ISLAMABAD, March 2: The government has decided in principle to remove gas subsidies to fertilizer and domestic consumers and withdraw over 17 per cent guaranteed rate of return to gas utilities for their successful privatization.

A senior government official told Dawn that it has been decided to link the profitability of gas utilities — Sui Northern Gas Pipelines Limited (SNGPL) and Sui Southern Gas Company Limited (SSGCL) — with Karachi Interbank Offered Rate (Kibor).

The Oil and Gas Regulatory Authority (Ogra) has been asked to work out how the profitability of these companies could be adjusted with the Kibor. The Ogra is currently in the process of benchmarking rate of returns on assets and equity of the gas companies and their linkage with Kibor to allow reasonable profits to the prospective buyers of the gas companies.

At present, the SNGPL and SSGCL are allowed 17.5 per cent and 17 per cent guaranteed rate of return on assets respectively under federal government’s covenant with the World Bank. This did not provide any practical incentive to the gas companies to be efficient.

Similarly, the gas utilities would not be required to subsidize various categories of natural gas consumers particularly fertilizer feedstock and majority of domestic consumers. Instead, the government would provide subsidy to these consumer groups out of federal and provincial budgets.

Moreover, the companies would not be responsible for providing gas connections to commercially unviable consumers in the far-flung areas. The government would extend finances to the gas companies for such expenditure for new connections in remote areas of the country as part of its social responsibility.

The sources said that the government was also considering setting up of a universal access fund to maintain subsidized gas rates for domestic and fertilizer consumers. As a result, the tariff rates for industrial and commercial consumers would stabilize at the current level.

This would provide comfort level to the private sector buyers of the gas utilities to concentrate on their commercial objectives and expand their system.

The domestic lifeline consumers using less than 100 mmcfd (million cubic feet per day) per month are highly subsidized. Similarly, the fertilizer companies are provided with subsidized feedstock for 10 years under the national fertilizer policy.

This is part of a package the government would introduce shortly before privatizing twin gas utilities. The government plans to privatize the two companies before September 2006 and is currently in the process of soliciting interests from local and international firms.

The government had hired the services of external consultants to recommend as to how to restructure the consumer tariff and balance sheets of SSGCL and SNGPL to attract quality investors for the sale of 51 per cent shares along with management control of the two utilities.