November 11, 2007	Sunday	Shawwal 29, 1428

ISLAMABAD, Nov 10: The government is reviewing utility and fuel pricing regimes to comprehensively restructure the energy sector.

Informed sources told Dawn on Saturday that there were two major forms of cross-subsidisation in energy sector which were affecting domestic business.

The first is cross-subsidisation in electricity and natural gas pricing, with commercial and industrial sectors subsidising households.

The purpose behind cross-subsidisation is to make essential infrastructure and services available to all sections of society.

Official planners have told the government that subsidies in energy sector can have distorting effect on consumption, leading to wastage in sectors where costs are kept low, and a decrease of competitiveness in sectors where energy is priced at higher rates.

The second cross-subsidisation in the energy sector relates to cross-subsidisation in pricing of fuels, with diesel being priced below gasoline to facilitate freight transportation.

The subsidy on diesel ensures that road freight transport charges in Pakistan are amongst the lowest in the world.

While retailers and wholesalers on the whole benefit from this strategy, there are dual effects for the transport sector.

On the one hand, possibilities for expansion of the sector are considerable as economy grows, but on the other hand, the sector generates relatively low profits on a per unit basis.

There are a number of quasi-subsidies in the energy sector also, which can impact domestic commerce, the planners believed. These mainly take the form of domestic crude transport to refineries at subsidised rates (using the NLC), and a long-term freight contract with the Pakistan National Shipping Corporation (PNSC) for transportation of imported crude oil, again at subsidised rates, thus a transport sector subsidy which allows two state-owned enterprises to benefit. The subsidisation of freight prices could benefit the commercial sector in terms of ensuring cheap transport, but there are environmental costs involved and they hinder adoption of fuel efficient technology and better maintenance practices in road transport.

The performance of the NLC and the PNSC also needed to be reviewed in addition to Passco to assess the feasibility of allowing the public sector to operate in areas where private sector capability is increasingly available.

While it is true that the role of the NLC has been substantially reduced in recent years, the PNSC has not been subjected to similar scrutiny.

The categories of subsidies and incentives analysed by the planners are cross-subsidisation in energy pricing, financial incentives and incentives for development of facilities (storage, warehousing), subsidy on freight transport, incentives in the real estate sector, agricultural and export subsidies.

The objective was to see how these subsidies and incentive regimes affect domestic commerce and possible policy measures that can be adopted to promote domestic commercial activity.

The government has provided targeted subsidies to certain public sector freight enterprises by disallowing the entry of private competitors in some fields, such as transport of crude oil.

This policy is meant to control prices of essential commodities, but has resulted in the creation of near-monopolies in some forms of freight transport.

About the agriculture and trade subsidies, Pakistan provides support to agriculture through subsidisation of research, storage and marketing, extension services, and infrastructure and flood protection services.

Infrastructure and flood protection services (which include primarily the construction and maintenance of the irrigation infrastructure) account for the bulk of subsidy payments for the sector, with only nominal expenditure on research and development, extension and storage and marketing.

Agricultural subsidies in general have little direct impact on these sectors beyond the residual effects they may have based on their effects on production.

The only area of domestic commerce directly affected by agricultural subsidies is storage, given the federal government’s support for the Pakistan Agricultural Storage and Services Corporation (Passco), the prime public sector agency responsible for storage of grains, particularly wheat.

Pakistan cannot provide direct export subsidies as it used to prior to its inclusion in the WTO regime, but can subsidise the cost of marketing and transportation of exports.