, make the gas distribution companies unviable and increase financial pressure on the government and the consumers.

“Our findings are in line with World Bank’s presentation shared with us, which highlight the risk that unbundling of the gas distribution business could create companies which are not viable”, a senior official at the Petroleum Division quoted a final report of the KPMG Taseer Hadi & Co.

The KPMG was hired by the Sui Northern Gas Company Limited (SNGPL) on the advice of the federal government to analyse four options for unbundling of the two utilities as part of larger gas sector reforms.

Based on findings of the consultant, the official said the outcome of the unbundling appeared to be creation of a transmission company that would take away the large and bulk consumers like those in the industrial sector considered ‘cream’ for generating most of revenue for some of the prospective firms for example like Pakistan LNG Terminal Limited (PLTL), Global Energy of Turkey or ExxonMobil of USA.

This would leave behind mostly subsidised small and residential consumers for the four provincial distribution companies to serve who would either have to pay higher rates for the local gas in the absence of cross subsidy from industrial and bulk consumers or the government would need to provide higher subsidies.

Also, in view of negligible losses on the transmission network, the gas companies were aggregating their transmission and distribution losses in the range of 10-12 per cent, which could go beyond 25pc on distribution alone basis.

It was in this background, the official said, the provinces were resisting distribution companies on provincial lines and want bifurcation of provincial integrated gas companies with entire business of transmission, distribution and gas fields as well.

The consultant – KPMG – has held in its 130-page report that Option-1 of existing structure without unbundling the offered the best value of the share at about Rs185 for SNGPL. Option 2 involving one transmission company and four province-wise distribution companies (Discos) and option-3 involving one transmission and two North and South Discos at best had share value of about Rs170 each.

The option-4 demanded by most of the provinces involving four province-wise transmission and discos also share value of about Rs184. In all four options, the capital expenditure (Capex) based on current estimates of future expansions requirements have been estimated at Rs300-305bn over the next 10 years.

The consultant said it had not assumed operational expenditure as result of unbundling but assuming a 25pc increase in human resource expenditure the share value in case of unbundling was negatively affecting share value by Rs6 per share and tariff increases at 0.7pc over the 10 years.

The difference is value is because of double taxation accruing for transmission business (30pc) – first as transmission company and then as part of revenue of Disco (minimum tax).

The consultant also noted that on a standalone basis the KP Disco would become unviable due to high unaccounted for gas (UFG) if it was not given transmission business as well.

The Punjab-based Disco on the other hand will also suffer losses due to current tax structure, the consultant held. The petroleum ministry official explained that in case of unbundling, the Punjab-based industry and residential consumers would be worse off with implementation of Article 158 of the Constitution that requires fresh gas finds to be given preferential allocation to the provinces where it is produced.

As a consequence, Punjab would ultimately left with RLNG only with a price range of Rs900-1,000 compared to half that price in other provinces having locally produced gas and resultantly render Punjab based industry uncompetitive and relocation to other provinces or other countries. Its residential consumers, too, would purchase expensive LNG or the federal or provincial government would need to shoulder the bill.

The report has also hinted at the impact of higher consumers tariffs for provincial consumers, for example around 50pc in Balochistan, 17-20pc in KP and about 11pc in Punjab.

The consultant also noted that current practice of ring-fenced LNG pricing (without affecting local gas consumers) “may not be sustainable or viable when subject to domestic consumers, or when majority of gas is from imported gases (LNG, IP and TAPI etc). A review of tariff structure is inevitable due to projected shift in sales mix”.

It also highlighted that current tariff for domestic tariff was highly cross-subsidized by industrial consumer tariff. However, with declining local gas supplies from fiscal year 2021 of all local gas supplies are projected to be made to domestic consumers, effectively no cross subsidy from within the system.

It has been proposed that both SNGPL and SSGCL were public listed companies and hence the interest of shareholders should also be examined before taking a final decision and a balance between public benefit and public cost should also be taken into account before reaching a policy decision.

Published in Dawn, September 13th, 2017