Double accounting: gas consumers to take the hit

Published January 25, 2016
Ogra has held that all mega gas projects should be financed through GIDC, as 
the same consumers were paying GIDC and return on assets of gas companies.
—AFP file photo
Ogra has held that all mega gas projects should be financed through GIDC, as the same consumers were paying GIDC and return on assets of gas companies. —AFP file photo

IN a rather strange move, the government appears changing goalposts in its plans to tax the consumers of gas in multiple ways.

Last week, the Ministry of Petroleum and Natural Resources moved a summary asking the Economic Coordination Committee (ECC) of the Cabinet to raise Rs101bn from commercial banks against sovereign guarantees for the development of gas pipeline infrastructure and build this amount along with over 17pc return to gas companies in consumer tariff. This was on top of huge funds being collected through Gas Infrastructure Development Cess (GIDC).

The hurriedly-called ECC special meeting was cancelled at the eleventh hour because Finance Minister Ishaq Dar was called to join Prime Minister Nawaz Sharif in Tehran on a peace mission and then travel to Davos to attend World Economic Forum. The ECC is now scheduled for Jan 27.

Originally, the government had introduced Gas Development Surcharge (GDS) under a 1967 law to finance gas infrastructure projects. Over time, it was converted into a revenue item to finance government expenditures and then it started flowing into provincial accounts on the basis of the quantum of gas produced.

So the objective — the use of GDS for infrastructure development — was compromised and the coffers meant for such developments dried up. Some other taxes on gas include general sales tax, excise duty, windfall on international oil price fluctuation, petroleum levy on LPG, discount retained on domestic gas production apart from royalties and income tax charged to gas companies.

The government had introduced the GIDC in 2012 to raise funds for development and expansion of gas pipelines. Since then, it has collected around Rs200bn as of June 30, 2015. This fiscal year, the government is again on a course for achieving budgeted target of another Rs145bn.

On paper, all these funds remain unutilised because the government has failed to frame enabling rules. All the parliamentary and judicial forums were given commitments that the funds collected under GIDC would be spent on development of gas infrastructure.

In their ‘statement of objectives’, the ministers for finance and petroleum and natural resources had said the funds would be spent on bridging the widening gas supply and demand gap through a number of major gas import projects/pipelines.

It was stated that unless the required infrastructure was developed for these projects, the government would be forced to import expensive liquefied fuels. Also, Pakistan could also be exposed to payment of liquidated damages and the neither the federal government nor any gas utility had adequate funding to cope with such an eventuality.

Based on this background, the petroleum ministry approached the ECC on Sept 2, 2015 on the request of gas utilities — SNGPL and SSGCL — ‘for arranging the funding facility from GIDC currently being administered by the ministry of finance as a part of Federal Consolidated Fund’.

It was stated then that the government was aggressively pursuing import of LNG to meet huge gas shortfalls and the two entities had taken in hand 1.2bn bcfd of LNG import along with development of an infrastructure for receiving, storage and regasification terminals at Port Qasim and/or Gwadar Port and pipelines linking the gas load centres in two phases.

For phase-I, the gas utilities had arranged funds through commercial borrowing and required Rs101bn for second phase (Rs58bn for SNGPL and Rs40bn for SSGCL). On Sept 3, the ECC approved bank borrowing against government guarantee to the extent of Rs101bn in favour of SNGPL and SSCGL for phase-II of pipeline augmentation plan.

Consequently, the finance ministry initiated its facilitation process for requisite bank financing in favour of the gas companies for achieving tight timeline for completion of the projects. The Oil and Gas Regulatory Authority (Ogra) in the meanwhile pointed out in its determinations of revenue requirement for SNGPL and SSGCL that financing of all mega gas pipeline projects should be through GIDC to avoid double impact on consumers as they were paying GIDC and return on assets.

Ogra said that financing of such projects from GIDC will not be added in rate base for return purpose which in fact invites double treatment at the cost of consumers. Therefore, Ogra held that this financial burden should not be passed on to the consumers/general public and all such projects should be financed through GIDC, which was set up exclusively for such purposes.

The gas utilities informed the ECC that they were making substantial investments in RLNG project of national importance against which return was not guaranteed while, on the other hand, they were incurring huge financial costs on these investments. They said financial arrangements were pre-requisite to execute and complete the RLNG project and avoid delays.

The petroleum ministry, however, believed that the GIDC should be used by the finance ministry through budget and Ogra should allow financing cost being incurred in creation of infrastructure related to transportation of LNG/RLNG as admissible expense of the gas utilities.

Earlier, the government has repeatedly been saying that the RLNG prices would be ring-fenced and all costs charged to the respective dedicated consumers — power, fertiliser, CNG etc — without making it part of revenue requirement of gas companies that affect domestic consumers of natural gas.

Published in Dawn, Business & Finance weekly, January 25th, 2016

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