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Dent in integrated market structure

February 20, 2017


Ever since its inception, Pakistan has successfully built a ‘common market’ in an evolving federal state.

Factors such as constitutional provisions ensuring free movement of goods, services, labour, capital, etc across provincial boundaries, and a uniform tax regime, since independence have helped shape this ‘common’ Pakistani market.

According to industry sources, the ‘common’ market has until recently also meant that uniform energy — oil, electricity and gas — prices are applicable all over the country regardless of whether the fuel is imported or produced locally in one federating unit or the other.

But severe gas shortages in the country, particularly for industry, in recent years have dealt a blow to this integrated market structure.

First, the constitutional provision under Article 158, which gives the provinces the first right to use gas produced by them, meant that Punjab — being the biggest consumer of natural gas with insignificant production — would have to face the most shortages, for years, at the expense of its industrial output, competitiveness and blue-collar jobs.

Second, the government decision to ring fence the price of expensive, imported liquefied natural gas (LNG) being supplied to Punjab-based factories for over a year — to improve gas supplies — has created a ‘price distortion’ in the country’s energy market: for the first time the same consumers are getting the same fuel at different prices in Punjab and the rest of the country.

Severe gas shortages in the country, particularly for industry, in recent years have dealt a blow to this integrated market structure

This has again increased Punjab-based industry’s cost of doing business and added to uncompetitiveness of exports from the province.

In Punjab, for example, a factory using LNG during February 2017 will pay Rs967 per mmbtu compared to Rs600 per mmbtu being paid by the industry using the locally produced gas in Sindh.

“At the current prices of gas being used for self-generation a unit of electricity costs Rs10.93 in Punjab and Rs7.78 in Sindh (including conversion cost of Re1 per unit). This means that to sell our products in the international market we have to first compete with our peers in Sindh and then with regional rivals like India and Bangladesh because of an increased cost of doing business on account of energy prices,” said a home textiles exporter from Faisalabad.

The growing gap between gas prices in Punjab and Sindh has naturally created deep divisions among the business community from the two provinces. These fissures came to the fore in recently with the division of the powerful textile lobby represented by the All Pakistan Textile Mills Association, on provincial lines, on the issue of uniform gas pricing for the entire country.

Aptma-Sindh is strongly opposed to Punjab’s demand that LNG be merged with locally produced gas for a weighted average cost of gas (WACOG) to provide uniform pricing to the industry across the country. Implementation of this proposal would significantly reduce the cost for Punjab-based factories but raise the price for the Sindh industry.

“Sindh doesn’t have any gas shortages. LNG is being imported for Punjab. Why should the industry in Sindh subsidise Punjab’s factories? It is the job of the government. Let the federal or Punjab government pick up the subsidy bill,” argued a former chairman of Aptma from Sindh on condition of anonymity.

He conceded that Aptma was divided over the gas pricing issue on Punjab-Sindh lines. “When the government reduced system gas price by Rs200 per mmbtu to pass on the benefit of decrease in well-head price to consumers in Sindh last year, Punjab opposed it and made it a point that the relief was withdrawn,” he added, bitterly.

“You may also recall that the (Asif) Zardari government had levied GIDC on the recommendation of our friends from Lahore to create infrastructure for gas supplies for the Punjab-based industry. We are still litigating against the cess in courts. We don’t resent the government helping tackle their problems and reduce gas shortages and prices for Punjab. But we should not be expected to pay their bills.”

Punjab on the other hand feels that the government is ‘pampering’ Karachi-based industry.

“When the apex court in August 2015 overturned a decision by Lahore High Court in January the same year on a petition by Flying Cement against imposition of Rs3.63 per unit debt servicing and Neelum Jhelum surcharge and Universal Obligation Fund on electricity consumers in 2014, the government took little time to recover the amount on account of these levies from the industry, mainly in Punjab.

On the other hand, the government is not pursuing more than 375 cases filed in Sindh against recovery of GIDC from users of system gas in that province,” a Lahore-based cement producer contended.

The government has recovered Rs179bn from the entire industry on account of these levies renamed as tariff rationalisation, fiscal cost and Neelum Jhelum surcharges since June 2015.

“Much of the additional surcharges on power bills is recovered from Punjab-based industry, which had little gas for self-generation before the start of import of LNG and was mostly dependent on the national grid for its energy requirements,” a textile factory owner added, saying Sindh factories were actually getting electricity at the regional average power price because of lower gas price and court stays against recovery of GIDC on gas bills.

Published in Dawn, Business & Finance weekly, February 20th, 2017