SPY EYES

The worst fears and apprehensions of the nation are finding the force of logic as PSO’s creditworthiness in the international market is becoming questionable. News of the state-owned enterprise struggling to come out of its sad pecuniary state has attracted the attention of many observers of the economic scene. The significance of PSO to Pakistan cannot be stressed enough; it is the driving force behind the economy. A potential dry-out could shake up the entire system and leave the economy limbless and utterly hopeless. As PSO defaults on its L/C payments and that, too for more than five times in the past few days, it continues to pose complex challenges for the country’s future.

Holding growth hostage and causing problems in the payment of dues to foreign suppliers, circular debt stands at a whopping Rs872.41 billion. The supply chain, thus, suffers at the hands of an acute, and chronic shortage of cash which has caused frequent, prolonged electricity outages in urban and rural centers of the country. The risk of possible paralysis of the entire system looms large. It is an equally distressing reality that the previous government used the entire CSF of $1.1 billion to extend power subsidies to consumers. The action qualifies as a fire-fighting maneuver at best and came at a huge opportunity cost of solving the core issue. Yet, there was method to this madness according to popular analysis. The tactic was aimed at keeping the system afloat till the elections. As a new government will come into power and inherit a plethora of economic worries, it is from then on that the real battle to keep crisis at bay will start.

A dismal indicator of the future is the value of PSO’s receivables exceeding Rs 126.803 billion. On April 9, the receivable break-down was as follows: WAPDA- Rs46.347 billion, HUBCO – Rs53.093 billion, KAPCO- Rs10.67 billion, PIA- Rs1.552 billion, KESC- Rs12.064 billion, IPPs owed Rs1.146 billion and Pakistan Railways- Rs1.303 billion. The energy sector thus posed the greatest problem to the oil marketing company and things are bound to become worse as temperatures escalate. The problems of corruption, overstaffing, free electricity to WAPDA employees, poor collection of bills, inadequate maintenance and upkeep of machinery, inefficient government owned generation and distribution companies have already played their part in worsening the already troublesome situation.

The scenario continues to get grimmer as cash reserves grow thinner. Unsustainable superficial measures may suffice to give the impression of improvement and feed the nation’s naïveté, but do nothing to help the situation. With the government giving a subsidy of Rs. 3.10 per unit of electricity, it anything but serves as a means to combat the woes of an approaching economic doom. The situation will become more aggravated as the subsidies are expected to reach a value of Rs 291 billion by end June against allocation of Rs 185 billion for the current financial year.

While it is true that PSO earned profits amounting to Rs9.32 billion (July 2012-March 2013) making for a 3.82% increase when compared to previous year’s statistics and that this led investors to earn a profit of up to Rs37.72 for every share in the company, the belief that the crisis is not nearly over has gained currency. The letter written by the Deutsche Bank is one reason to ponder over the problems that have arisen as a result of late and irregular payments. The credibility of the organization in the international market is at stake and losing it would prove to be fatal.

Currently, the overall growth in profitability stands at a modest 3.82% and is attributed to a smaller penal income. Topline Securities opines that with reference to the humble penal income, there are two possibilities. The first is that the payment from debtors to the PSO has shrunken and the second assumption is that there has been significant progress in taming the burgeoning circular debt. The 32% drop in financial charges for the period also follows the same narrative indicating that the company owes less to its suppliers, hence incurring lower penalties on late payments.

For a nation that ties its hopes to the ‘we can’ rhetoric, the statements of MD Pakistan State Oil, Mr. Yahya Mir give reason for optimism. That the success thus far in bringing down receivables to Rs110 billion will become a withstanding trend and the cost-cutting measures will save PSO at least Rs8-9 billion annually should serve as a sigh of relief. PSO according to the MD is so ‘interwoven’ into the fabric of the economy of Pakistan that its downfall can cause the entire system to come tumbling down like a deck of cards. In addition to a crisis in the energy sector, its downfall might harm Pakistan’s profitable banking industry which has helped finance its operations whenever the need arose. Therefore, in this doom and gloom there is some kind of realization on part of the concerned authorities that the issue at hand is grave and requires immediate attention. Additionally, the NAB drive against electricity bill defaulters is also an encouraging development- at least in spirit.

With this in mind, it will become important for the elected government to call for restructuring of the energy policy with a reduced dependence on oil- a commodity that makes for a significant part of the country’s import bill. The portfolio mix of Pakistan’s sources of energy generation, while an interesting debate on its own, is relevant in to the context. Owing to myopic policies of yester-years, the reliance on oil for energy generation increased substantially leaving the country dependent on the commodity for generation of around 40% of its electricity from oil- a statistic which is much higher than other countries. For the sake of comparison, one can look towards the neighbor to the east- India. The country generates only 3% of its electricity from this means. Bangladesh, another national favorite for comparison, generates only 5% of its electricity by oil. OGDCL has forecasted that the national oil reserves will be exhausted by 2025.While it is important to understand the impact of the follies of the past, equally important is the understanding that little if anything has ever has come out of crying over spilt milk.

In the long run, reduced dependence on oil that will come about as a change in the energy portfolio can also significantly lower the import bill. As of now, Pakistan imports 6 million tons of fuel oil, 3.5 million tons of diesel, 1.5 million tons of petrol and 0.5 million tons of jet fuel every year.  Moreover, Pakistan should also aim to establish more oil refineries at home. Recently, an MOU was signed with the Government of Khyber-Pakhtunkhwa for the establishment of a state-of-the-art oil refinery, which is expected to be commissioned by 2016-17. The refinery will be capable of produced 40,000 barrels per day of refined oil. It will save lower the import bill and save additional costs related to transportation for instance. The next government should also focus on bringing efficiency and order to the organization with a greater emphasis on implementation as that is the key to bringing about any change. The policy should be framed with a long-term view of national interest. Pricing policies can be revisited and some, if not all, subsidies can be removed as this is still a sensitive issue in the country.

The economy of Pakistan that is already in a limbo, caught between aspirations and despair will not be able to withstand a blow to PSO. Multiple industries will be affected as the issue continues to gain gravity. Currently, Moody’s rating of Pakistan is Caa1 for sovereign debt and the outlook is listed as negative which raises serious concerns about the future. The situation demands that whosoever is entrusted with the responsibility of ruling over the masses as a result of the upcoming elections demonstrate the kind of political will to tackle the issue through action. History will not be kind to us for the mere reason that the democratic process was a new experience.  If we don’t rise to the challenge, the ghost of strategic mistakes will continue to haunt us for years to come.

SPEARHEAD RESEARCH