New plan pitched to create fiscal space for gasping energy entities

As the petroleum sector circular debt stands at a whopping Rs1.6 trillion or 3.35 percent of GDP, the government has another plan to create fiscal breathing space for the entities gasping for cash, according to official documents.

With petroleum sector circular debt hovering over Rs1.6 trillion including Rs1.1 trillion principal plus Rs500 billion late payment surcharge, Ministry of Energy has started to deliberate upon a new plan to reduce liquidity problem of the companies trapped in the vicious debt cycle, according to official correspondence on reforms pertaining to various strategic workstreams being undertaken by the incumbent government.

Intercorporate circular debt has been defined as lack of enough cash flow in the system to fulfill financial liabilities, creating ‘circular debt’ issue.

In other words, the ‘circular debt’ in energy supply chain refers to the cash flow shortfall incurred from the delayed/non-payment of obligations by consumers, upstream, midstream and downstream/distribution companies and the government.

According to a report, the energy sector circular debt, which includes financial liabilities of power and petroleum sectors combined, continues to grow in size over the years, rising from Rs161 billion or 1.6 percent of GDP in 2008, to Rs2.15 trillion or 5.2 percent of GDP in June 2020.

Turning to petroleum sector circular debt, despite present government’s several efforts to resolve this lingering issue, there has been no tangible improvement as far as reducing the size of circular debt.

This fact has been admitted in a correspondence between the Special Assistant to the Prime Minister on Energy and the Minister of Energy. According to a letter dated July 23, 2021, it is stated that: “whilst there’s enough focus on the Power Sector’s Circular Debt stock & flow, last year’s gross figure for the Petroleum Sector was also c. Rs1600b (Rs1,100b principal + Rs500m late payment surcharge) affecting all companies across the value chain i.e. Oil and Gas Development Company (OGDC), Pakistan Petroleum Limited (PPL), Mari, 5x Oil Refineries, Pakistan State Oil (PSO), Pakistan LNG Limited (PLL), Sui Northern Gas Pipelines Ltd (SNGPL), Sui Southern Gas Company Ltd (SSGC), etc”.

“This has a direct and choking impact on the working capital/liquidity flow in the energy sector that was again evident recently on the fuel supply chain,” the document further said.

While dilating upon some of the immediate remedial measures, it further said, “There are some specific propositions to create financial headroom on the balance sheet of various energy companies, such as: (a) clearing SNGPL & SSGC’s Rs500+ billion outstanding aggregate liabilities toward OGDC and PPL, through the issuance of public debt and ploughing back most of it to GOP via dividends; (b) swapping PSO’s Rs100+ billion receivables from Guddu & Nandipur power plants with majority equity, etc”.

Inefficiency and corruption have also been the partly blamed for rising tendency of circular debt which continued to impede development of the national economy for about a decade now.

Out of petroleum sector circular debt, it is worth mentioning here that gas sector circular debt has relatively been a new phenomena as it started to build up following initiation of LNG (Liquefied Natural Gas) imports since 2015.

According to a report, the circular debt in the gas sector has grown to more than Rs532 billion as the twin Sui companies fail to make payments to their suppliers on account of poor cash flows.

Moreover, the official correspondence also mentions several other measures relating to proposed Strategic Workstreams in the energy sector that have been termed beyond the usual firefighting.

It noted that the recent challenges in power and gas supply have again highlighted the urgent need for holistic and structural reforms in the energy sector.

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