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LNG imports at high prices cause Rs10b loss

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ISLAMABAD:

Pakistan has borne a loss of over Rs10 billion due to mismanagement in the import of liquefied natural gas (LNG) cargoes that led to the purchase of expensive fuel, noted the Auditor General of Pakistan in its report.

According to Rule 4 of the Public Procurement Regulatory Authority (PPRA) Rules 2004, procuring agencies, while engaging in procurements, shall ensure that the procurements are conducted in a fair and transparent manner, the object of procurement brings value for money and the procurement process is efficient and economical.

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During the audit of Pakistan LNG Limited (PLL) accounts for financial year 2020-21, the auditors observed that the management awarded spot cargo contracts at higher prices for delivery in July, September and October 2021.

PLL management floated two tenders on May 21 and June 5, 2021 for the spot purchase of LNG and delivery in July 2021. According to the bid evaluation reports dated June 2 and June 8, 2021, Trafigura and Vitol Bahrain offered prices of $11.7747, $11.6612 and $12.7777 per million British thermal units (mmbtu) for delivery windows of July 8-9 and July 12-13, 2021 respectively.

However, the PLL board of directors cancelled the bidding process, considering the price exorbitant that was predicted due to an unprecedented increase in the global LNG demand and the JKM (Japan Korea Maker) market benchmark.

In contrast with its earlier observation, the board reduced the lead time for LNG procurement.

In order to meet consumer demand, the management again floated two tenders on June 17 and June 24, 2021 and awarded contracts for spot cargoes to QP Trading and Vitol Bahrain at higher rates of $11.97 and $13.45 per mmbtu for the same delivery windows. It resulted in an excess cost of Rs983.215 million.

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Similarly, a tender for the spot purchase of LNG and delivery in September was floated on June 19, 2021. According to the bid evaluation report dated July 6, 2021, Qatar Petroleum and Total Gas and Power quoted prices of $13.7875 and $14.6721 per mmbtu for the delivery windows of September 16-17 and September 26-27, 2021.

However, the PLL board cancelled the bidding process, considering the downward trend in LNG prices in the international market. In contrast with its earlier observation, it reduced the lead time for LNG procurement.

The management again floated a tender on July 20, 2021 and awarded spot cargo contracts to Gunvor Singapore and Petro China International at higher rates of $15.397 and $15.1988 per mmbtu for the same delivery windows. The revised tender resulted in an excess cost of Rs1,148.421 million.

Later, the PLL management floated a tender on June 19, 2021 for the spot purchase of LNG and its delivery in October 2021.

As per the bid evaluation report of July 6, 2021, Qatar Petroleum and BB Energy offered prices of $13.9875, $16 and $13.9875 per mmbtu for the delivery windows of October 8-9, 23-24 and 28-29. However, the board cancelled the bidding process, considering the falling LNG prices in the global market.

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The tender was floated again on August 30, 2021 and contracts for spot cargoes were awarded to Vitol and Trafigura at higher rates of $19.8477, $20.2877 and $18.9966 per mmbtu for the same delivery windows. It resulted in an excess cost of Rs8,143.403 million.

Auditors were of view that the mismanagement in LNG procurement decisions led to an extra cost of Rs10.275 billion due to the less lead time and JKM forecast.

The matter was reported to the PLL management in October 2021 which, in its reply on December 29, 2021, stated that in accordance with the PPRA guidelines of accepting a single bid while ensuring the rate reasonability, the bids received for initial tenders for July 2021 could not be awarded.

However, it said, PLL was constrained to purchase those cargoes later owing to directives from the ministry to procure LNG to avoid expected energy shortage in the country.

Published in The Express Tribune, November 20th, 2022.

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Privatisation fails to meet objectives

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ISLAMABAD:

The success of Pakistan’s privatisation programme has remained limited to only generating $11 billion in sale proceeds, as the country could not achieve the post-privatisation objectives of improving efficiency and competition, says a new independent study.

The findings come amid the International Monetary Fund’s (IMF) push for approval of the State-Owned Enterprises (SOEs) Bill to improve efficiency and management of public sector firms. The finance ministry has requested the holding of a joint session of parliament to approve the law, after the bill was rejected by the Senate.

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In a study titled “Public Sector Enterprises (PSEs) in Post-Privatisation: Evidence from Pakistan”, authors Naseem Faraz and Dr Ghulam Samad concluded that the key objectives of the privatisation programme had remained unfulfilled. The study has been published in the Journal of Applied Economics.

“Our main finding is that the performance of firms has improved in the post-privatisation period but (it is) statistically insignificant,” said the authors. Privatisation has been carried out with the motive of reducing the fiscal burden and increasing the efficiency of the inefficient PSEs. Since 1991, the sale of PSEs has raised revenues of Rs649 billion, or $11 billion.

The $11 billion has been worked out by applying the exchange rate of the year when a privatisation transaction took place.

Pakistan is one of the developing countries where privatisation of a large number of PSEs has taken place, but the post-privatisation effect is yet to be analysed. Second, rather than focusing on one or a few sectors, the study considers all the privatised PSEs.

The study showed that the performance of a few firms improved in the post-privatisation period but it largely remained negative.

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“In particular, the privatised PSEs in energy, cement and chemical sectors do not show positive gains in the post-privatisation period. However, the telecom and textile sectors have experienced a positive change in the performance of the privatised PSEs.” “Similarly, the results also showed that the efficiency of firms did not increase significantly.”

