HIGHER ENERGY PRICES
HEAVY TAXES ERODING INDUSTRIAL COMPETITIVENESS, PENALIZING MASSES
SHABBIR H. KAZMI
Jan 19 - 25, 2009
The response of the Government of Pakistan (GoP) to hike and fall of international crude oil prices demands detailed examination to formulate strategy for facing such a global phenomenon in the future. It goes without saying that delayed actions and political motives further complicated the issue. On top of every thing the change in the government initiated blame game but lack of understanding of severity of the issue by newly elected government did not allow it to indulge in prudent thinking and rational decision making.
The year 2007 was crucial for the previous government because of general elections and it avoided transferring the adverse impact of hike in global crude oil prices to the masses. Year 2008 was a difficult year for the new incumbent who also found it difficult to pass on the rise to consumers. As country's finances ran into problems and the GoP had to approach the IMF for the financial assistance, they found it more convenient to keep energy prices on the higher level. This is being done in the name of withdrawal of subsidies but it remains to be found whether the government pays any subsidy or collects billions of rupees taxes on energy products?
It is on record that the successive governments in Pakistan have been collecting billions of rupees taxes on energy products. Often some of the taxes are merged while calculating the cost of products and on top that development surcharge and surcharge on surcharge are added. According to some of the analysts often 2/3 of the retail price consists of taxes and 1/3 is the cost of product. That is one of reasons the successive governments have avoided public debate on pricing formula of energy products.
While in opposition the current ruling alliance was critical of pricing of energy products but once in office it follows the footsteps of its predecessor. After having touched the peak of US$147/barrel crude oil prices are hovering around US$37/barrel but the government has not made corresponding reduction in gas and POL prices. It still claims paying subsidy but in fact it is making a fortune. As the country suffers from an inefficient tax collecting regime, the successive governments including the present one try to collect as much tax as possible on the energy products to compensate to shortfall in revenue. In Pakistan bulk of the revenue is collected as indirect and presumptive taxes. Governments often say that a large percentage of population is out of the tax net but the fact is that poor pays tax but huge income of feudal lords from agriculture remains tax free.
Subsequent to the hike in global crude oil prices there was substantial increase in electricity and gas tariffs, freight and transportation charges and fares of railways, airlines and local and inter city buses. However, no corresponding reduction has been made after fall of crude oil prices to the current levels.
Private transporters have reduced the freight charges and fares to some extent but Pakistan Railways and PIA have not. The delay in reduction in fares by these state owned enterprises is attributed to their huge accumulated losses for the period when crude oil prices were breaking record one after the other.
However, it is necessary to point out that hike in oil prices is not the only reason for huge losses being posted by Pakistan Railways and PIA. Over the years these entities have become over-employed, besieged with inefficient and rampant corruption. Unfortunately, all successive governments have inducted their 'loyalists' in state owned enterprises. Though, there have been some retrenchments but most of the moves were aimed at inducting the favorites and weeding out the opponents.
ELECTRICITY AND GAS TARIFFS
Persistent hike in electricity and gas tariffs has been eroding competitiveness of local manufacturers. The situation becomes more pinching when international trends and local price movements are in the opposite direction. It is partly because of an inefficient pricing policy and more importantly electricity and gas companies operating in the public sector. Be it POL products or gas the effort is to maximize dividend payout of the state owned enterprises. The added advantage is huge collection of corporate tax.
As regards WAPDA and KESC it has been pointed out again and again that losses of these entities are only because of massive electricity theft, gross mismanagement and rampant corruption. Unless these contentious issues are resolved these entities can never post profit even if tariffs are doubled. It is also on record that hikes in electricity tariff proliferates power theft.
It is also on record that CNG price is fixed arbitrarily and there seems to be no link with crude oil price movement. It is believed that CNG price is linked with crude oil price but the recent trend negates this. Though, crude oil prices have come down to one third of the peak, there has not been any corresponding reduction in CNG price. The gas wellhead price may be linked with crude oil price but its lagged impact creates more confusion.
The movement of crude oil prices in the recent past clearly suggests that it was the outcome of over indulgence of funds in commodities markets. Pakistan is heavily depended on imported crude and its gas reserves are fast depleting. Therefore, there is a need to develop alternative sources of energy i.e. coal, solar, wind, nuclear, and all others. However, the focus should be on indigenous resources.
Local trade and industry should also come up with energy conservation plan. Since the country is heavily dependent on imported energy products, containing wastages and improving efficiency could help in cost optimization and improving profitability.