INSIGHT AND FORESIGHT

January 28, 2015

CORRUPTION & OIL POLITICS IN PAKISTAN

Filed under: Uncategorized — sharafs @ 6:54 am

Apart from terrorism and military security, oil politics is super vulnerability that can bleed Pakistan blue at short notice. Pakistan’s economic performance is hostage to Oil. This is a researched opinion on oil politics linking international interests, international oil politics, home grown corruption and dictates of manipulating Pakistan’s economy through hit men.

At a time when international oil prices are at record low, Pakistan’s federal government showed how it was capable of snatching defeat from the jaws of victory. Logically, this sudden relief should have become a boon to kick start a sick and ailing energy sector and growth. My oft slur of calling Pakistan’s rulers Rip Van Winkles (sleeping leaders) was vindicated. These self-centred rulers ensure that Pakistan remains an energy starved and dependent country.

In 2004, Pakistan’s biggest Economic Hitman came of age. Government’s decision to reform oil companies into Pakistan State Oil (PSO) had malafide intentions. It created a boon for cartels and a bane for the country. By then, Independent Power Producers (IPPs), the biggest consumers of furnace oil had eclipsed the country’s hydro power potential, earned back their investments, were remitting profits and making illegal windfalls.

As per original IPP projections, the prices of electricity rather than reduce, were deliberately supercharged by unprecedented devaluation of rupee. (http://nation.com.pk/columns/29-Jun-2013/my-eye-your-eye) Financial relief was not passed to consumers. In 2006, Chairman NAB notified the government of an embezzlement worth over Rs. 84 billion in PSO. Under pressure, Lt General Shahid Aziz resigned. The issue of circular debt and other cartels in sync caused the collapse in 2007-8 that persists today.

Overseeing this vicious circle of corruption were the Ministry of Finance, Petroleum and Water & Power. In addition oversight regulatory authorities were placed to ensure transparency and good practices. These were OGRA, NEPRA, SECP, CCP, NAB and SBP. The fact thes failed to detect and remove irregularities that caused the 2007 and 20014-15 crises indicate that either they were accomplice, incompetent or prevented from performing their functions. When Admiral Fasih Bokhari chairman NAB dared to point out irregularities in PSO and affiliated cartels, he was maligned by a particular media house, pressurised by the Supreme Court and forced to resign. Chairman SECP and Governor State Bank also followed suite (http://nation.com.pk/columns/01-Feb-2014/corruption-the-sinkhole).

If the methodology of how the two tiers of this system work is understood, it is easy to point how the petrol crises took place. It also leads to the conclusion that rather than governments, non-state actors in form of monopolies and cartels with multiple controls run Pakistan.

PSO operates in two circles. The first deals with the supply of furnace oil to IPPS and has nothing to do with the petrol crises. OGRA ensures supply and regularisation of tariffs to gas fired IPPS. This tariff is opaque. NEPRA through a manipulative formula sets rates of electricity that are ultimately passed to consumers through PDCs. WAPDA collects the tariffs and pays IPPS under vigilance of Ministry of Finance. How the IPP defaults led to petrol shortages indicates intertwined crises within PSO, distribution companies and IPPS dwindling margins of profit on deferred payments and default.  This excludes shippers, importers like Bakri and adulteration mafia. Bakri once blacklisted became the premier importer on intervention of Shaukat Aziz in 2004. Hidden windfall follows the backdoor.

PSO regulates the internal production of fuel and lubricants and also imports fuel to make up the shortfall. It directly or through dealers imports supposedly international standard oil products. These are mixed with substandard products of domestic producers and suppliers who are paid the same price as import. In the distribution networks, the prices of carriage are standardised irrespective of the distances. This causes a huge loss to the state in cost plus carriage. Hidden windfall follows the backdoor to offshore entities.

When speculating a rise in oil prices, PSO has a common practice to supply products to IPPS and distribution companies on deferred payments for 5-7 days. The companies sell these at a higher price making exorbitant profits. As a case study, between march-April 2012 (23 Days), PSO supplied 72912 Kilo Litres of Diesel and 44760 Kilo Litres of Petroleum products with a cost lag of Rs. 4.70 and 8.02 respectively causing a loss/ profit to PSO/Distributors of Rs. 701.661 Million through 21 distribution points. This is just a tip of the iceberg. The loss through IPPS is even higher. Officials in PSO (who prefer not being named) point that since 2004 this loss amounts to more than Rs. 32 Trillion; a figure I repeatedly cited in my articles to apprise the nation about this daylight robbery (http://nation.com.pk/columns/09-Feb-2013/pakistan-s-stinking-black-hole). In 2014, as international prices began to decrease, the malpractice caused huge losses; an explanation why PSO defaulted 26 times since October 2014. It was the responsibility of the Ministry of Finance and Petroleum to be cognisant of the falling levels of stocks in being and transit. The Finance Minister is the Chairman of the Economic Coordination Committee and all concerned are part of it. It is mysterious that these crises should have gone unnoticed though predicted in these columns (http://nation.com.pk/columns/04-Jan-2014/truth-and-remorse).

This means that the ECC was hardly convening or paying attention to stock depletions accentuated by the abrupt decision to close CNG stations in December-January. Even if ECC looked the other way, ministry of petroleum should have raised alarms. At the same time the pricing and fraud mechanism with IPPS increased the default burden of PSO. It also appears that OGRA failed in its function to regulate the fluctuating pricing mechanism and awoke only due to the pressure of PTI. NEPRA too failed at monitoring the power tariffs. The government’s decision to preferentially and directly release overs 500 Billion to IPPS outside AGPR and pay over Rs 200 Billion to PSO are shady transactions.

The same mafia has also stalled Pakistan’s indigenous efforts at self-reliance. The commissioning of Geo Thermal Projects, Thar Coal, Kohlu and Tall Blocks promise to make Pakistan an energy giant of the world in a few years. Hence the same international pressure as exerted on the Iranian and Central Asian gas pipelines comes to fore. Linking all these with instability in Balochistan suddenly start making sense. International oil politics and agenda dictate that Pakistan remains backward. Pakistan has aplenty to compromise the future of the country.

With the crises wide open it is time the records of PSO, distribution companies and IPPs are put to multiple audits. Through a unanimous parliamentary resolution, it makes a fit case of criminal investigation and trial by a military tribunal. But there is a BUT.

If the government shows the guts to probe and punish these cartels, it will have to face the combined wrath of IPPs and the World Bank (http://nation.com.pk/columns/15-Jun-2013/portals-in-budget-2013-14). In all probability, the government and opposition being sides of the same coin will acquiesce.

The cancer has spread to sinews of all political parties.  Pathetic but true.

Brigadier (Retired) Samson Simon Sharaf is a political economist and a television anchorperson. Email: samson.sharaf@gmail.com

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