March 12, 2002	Tuesday	Zilhaj 27, 1422

ISLAMABAD, March 11: The World Bank has asked Pakistan to suspend Rs8 billion subsidy to oil refineries from budget 2002-03 and cap import parity prices instead of these being determined by oil companies, official sources told Dawn.

“The government, in connection with FY2002/03 budget, should formulate a policy of providing for gradual elimination of the subsidies over a defined time frame, such that, say within three years, the subsidy programme be terminated,” the bank said.

In its latest aide memoire on structural adjustment programme finalized in consultation with petroleum ministry senior officials led by federal minister Usman Aminuddin a few days ago, the bank stated that “provision of subsidies to the refineries is unusual, and it gives their shareholders limited incentives to improve efficiency, invest and compete.”

The bank has also criticized the government for providing custom exemptions and tax holidays on investments in refineries and an uncompetitive fuel oil market.

“The approach adopted in the case of fuel oil by industry is not fully competitive, particularly since it is based on actual cost of imports and does not provide for competition among the refineries,” the bank said.

The World Bank is of the view that the government should not allow the industry to determine import parity prices on the basis of actual import costs and should switch to a price cap system both at the level of refineries and the main depots.

Pakistan’s three refineries — Attock Refinery Limited (ARL), Pakistan Refinery Limited (PRL) and National Refinery Limited (NRL) — currently benefit a guaranteed return of 10-40 per cent and Pak Arab Refinery Limited (Parco) around 25 per cent. The total subsidy to refineries constitute around Rs8 billion per annum.

While Parco constitutes a recent investment for which the government provided specific guarantees, the other three refineries have been in operation for many years so that the subsidy scheme emanates more from a custom that a government obligation, said the bank.

In the fuel oil sector, Pakistan State Oil has the largest market share mainly because of the fact that it has long term fuel supply agreements with the independent power producers.

The current practice is for the PSO to determine the actual price of imports in the past fortnight, to which margins are added so that a reference price ex-depot is determined and communicated formally to the government and the other players.

The cost of transport is negotiated by the OMCs with the tanker owners and is reported to be 3 to 5 per cent below the cartage rates determined by the government in connection with the freight pool.

The OMCs claim that they sell the products at a discount in relation to the prices publicised by PSO. Wapda, the largest consumer of fuel oil, considers that it is better to import fuel oil directly instead of purchase from PSO, and is currently making arr