Which Way Prof­itable Com­pa­nies?

The govern­ment of Prime Min­is­ter Nawaz Sharif may be right in pur­su­ing a ‘no bail-out’ pol­icy but this could af­fect prof­itable govern­ment en­ter­prises as well.

Southasia - - ECONOMIC POLICY -

Ac­cord­ing to the pri­va­ti­za­tion pol­icy of Prime Min­is­ter Nawaz Sharif’s govern­ment, un­der the var­i­ous aid covenants signed be­tween the govern­ment and in­ter­na­tional fi­nan­cial in­sti­tu­tions, the govern­ment will no longer pro­vide bail-out pack­ages to state-owned en­ter­prises. This ap­pears to be a wise de­ci­sion be­cause in­sti­tu­tions like the PIA, Steel Mills, etc. have been cost­ing the govern­ment bil­lions of ru­pees ev­ery day. How­ever, as a con­se­quence of this no bail-out pol­icy, two govern­men­towned com­pa­nies – namely SSGC and SNGPL – which would have ac­tu­ally raised prof­its for the govern­ment will now prob­a­bly end on the scrap heap

SNGPL and SSGCL have been very lu­cra­tive un­der­tak­ings for the govern­ment for the past 40 years. Both com­pa­nies have never asked for, or re­quired, govern­ment grants or bailouts. But it is highly ques­tion­able the way they have been treated by OGRA over the past decade. It ap­pears that these com­pa­nies are de­lib­er­ately be­ing run into the ground so that they may be sold at throw­away prices

OGRA was es­tab­lished to pro­mote com­pe­ti­tion in the oil and gas sec­tor and to en­sure the well be­ing of the people of Pak­istan as well as the com­pa­nies op­er­at­ing in these sec­tors. How­ever OGRA’s ac­tions from 2005 show that it has never given any im­por­tance to ei­ther SSGC or SNGPL. Since 2005, OGRA has im­posed tens of bil­lions of ru­pees in penal­ties on these com­pa­nies un­der the head of “UFG”, which is unac­counted for gas or line losses faced by gas com­pa­nies dur­ing sup­ply of gas to the end con­sumer. Some of this UFG is within the power of the com­pa­nies to con­trol, whereas the most part of it is not.

OGRA seems to have mis­clas­si­fied cer­tain in­comes gen­er­ated by the com­pa­nies through ac­tiv­i­ties that OGRA has no power to reg­u­late. Con­se­quently, this mis­clas­si­fi­ca­tion has caused these com­pa­nies more losses. OGRA has the power to de­cide what part of the in­come from “gas sup­ply” (aka “op­er­at­ing in­come”) should go to the com­pa­nies as their earn­ings or prof­its but it has no power to con­trol the in­comes that these com­pa­nies de­rive from projects or ac­tiv­i­ties other than gas sup­ply. By wrongly clas­si­fy­ing these other in­comes as “op­er­at­ing in­come” OGRA takes con­trol of these in­comes also and de­prives the com­pa­nies of their le­git­i­mate earn­ings.

Sui North­ern Gas Pipe­lines Limited ( SNGPL) and Sui South­ern Gas Com­pany Limited ( SSGCL) are legally reg­is­tered as “com­pa­nies” but they are not per­mit­ted to fix the price at which to sell “nat­u­ral gas” and they do not earn prof­its di­rectly from the con­sumers. The profit they earn has been fixed in their li­cences by OGRA at a cer­tain per­cent­age of the value of their as­sets. For de­ter­min­ing this profit and the price at which these com­pa­nies will sell gas to the con­sumers, OGRA un­der­takes a tar­iff de­ter­mi­na­tion ex­er­cise ev­ery year. Through this process, OGRA de­ter­mines what per­cent­age of UFG the com­pa­nies will be al­lowed to re­cover from their con­sumers in the gas bill. The re­main­ing per­cent­age is to be borne by the com­pa­nies as a penalty for fail­ing to achieve the bench­mark set by OGRA. These penal­ties have crossed Rs.50 bil­lion over the past 8 years, even though most

of the fac­tors con­tribut­ing to UFG, such as loss of gas due to op­er­a­tional/ tech­ni­cal losses, poor law and or­der sit­u­a­tion and theft, etc. are be­yond the con­trol of the com­pa­nies and are stan­dard op­er­at­ing costs for businesses op­er­at­ing in volatile coun­tries.

