How Price Rationalization Can Help Reduce the Gas Circular Debt
Key Highlights :
The gas circular debt in Pakistan is estimated to reach Rs 1.6 trillion by June 2024, a doubling of the debt of two Sui companies by June 2022. This is a ticking bomb that needs to be defused immediately. The only viable way to do this is through price rationalization across sectors and regions.
The federal government has reportedly shared a plan with the IMF to reduce the gas circular debt. This plan consists of two components – one is to introduce a subsidy for dividends swap and the other is tariff rationalization.
Authorities are also working on implementing weighting average cost of gas (WACOG) by using a blended price of imported RLNG and indigenous gas. This means that 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.
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. 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 not a 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.
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).
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.
Price rationalization is the only way to reduce the gas circular debt. It is essential to ensure that all sectors and regions are paying the same price for gas. This will ensure that the debt is paid off over time and the federal government can get back the lion’s share of the dividend. It is also important to ensure that the burden of the debt is not placed solely on the federal government and that the provinces also bear their fair share. Price rationalization will also ensure that resources are allocated efficiently and that the precious resource of gas is not wasted.
Real reforms are needed to reduce the gas circular debt. Window dressings may help in the short-term, but real reforms are the only way to ensure sustainable stock market performance. The IMF should push for real reforms to end the gas circular debt and ensure the sustainability of the energy sector.