The authors said that according to their assessment through the Key Informant Interviews, the malfunctioning of regulatory environment led to the market failure that eventually resulted in market exploitation.

Regulations and regulators are captured by the market, bureaucrats, judiciary and politicians. An effective regulatory environment does not exist to force the privatised entities to have higher efficiency and develop a competitive environment.

Government intervention in the regulatory sphere is dominant. Every regulatory authority has a board member from the government. This practice is clearly not aligned with the privatisation regulations.

The government intervention (secretary sitting as a board member) creates conflict of interest by having ownership and management together.

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The privatised banking and energy companies have failed to bring in the benefits of sell-off, according to the study. The process of privatisation and rewards distribution favoured mainly the buyers, while the government faced risk and cost.

According to the authors, the privatised companies earned a higher average rate of return on assets compared to their fully government-owned counterparts, as measured by the total net profits-to-sales ratio.

The higher returns on assets suggest a favourable effect of privatisation. On the contrary, the profitability or productivity measure (net profits-to-sales ratio) was relatively higher for the privatised firms but it was statistically insignificant compared to the period when the firms were fully government owned.

“The privatised firms experience a mild increase in productivity compared to their pre-privatisation period. This difference in performance is not statistically significant.”

Privatisation also did not enhance the efficiency of the privatised firms in terms of increase in sales. It suggested that the efficiency improvement was merely coming through the reduction in cost of production.

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The study identified weak regulators as a reason for the failure to achieve the privatisation objectives.

“Unfortunately, the regulator Pakistan Telecommunication Authority (PTA) did not influence PTCL and other related entities to work in a regulated market environment.”

The role of the PTA is limited to overseeing the determination of market prices. PTCL’s privatisation was not a fair deal. It lost $800 million and also did not improve the market in terms of competition.

“The government sold 26% shares to Etisalat and also transferred the management, which is against the rule, which requires 51% shares,” emphasised the authors.

The government had agreed that Etisalat would pay $2.6 billion by making upfront payment of $1.4 billion and the remaining $1.2 billion in nine installments of $33 million each. For the deal, the government received only $1.8 billion and the remaining $800 million was never paid.

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“The monopoly of the telecom sector persisted despite the privatisation and drove away billions of dollars.”

The privatisation of KESC, now KE, also did not achieve the objectives. Though the main reason of the privatisation was to get rid of the loss-making enterprise, unfortunately the government is paying more after privatisation, according to the study.

Published in The Express Tribune, November 24th, 2022.

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Tractor maker faces legal action over fraud

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KARACHI:

The Federal Tax Ombudsman (FTO) has ordered legal action against a tractor manufacturing company as the Federal Board of Revenue (FBR) reported a fraud of more than Rs10 billion.

According to FBR sources, the tractor company has allegedly committed a fraud of over Rs10 billion under the previous government’s initiative to provide tractors at a lower cost to the farmers.

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As part of the subsidy scheme, the government gave billions of rupees to the deserving and underprivileged farmers for the purchase of tractors.

Sources said that the tractor manufacturer had claimed sales tax refunds on fake documents and flying invoices. The FBR then referred the case to the FTO.

They added that the FBR recommended the application of the Benami Transactions Act while taking legal action against the tractor manufacturer.

“The respondent company misused pay orders of the complainant by issuing bogus and fake sales tax invoices to other persons for obtaining fraudulent adjustment and refund,” a notification of the FTO office read.

The FBR has initiated legal proceedings against the owners and dealers of the tractor manufacturing company for the recovery of money obtained through fraudulent means.

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The Directorate General of Intelligence and Investigation, Inland Revenue has been tasked with investigating the fraud and tax evasion case.

Published in The Express Tribune, November 24th, 2022.

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G7 looking at Russian oil price cap of $65-70

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BRUSSELS:

The Group of Seven nations (G7) are looking at a price cap on Russian sea-borne oil in the range of $65-70 per barrel, a European Union (EU) diplomat said on Wednesday.

Views in the EU are split, with some pushing for a much lower price cap and other arguing for a higher one. The G7, including the United States, as well as the whole of the EU and Australia, are slated to implement the price cap on sea-borne exports of Russian oil on December 5.

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“The G7 apparently is looking at a $65-70 per barrel bandwidth,” the EU diplomat said.

“Poland, Lithuania and Estonia consider this too high because they want the price set at the cost of production, while Cyprus, Greece and Malta find it too low, because of the risk of more deflagging of their vessels, which might mean the G7 has found a good middle-ground,” the diplomat said.

Some 70%-85% of Russia’s crude exports are carried by tankers rather than pipelines.

The idea of the price cap is to prohibit shipping, insurance and re-insurance companies from handling cargos of Russian crude around the globe, unless it is sold for no more than the maximum price set by the G7 and its allies.

Because the world’s key shipping and insurance firms are based in G7 countries, the price cap would make it very difficult for Moscow to sell its oil – its biggest export item accounting for some 10% of world supply – for a higher price.

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At the same time, because production costs are estimated at around $20 per barrel, the cap would still make it profitable for Russia to sell its oil and in this way prevent a supply shortage on the global market.

Brent crude front-month future oil prices initially fell to $86.54 from $87.30 on the news.

Published in The Express Tribune, November 24th, 2022.

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