Much-needed measures for documenting the economy await promulgation of an ordinance for integration of data across all tiers of government. And austerity measures by Cabinet Committee on Economic Revival (CCER) being considered, (Single Treasury Account Rs 424 billion, 10% reduction in FY22 Federal Government of Rs 54 billion in six months, devolved ministries Rs 328 billion, devolution of HEC Rs 70 billion and sharing of BISP Rs 217 billion with the provinces, MoF review of tax exemptions (3 major taxes amount to Rs 1.3 trillion, subsidies, grants) are a positive step.
Fuel market requires a paradigm change. Not subtly but by taking disruptive steps aimed at evolution of a competitive energy market. SIFC (Special Investment Facilitation Council) apex committee needs to commit to deregulation and a visible conducive business environment requires no judicial activism that leads to cancellation or renegotiation of contracts; but one that ensures an effective contract arbitration process including educated and prudent deliberations by regulator and parliamentary committees/subcommittees.
Building a competitive market also requires confidence building by SBP, FBR, Regulator, MoE and investigation agencies for facilitating establishment of an efficient transportation infrastructure to expand fuel, electricity and gas supply chain by road, rail, transmission lines and waterways across the country.
This necessitates support to Pakistan Railways for laying a fibre optic network for data and fuel handling as part of ML1 by removal of noncompetitive clauses that monopolize HSD/MOGAS volumes to Pak Arab Pipeline Company and restricts Furnace Oil (FO) to Pak Railways. Due to reduced usage of FO, Pak Railways’ business revival plan is a nonstarter.
Secondly, moving out regulatory functions from the two Divisions of MoE has been initiated but their independence has not been assured. Delays in appointments in Competition Commission of Pakistan and notification of gas price increase are examples but plans to link high end customer price with 11.2 kg LPG is a good step.
An integrated regulator, instead of establishing provincial regulators, needs to be thought through based on how we intend to manage energy and balance provincial autonomy.
Deregulation of oil industry requires release of frozen shares of PSO (Pakistan State Oil) and rescinding the Petroleum Marketing Act., allowing Oil Marketing Companies (OMCs) to set provincial or national retail prices.
For the oil sector, this means doing away with IFEM (Inland Freight Equalization Margin) whose amount last year is estimated at around Rs 60-70 billion shared between affreightment contractors, white oil pipeline and Pakistan Railways.
The expense to transport from depots to retail outlets is additional. IFEM Audit by Ilyas Saeed and Co. Auditors assigned by Ogra for 2012-20 for reconciliation had a completion target of Sept 2023. It is pending and TORs for 2020-23 are still not agreed nor audit initiated. Being the largest shareholder, it hurts PSO in terms of financing cost.
Transfer of RON differential and high sulphur penalty with regulatory duty transfer to IFEM has helped reduce the logistics cost to consumer (current pool is negative by Rs 1.53 billion as of May 2023) but has “subsidized” OMCs who should instead be settling gain/loss amongst themselves.
This amount should be used to build reserves and it is increasingly necessary to review the impact of the new Refinery Policy under which funds will increase till EPC award to upgrade the old units. This has to be expanded later by allowing margin setting by OMCs, as already being done for kerosene, FO, lubricants, (Research Octane Number) RON 95.
Fourthly, a deregulated environment also requires removal of monopoly of Fauji Oil Terminal and Distribution Company on import infrastructure in Port Qasim, rebuilding oil piers in KPT, connecting the two ports by pipeline pending close to a decade.
Pakistan Refinery Limited should have taken lead much earlier, being a significant beneficiary. Policy changes made to build bonded storage and its rules should assist OMCs in developing trading/commercial storages for oil but strategic storages need to be built and managed by GOP.
This business as usual model that continues to delay deregulation by repeated extensions, issuance of new/amended Refinery Policies in the hope that one day it will improve competiveness, reduce demurrages and build our strategic and commercial reserves is ridden with an uncertain time-frame for its materialisation. Alternate requires reinventing, integrated planning and SIFC intervention for evolving a strategy with a 15-year horizon of building an “oil and gas city” (refinery, petrochemical, storage, pipeline) in Gadani and/or Gwadar based on regional play and energy security of the country. Third party participation in CPEC (China Pakistan Economic Corridor) will assist further in this endeavour.
The estimated investment of over $4-5bn under “new” Refinery Policy by existing refineries with the 1960s technology, despite their history of delaying up-gradation over last 15 to 25 years and even more, knowing that the changing fuel landscape of the country will reduce fuel oil and enhance refined products including gross refinery margins.
But the elephant in the room is that why is Pakistan not expeditiously progressing a new and efficient refinery with local refinery participating with PSO and Aramco as equity partners in the $10-12bn refinery/petrochemical project (new policy expected soon) instead of upgrading?
Additionally, building winter consumption of electricity is necessitated by our dwindling gas reserves and increasing dependency on imported gas. This requires building electricity transmission network in Balochistan and KP (which will also later support regional energy trade).
(To be continued)
Copyright Business Recorder, 2023