ISLAMABAD, Oct 5: The World Bank has criticised the government for creating over Rs23 billion circular public debts outside the federal budget as a result of erroneous oil pricing that include more than six ‘grey areas’, some of them to the disadvantage of consumers.
At the conclusion of a 10-day visit on Sept 15, the World Bank mission on oil and gas noted with concern in its aide memoire that the government had developed an unbudgeted debt to the (oil) industry amounting to $400 million.
These circular debts have been created because the impact of international price fluctuations was not passed on to the consumers. Such a debt could result in a chain default in payments by public and private sector oil companies and refineries at home and abroad.
The aide memoire, provided to Dawn by a senior joint secretary at the petroleum ministry, has been finalised in consultation with all stakeholders.
After examination of all components of retail oil prices, the mission said the ocean losses and handling charges at 0.5 per cent were, therefore, on the high side.
Similarly, the tariff plus petroleum development surcharge, commonly known as deemed duty at the rate of six to 10 per cent on four petroleum products was designed to unduly protect the rusted and outdated refineries at the expense of consumers. “The refineries are rather old and depreciated, and giving them a protection is questionable under the circumstances,” it said.
The bank also criticised an unbalanced fuel policy and said taking into account heating rates for gasoline, liquefied natural gas (LNG) and liquefied petroleum gas (LPG), compressed natural gas (CNG) was by far the cheapest. Had there been no taxation on gasoline, LPG would lose its competitive advantage.
Given the cost of converting to LPG was also lower than that of converting to CNG, LPG use in vehicles had been expanding rapidly.
The rapid expansion of LPG used would ‘exacerbate’ the problems of the refining industry in 2007, given that production of gasoline constrains the output of valuable diesel oil, which as a result is to be imported at a high cost.
The bank argued that in all, given the price advantage of LPG and CNG, the market for gasoline is expected to continue to decline. It will result in a further erosion of the fiscal income arising from petroleum taxes.
It said that to stop the bleeding of income, the only realistic solution was to introduce comparable taxation for the three products. In addition, the government should consider banning the use of LPG for automotives or tax it comparably to motor spirit so that more LPG becomes available to households.
The World Bank has also criticised the government for maintaining 29 oil depots for uniform prices and have supported oil industry’s demand for reducing their number to eight before completely eliminating them. It says the companies had to maintain a high fund to equalise prices at 29 wholesale depots and as a result, the consumers do not get the right signals about the scarcity value of the products.
Also, the oil industry controls high balances which the government cannot easily check or control and tanker fleet operates at government sanctioned rates, well above the costs of services rendered. This has resulted in an oversized fleet and the creation of a strong industry lobby, the bank said.
The government has also been censured for still allowing the use of 10,000 ppm (parts per million or 1%) sulphur, notwithstanding the environmental consequence, and the low quality of air in cities such as Karachi and Lahore. The government recently asked the industry to switch to Euro II diesel (2,500ppm) by January 2008 but the industry believed it was not given enough time. Hence the shift might take more than four years.
