Pakistan Pulse: (September-6-2013) IMF program: Energy reforms and privatization After viewing Pakistan’s submitted ‘Memorandum on Economic and Financial Policies’, we broadly presented our view in yesterday note captioned ‘IMF program and interest rate direction’. Coming towards the detailed plan, we believe that the core criteria for the success of the plan will lie around the govt measures to address structural issues i-e energy sector and public sector enterprises. Energy sector reforms Low recovery and increasing input costs had resulted into massive circular debt pile up and cost 1.5% of the GDP (Rs349bn). To address this, gov’t intends to revamp the sector by rationalizing power tariff, increasing taxes and reducing cost of production. Following are the key points extracted from the document. • As per the document, gov’t reduced subsidies by annualized 0.75% of GDP (approx. Rs200bn) by increasing power tariff in August 2013. This will be positive for the whole energy chain (PSO, HUBC, OGDC, PPL etc) as it would enhance their recoveries. • Gov’t intends to reduce subsidies further by 0.4% of GDP or Rs100-105bn in FY15-16. • Imposition of gas levy by 2013 end is also on paper to increase tax collection by Rs100-105bn i-e 0.4% of GDP. Sector Impact: • News flows suggest, the gov’t will target all gas consumers (expect domestic) by imposing a tax. At present, fertilizers are paying Rs323/mmbtu on feed gas while other sectors (having captive power) are charged at Rs600-650/mmbtu. • Currently, discount between international and local urea stands at 14%, making it difficult for urea manufacturers to pass on the impact to end consumer completely. We believe if levy of Rs200/mmbtu on feed gas is imposed, local manufacturers will be able to pass 80-85% of the total increase. However, if levy is imposed at Rs300/ton, manufactures will only be able to pass on 50-60%. Therefore taking a hit on their margins. • As for other industries (using gas for captive power production) news flows suggests that 100% hike in gas tariff will take place. For cement manufactures this increase will result in a rise of Rs7-15/bag for producers using 35-100% gas for their electricity needs. For textiles, we believe the same increase will have 15-20% impact on textile sector profits. Public sector enterprises (PSEs) Improving the bad performance of PSEs and their privatization will be another test ground for govt. As per the plan, govt is working on privatization of 65 PSEs, out of which strategy of block sale or secondary public offer for 35 PSEs will be announced by September 2013. However, privatization of Pakistan International Airline (PIA), Pakistan Steel Mill (PSM) and Pakistan Railway will be of prime importance. Following are the key points on privatization from the document. • Govt will strip nonviable operations/department of PIA under another PSE i-e PIA2. After that, 26% shares of PIA will be offered to strategic investors in privatization by the end of June 2014. • Restructuring plan of Pakistan Steel Mill will be approved by end-September 2013 for which govt has already appointed professional board. We believe that the successful reforms will not only result into reduced fiscal deficit, it may also bring foreign investors and foreign exchange into Pakistan. But, considering the fact govt is stuck up with the issue of terrorism and violence in the country, privatization plans look optimistic. Regards Topline Research
Posted on: Fri, 06 Sep 2013 06:30:09 +0000
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