ISLAMABAD, May 1: The government has decided to repeal the Marketing of Petroleum Products (Federal Control) Act 1974 to enable smooth transfer of Pakistan State Oil (PSO) to the strategic buyer when it is privatized by September this year.
The question whether the government would continue to retain a statute to the effect that “federal control of marketing in petroleum products is necessary in the public interest” is, however, yet to be decided by the cabinet.
Privatization Commission sources told Dawn that ministries of law, petroleum and privatization commission, in consultation with Securities and Exchange Commission of Pakistan and financial advisers on the PSO, were currently busy finalizing details of the ordinance to repeal the act before privatization.
The new law would also include compulsory stock obligation (CSO) whereby all marketing companies are bound to supply certain level of petroleum products to the defence as strategic reserves besides inclusion of a military surcharge on petroleum products for construction of military storages.
Under the 1974 Act, the PSO is defined as a “marketing company” and is subject to the government control. Section 6 and 7 of the act empowers the government to appoint the managing director and board of management of the company.
The managing director has unusually all the powers of the board while section 11 prevents the members of the board from refusing to adopt the balance sheet of the company.
The financial advisers have advised the government that continued exercise of these powers by the government after privatization would not be acceptable to a strategic investor in PSO because PSO is the only marketing company which falls within the powers of the 1974 act.
Once the 1974 Act is repealed, PSO would be run under normal company law.
While repealing the 1974 Act in entirety before the privatization, clear provisions would be incorporated within the ordinance protecting the directors from actions taken in good faith under the 1974 Act.
The law would ensure that provisions of the ordinance allow the current board of directors to continue in office until an election of directors can be held under normal companies ordinance principles and that each director holds office as an elected director.
When the strategic investors acquired the majority stake in the PSO, management control would be effected through the resignation of some of the directors and their replacement by representatives of the strategic investor. This would be done at the closing board meeting and recorded in the board minutes.
The repealing ordinance would provide that an election must be held within a specified time period preferably 6-12 months to ensure that privatization occurred and management control has transferred to the strategic investor before the election.
In view of the privatization of the PSO, the military authorities have already decided to raise their strategic reserves to 90-day period from existing 20 days, at locations where no private lorries would be allowed to go unlike the existing arrangement with the PSO.
The government directly holds 25.51 per cent shares in the PSO while around 36 per cent shares are owned by National Investment Trust (16.42 per cent), Investment Corporation of Pakistan (11.4 per cent), Habib Bank Limited (2.22 per cent), National Development Finance Corporation (1.68 per cent), State Life Insurance (3.27 per cent), besides less than one per cent by United Bank Limited, Regional Development Finance Corporation, Industrial Development Bank of Pakistan and Pakistan Insurance Corporation.
The only possible solution to the military concerns in the wake of the PSO privatization is to establish its own supply chains and instruct PSO and other oil marketing companies to deliver product to a central stocking point or several points from which the military would use its own transportation to deliver products to secret storage locations, said senior officials.
The military authorities had expressed the fear that after PSO privatization, supplies could be disrupted if payments for products were not made to the private companies in the case of emergency. Two mechanisms would be put in place to mitigate this concern. A military surcharge would be placed on POL retail prices to ensure that army always had sufficient funding to pay for its fuel requirements. Secondly, the government would also provide oil companies with evergreen guarantees under which they would be guaranteed payment by the government if the armed forces failed to pay for the supplies.
The official said that the government also had wide-ranging powers within the constitution of Pakistan to deal with emergency situations. In 1965 and 1971 Pak-India wars, two pieces of legislation placed restrictions on the sale, export or other disposal of petroleum products or their use or consumption in a form and manner as specified by the Chief Petroleum Officer or Area Rationing Authority.