Audit flags Rs80bn excess UFG losses at SSGCL, identifies Rs81bn recoverable

ISLAMABAD: The Auditor General of Pakistan has raised audit observations amounting to Rs250.832 billion on SSGCL, including Rs157.048 billion in UFG-related observations and Rs80.014 billion in UFG losses beyond OGRA's permissible benchmark, while identifying Rs81.251 billion as recoverable.

Sui Southern Gas Company Limited (SSGC) is a public limited company incorporated in Pakistan and listed in Pakistan Stock Exchange. The shareholding of the Government of Pakistan in the company is 53.18%.

The main activity of the SSGC is transmission and distribution of natural gas in the provinces of Sindh and Balochistan. The company is also engaged in certain activities related to the gas business including manufacturing and sale of gas meters, construction contracts for laying of pipelines and transportation of RLNG to SNGPL. SSGC is serving more than 3.113 million consumers in Sindh and Balochistan through a pipeline network of 47,520 KMs. The company is facing multiple problems that include governance issues, operational inefficiency, weak contract and project management that have suppressed the profitability and business growth of the company over the period of time. The company had not been able to finalize its accounts for the FY 2023-24 due to non-resolution of issues with Oil and Gas Regulatory Authority (OGRA) leading to non-determination of its revenue requirements for the aforesaid financial year.

According to the audit report, audit observations amounting to Rs250.832 billion were raised during the current audit of SSGCL. Of this amount, the audit identified Rs81.251 billion as recoverable. The observations have been classified as UFG-related issues amounting to Rs157.048 billion; receivables management, Rs56.043 billion; non-compliance with government policy, Rs20.227 billion; operational and performance issues, Rs10.173 billion; non-compliance with OGRA regulations, Rs3.937 billion; procurement-related issues, Rs2.301 billion; weak internal controls, Rs799.397 million; corporate governance-related issues, Rs17.545 million; and other observations, Rs285.430 million.

The audit identifies UFG as the company's biggest operational and financial challenge. It said SSGCL sustained Rs80.014 billion in UFG losses beyond OGRA's permissible limits during FY 2020-21 to FY 2023-24 because it failed to achieve the Key Monitoring Indicators (KMIs) prescribed by the regulator for reducing gas losses.

According to the report, SSGCL's actual UFG remained consistently above OGRA's benchmark throughout the review period. Against the regulator's targets of 6.92 percent, 6.97 percent, 6.25 percent and 6.30 percent, the company recorded actual UFG of 15.31 percent, 17.84 percent, 18.06 percent and 13.94 percent, respectively. The audit concluded that ineffective implementation of the UFG reduction plan and non-achievement of KMIs reduced the company's profitability and dividend payable to shareholders, including the federal government. The Departmental Accounts Committee (DAC) directed the company to strengthen implementation of its UFG reduction plan and bring losses within the permissible benchmark.

The report further observed shortcomings in the company's anti-gas theft efforts despite establishing dedicated departments to detect pilferage. Audit estimated the financial impact of failure in detecting gas theft at Rs53.928 billion, stating that weak surveillance and ineffective UFG control activities resulted in large-scale undetected theft.

According to the audit, gas theft valued at Rs49.984 billion remained undetected by the company's Customer Relations and Security Services and Counter Gas Theft Operations departments. In FY2023-24 alone, SSGCL reported theft claims of Rs858.671 million involving 331 cases, while inaction against 82,543 non-consumers allegedly resulted in additional losses of Rs3.086 billion. The DAC directed the management to intensify efforts to detect theft and pursue recoveries through the courts.

Receivables management emerged as another major concern. During the audit of FY 2023-24, SSGCL was found to have outstanding gas dues of Rs55.731 billion, including Rs1.895 billion owed by 455 industrial consumers and Rs53.836 billion owed by commercial and domestic consumers. The audit further noted that Rs24.717 billion of the outstanding amount was unsecured and attributed the situation to weak financial management. The DAC directed the company to expedite recovery of the outstanding dues.

The audit also highlighted the non-implementation of an Economic Coordination Committee (ECC) decision relating to Habibullah Coastal Power Company Limited (HCPC). It observed that SSGCL failed to implement the ECC decision for more than five years and ultimately treated Rs4.157 billion receivable from HCPC as bad debt and operating expense, resulting in non-recovery of public money. The DAC instructed the management to pursue the matter with OGRA and recommended fixing responsibility.

Among its governance-related observations, the audit pointed to weak internal controls that resulted in gas theft through six fake gas meters, causing a loss of Rs123.611 million. It also questioned the assignment of 61 percent of the company's 2,299 recovery cases to only seven lawyers, saying the practice led to litigation and reflected weaknesses in legal case management.

The audit report noted that SSGCL continues to face governance challenges, operational inefficiencies, weak contract and project management and unresolved regulatory issues. It also pointed out that the company had not finalised its audited financial statements for FY2023-24 due to unresolved matters with OGRA regarding determination of its revenue requirements.

The AGP recommended strengthening internal controls, improving UFG management, accelerating recovery of outstanding dues, implementing pending government and DAC decisions, enhancing anti-theft measures, and fixing responsibility where audit observations are established.