EDITORIAL: Ever since Pakistan went into the business of LNG buying, there have been several instances when the government procurement from the spot market and under long-term contracts have been scrutinized by the media, Opposition parties and at times by National Accountability Bureau (NAB). Recently, the sector is again in the news over high price of spot cargo purchase which seemingly has resulted in higher cost to the exchequer. A more accurate representation would be to refer to higher price purchases as “opportunity loss”, since the government has at times paid higher by not timing the market right. Yet there is little praise by the media when the government manages to place the right bets. First, in case of spot buying, the buyer must make a judgement call, which, by definition, is subjective and can go either way. If you buy and the market goes up tomorrow, you are right and vice versa. In case of a volatile and moving market in days of the pandemic, decision-making can become even more difficult. For example, the government was bashed in winters of 2020 for not buying for winters during summers when the prices were extremely low. Now the prices are moving up; and lately the government delayed the buying decision and prices went further up for government’s chagrin. It, therefore, had little choice but to face strong media criticism.
When such ‘trials’ happen, there is risk that NAB picks up the case and question the decision-makers – usually bureaucrats. Seeing that, the decision-makers become extra cautious. This makes the decision-making even more difficult in a moving market. Then there are absurd procurement rules. And now, the government has decided to involve board of companies (PSO and PPL) in decision-making. That will add further red tape to the system; but what is the option when no officer in these companies is ready to make a call in fear of ‘undue’ accountability?
First, the decision of buying or selling in a spot market is best left to trader for some plausible reason. In case of governments, however, not only do the decision-makers lack the right market knowhow, the decision-making processes are not smooth enough to support a sharp trader. Hence, there are more chances of suboptimal decisions. Public and private sectors have different ways of operating. Long ago, a senior bureaucrat said that governments are never interested in the most economical purchases, but they are always interested in procedurally correct purchases. This is a clear departure from commercial thinking found in the private sector where the trader is rewarded on his performance. It is dependent on his decision-making on the decision that he makes. It is also important to note that procedural lapses commit by star performers are often ignored.
That cannot happen in government. Bureaucrats are not trained for this. Their key performance indicator is whether they are procedurally correct or not. And in their bid to ensure that rules are followed, they often fail to get the price right. In case of RLNG, the decision to buy on spot is best to take at least 2 to 3 months in advance. But the decision-making in government is based on demand generated by gas companies. They in turn wait for the power sector to generate demand. And the power sector creates demand based on merit order. This, in turn, is a function of efficiency and cost of various fuels. The cost of fuel changes with changes in prices.
All these players from power sector to gas distribution companies to LNG buying companies are from the public sector. Their aim is to remain procedurally correct, and when so many players prioritize procedure over economics, sub-optimal economic decisions are made. One way to deal with the challenge is to reduce the footprints of government in spot buying. With long-term Qatar contract kicking in from Nov 21, the government spot buying shall reduce significantly going forward. Moreover, deliberations on new terminals has entered an advance stage that will bring more competition to the market and make the overall market better.
The important thing for government is to have these new terminals as current supply chain is overburdened. Demand is generated from end-buyers, and decision-makers cannot make a call as they are not sure about the storage (ullage) available to secure additional LNG. The two existing FSRUs (floating storage and regasification units) are effectively functioning with 90-95 percent utilisation only as ‘FRUs’ with capital or upper-case letter “S” simply missing. The ideal capacity is around 50-60 percent and with new terminals coming in, the government will have the cushion to procure without fearing anything and everything.
Copyright Business Recorder, 2021
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