In June 2009, the National Accountability Bureau (NAB) furnished to the Justice Bhagwandas Commission a report on alleged wrongdoings by government functionaries and the oil industry that caused losses of over Rs83 billion in five years.
The NAB report that covered the petroleum pricing mechanism between June 2001 and June 2006 was originally submitted to the then president Gen Pervez Musharraf and prime minister Shaukat Aziz on June 13, 2006 by the then NAB chairman Lt-Gen (retd) Shahid Aziz. The report was never made public, but Gen Aziz was immediately shown the door unceremoniously.
The report observed that “It is sufficiently evident that (functionaries in the) Ministry of Petroleum in collusion with the Oil Companies Advisory Committee (OCAC), oil industry and oil marketing companies (OMCs) have engaged themselves in corrupt practices for generating colossal undue financial gains for refineries and OMCs at the cost of public and economy as a whole”.
It said the federal cabinet in June 2001 entrusted the role of oil price setting to the OCAC under monitoring by the director-general of oil. But none of the directors-general performed the task of monitoring and some of them even expressed ignorance about the cabinet decision. The entire price setting by the OCAC “remained non-transparent/dubious and the DG Oil/ministry did not play any role, violating the cabinet decision”. As a result, the companies’ profitability jumped up to 4,000 per cent.
The enquiry commission’s report, which highlights the manipulation in the pricing mechanism, adulteration, tax evasion and figure-fudging across the oil supply chain, reads just like the 2006 report by then NAB chairman
It said that under a federal cabinet decision, the Oil and Gas Regulatory Authority (Ogra) was established in March 2002. It required the government to immediately transfer the monitoring and regulatory function of petroleum prices to Ogra. However, the transfer of the regulatory role to Ogra “was delayed by the ministry for more than four years. The gas regulation and licensing function were transferred to Ogra, but the POL pricing was withheld for four years”.
The Bhagwandas Commission adopted the NAB report and among certain technical adjustments asked the government to immediately start work on the capacity building of Ogra and the Ministry of Petroleum with the support of an expert group. The export group later complained to the Supreme Court that the kind of deregulation proposed by the petroleum ministry had serious faults and that would not create conditions for effective regulatory interventions as the regulator had not been strengthened.
Typical bureaucratic wrangling followed in the shape of fights over powers and control of the Directorate General of Oil in the petroleum ministry and Ogra. The government transferred the functions of monitoring and regulation of gas and licencing to Ogra but the pricing of petroleum goods largely remained outside of Ogra’s purview.
Fast forward to January 2015, the country faced a severe shortage of major petroleum products. The blame game followed between the petroleum ministry and Ogra over the responsibilities and failures as the oil industry once again made good bucks out of the crisis.
As the oil companies deliberately understocked to avoid inventory losses as prices plunged and consumption increased amid a rising circular debt, the then Ogra chief said the regulator was not responsible for the supply and demand situation of oil products, which fell under the jurisdiction of the federal government.
It is normally the petroleum ministry’s responsibility to ensure adequate supply and demand as it holds monthly product review meetings with oil companies and refineries to review stock position and plan accordingly if further supplies are needed. The responsibility for building infrastructure (storage tanks) belongs to Ogra while the DG Oil must ensure the mandatory 21-day stock build-up. Yet, Ogra imposed a fine on all OMCs for not maintaining mandatory stocks.
The then secretary finance separately testified before a parliamentary panel that the oil supply chain had broken down due to large amounts of money that were held up in lieu of the circular debt accumulated by the power sector. Some heads were rolled in the petroleum sector though the parliamentary panel was told that the power sector was the real problem where recoveries were not improving and system losses were increasing.
Here we are in December 2020, again with similar conclusions over the petroleum shortage that started building up in March and exploded in June 2020 with nationwide supply chain disruption as international prices went down and oil companies kept offloading inventory losses. Consumers and the country failed to benefit from the oil price bonanza.
An enquiry commission comprising mostly officials of intelligence and investigation agencies repeats similar things i.e. 90pc of OMCs were not maintaining mandatory 21-day stocks and did not utilise their import quotas. It estimated Rs250bn worth of oil smuggling from Iran and found that a wide range of operations of the oil sector were against the laws and rules, operating in vacuum and without any check and balance.
The commission went beyond its domain and size to recommend the total abolition within six months of Ogra that has come into existence through the constitution and demand the performance audit of all regulatory bodies (Nepra, Pemra, Competition Commission and Drap).
The commission identified a series of malpractices, including the manipulation of pricing mechanism, adulteration, misrepresentation and evasion of taxes, figure fudging and so on across the oil supply chain. It feels like re-reading the 2006 Gen Aziz’s report when it says “much of the mess that abounds in the oil industry pertains to Ogra and the related laws/rules” that was never in a position to execute and enforce rules and constantly shunned away from its responsibility.
The enquiry commission also concluded that the Petroleum Division had not fared much better during the last decade. “The story of the Petroleum Division is also rife with apathy, incompetence flavoured with malpractices, and disregard to laws/rules.”
What else can be a better example of the elite capture?
Published in Dawn, The Business and Finance Weekly, December 21st, 2020