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Forex drain on account of freight

Forex drain on account of freight

Pakistan State Oil (PSO) is Pakistan’s largest oil marketing company both by value and by volume. PSO is the nationally State Owned Enterprise (SOE) responsible for the import, storage, distribution and sale of refined petroleum products in the country. By all measures, PSO is a massive entity, one of Pakistan’s few companies with revenue streams in billions of US dollars. The size of these mind-boggling revenues makes sense when one analyzes the sheer scope of what PSO actually does. It has one of the largest (if not the largest) countrywide networks of petrol stations, providing fuel to low service delivery areas in the nooks and corners of the nation, selling fuel to power plants and airlines alike, with the corporation also being responsible for the import and sale of LNG to Pakistan’s gas utility companies SSGC and SNGPL.

But with great power comes great responsibility and the debt PSO owes to this nation is equally colossal, more specifically the organization (as of 1st February 2023) has accumulated PKR 718 billion (USD 2.66 billion) in receivables and PKR 219 billion (USD 0.81 billion) in payables due to Pakistan’s circular debt crisis.

To put things into perspective, PSO reported its highest-ever gross revenues of PKR 2.7 trillion for the year ended 30 June 2022 in its latest available annual report. The profit before taxes for the said period were PKR 147.8 billion. Suffice it to say that FY 2021-22 was a stellar year for PSO with some of the highest-ever returns.

The National Institute of Maritime Affairs (NIMA) has worked out that Pakistan spends approximately USD 6 – 8 billion annually as payment to foreign shipping companies for the carriage of approximately 100 million tons of cargo to and from Pakistan. A massive chunk of liquid imports of 18 to 21 million tons, representing around 70% of all liquid imports, is transported by foreign carriers of which PSO manages around half. Yet the company has staunchly remained in favor of importing petroleum products through foreign carriers shunning domestic carriage solutions.

Pakistan is currently in the midst of a full-blown economic crisis with the country’s reserves plummeting to critical levels. The public debt is climbing to dangerously unsustainable levels nearing Pakistan’s GDP. As per the State Bank of Pakistan, by September 2022, the Total Gross Public Debt for Pakistan was PKR 51,130.5 billion (USD 189 billion at present exchange rates) and we know for a fact that several billion dollars of debt have been added since then. In these circumstances it is absolutely stupefying that certain sections of the state persist in their wasteful ways, throwing away millions of dollars unnecessarily which could have gone to the less fortunate segments of our society.

It is the collective responsibility of all Pakistanis to band together in these tough economic times. Pakistan and by extension PSO should ensure that Pakistan’s funds are used to benefit the people of Pakistan, as opposed to the current outflows from the country, permanently depleting the nation’s collective wealth. Instead of giving business to a foreign entity and economy, Pakistan should focus on expanding its own capabilities, training its own people, adding to the health of our own economy.
Pakistan National Shipping Corporation (PNSC) is Pakistan’s sole ship-owning company and flag carrier. It has two 75,000-ton product tankers in its fleet, which are suitable for the import of refined petroleum products including MOGAS and Diesel. The aforementioned vessels were purchased for the sole purpose of carrying Pakistan’s refined petroleum products. Despite this, PSO has never engaged PNSC directly for the import of clean petroleum products and those vessels have been consigned to toil abroad.

PNSC’s LR-1 tanker vessels are employed overseas for the carriage of refined petroleum products instead of serving PSO’s requirements. The irony of the matter is that these vessels have been engaged by PSO’s third-party suppliers for carriage of PSO’s cargoes instead of carrying the cargoes directly for PSO thus incurring higher freight costs. Since freight and demurrage costs are a direct pass-through for PSO, it is the people of Pakistan who have continued to suffer by having to pay precious foreign exchange for hiring the ship as well as the international middlemen instead of dealing directly with the shipper.

There have been many occasions where PSO’s cargos have been carried to Pakistani ports on PNSC’s vessels but the vessels were chartered by PSO’s suppliers rather than by POS directly. PNSC has access to priority berthing and discounted port dues, all of which aid in materializing cheaper voyages thus depriving the nation of these benefits. Employing PNSC could result in freight and demurrage foreign exchange savings for the national exchequer in excess of USD 260 million, with those savings eventually being passed down to the people.

It is not considered an outlandish idea in Pakistan to hire a SOE, more specifically PNSC, for the carriage of liquid bulk cargos. PNSC already successfully carries more than 85% of all crude oil imported by refineries in Pakistan. Past results have indicated that timely and prompt deliveries have ensured that the nation’s energy supply chain remains intact.

The crucial benefit of an SOE is that ideally, the organization should have the strength of the state behind them, with implicit cooperation underpinning a cohesive relationship amongst all arms of the state. Circumstances, wherein state institutions have to convince each other for their patronage instead of just getting on with the job have resulted in creating inefficiencies in the supply chain, adding to the cost of doing business that has been borne by ordinary Pakistanis.

Our neighbor to the east, India has taken an altogether different approach by using all of the powers at its disposal to promote its domestic shipping industry. India has launched a scheme to provide INR 1,624 crore over five years as subsidy support to Indian shipping companies in global tenders floated by Ministries / Departments for the import of government cargo. Depending on the age of the vessel the subsidy ranges from 5% to 15% on the quote offered by a competing foreign shipping company or the actual difference between the quote offered by the Indian flag vessel and the quote offered by the competing foreign shipping company, whichever is less. The eligible shipping company is paid the subsidy amount along with the charter hire amount and the tendering agency will be then reimbursed. As per anecdotal evidence, this has resulted in many foreign shipping companies opting for the Indian flag, to cater to the Indian market and stay competitive with domestic shipping lines. This results in cheaper shipping services and encourages local employment at the same time, ensuring that the maritime economy thrives.

PSO currently employs CNF (Carriage and Freight) contracts to transport its refined petroleum cargo, whereas to engage a domestic shipping line they would have to use FOB (Free on Board) contracts. FOB can be a cheaper alternative because shipping rates are pre-determined and negotiated along with the selection of cost-effective insurance limits unlike CNF where the freight rate is more dependent on the spot market and is bundled with the cost of the product being imported. CNF contracts result in removing all legal responsibility for transport (including any damages during transportation) from the buyer, with responsibility resting with the seller. Therefore, these types of contracts can be far more expensive than FOB contracts in which case the buyer is responsible once the product has been loaded onto the vessel.

A contract based on CNF has exposure to foreign exchange volatility which can cause a drastic and sudden cost escalation. Contracting PNSC, a domestic entity, would result in better credit terms for PSO with payment in Pakistani Rupees instead of US Dollars, which are a drain on our exchequer. This would result in optimal cash management, with Pakistani entities being favored over foreign operators.
For its part, PNSC has always performed its obligation and has often gone beyond the call of duty. PNSC has given PSO fixed rates with PNSC absorbing market volatility. PNSC is more flexible in loading and discharging times unlike foreign carriers which can save PSO demurrage charges. PNSC has even fixed demurrage rates unlike foreign carriers which charge based on market rates. All of these factors can result in significant savings which are currently being ignored.

PSO has relied on CNF contracts with foreign shipping lines since that is the easiest way out, where all responsibility for the cargo rests with the shipper. This convenience has a high cost which needs to be paid. Sadly, the cost of PSO’s decisions is not being borne by PSO. Instead, the buck is being passed down to the people of Pakistan, where they have to pay for PSO’s choices at the fuel pump. This is indeed a low-hanging fruit, however, the fruit is rotting.

The writer is an advisor to the Karachi Chamber of Commerce and Industry. He can be reached at,

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