July 17, 2006	Monday	Jumadi-ul-Sani 20, 1427

WITH over 50 per cent share in the total energy consumption, the natural gas is playing a critical role in fuelling economic growth. And the demand for gas is growing rapidly.

No wonder, various market players are eyeing the emerging opportunities in the sector offered by privatisation. On the agenda for sell-off are major producers like Oil and Gas Development Company Limited (OGDC), Pakistan Petroleum Limited (PPL) and distribution companies like Sui Southern Gas Company Limited (SSGCL) and Sui Northern Gas Pipelines Limited (SNGPL).

Not only this, the gas sector also impacts on inter-provincial relations as royalties and gas development surcharge constitute a substantial portion of provincial budgets, at least in the case of Sindh and Balochistan.

Any wrong step by the policy makers at this stage, either in the shape pricing mechanism, market structure or the regulatory environment could spark a crisis.

In this background, the Council of Common Interest (CCI) has been revived under article 153 of the Constitution. Feeling financially threatened by reduction in its royalty and gas development surcharge(GDS) owing to depleting Sui field and the surcharge distribution formula, has been demanding arbitration to settle its dispute with Sindh.

The province can seek a fair settlement through the CCI to improve its finances given the fact that recommendations of the Parliamentary Committee on Balochistan has not resolved grievances of the provinces. As a spill over effect, the province may resist the privatization of the Pakistan Petroleum Limited (PPL), against which the provincial assembly has passed resolutions in the past.

The sale of PPL has been delayed for more than five years despite a commitment made with the International Finance Corporation - the commercial arm of the World Bank - which holds minor shareholding in the company.

To meet the IFC’s deadline, the government had started the process of doing away with cost-plus price formula and putting in place a market-based mechanism entailing over 170 per cent increase in consumer prices but the process has since been slowed down.

On the other hand, while the government has decided to offload 10-15 per cent more shares of the OGDCL through Global Depository Receipts in London and New York shortly and secondary public offering at home, it has not moved very fast towards its strategic sale.

Now it is officially confirmed that though the PPL, SSGCL and SNGPL have not been taken off the sale list, their privatisation has been put on back burner for the time being, to resolve issues relating to market structure and gas pricing and subsidies.

The market is plagued with the inefficiencies, distortions and monopolies and a domestic fuel which should have played a balancing act in containing energy prices, has itself been pegged with the imported fuels, turning it into a disadvantage.

The government had started a couple of years ago the process for strategic sale of SSGCL and SNGPL on, ‘as-is-where-is’ basis but was advised against it by the Oil and Gas Development Authority and the World Bank.

The World Bank believed that privatisation of monopolies would add to the imbalance in the gas market and has since been proposing a third party access (TPA) regime through unbundling of supply, transmission and distribution companies.

Gas imports have become inevitable as reserves at 32.8 trillion cubic feet and depleting, would last at the current production rate for about 25 years, leaving out perhaps larger than this unmet demand and facing acute shortages by next winter.

The World Bank has asked Pakistan to do away with subsidies to domestic gas consumers and remove other tariff distortions to create a competitive gas market by separating transportation, distribution and supply roles of two gas utilities - SNGPL and SSGCL.

This is part of the World Bank’s 111-page final report on proposed introduction of competition in the gas sector and sale of state-owned gas companies particularly Sui Northern Gas Pipelines Limited (SNGPL) and the SSGPL. The bank had appointed an Argentinean consultant on the request of Pakistan to conduct a comprehensive study.

The government is currently looking into the mechanism of providing subsidies to the domestic and fertiliser sector through budget to relieve the prospector/investor of this financial burden and to lure them for privatisation.

In the recent tariff revision, the government has however divided the first 100-cubic meter slab into two to reduce subsidy to some extent.

The natural gas consumer tariff involves about Rs20 billion subsidy per annum which is applicable to all - big and small - domestic consumers. The lowest slab of 50-unit per month, described as lifeline category, carries the highest subsidy and is applicable to all consumers. Fertiliser sector alone enjoys about Rs9 billion subsidy.

“Retail tariffs do not reflect location cost differences. Consumers pay the same price wherever their consumption premises are located; even disregarding social-political considerations tariffs hide regional cross-subsidies among users”, says the World Bank.

Retail tariffs reflect political-social considerations. “Large cross-subsidies benefit the first and second slab of the residential category and the fertiliser plans at the expense of higher tariffs to the rest of the consumers”. This is one other source of cross-subsidisation that needs to be tackled at restructuring and possibly by the largest obstacle to unrestricted open access.

The World Bank suggests that transportation and difference of cost of gas from various gas fields should also be made pass-through items in the overall tariff calculations so that future companies of transportation, distribution and sale of gas become independently profitable.

Gas producers like OGDCL and the PPL are currently at the advanced stage of sale process while utilities like SNGPL and SSGCL are currently being prepared for privatization. The two utilities currently are engaged in transportation, distribution and sale of gas business in an integrated form.

It says the residential consumers impose a higher system cost for unused capacity in off-peak periods than industrials that consume similar amounts during the year. If costs are not adequately reflected in tariffs, and industrials are charged more than their stand alone cost, some of them would move out of the system which was an inefficient outcome.

The bank proposed that TPA regime should be introduced for gas business so that a separate company could purchase gas from producers and transport it to distribution companies for a fee.

Since the constitutional forum of CCI has been put in place, it would not be out of place for the federal and provincial leadership that thrives on tax-payers money to analyse what has been the impact of replacing public sector with the private sector in sugar, cement, banks, petroleum and power sector and what safety nets could be put in place to improve the situation in future to the interest of common people.

It is no doubt better to take decisions at the CCI level on the emerging high prices of imported gas, its impact at home and future domestic market.