THREE cheers for the Supreme Court! I knew operating a CNG station was a profitable enterprise, and licences were reserved for those with political clout.

But even someone as cynical as me did not know exactly how profitable the enterprise was until I read the Supreme Court order in the Ogra case.

For the first time that I know of, the complete cost build-up of CNG has entered the public realm.

For petrol and diesel the total cost with itemised build-up has been available on the Ogra website for many years. But for CNG, only the final notified prices have ever been shown, and we’ve had no idea what the breakdown of those has been. Until now.

On Oct 25, the Supreme Court demanded that the chairman Ogra submit the full cost build-up of the retail and prescribed prices of CNG, and what emerged was a jaw-dropper. It turns out the business of operating a CNG pump in Pakistan is so profitable it very likely leaves every other category of business in the hydrocarbon sector gasping for air. And that’s not a casual metaphor.

From the chart submitted by the chairman Ogra, we learn that CNG station owners charge the consumer Rs20 as operating costs, and Rs11 as profit for every kilogramme of CNG purchased. Then in a small footnote, we are told that “Operating Cost includes compression cost, maintenance, depreciation, fee etc as per MoU signed b/w CNG Association & FG.”

I particularly like that “etc”. Not much is known about this MoU, but it would be great if it could be shared with the media.

And if you want context on the amount the CNG station owners are getting as ‘operating cost’ and as profit, consider that the oil-marketing companies (OMCs) get less than Rs2 per litre as their margin in petrol, kerosene and diesel, the oil dealerships get just over Rs2, it costs Rs6 per litre as inland freight to pay for cartage and storage that maintains price parity across the country.

In the gas sector, operating cost of gas companies like SSGC is just over Rs1, with return on investment at 85 paisa per kilogramme.

So how on earth are CNG station owners charging operating costs of Rs20 per kilogramme? And what on earth are they doing getting Rs11 as profit when the maximum total cost was Rs92 per kilogramme?

The math gets a little tough because volumes of CNG consumed in the country are reported by the ministry in cubic feet, whereas the retail pricing is reported in kilogrammes.

But if you consider that 10 per cent of all domestic gas gets used in CNG stations, and about one-third of this amount goes into the pockets of CNG station owners as ‘operating cost’ and profit, you’ll get an idea of the enormous transfer of resources that takes place on a daily basis.

In stray remarks before the press, the CNG association head has claimed that out of the Rs20 he charges as ‘operating cost’, almost half is the cost of electricity for compression purposes.

I find that hard to believe, but if it is true then Ogra is obligated to ask all CNG stations to submit their electricity bills, and compare the amount of electricity consumed with their declared sales, and cross-check the figure with their tax records. I say obligated for one simple reason: the Supreme Court has ordered a “scrutiny of audited accounts of CNG stations”.

If the Ogra chairman cannot live up to the requirements of this order, he has no business occupying his office. If he shows trepidation at the thought of scrutinising the audited accounts of politically connected CNG station owners, then he should vacate his office rather than search for a compromise at the cost of the public interest.

Contrary to some interpretations, the Supreme Court has not touched the price of gas. It has only ordered the government to properly determine the costs and profits that CNG station owners are charging the public.

It’s true that gas should not be sold cheaply simply to put smiles on people’s faces. But it’s also true that rentier levels of remuneration should not be included in the cost build-up that end-consumers pay. Price reforms should add value to the public interest by incentivising efficiency and production volumes, not stuffing the bottomless pockets of CNG station owners.

“Ogra is not authorised to fix the operating costs and profit of the operators of CNG stations, arbitrarily,” observed the court, thus throwing out the MoU signed between the government and the station owners that had formed the basis for the exorbitant determination of ‘operating cost’ and profit.

Now the regulator has been ordered to do its duty and determine for itself what the operating costs of the station owners are and fix the amount appropriately. All other aspects of the judgment are minor by comparison to this Rs31 swing of the gavel.

The price link with petrol and the gas development surcharge have been objected to, but the government still has time in which to persuade the court of the merits of retaining these measures. Memories of the Steel Mill case are being unfairly invoked in what is otherwise a skillful and discerning judgment. The station owners have no business pocketing one-third of the retail price of the gas they sell. Nobody in the oil and gas supply chain gets that sort of return, or is allowed to pass through that sort of cost to the end-consumer.

They have even less business complaining about the order since it was they who brought the petition before the Supreme Court in the first place, asking it to please bring down the price of gas for the benefit of the masses, on whose behalf the station owners think they are entitled to speak.

The writer is a Karachi-based journalist covering business and economic policy. khurram.husain@gmail.com


Comments are closed.

