ISLAMABAD, April 13: The government has decided to issue term finance certificates (TFC) of Rs 130 billion during the current fiscal year to pay off a major part of over Rs300 billion of energy sector circular debt involving over a dozen power, oil and gas companies.

A finance ministry official said the government had already taken up the matter with all commercial banks operating in the country.

The exact tenure and timing of the transaction would be decided after receiving feedback from the banking consortium, but the process would definitely be completed before June, he said.

Sources said that some leading private banks have expressed their reservations over extending more financing for the power sector because of their over-exposure in a loss-making industry but they would not be in a position to resist the government demand. Almost every bank will have to pool together required financing, they said.

Coupled with the TFCs, the government will make a series of book adjustments to dissolve the circular debt that has created a liquidity crisis for almost all power companies, refineries, oil marketing companies, exploration and development firms and gas utilities.

This will also include adjustment of government dividends payable by public sector oil and gas companies against their receivables from the government and its channelling through balance-sheets of various companies.

The sources said that because of the liquidity crunch, private refineries and independent power producers were holding back their payments to oil and gas suppliers. Giving an example, the sources said, an exercise completed by the finance ministry revealed that even after adjustments of all payables by the public sector, five major refineries except Pak Arab Refinery were sitting on a cash balance of over Rs36 billion as of April 1, 2011, which they should have cleared against government taxes including petroleum, discounts on crude oil and other liabilities.

The book adjustment alone could reduce the circular debt by about Rs100 billion in a single day, the official said. The government is expecting about Rs70 billion in dividends on account of its share in public sector companies, of which about Rs50 billion has to come from its shares in oil and gas companies. Discounts on domestic crude oil is expected to contribute another Rs15 billion in the government’s non-tax revenue.

Both put together, the government is yet to receive about Rs60 billion of its share in refineries and public sector oil and gas companies for the last two quarters of the year while refineries held back about Rs9 billion of the discount on crude oil in the first two quarters of the fiscal year on the excuse of their receivables from Pakistan State Oil and some power companies.

Government estimates suggest that instead of collecting these amounts, such government receivables should be adjusted against payables on behalf of provincial governments and federal departments on account of electricity arrears. The electricity arrears in excess of Rs125 billion will be deducted at source from federal budgetary transfers to the provinces.

With the injection of Rs130 billion to be raised through TFCs, securitisation of government dividends, petroleum levy and other taxes, the circular debt can be reduced to a negligible level, although for the electricity tariff increases will be required to forestall re-emergence of the circular debt going forward.

Mainly because of circular debt, most of the oil and gas companies have not been able to take in hand development and expansion projects, with oil and gas exploration and development activities coming almost to a dead end having far-reaching repercussions for the energy sector.