PRICING OF POL PRODUCTS

SHABBIR H. KAZMI
(feedback@pgeconomist.com)
Nov 1 - 7, 20
10

Many of the sector experts have consensus that pricing of petroleum products are not fixed in a transparent manner. While the best effort is made to maximise collection of petroleum development levy, oil marketing companies benefit automatically and the worst sufferers are consumers. Availability of CNG has reduced the cost per kilometer of cars users but motorcyclists and users of public transport are paying the cost through their noses.

Therefore, there is an urgent need to redefine POL pricing mechanism. Some of the experts also insist that government should stop collecting PDL and find some other ways to enhance revenue collection.

Policy makers and even the economist say that number of taxpayers is very small in Pakistan. This is a fallacy because each and every individual is paying tax. The indirect taxes still constitute the largest chunk of revenue collection and some of the taxes are general sales tax, central excise duty, petroleum and gas development levies. Most of these taxes are collected at import and manufacturing levels. Regrettably, many of the taxes are clubbed into cost of product while determining the margins of intermediaries. Under the covenants of IMF assistance program Pakistan is required to introduce reformed general sales tax (RGST), aimed at enhancing revenue collection of the government.

Fixation of refining margins for crude oil refineries also causes distortion is pricing. It is on record that at times import of certain products cost less as compared to buying the same from the local refineries. Following this bad policy has plunged capacity utilisation of local refineries to less than 70 per cent.

On top of this, delay in getting the payments from oil marketing companies has put the refineries of the verge of bankruptcy. Because of liquidity crunch refineries are forced to borrow more and more from the commercial banks, which adds to their financial cost, erode their profitability and impairs their expansion programs. Most of the refineries operating in Pakistan are based on the technology of fifties and sixties and are capable of producing limited products and are incapable of producing higher distillates. If they have ample funds at their disposal, most probably they could undertake expansion plans. However, some of the experts are of the opinion that Pakistan should emulate Singaporean experience and establish state-of-the-art refineries as many of its neighbors are grossly deficient in indigenous production of refined products.

Prior to the commencement of mid-country refinery both the locally refined products and imported white oil products had to be carried from Karachi to up country. Since the government decided to follow uniform prices of POL products throughout the country consumers living in Karachi and its vicinity has to bear the cost of transporting these products to upcountry. Experts have been saying that this is 'unjust' policy, which penalises one group of consumers to ensure availability of products at the same prices throughout the country.

It is often alleged that 'freight pool system' is full of corruption. Despite construction of white oil pipeline, use of railway wagons and maintaining pool of company-owned tankers, private tankers are also used in large number. Under the prevailing system transporter is required to carry product to certain destinations in the upper part of the country and also given the freight cost. However, it is alleged that these contractors carry only small part of the total designated quantities and sale bulk of the products within Sindh and Punjab. Therefore, there is need to abolish this system at the earliest. With the commencement of mid-country refinery and construction of huge storage facilities in Mahmood Kot getting rid of the freight pool system seems possible.

Some of the critics say that like any other product POL products should also be sold at uniform prices throughout the country. However, they also subscribe to the suggestion that government should bear the cost of transportation and no effort should be made to recover it from the consumers. Some experts say the prices of POL products should be the lowest in Karachi because 1) three refineries are operating in Sindh, 2) imported POL products also land at two of the seal ports located here and Karachi consuming the largest percentage of overall consumption of POL products in the country. Opponents of uniform prices of POL products say if consumers of food grains, vegetables, fruits and many other products have to pay the freight cost why the same law should be applicable of POL products.

It is suggested that public accounts committee should look into the details of POL pricing policy. It is believed that the government plans to reassign the mandate of fixing POL prices to oil companies advisory committee. One wonders about a system where sellers determine prices of their products and government and consumers look at them as helpless entities. This certainly shows that the OCAC is stronger than the government.

Some of the experts are of the view that there is nothing wrong with whether OCAC or Ogra fix the prices but the method should be transparent and known to all. The government should publish the pricing formula and mechanism by printing advertisements in newspapers and running commercials on television channels.

Consumers have a legitimate complaint that regulatory authorities be it Ogra or Nepra have failed to protect the interest of consumers. In fact, they have been facilitating the government to maximise its revenue collection and producers/service providers maximise their profit.

Consumers are right in demanding that freight pool system should also be abolished at the earliest. There is no need to follow this policy after the commencement of mid-country refinery and construction of black and while oil pipelines. Oil companies should also free themselves from 'tanker mafia'. However, noting could be achieved without resolving the inter corporate debt issue.

Last but not the least government should ensure construction of modern crude oil refineries in the country by resolving the refining margins. There should be some incentive for running the refineries at optimum capacity utilisation. It will also help in bringing down the cost of finished products in the country.