Forced mis­clas­si­fi­ca­tion of in­comes like me­ter man­u­fac­tur­ing, sale of gas con­den­sate, sale of LPG, royalty in­come, late pay­ment sur­charge etc. are de­rived from ac­tiv­i­ties that OGRA has no author­ity to reg­u­late. This means that the prof­its of the com­pa­nies from these un­re­lated in­comes have been counted as in­come de­rived from sale/trans­mis­sion of nat­u­ral gas. The con­se­quence of this il­le­gal clas­si­fi­ca­tion is that these in­comes are ex­cluded from the due prof­its of the com­pany, re­sult­ing in a lower tar­iff for con­sumers. The losses faced on this ac­count alone come to Rs.20 bil­lion.

The big­gest loser has been the Govern­ment of Pak­istan (and con­se­quently the pub­lic at large) which is the ma­jor­ity share­holder in SNGPL (62 per­cent) and SSGCL (82 per­cent). The ac­tual loss caused to the govern­ment due to these ac­tions of OGRA is Rs.50 bil­lion. The re­sult is that SNGPL is due to de­clare bankruptcy pend­ing a cor­rec­tion of its ac­counts by OGRA whereas SSGCL is on the verge of bankruptcy. In these con­di­tions, the govern­ment will ei­ther have to bail these com­pa­nies out by in­ject­ing bil­lions of ru­pees or just sell them off. As per the govern­ment’s no bail-out pol­icy, they will not be given any grants, and would have to be sold – at throw­away prices.

OGRA’s stance is that through the afore­men­tioned mea­sures, the price of gas that the poor do­mes­tic sec­tor has to pay has been kept low. The fact is that the do­mes­tic sec­tor is al­ready heav­ily sub­si­dized and 85 per­cent of do­mes­tic con­sumers pay less than half of the ac­tual cost of pro­vid­ing gas to them. Even al­low­ing a ma­jor in­crease in the tar­iff that the com­pa­nies may charge would in truth have a very small im­pact on the ac­tual price paid by the do­mes­tic con­sumers of nat­u­ral gas. The cur­rent aver­age monthly bill of 85 per­cent of the do­mes­tic con­sumers is not more than Rs.216 whereas the ac­tual cost of pro­vid­ing nat­u­ral gas to them is more than twice this amount. There­fore, even if the com­pa­nies had been al­lowed to raise their tar­iffs law­fully, the bill of these 85 per­cent do­mes­tic con­sumers would have in­creased by only 15-20 ru­pees. The bulk of this in­crease in tar­iff will be borne by the rich in­dus­trial sec­tors con­nected to the nat­u­ral gas net­work that are at present mint­ing money by pay­ing far less for nat­u­ral gas than they should.

At present, even within the in­dus­trial sec­tor, only about 10,000 con­sumers are con­nected to the nat­u­ral gas net­work while an overwhelming num­ber have no ac­cess to nat­u­ral gas. If the tar­iff in­crease were al­lowed, the price be­ing paid by a hand­ful of the rich in­dus­trial con­sumers ( who use nat­u­ral gas not for sus­te­nance but for profit max­i­miza­tion) would have gone up by 10-15 per­cent while the prof­itabil­ity of these com­pa­nies in which the govern­ment holds an overwhelming ma­jor­ity of shares would run into bil­lions of ru­pees.

This en­sures that the in­ter­ests of large in­dus­trial con­sumers stand pro­tected in­stead of the in­ter­ests of the or­di­nary people of Pak­istan, the gas com­pa­nies and the govern­ment of Pak­istan. As a con­se­quence of il­le­gally keep­ing the price of nat­u­ral gas low, OGRA has al­lowed a hand­ful of con­sumers in the in­dus­trial, power, CNG and fer­til­izer sec­tors to pay a frac­tion of the cost they would other­wise have had to pay for al­ter­na­tive fu­els. It should be noted that in­dus­tries that are not con­nected to the nat­u­ral gas sec­tor pay at least two and half times more for fuel than these hand­ful of in­dus­tries be­ing pro­tected by OGRA.