Comments (11)

Rashid
November 1, 2012 5:27 pm
Market forces do not work as per Adam Smith's theory in casses where big capital is needed. we have seen how greed had brought the players together at the expense of the customers.
observer
November 1, 2012 5:26 am
The government must impose tax on CNG in some other name and also tax cars more (but be sure to spend the proceeds to introduce/improve public transport system). But too cheap CNG means too many cars on small roads. I have seen children in high school uniforms driving cars to their schools/colleges. Mass transport system needs to be developed on war footing or oil import bill of Pakistan will be atrificially high (consuming foreign exchange, contributing to traffic mess, and pollution).
Arif Butt
November 1, 2012 5:42 am
Rs.11 per kg is too high to bear. Ogra should re-consider its MoU with CNG station owners with particular reference to operating cost and profit. Any business with so high operating cost and unfair profit should never be allowed in the first place. CNG station owners should also be subject to penality for their past unfair earnings by the court.
Sandip
November 1, 2012 2:17 pm
Why not let market fix the price? What is the reason for Government to fix the price. Lets put it this way, if current operator are charging higer price then new operator can enter the market with lower price and bring the overall price down. Let operator figure out where he wants to profit and what are his operating expense. But for that to work allocation of gas station needs to be made transparent also and I am sure Government is not willing to do that either.
HA
November 1, 2012 11:30 am
Use of CNG for transportation purposes is adversely impacting supply of gas to industrial and domestic consumers. Therefore controlling its consumption through high prices is a good option. It is incorrect to state that Licenses to operate CNG stations are allocated to influential people alone. If it does not remain a profitable proposition, the CNG satiations will not operate in the private sector. Let the market forces determine the price of CNG. Courts should not interfere in such matters as economics is not their area of expertise.
shahid
November 1, 2012 6:41 am
As prices of CNG has dramatically reduced. it is good for all of paksitani who suffered a lot due to high price but what is fault of petrol consumers who are paying much more in camprassion with CNG, The Chief justice should take notice of high difference between fuel and that of CNG.
abdullah
November 1, 2012 6:21 am
please take acton on diesel price without this inflation cant be control. because diesel provide a major role in price rising in food items and production cost.
Cyrus Howell
November 1, 2012 6:33 am
"If the Ogra chairman cannot live up to the requirements of this order, he has no business occupying his office. If he shows trepidation at the thought of scrutinizing the audited accounts of politically connected CNG station owners, then he should vacate his office rather than search for a compromise at the cost of the public interest... ...Contrary to some interpretations, the Supreme Court has not touched the price of gas. It has only ordered the government to properly determine the costs and profits that CNG station owners are charging the public...." . Very sharp. Try to have this article entered into the court record as a "friend of the court". The author could recommend to the court the appointment of a recognized international CPA firm to settle the accounting method. The public would be firmly behind this as they are demanding a fair accounting.
Anwaar Sardar
November 1, 2012 8:13 am
I am petrol pump & CNG owner feeling relieved that the Supreme Court has taken notice of the CNG operating costs. Once for all, the issue of reasonable margin would be settled as forensic audit of CNG costs & margin has been ordered by the SC. Unfortunately, it has become a fashion in Pakistan even among the journalists to pass on remarks without evaluating the facts. Now, I am sure after going through a forensic audit, the rate of reasonable margin or return on investment would be established. A CNG station in Lahore installed on a privately owned land costs between Rs. 50 million to 200 million depending on the cost of land. Without going into technical details, any sane person should easily understand the fact that a business should be able to provide returns better than the bank interest rates, as that is the only incentive for an entrepreneur to enter into the business activity in the first place. Otherwise, an invester would just keep his investment in the bank to earn interest, a trend which could deprive economic activity in an economy. With this submission, I would request our opinion leaders to abstain from writing or talking without facts for the purpose of playing with the sentiments of the "have-nots" majority. Wait for the forensic audit as ordered by the SC and talk against CNG if the their profit margins are not in line with the investment and business conventions prevailing under the circumstances.
haider
November 1, 2012 11:41 pm
i am a cng owner.and the first thing i would like to clarify is that i built that cng by my hard earned money and it was not the part of any political qouta or favour.secondly,yes we can argue that cng owners margin is high.then pleasse go deep down into the details of the compressing cost.i would love to give u a glimpse of the cost,for compressing 200 kg of gas on generator u need to put 35 ltrs of diesel in it.so it means in one ltr u can compress 5.7 kg.and average price of diesel is 105 rupees..in this way for compressing one kg on diesel a cng owner will spend 17 to 18 rupees.and all of us know that average loadshedding time in the whole country is at least 8-10 hours a day.does it make sense khuram sb.
Zahra Arif
November 1, 2012 10:56 am
A truly eye-opening and simply explained piece. Good on you, Khurram Hussain.
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