MAGNIFIED LOSS TO THE MANUFACTURING INDUSTRY AS CNG IS USED FOR TRANSPORTATION
SAAD ANWAR HASHMI
Dec 10 - 16, 2012
CNG was introduced for transportation in late 90's to counter the rise in price of oil which caused inflation from the supply side. The idea for CNG was to provide cushion to the consumers specially the transportation network to keep the prices low. As the price of fuel based on international oil prices increased, the demand for CNG in the country increased. CNG kits were imported an sold at a premium where licenses were issued to establish CNG pumps country wide those who had the capital. The CNG industry thrived as a substitute to petroleum. The government also hoped to reduce the oil import bill. Gas supply which was intended for manufacturing and domestic consumption was diverted to the transportation industry without looking into macro impact of such problem. People today are so inclined towards gas specially the transportation network that phasing out CNG would result in loss of business of many. The government never anticipated these problems early on. As gas supply is curtailed, the biggest impact is on the Fertilizer sector. Pakistan being an agrarian economy relies on fertilizer for agricultural produce. Fertilizer plants have witnessed loss in production and shutdown days due to non-availability of gas, specially Engro's Enven Plant. The government faces a dilemma in this regard, where should gas be directed i.e. towards transportation or towards manufacturing concerns and domestic household use. Whenever there is top line pressure and revolt, the gas is directed accordingly. Based on latest figures available, Pakistan is the second country in the world with the highest number of CNG run vehicles in the world. Iran has 2.86 million vehicles whereas Pakistan has 2.85 million vehicles running on CNG.
It has now been argued and widely understood that gas used for transportation is a waste of this resource. Gas can be better utilized for the manufacturing industry which would enhance production, create employment and increase GDP. With the quantum of vehicles moving towards CNG despite availability of pumps, long lines are witnessed in the country everyday. However, to give OMC's a level playing field to compete with CNG pumps, the selling price of CNG was being increased by OGRA consistently with no real justification. Supreme court notice revealed that the pricing formula was forged and that CNG prices would reduce keeping into account the costs. There was an immediate decrease in the price of gas by PKR 30 per kg. In a subsequent decision, the price was further scheduled to be reduced by another PKR 25 to PKR 30 before CNG pumps announced closure without considering the benefit to the consumers. Transporters, Taxi and Rickshaws running on CNG with post reduction in price did not reduce their fares.
The CNG association called a nationwide strike which is unfortunate. The government and OGRA falling under this pressure is currently reviewing the price of CNG which would unjustified so no pricing formula would justify another increase by PKR 30 or more since the cost of gas is known. OGRA with consultation with SNGPL and SSGC is once again considering maintaining the price at previous levels without taking a stand on the same. One cannot even comprehend if ever the government makes an attempt to eliminate CNG from the transportation system, law and order situation it would create in the country. Therefore, with CNG used heavily in transportation, the government and OGRA both are on a swing going to-and-fro with no solution visible expect keep the CNG independent of the impact it would bring on the industry.
CNG station owners have made a windfall profit and are still making profits when the price has been reduced. The CNG association claims that even with reduced rates, the business is still profitable keeping with low costs. CNG owners do not want to loose the profit they have been earning and want the prices to be higher. Looking into the cost and price of CNG sold; CNG is extracted at a certain cost and expenses from ground up. SNGPL and SSGC charges 17.5 percent profit on the fixed operating expenses. Coupled with federal development surcharge and GST of 25 percent, the price factor is already escalated at this point. In addition to the above, CNG pumps build a percentage classified under expenses and profits which is where windfall gains happen.
It is disappointing that OGRA cannot make a stand and put the benefit of the consumers first rather than succumb to demands of CNG station owners. There are no stringent policies which would show a road map of CNG availability for transportation. We have established that the use of CNG for transportation has a negative impact. The government could gradually phase out CNG and bring the prices of petroleum down removing the tax which is currently averaging 32% to 35% per liter. Secondly, lease of CNG stations currently with a tenor 15 years should be removed with an option to have the station converted to petroleum for no additional charges. There have been discussions for rationing gas to different industries based on their requirement which would once again include gas holidays. The textile sector has already been affected with non-availability of gas. Thinking on such lines would not yield any results as gas is required by every industry and the more available, the better it would be to keep the manufacturing facility running with production. Gas results in reduction in cost of production through reduction in expenses which in turn increases when industries switch to electricity and oil which is not suitable in the long run.
The question is, what can be the solution to the CNG problem? If phased out, violent uproar would result in law and order issues not something the government can handle effectively. The only solution is to first remove all taxation from petroleum production to the point that CNG is expensive and unviable. The loss in government revenue through petroleum could be adjusted with high duties and taxes on non-essential imports e.g. cigarettes and products already produced locally. This action would immediately result in closure of CNG businesses. Furthermore, lease for a CNG pump should no longer be issued and phased out accordingly. Such an action would assist the economy through increase in employment, reduced manufacturing cost and increase in GDP through enhanced production.