Gas price hike

May 19, 2019

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THERE is little doubt that the gas sector, particularly its pricing regime, is badly in need of reform and overhaul. Most reform-minded people also agree that whatever shape these reforms take, a hike in the price of natural gas is inevitable. To some extent, this has to be accepted by the consumers. For far too long, we have been lying to ourselves about natural gas. We have been telling ourselves that gas is cheap and abundant — whereas in reality, it is precious and scarce. The chief instrument through which this untruth has been propagated is the price, which for domestic consumers has been so low that it has encouraged a culture of waste. All this has to change.

But there are two situations in which an increase in gas prices is simply unacceptable. The first is when gas is taxed to fill a hole in the fiscal framework. The second is when the price is increased to pay for the inefficiencies and guaranteed returns on assets for the two public-sector distribution companies. Considerable pressure is building up on the gas price as the regulator Ogra has submitted the second of its biannual gas price determinations, and found that both distribution companies deserve to be allowed to sell their natural gas at significantly higher rates. For the northern region, controlled by SNGPL, the proposed hike is up to 47pc; and for the southern region, controlled by SSGC, it is 28pc. The regulator has justified this on the basis of the exchange rate depreciation.

Meanwhile, the government should note that generic price increases, without the attendant reform of the pricing mechanism and governance framework, are exercises in futility. There may well be a temptation to yield to gas price increases, particularly in light of the IMF programme signed recently, which is going to make it more difficult to use fiscal resources to plug the revenue gaps of public-sector enterprises, including the gas companies. So, while passing the costs of all the losses, the inefficiencies and theft to consumers may appear to be an attractive proposition, it would be a mistake to do so because, with everything else remaining as it is, these entities will simply keep returning for higher tariffs while doing very little — if anything at all — to improve their own performance. What is needed is a new gas-pricing mechanism that steadily pushes the regulator out of this job and allows market forces to play a larger role. Following this, governance reforms that make performance the benchmark of success for the management of these companies are also critical. This is a moment for the government to reflect on the above and to advance a vision for the holistic reform of the gas sector. Once that is done, price hikes will be much easier to digest.

Published in Dawn, May 19th, 2019