Break PSO up

If Pakistan State Oil (PSO) were a privately-owned firm, the populist commentators who pass for journalists in Pakistan would be foaming at the mouth calling for its break-up by now. The state-owned company controls close to 65% of the Pakistani oil market, making it close to a monopoly. True, it is a heavily regulated monopoly, but if the petrol crisis has taught us anything, it is that PSO is too large to continue functioning as a single entity. The dominance of this one company of the entire country’s energy chain is simply too big a risk to the economy. It is time to break up the company.

PSO is by far the largest company in Pakistan in terms of revenue. In fiscal 2014, its revenues were nearly Rs1.2 trillion, making it more than three times as big as the next largest company, Pak-Arab Refining Company (PARCO). How did our energy sector come to be dominated by one company? The answer, as always, lies in history.

PSO is yet another monstrosity created out of that national calamity known as Zulfikar Ali Bhutto’s nationalisation drive. It was cobbled together in 1974 by the government through a series of forced mergers and acquired its current form and name in 1976.

In February 2000, the legendary Shaukat Raza Mirza — the man who led the management buyout of Engro in 1991 — was appointed CEO and turned around the company to becoming one of the few government-owned institutions that could compete with the private sector for some of the nation’s best talent. (Mirza, one of the most talented business leaders in Pakistani history, was murdered for being Shia in July 2001.)

PSO has two main lines of business: its retail business, and the wholesale business. The retail business is the one most Pakistanis are familiar with: PSO supplies 3,689 franchisees who own PSO-branded petrol pumps with a variety of fuels used by ordinary commuters, including petrol and diesel.

The company does not break out its revenues by business segment, but the retail segment is by far the largest source of income for PSO. With over 60% market share, the company is a dominant player in the retail fuel sector and a critical component of the energy sector, though its dominance is being challenged by newer, faster-growing rivals.

The wholesale business is just as important a piece of the energy puzzle, though one that most people are not familiar with. In this line of business, PSO supplies fuel to larger customers, including the military and large companies, but mostly the power sector.

About the only thing the two businesses have in common is that they both involve selling oil. The customer profile, the fuel mix, and the business model are all completely different. The retail business is a cash-based business. PSO receives instant payment for the fuel it sells to your local petrol pump. No money, no sale. Fairly straight-forward business with relatively little financial risk.

Meanwhile, the wholesale business has massive amounts of financial risk, not least because many of its customers are reliant on the government for payment and often refuse to pay until the government pays them. It is this wholesale business that is involved in the ‘circular debt’ that you have been hearing so much about and the reason why PSO is unable to get banks to lend it money to import more oil.

There are, of course, many, many reasons why the petrol crisis happened, and many ways the government can and should try to fix the problem. But since it is becoming increasingly clear that it is in no mood to do so, the least it can do is try to isolate the problem.

If PSO’s retail business were spun off into a separate company, it would have a completely separate financial profile and far better borrowing abilities. It would always be able to import oil for petrol stations because it would always be cash rich.

Meanwhile, the wholesale business can continue to limp along until the government finally musters up the courage to come up with a real energy policy. Wholesale PSO would likely be a financial basket case, but at least it would limit the damage to the power sector and not spread it to petrol pumps across the country.

Published in The Express Tribune, January 23rd,  2015

Farooq Tirmizi

CEO, Elphinstone

Farooq Tirmizi is the founder and CEO of Elphinstone, the financial services firm that operates SmartRupee.

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