February 29, 2008	Friday	Safar 21, 1429

ISLAMABAD, Feb 28: The government is likely to change the variable mode of inland freight equalisation margin (IFEM) on oil products to a fixed charge to make it more transparent and meet only the oil transportation cost rather than a source of profitability.Petroleum Ministry sources told Dawn on Thursday that Oil and Gas Regulatory Authority (Ogra) has pointed out a number of problems with existing system of price equalisation across the country. These sources said the government had given a restricted accountant’s job to Ogra by allowing calculation of (IFEM) by the oil companies and refineries.

The IFEM calculated by oil companies is currently final and binding for Ogra for the purpose of oil price calculation. IFEM is a cost the oil companies and refineries charge on oil products in the name of transportation cost to maintain uniform prices across the 29 depots.

These sources said the existing IFEM system not only lacked transparency but involved conflict of interest for the fact that private firms set a rate that is going to benefit them – a role which should be in the hands of an independent regulator or government authority.

Secondly, the physical movement of petroleum products was very difficult to verify for the fact that many companies were running virtual depots and agencies without real storage of products which raises suspicion of price manipulation and hence they lack any incentive to improve efficiencies in product transportation.

The sources said that since the entire formula was somewhat erroneous, Ogra saved its own skin by asking the heads of refineries and oil companies to submit monthly undertakings that the IFEM estimates were actual transportation cost.

Originally, the heads of these oil companies and refineries expressed their inability to sign such undertakings fearing some investigations they finally had to give in when Ogra refused to calculate POL prices on the basis of these IFEM estimates.

The petroleum ministry sources said Ogra was proposing to the government to restructure the IFEM mechanism and give such powers to Ogra to determine IFEM rates.

The IFEM charge on oil products currently fluctuates substantially between Rs1 per litre to Rs4 per litre without similar change in transportation costs, giving impression that it was being calculated arbitrarily and without any proper mechanism.

Three options are currently under consideration. First, the IFEM be divided into two parts and announced in advance for one year. A fixed annualised freight cost of oil marketing companies to be determined on historical basis and a variable refining component recovered from all the petroleum products.

This would mean that transport cost of OMCs for the previous year would be taken as benchmark for the next year and any reduction or increase in cost should directly go the respective company for loss or profit, respectively.

Separately, the freight cost of Parco and Attock Refinery should comprise refining component to be recovered from sale of motor spirit only. These sources said both companies were real beneficiaries of IFEM because practically it gives them double advantage because of their location, mode of transportation and guaranteed returns.

Second option is that fixed annual OMCs freight cost should be determined on the historical basis while refining cost should separated and loaded on the motor spirit.

Third option is that the OMCs freight cost should be recovered through the petroleum products while the refining component should be paid by the government directly.