UFG losses; brokers gains

While the country is engulfed in a political crisis, the rumour mill is grinding another spicy story; the Ogra is busy finalizing the review petition of the gas distribution companies. The distributors plea is to allow them further leeway in the Unaccounted for Gas (UFG) losses, which, simply put, means requesting to be more inefficient than they already are.
The noble idea behind the expected upwards revision of UFG losses is based on aligning the rules with the ground realities in the country. And the ground reality, bluntly put, is that the gas discos are extremely inefficient. Well placed sources in the industry claim that the Ogra has already decided on the matter and that it will raise the inefficiency bar to 7 percent from the existing 5 percent.
"It is a step backwards. People at Ogra are extremely inefficient and incompetent. They have no control over the gas producers, which worsens the problem," Farooq Rehmatullah, a renowned industry expert told BR Research.
Rehmatullah adds that the companies should make huge investments to address the situation, arguing that the burden eventually falls on the consumer. "Instead of reforming, these companies indulge in political hiring, which leads to inefficiency that is eventually paid for by the consumer" said Rehmatullah.
His argument makes sense as the international benchmarks for UFG losses are as low as 0.02 percent, where the Ogra is allowing more space for inefficiencies instead of tightening the screw.
Recall that in July 2010, the World Bank was believed to be working on the Natural Gas Production Enhancement and Efficacy Project to address the issue of discos UFG losses. The $250 million plan is aimed at reducing the UFG losses by considerable margins in the next three years. What then explains the upward revision to 7 percent; perhaps the notion that "everyone should have an equal right to corruption".
It was not so long ago when the management of SSGC had brought the UFG losses down to 6 percent, which have again swelled to more than 8 percent in the current regime. "There is massive theft and political patronage within the discos that make matters look worse than what it should be", Munawar Baseer, former MD SSGC told BR Research.
It must be noted that 78 percent of the gas SSGC distributes is consumed in Karachi which has a low UFG rate, 5 percent at worse. So, even if the interior Sindh and Balochistan are allowed a high rate, say 10 percent as the theft and leakage occurrences are on the higher side, the weighted average UFG loss should never exceed 6 percent. This defies the logic behind allowing 7 percent UFG rate to the SSGC.
But controversy or no controversy, shares of SSGC and SNGPL have been the darling of the otherwise dull stock market in the past month. Certainly, a 48 percent and 16 percent jump in share prices respectively deserve a mention. Surely, such a rise cannot be entirely based on hopes that the Ogra might revise the UFG benchmarks. Clearly, the smart money knows a lot more than what the average Joe knows.
Sources very close to the company and well-connected in the industry claim that a group of leading stock brokers from Karachi met the Ogra Chairman (who incidentally happens to be a close relative of Jehangir Badar) a few days back and got the assurance that Ogra would increase the allowed UFG losses to 7 percent. The assurance, of course, was reportedly in return of some bank notes; the news may sound like an English tabloid news item, but the source claims it holds water.
"The Supreme Court should take suo moto action over the alleged deal and should not let the companies declare dividends. The amount should be reinvested in the companies to improve the efficiency, rather than going in the pockets of some stock brokers who hold large chunk of discos shares", the informed source told BR Research.
So whats in the store next? Its anybodys guess at the moment, but if the Supreme Court does come into action, it may not be all good news for the investors seeking high dividend yields in the discos stocks.