REDEFINING POL PRICING MECHANISM

SHABBIR H. KAZMI
(feedback@pgeconomist.com)
Sep 27 - Oct 3, 20
10

Determining prices of petroleum, oil and lubricants (POL) has remained a difficult task for the government. One of the key policy issues is determination of prices of petroleum products in response to the changing international prices of crude oil prices. The lack of timely adjustments of domestic POL prices at times facilitates mobilisation of huge revenue and, also forces payment of huge subsidies. The issue of domestic POL prices not only has significant fiscal policy implications but also fuels inflation in the country, eroding competitiveness of the local manufacturers. Setting of domestic POL prices has always confronted serious policy implications.

It is no secret that most of the policy moves are aimed at enabling the government to maximise levies on energy products including CNG and LPG. The government has been increasing CNG price to bring it at par with motor gasoline. However, worst has been the increase in HSD mostly used in public transportation. Public representatives have often objected the policy and said the CNG and LPG are consumed by common man and giving any power to the ministry for levying PDL on such fuels would hurt the consumers badly.

In the past, a controversy also emerged whether the government pays and subsidises POL products or collects huge levies by keeping the pricing formula most ambiguous, confusing and secretive. It is often said that the government is paying billions of rupees subsidy on POL products, which cannot be sustained for long. It is on record when the former Prime Minister recommended exempting all taxes on POL products the FBR did not agree with this proposal.

The POL pricing formula is often discussed because of charging of deemed duty from the refineries. There were suggestions that the policy of charging deemed duty from refineries should be eliminated immediately. This policy is pushing refineries to virtual bankruptcy. At times prices of certain products refined locally is more than the imported one. Therefore, oil marketing companies prefer to import these rather than buying from the local refineries.

The negotiations between the government and the industry to work out a mutually acceptable oil pricing formula have remained inconclusive and there are also clear indications that even if they agree any relief for consumers will not be possible. In such deliberations normally the representatives of oil marketing companies, refineries, the oil and gas regulatory authority, secretaries of petroleum, planning and finance ministries and members of the committee of experts take part but the outcome is 'too many hands spoil the curry'. There seems to be no consensus among the participants mainly because of the finance ministry insisting on additional collection to meet the expenditures due to the war on terror, subsidies, and other pressures. Therefore, no relief in terms of reduction in taxes on oil products could be expected in near future.

It may be recalled that in November 2009 the government had set up a committee of experts on the instructions of the Supreme Court to remove lacunae in the oil pricing mechanism causing billions of rupees losses to the nation. The belated but partial decision to form the committee was taken on the recommendation of the Justice Bhagwandas Commission appointed by the apex court to look into the oil pricing mechanism. The commission had found glaring faults in the mechanism, proposed drastic changes in the formula and recommended involvement of technical experts and independent economists in the committee to ensure fair play in the light of global experiences.

The National Accountability Bureau (NAB) had also submitted a report on wrongdoings of government and oil industry functionaries in the pricing of petroleum products. The report covering the petroleum pricing mechanism between June 2001 and June 2006 was originally submitted on June 13, 2006 to then President Pervez Musharraf and Prime Minister Shaukat Aziz by NAB chairman.

The report had concluded that 'it is sufficiently evident that (functionaries in the) ministry of petroleum in collusion with the Oil Companies Advisory Committee (OCAC), oil industry and oil marketing companies (OMCs) have engaged in corrupt practices for generating colossal undue financial gains for refineries and the OMCs at the cost of the public and the economy as a whole.'

The report said the federal cabinet in June 2001 entrusted the role of fixing oil prices to the OCAC under monitoring by the director general of oil, but none of the directors general performed the task and some of them even expressed ignorance about the cabinet decision. Price fixation by the OCAC remained non-transparent/dubious and the DG oil/ministry did not play any role, violating the cabinet decision.

It said that under the cabinet's decision, oil and gas regulatory authority was created in March 2002 and the government was required to immediately transfer the function of monitoring and regulating of petroleum prices to the authority. However, the transfer of regulatory role to Ogra 'was delayed by the ministry for many years. Similarly, 'the deemed duty in the guise of tariff protection was allowed to refineries without seeking specific legal cover.

One of the contentious issues is uniform prices of POL products throughout the country. The residents of major cities having the largest population of vehicles and also consuming bulk of the POL products feel that they are being exploited. Residents Karachi which has two refineries and also two major seaports are forced to pay higher price of POL products under the policy. They demand change in the policy and say if the government wants to provide any benefit to the people of far flung areas the amount should be paid from its kitty and not through cross subsidy.