The two gas util­i­ties will even­tu­ally be sold at throw­away prices be­cause the govern­ment now has a ‘no bailout pol­icy. The en­tire pop­u­la­tion of Pak­istan will suf­fer as a con­se­quence. The to­tal do­mes­tic con­sumer base of the two com­pa­nies is around 7 mil­lion. Ac­cord­ing to the Bureau of Sta­tis­tics, an aver­age house­hold in Pak­istan has 6.5 per­sons, which means that cur­rently only 45.5 mil­lion out of the 190 mil­lion people in the coun­try have ac­cess to nat­u­ral gas and that too al­most ex­clu­sively in ur­ban ar­eas. Ru­ral Pak­istan has to rely on LPG and kerosene which, vol­ume per vol­ume, re­spec­tively costs Rs.4,100 and Rs.4,600 per month as op­posed to the priv­i­leged class of nat­u­ral gas con­sumers pay­ing Rs.216. Those people who have to rely on LPG and kerosene as their pri­mary fuel source are the poor­est of the coun­try and live in small vil­lages and towns of the four prov­inces.

If the com­pa­nies had been al­lowed to earn their law­ful and due prof­its, the govern­ment of Pak­istan would have had tens of bil­lions of ru­pees to spend on pro­vid­ing sub­si­dies to the poor­est of the poor. It is shock­ing to note that while the en­tire budget for the Be­nazir In­come Sup­port Pro­gram for the last year was less than Rs.40 bil­lion, if OGRA had per­formed its func­tions and du­ties in ac­cor­dance with law, SSGCL and SNGPL would alone have con­trib­uted more than Rs. 30 bil­lion to the pub­lic ex­che­quer last year in the form of taxes and div­i­dends. This amount would have been charged from the rich in­dus­trial class of con­sumers and would have been spent to pro­vide sub­si­dies for the poorer con­sumers who live, not in the ur­ban cen­ters of La­hore, Karachi, Is­lam­abad, Rawalpindi, etc. but in the ru­ral ar­eas of in­te­rior Sindh, in­te­rior KPK, south­ern Pun­jab and Balochis­tan. To­day, these people pur­chase al­ter­na­tive fuel by pay­ing over 20 times more than nat­u­ral gas, whereas those liv­ing in the ur­ban cen­ters are sub­si­dized and the rich in­dus­tri­al­ist, power pro­ducer, fer­til­izer man­u­fac­turer and CNG sta­tions are pay­ing one third of what they should have paid for al­ter­na­tive fu­els.

The govern­ment’s ul­ti­mate pol­icy to pri­va­tize these be­he­moth com­pa­nies to in­crease ef­fi­ciency and pro­duc­tiv­ity in their op­er­a­tions will ac­tu­ally be detri­men­tal in this state of af­fairs. The two gas com­pa­nies with abysmal prof­its and fight­ing an in­dif­fer­ent and in­ef­fi­cient reg­u­la­tor can­not fetch a good price and would have to be sold at a frac­tion of their true worth which would re­sult in fur­ther losses to the GOP. If OGRA func­tioned as per the man­date of its law, the prof­itabil­ity of these com­pa­nies would in­crease to a point where it would ac­tu­ally be ben­e­fi­cial to re­tain these com­pa­nies with the govern­ment rather than to pri­va­tize them. These com­pa­nies have true po­ten­tial to be­come price­less as­sets. Even if only the to­tally le­git­i­mate claims re­lat­ing to UFG and op­er­at­ing in­comes are granted, the com­pa­nies are likely to fetch Rs. 100 per share – to­tal­ing U.S.$2 bil­lion. On the other hand, in the cur­rent state of af­fairs, it would be a mir­a­cle if the govern­ment man­ages to get even U.S.$200 mil­lion from sale of these com­pa­nies.

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