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.
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.