SUBSIDY MYTH OR FACT

Government is still collecting billions of rupees as tax on energy products

SHABBIR H. KAZMI
Dec 03 - 09, 2007

There is growing pressure of the critics on the government to disclose the correct pricing mechanism. The growing perception is that government is hardly paying any subsidy on key POL products. The collection under Petroleum Development Levy may have declined to low levels but the government is still collecting billions of rupees in the form of different taxes applicable of POL products, be it kerosene oil or HOBC.

The economic managers have been saying that despite skyrocketing crude oil prices the government has maintained POL prices at the parity of $60 per barrel. The argument is that in January this year price of crude was less than $60 which is now hovering around $100 a barrel but the government has not revised POL prices upwards. However, to compensate the oil marketing companies government is paying billions of rupees as subsidy.

As against this the critics say, "Keeping in view the price of Light Arabian Crude and the prevailing prices of POL the government is not paying any subsidy." To substantiate their statement critics refer to ex-refinery and retail prices of POL products. When on subtract ex-refinery prices plus commission from the retail price a substantial portion is still going to the government. The critics ask is the collection not enough that the government wants to collect more under Petroleum Development Levy, over and above the taxes already being collected.

The critics go even bitterer when asked to comment on the impact of high global oil prices on Pakistan economy and the people. They say, "All are making money be it the government or the oil marketing companies/ petroleum dealers. No one seems to be taking about the miseries of common man. The ultimate consumers of POL products are paying the price through their nose but government continues to say it is paying billions of rupees subsidy."

One could read/hear perspective of oil marketing companies and petroleum dealers, mostly complaining about the declining margins. Even the public representatives prefer to keep mum because they could not offend the powerful oil marketing companies. On top of this the Senators, MNAs and MPAs are obliged to say whatever they are told and not the point of view of common man.

Lately, a standing committee did try to understand POL pricing formula but all in vain. It is believed that the oil marketing companies as well as the government avoided disclosing the factual position and just vomited out the figures they were told to disclose.

The electricity companies, WAPDA and KESC, say that they are not allowed to raise power tariff in accordance with the rising price of furnace oil and the time lag adds to their losses. This may be correct to some extent but can these utilities deny that the major cause of their losses is not the rising power generation cost and/or power purchase price but out of proportion transmission and distribution (T&D) losses.

It is very difficult to comment on the quantum and reasons of losses incurred by WAPDA because of exceptional delays in release of its annual financial accounts. However, it is on record that in a particular year the number of units billed by the KESC were less than the units it generated and all the quantum bought from IPPs went towards T&D losses.

It is win-win situation for IPPs because fuel is a pass on factor for them. On one hand the government, through state owned oil marketing company PSO is obliged to supply furnace oil and in case of any interruption also liable to pay the penalty. However, the IPPs can just pass on the fuel cost to WAPDA and KESC. IPPs are also guaranteed minimum power purchase from WAPDA and KESC.

Going further reveals even more interesting story. Whenever the government increases price of HSD by one rupee per liter, transporters increase tariff by one rupee per passenger. Gone are the days when fare was increased in paisas because now the currency of smallest denomination in the country is rupee. Even the baggers do not accept less than one rupee as Khirat, why should the transporters charge fare in paisas. The lowest fare is four rupees for the bus and twelve rupees for the coach and mini buses are at liberty to charge whatever they like.

It is believed that the government is not paying any subsidy on HSD. The reasons for not paying the subsidy are beyond comprehension because this is the fuel of "poor". It is the common man, who travels in public transport. Despite this it is propagated that an ordinary man does not pay any tax. Is this not the burden being carried by the common man?

It is also said that government pays subsidy on kerosene oil but the claims remains highly disputed because no one knows exactly, who are the beneficiaries. Since the residents of some of the areas do not have access to natural gas or any other low cost fuel, it is the responsibility of the government to ensure supply an affordable fuel for the domestic consumers.

However, many critics say that poor never get the benefit because the middlemen always cheat them. In the past a significant quantity of kerosene oil was smuggled to India and also used for adulteration in diesel. It is also used as additive in paints. Therefore, the poor never get kerosene oil at the government stipulated rate.

With the increase in crude oil price, gas prices are also on the rise, simply because well-head price is indexed with crude oil price. Till recently there was a cap of $50 per barrel, which has been removed recently. Therefore, the consumers should be ready for further and substantial increase in gas tariff.

The gas marketing companies have already approached Oil and Gas regulatory Authority (OGRA) for the hike in gas tariff. Their contention is that due to a number of reasons i.e. increase in gas price, administrative expenses and interest rate etc., achieving 17.5% return on operating assets is not possible. This rate has been fixed by the government. Lately, gas marketing companies were earning more than the stipulated rate and transferring the difference to the government, which is no longer possible.

In order to bring the price at realistic level, it is necessary that government reduce its levies applicable on POL products and gas. Efforts should also be doubled to ensure availability of biofuels for the vehicles, coal for the power plants and construction of dams to enhance hydel power generation.