“We write in continuation of our written and verbal communications [to the authorities concerned] in respect of PSO’s power sector receivables, and their potentially catastrophic effect on the viability of PSO’s business. In view of these receivables, which now stand at Rs 198 billion, PSO has also incurred penalties of approximately Rs 250 million (for the period from October 2014 to December 2014) on account of delayed payments of Rs 50 billion to banks, USD 1.8 million as demurrages (from July 2014 to November 2014) and suppliers’ claims of about USD 6.4 million for damages due to delay in nomination of vessels and in opening of LCs. In view of the above situation PSO is not able to open further LCs as its credit limits stand exhausted and LC lines of Rs 110 billion are blocked. PSO is therefore left with no option but to freeze its business with the power sector once current supplies have been exhausted.
“As indicated during our meetings, we have placed tenders for cargoes for LSFO for supply to Kapco, but these cannot be followed up as LCs for the import cannot be opened because of the above restrictions. The amount of Rs 10 billion promised to PSO for Kapco will, once received, be primarily used to import the relevant cargoes but given supplies currently available and the lead time of 20 days involved in sourcing further cargoes, it is likely that Kapco will experience stoppage. Also, given the request to increase the supply to Kapco from 1,500 MT to 4,500MT per day, we would highlight that if increase is effected, the number of days coverage of LSFO for Kapco would reduce from 37 days to 13 days. The alternate fuel for Kapco is HSD which can be supplied subject to advance payment and subject to the reservations regarding the overall availability of white oil highlighted below.
“Similarly, as regards Hubco, based on the proposed increase from 5,000MT to 7,000MT and the existing stock position, the number of days coverage would reduce from 18 days to 12 days. Further, as you are aware, Hubco uses a special grade of FO and there is a cargo of FO already Imported (waiting for berth) for them which will be used only for Hubco. PSO can only continue to effect supplies to Hubco as long as these stocks last. Other power sector companies will also continue to be supplied until the stocks of FO are exhausted. Given that supplies are dwindling and the time involved in sourcing further cargoes, the supply of furnace oil will run dry unless funds are received immediately. This will happen much sooner if the requested increases in supply are effected.
“We would emphasise that we can only recommence business once our receivables are cleared or at the very least all our liabilities (for demurrage, penalties to banks and suppliers) wiped out. We would also highlight that the lack of financing (due to the power sector receivables) will also have an impact on white oil supplies as our inability to effect further borrowings or avail of LC facilities until retirement of the existing LCs will extend to all future imports, including white oil imports. It is not possible to selectively honour only those LCs that relate to the import of white oil as any such practice would not be acceptable to the lending/LC opening banks, may attract the cross default clauses of our financing agreements, is not in line with prevailing practices and could lead to further restrictions on PSO’s financing lines as well as reputational issues with suppliers and others.
“As you will appreciate, PSO in accordance with GoP instructions and in the national interest, and to fulfil the requirements of its customers, has been continually endeavouring to meet the fuel requirements of the power sector. However, in view of the situation described above, it cannot continue to do so and will have to stop further supplies of furnace oil to the power sector unless its above liabilities are discharged and its dues are cleared.
“Going forward, it is imperative to strike a balance between payments and supplies to enable smooth fuel supply operations and to prevent such a grave situation arising in future. As another measure to ensure such a situation does not arise in future, we would request that from now on PSO be allowed to deal with the private power sector in accordance with our contracts with them.”