Circular Debt In the Energy Sector and Its Resolution

Winter Internship Program 2010-11

Team Members

• Arif Mustafa (BBA Finance, SZABIST)• Raza Ravjani (ACCA till date)• M. Raza Banani, BBA(Finance) 3rd year, ACCA till

date (Iqra University)• Soomal Memon, (ACCA Finalist)

PSO Winter Internship program 2010 (FR-MIS) 2

Introduction

• What is Circular Debt?

• Causes of Circular Debt.

• Entities involved in Circular Debt.

PSO Winter Internship program 2010 (FR-MIS) 3

• Facing problems in cash inflows.

• One entity influencing the other.

• Every participant is debtor as well as a creditor.

owes

owes

owes

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Circular Debt

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Key Players in the Energy Sector

Source : The Lahore Journal of Economics, ‘Dynamics of Circular Debt in Pakistan and its resolution’ by Syed Sajid Ali and Sadia badar

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(FR-MIS)

Understanding the circular Debt Cycle

Source : JS Global Capital Limited ‘PSO company update’

Causes Of Circular Debt

• Oil Prices

• Government Policies • Cash flows of PEPCO

Recovery from FATA Recovery from government institutions. Recovery from KESC

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How did Inter-Corporate Debt chain developed in the Energy Sector?

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Source: The Lahore Journal of Economics, ‘Dynamics of Circular Debt in Pakistan and its resolution’ by Syed Sajid Ali and Sadia badar

June 2006

November 2008

August 2006

August 2008

June 2007

June 2008

July 2008

PEPCO was forced to obtain bank loans against government guarantee

PEPCO delayed payments to IPPs

IPPs started borrowing from banks

IPPs payable to OMCs (mainly PSO) started building up

OMCs deferred their payments to refineries

OMCs and Refineries started to obtain loans from banks

A few refineries (e.g. Bosicor) were unable to open oil import LCs due to exhaustion of their exposure with banks

2004 2005 2006 2007 2008 2009 20100.00

2,000.00

4,000.00

6,000.00

8,000.00

10,000.00

12,000.00

189

371884

1,158

1,368

6,232

9,882

Financial Charges

Financial Charges (Rs. Million)

Year

Rupees in ‘000’

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Analysis of Financial statements (PSO)

Source : PSO Financial reports

2004 2005 2006 2007 2008 2009 2010

-1.50

-1.00

-0.50

0.00

0.50

1.00

1.50

2.00

2.50

3.00

2.20 2.202.10

1.10

2.40

-0.93

1.00

Net Profit Margin (%)

Net Profit Margin (%)

Year

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Contd..

Source : PSO Financial reports

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Contd..

2006 2007 2008 2009 2010

(10,000,000)

(8,000,000)

(6,000,000)

(4,000,000)

(2,000,000)

-

2,000,000

4,000,000

6,000,000

8,000,000

Free Cash Flow analysis (Liquidity status of the company) 5 years at a glance (PSO)

CFOFCFFFCFECFICFF

Number of years

Rupees in '000'

Source : PSO Financial reports

Recommendations

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Short to Medium Term:

• Increase in tariff. • Flotation of TFCs

• Transmission/Distribution Losses

• Control of theft.

• Improvement in cash flows of PEPCO

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Contd..

Long Term:

• Production of electricity from coal.

• Infrastructure development.

• Removal of subsidies from Tariffs.

• Issue of tax exempt energy bonds.

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Contd..

Thank You,Any Questions?