Pakistan’s accountability problem

9 January 2017
11 January 2017, Week 1, Issue 557

Until Pakistan doubles its efforts to counter inefficiency and corruption the World Bank’s recent decision to cancel a loan for gas projects will remain the right one, reports Sam Wright

What: The World Bank cancelled a US$100 million loan to help boost SSGC distribution efficiency.

Why: The state company’s bureaucratic processes and inability to meet targets underpinned the bank’s decision.

What next: Corruption and mismanagement remain a major concern for energy investors, who will likely stay away until there is a substantial improvement in the operating environment.

The World Bank has cancelled a US$100 million loan for natural gas projects in Pakistan. Although investment is sorely needed, ongoing leaks, theft and mismanagement mean that the decision is the correct one.

In December 2016, the World Bank announced that following a strategic review, it had decided not to back a drive to boost efficiency by Sui Southern Gas Co. (SSGC) in its distribution areas in Karachi, Sindh and Balochistan. The hope was that SSGC and other distributors could cut the amount of unaccounted for gas (UFG) – that stolen through illegal, improvised connections or lost to leaks – in their systems.

The scale of this problem is substantial. More than 400 mmcf (11.33 mcm) per day of gas is thought to be as a result of UFG, although under-reporting may be rife. This is at least 10% of domestic output. For a country continually battling blackouts and supply shortages, resolving the issue would be a major step in the right direction.

For the World Bank, though, its investment needed to be matched by a commitment from SSGC. A number of targets for reducing UFG were put in place, which were missed. Overall, the amount of gas lost from pipelines over the past three years has decreased by just 3%.

Opportunism

Unlike neighbouring India, piped gas is commonplace in Pakistan, with connections stretching deep into rural communities. While this has helped numerous politicians win favour with local voters, the rapid growth of this infrastructure and a lack of ongoing investment have made monitoring a major challenge, leading to frequent leaks and thefts.

In January 2016, SSGC managing director Khalid Rahman told the Dawn newspaper that the company had been battling to bring UFG under control, but was struggling with the scale of the task.

“The biggest reason for this is our old pipeline structure,” he added. “There has also been a lot of unplanned growth in our distribution network, which we couldn’t manage too well. With the increase in population and construction, we have a 46,000-km distribution network, which is substantial. After 2011, we did impose certain restrictions regarding connections but now that has led to gas theft as new housing schemes come up.”

He said: “Our teams are out in the field catching the thieves. We haven’t been able to find a bad element inside but if we do the consequences would be very big. Still, the problem is rampant.”

According to the World Bank, however, there are other failings. The organisation pointed to bureaucratic processes within SSGC as contributing to procurement delays and bid expiration.

Meanwhile, Rahman has also faced pressure from the country’s anti-corruption body, the National Accountability Bureau (NAB), to resign over his alleged influencing of witnesses in a case against former oil and gas minister Asim Hussain. The latter is accused of a series of offences such as money laundering and the misappropriation of funds, which could have significant implications for SSGC.

The NAB, however, is also under increased pressure, with the Supreme Court last week accusing the body of “facilitating corruption in the country” through its voluntary return scheme, which allows those guilty of corruption to confess their crimes and escape punishment.

Covering the cracks

According to the country’s energy ministry, Pakistan has domestic conventional reserves of around 20 tcf (566.4 bcm) of gas and 385 million barrels of oil, as well as shale deposits of 200 tcf (5.66 tcm). While this is considerably larger than estimates from the US Energy Information Administration (EIA), which places recoverable shale gas reserves at roughly 105 tcf (2.97 tcm), it is still clear that the country should not be battling with such deep shortages of supply.

However, domestic exploration and production remains erratic at best, hampered by bureaucracy, corruption and a lack of communication across government agencies. Foreign partners with ready access to capital and technology have proved unwilling to work in this environment, while subsidised fuel and long running issues with circular debt and late payments from refiners and power generation companies have lessened the appeal even further.

Instead, Pakistan has been forced to a turn to LNG imports. In 2016, the country received its first shipments of the fuel, helping relieve some of the downward pressure on a drastically oversupplied global market.

This is undoubtedly a high-cost solution, especially when it can be assumed that more than 10% will be lost as soon as the gas is transferred to the domestic pipeline system. To counter this and make LNG more viable, distributors have been permitted a 4.5% UFG ceiling to account for theft and leakages. However, the NAB, already investigating the award of LNG terminal contracts and spot purchases for possible corruption, has found that SNGPL has been charging 10.3%, as well as seeking different prices across different industries.

With all of this in mind the World Bank’s decision was relatively straightforward. Although investment is sorely needed to improve Pakistan’s gas sector, the current environment means that there is no guarantee that the funds could be used wisely. While corruption and mismanagement remain rife, and with even the NAB under the microscope, this is unlikely to change.

Edited by

Andrew Kemp

Editor

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