ISLAMABAD: In an unusual development, the water and power ministry has decided to directly import furnace oil for generation companies on deferred payments on the back of sovereign guarantees after having failed to clear over Rs42 billion arrears of the state-run Pakistan State Oil.

The decision has been taken against the background of an intense controversy with public sector institutions accusing each other of not doing their job, acting beyond their statutory roles and being responsible for the acute energy crisis which is affecting almost every segment of national economy.

Knowledgeable sources told Dawn on Monday that the power ministry had already held initial discussions with “a number of companies for supply of fuel oil on deferred payment” and now sought a formal approval for sovereign guarantees from the Economic Coordination Committee of the cabinet to start imports. The ECC is expected to take up the matter on Tuesday.

“This is a new financial scam in the making,” said a senior official of the petroleum ministry. He said a group of consultants working with the power ministry was behind the move to facilitate some “flying importers”.

The power sector has been holding back over Rs130 billion to the PSO for a long time, making it difficult to arrange sufficient oil imports. As of Monday, public sector generation companies owed Rs42.3 billion to the PSO, Hubco Rs58 billion and Kapco Rs42.3 billion.

Water and Power Secretary Javed Iqbal rejected a perception that the import process would not be transparent and said he would personally ensure that nobody took undue advantage. Dawn

He told that the proposal for direct imports had been taken in hand for two reasons. First, the PSO has failed to meet its commitment of supplying 23,000 tons of furnace oil on a daily basis to meet power sector's requirement and, secondly, some power companies, including Kapco and AES Pakgen, have complained about 'too high' moisture and contamination in PSO supplies.

Mr Iqbal said the power ministry wanted to encourage competition and look towards other suppliers. “This will also give us a breathing space for some time”.

He agreed that one of the reasons behind short supplies by the PSO might have been outstanding dues, but said the finance ministry had released Rs45 billion to PSO on Dec 16 last year against a commitment that it would ensure at least 23,000 tons of fuel a day. Barring one or two days, the PSO supplies have been well below this quantity.

When asked how would the power ministry bypass long-term supply contracts with the PSO which was practically providing fuel on deferred payments, Mr Iqbal said the other option was to “let the country slip into more power outages”.

The power ministry in its summary claimed that the rates quoted by private parties were in line with the prices being charged by the PSO which had agreed to handle fuel oil for a charge of 3.5 per cent of the landed cost.

“It is, therefore, proposed to allow Gencos (generation companies) to buy fuel oil directly on a deferred payment basis to tide over the current financial crisis,” said the summary sent to the ECC.

And since the “local banking sector is no longer willing to lend to the power sector” because of over Rs301 billion borrowing and further accumulated circular debt, Gencos should be allowed to issue necessary guarantees to fuel suppliers backed by sovereign guarantees.

The summery said that three generating companies of Wapda and Kot Addu Thermal Power Company consumed about 350,000 tons of furnace oil every month.

At the current price of Rs55,000 per ton, this comes to approximately Rs19 billion per month. The ministry said the arrangement for direct imports would provide an interim relief of Rs19 billion per month to Pepco.

Interestingly, the ministry wants the payment for deferred amount for fuel oil to be made through proceeds of the funding raised by the Power Holding Company on account of tariff differential for the last financial year, but does not say why these proceeds are not being paid for furnace oil provided by the PSO.

The petroleum ministry and the PSO have strongly opposed the move, saying the state-run supplier had long-term exclusive supply agreements with Kapco till 2021 and with Pepco till 2024 which, if violated, would have serious legal complications not only for the PSO and power companies but also for international suppliers.

They said that on an average the PSO supplied about 500,000 tons of furnace oil to Hubco, Kapco and Gencos on a monthly basis, but Pepco and IPPs had not been able to make timely payments for supplies. Pepco had also tried in vain a similar arrangement in the past.

“The issue of devaluation of the rupee against the dollar under deferred payment will have serious financial implications due to additional cash outflows at the time of settlement of deferred liabilities”.

They said the PSO was already supplying fuel to Gencos and IPPs on deferred payments of up to six months and if the proposed arrangement was approved it would create more cash outflow problems on payment of sales tax at import stage and transportation cost of Rs4.5 billion per month.

The PSO has also contested the power ministry's claim that it had agreed to handle Gencos' direct supplies at 3.5 per cent charge.

It said that a detailed examination of legal aspects would be required to address a number of operational modalities like insurance, transit losses, quality issues, berthing of vessels at ports, discharge activities, charges for nomination of surveyors, product sampling and testing and appointment of clearing agents.