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It may attract more foreign investors in the oil sector of Pakistan

Jul 10 - 16, 2000

The decision announced by the government to deregulate import of fuel oil which is certainly a major change in the regulated oil market of Pakistan has evoked high hopes among the people for a drastic cut in electricity charges which are the highest in Pakistan.

In order to ensure smooth sailing of the new policy of free import of furnace oil, a regulatory body in the name of Petroleum Regulatory Board is however being constituted to make the new system a success. Since more new multinational oil market companies are likely to be attracted to enter into Pakistan market arrangements are also under way for a free flow of foreign exchange for import of oil.

The Secretary Ministry of Petroleum had already indicated that the government is in favour to exempt the fuel from customs, excise duty and development surcharge.

Currently the government as charging Rs35.20 per ton as customs and excise duty which is being withdrawn. A fixed development surcharge of Rs327.90 was also being done away with. All these taxes will be replaced by a 15 per cent sales tax to be imposed on the import of furnace oil.

In fact, the free import of fuel oil was the long standing demand of Independent Power Producers (IPPs) attributing the high cost of power generation to the costly fuel oil provided by the government in Pakistan. Let us hope for reasonable decline in electricity charges with the implementation of deregulation policy for import of fuel oil by the power producers' in particular and other industrial users in general.

Currently Pakistan is generating over 15,000 MW of electricity out of which over 10,316 mw are generated through thermal based on furnace oil generation. The IPPs have a considerable contribution of over 4000MW in Thermal power generation. Around 5000 MW generated by Hydel system while a meager amount of 137 mw is added by Nuclear Power Plant in Karachi.

Although WAPDA claims that some 11 IPPs have renegotiated the power tariffs downward, yet the tussle between WAPDA and Hubco continues to present an ugly picture on the economic front and is said to have adversely affected the investment climate in Pakistan.

Whether the deregulation of fuel oil helps resolving the WAPDA-Hubco tussle on Power Purchase Agreement or not, it is in the interest of the national economy that an amicable solution to the problem should be sought at the earliest.

The oil and gas and power sectors in Pakistan still offer a great attraction for foreign investors provided a better atmosphere is made available. The experiment of a partial deregulated oil market in Pakistan is expected to produce some positive results as far as the foreign investment is concerned. It is unfortunate that WAPDA-Hubco tussle took a new turn this week when the later invoked the Government's sovereign guarantee when WAPDA allegedly failed to open a satisfactory letter of credit for making the payment of Rs3.9 billion to the company.

According to a report Hubco has issued a formal notice to the managing director of private power and infrastructure board, the ministry of water and power and the government of Pakistan. It notifies WAPDA of continuing breach of section 9.1 of the power purchase agreement. The guarantee was given by the President of Pakistan on June 3, 1995 in favour of Hubco for and on behalf of the Islamic Republic of Pakistan.

According to informed sources, the groundwork for implementation of the policy for deregulation of import is in advance stage and a formal announcement is likely to be made at the fag end of the current month.

Some teething problems in the initial stage of the implementation of the free import of oil policy may arise specially the transportation cost that has to be borne by the consumers located in the upcountry. The Hubco 1292 MW, Tapal 126 and Gul Ahmed 124 MW will be lucky in the sense that they won't have to bear the transportation cost as other projects located upcountry will have to bear. However a final word about this transportation cost has yet to be made public by the government.

Some quarters have expressed the concern that the deregulation of furnace oil import may prove costlier for upcountry consumers since it will no more be a part of freight pool plan. Javed Jabbar currently minister for Information is however in favour of abolition of the freight pool system in Pakistan, which he thinks, is costing billions of rupees to the national exchequer. He had indicated for abolition of freight pool system while he was the minister for petroleum in the care taker government of Moin Qureshi. The major consumers of the furnace oil other than IPPs are WAPDA, sugar mills and cement units.

The ECC which has reportedly approved deregulation of the furnace oil is of the view that the existing freight pool mechanism and all the inland transportation cost will be borne by the consumers on actual cost basis.

When the free import of the fuel oil is allowed, the imports will be confined to Port Qasim i.e. Fauji Oil Terminal Company (FOTCO). Other oil imports like low sulfur fuel oil however will continue to be imported through Karachi port.