ISLAMABAD, April 25: The government has decided to increase the rate of return to gas utilities — SNGPL and SSGC — and revalue their assets to maximise privatization proceeds and private sector investment in gas infrastructure.

A senior government official told Dawn that the decision has been taken on the recommendation of the World Bank that would also finance a study for the assets revaluation of gas utilities and updating the financial targets according to market rates.

Sui Northern Gas Pipelines Limited (SNGPL) and Sui Southern Gas Company (SSGC) are currently operating on the basis of a fixed rate of return on net assets, before interest charges and taxes. Attainment of the stipulated profits is for all purposes guaranteed through adjustments of the Gas Development Surcharge (GDS), thus lacking the financial incentives to improve operational efficiency.

Simultaneously, a rolling indicative gas master plan would be prepared and updated annually. An international independent consultant firm would be hired by end of May this year to complete the task of financial targets and revaluation of assets.

This would enable the utilities to raise capital, both debt and equity, consistent with the expectations of investors in the Karachi Stock Exchange, of international lenders and international public utilities practices. The consultant firm would also suggest steps to protect consumers of natural gas against price gauging by monopoly suppliers. The study would also examine the structure of tariffs and allocation of tariffs to different categories of consumers.

The official said the performance of both the companies has improved in the last fiscal year on account of general decline in interest rates and in case of SNGPL following rescheduling of short term liabilities and an offsetting exercise involving trade debtors and creditors.

Mainly because of this reason, both companies declared dividends for the first time in a decade, approximately 15 per cent return on paid-up capital, which is, nevertheless, low given the prevailing capital market conditions, said the official.

The government and the World Bank agreed that the current stipulated returns, 17.5 per cent on net assets for SNGPL and 17 per cent for SSGC, were low.

It has, therefore, been decided to update on top priority the financial objectives and stipulated returns the two utilities were entitled to. These measures would be made part of the gas tariff rationalization plan because increase in rate of return to companies would also involve sizeable increase in consumer gas tariff.

This, policy makers believe, would provide incentives to the utilities to improve their efficiency and for the investors to invest in the gas infrastructure besides increased proceeds through privatization.

At present, the infrastructure is not sufficient particularly in winter season to deliver gas to consumers resulting in load-shedding equivalent to 300 mmcfd for SNGPL and 150 mmcfd for SSGC largely at the expense of the power sector at a high cost to the national economy.

Both the utilities have embarked on a short term system development to bring within five years additional one BCFD gas to the system. This is, however, being financed 75 per cent through high cost market and bank borrowing and 25 per cent on internal cash generation.

The study would cover optimization of the development programme in relation to the location of gas reserves, the location of the gas market, the quality of gas, the benefits of the gas storage, designing pipelines for peak requirements or seasonal replacement of natural gas in power plants with fuel oil and the connection points for possible gas imports.