Reportedly, the plan to reduce the gas circular debt has been shared with the IMF. It has two components – one is to introduce a subsidy for dividends swap and other is tariff rationalization.
The gas circular debt is estimated to reach Rs 1.6 trillion by June 2024 (the debt of two Sui companies was Rs 760 billion by June 2022 and its doubling in two years). It’s a ticking bomb, and the only viable way to defuse it is price rationalization across sectors and regions.
Apart from the plan being shared with the IMF, authorities are also working on implementing weighting average cost of gas (WACOG) by using a blended price of imported RLNG and indigenous gas.
In this scenario, the average domestic gas bill will increase by 3-5 times depending upon slabs and the increase is to be shared by industrial and other consumers. Not an easy reform.
The lopsided pricing is causing some sectors (such as power and Punjab industrial consumers) to pay much higher gas prices than others while the overall differential of cost and price is resulting in the buildup of the gas circular debt.
In case of indigenous gas, others (good paying consumers) are supposed to cross- subsidize the domestic users. However, with these already being shifted to LNG, the gap is not recovered and becomes part of the circular debt.
In winters, expensive RLNG is being diverted to domestic consumers in the north where the cost is multiple times of the price recovery. The only way to end this is price rationalization.
There is a stock of gas circular debt (estimated at Rs 1,100-1,200bn) by June 2023 and flow which is estimated at Rs400-500 billion in FY24. And to partially deal with the stock, one proposal is that the federal government gives supplementary grants to gas companies which will clear payables to OGDC, PPL and GHPL. And in turn, these companies pay dividends to the shareholders with the government being the majority shareholders to get back the lion’s share of the dividend.
However, this is no reform. There is no benefit to companies like OGDC and PPL. There is nothing to plug in the flow of the circular debt. The main beneficiaries are the minority shareholders of these companies due to a potential jump in the share prices and one-time lumpy dividend payment.
“We (OGDC & PPL) are better off, if we write off these receivables (from Sui companies) than paying these in dividends, as we get 39 percent tax benefit by writing off, while dividend payment is cashflow negative for us,” lamented an official close to these companies.
These companies should neither pay dividends nor right off the payables. They should get these receivables overtime by gas price rationalization. The government should leave cosmetics and book entries and do substantive reform. These window dressings are good for short-term spike in the stock market. However, real reforms pave way for sustainable stock market performance.
The federal government should get net dividends anyways which they are entitled to through price recovery of gas companies. However, the above-mentioned proposal is net-negative for the federal government, as it is taking undue burden of Sui companies on its books.
Interestingly. If Sui companies recover price higher than the cost, the surplus is shared with respective provinces.
On this token, the deficit should also be borne by provinces. Why does the federal government assume the liabilities? Isn’t already lopsided fiscal federalism bankrupting the federal government?
The solution should be that the gas price increase be not only to stop ‘flow’ but also be able to recover stock of circular debt over the period of a few years. And in this manner, Sui companies gradually pay off OGDC and others, and in turn they pay dividends as and when they get the money.
Thus, the key is price rationalization. There is a huge disparity in gas pricing. Some are getting undue advantage which is resulting in inefficient allocation of resources. For example, in power sector, Gencos in south with low efficiencies (30-32%) are getting indigenous gas at a huge discount while newer plants of 60 percent plus efficiency are getting imported RLNG at a very high rate. And Gencos usually come higher on merit order due to lower gas cost, and the precious resource is being wasted due to lower efficiency. If WACOG is implemented, the overall cost of power production to become low and allocation of resource to become optimal.
The other more important element is about price disparity to industries. In South, exporting sectors get indigenous gas at $3.8/mmbtu while folks in north are paying $9. The cost benefit to South consumers is $360 million a year, as they got around 210 mmcfd last year. Then non-exporting industries got around 110 mmcfd at $4 while those in North are paying $12.5 – the cost differential is $300 million.
Thus, some industrialists in the South are getting a benefit of $660 million (Rs190 billion). If North folks are competitive at the higher cost, it means that South players are making extra profit.
Then KE is relying on imported gas for its new efficient plan while industries are getting much cheaper gas for their inefficient captive plants. The real reform is to balance this anomaly.
The gas circular debt reduction proposal was made by the outgoing government while the caretakers should press on implementing the real reforms.
The IMF should not carry away by cosmetic steps and push for real reforms to end the gas circular debt. It is imperative for the energy sector sustainability.
Copyright Business Recorder, 2023