With the first phase of the increase in oil marketing companies’ (OMCs) distribution margin from 2 to 3.5 per cent and petroleum dealers’s commission from 3 per cent to 4 per cent in place and the second envisaged for June 2002.

Pakistan has agreed to the World Bank proposal to reduce taxation on motor gasoline and proportionately pass on to High Speed Diesel (HSD) and Compressed Natural Gas (CNG) to remove inherent fuel pricing imbalance. But there is no balancing factor for the transitional period.

This would be part of a new, long term and comprehensive policy on petroleum fuels that is being prepared with the assistance of the World Bank as part of $350 million structural adjustment credit (SAC). An amount of $500,000 is being provided by Institutional Development Fund (IDF) as grant for this “National Policy on Petroleum Product Stocks and Storage Facilities”.

Of the total amount $156,650 have so far been disbursed the grant is going to close on June 30, 2002. The policy would also take into account falling fuel consumption and resultant sluggish industrial activity and import substitution.

This has come following a report on fuel taxation analysis conducted by the World Bank which suggested: “with respect to motor spirit, in a sample of 52 countries, Pakistan had the highest rate of taxation on gasoline when compared to diesel resulting in a structural shift away from gasoline towards HSD (High Speed Diesel) and CNG”.

The countries that were taken as sample included India, Brazil, Azerbaijan, New Zealand, Madagascar, Georgia, Bangladesh, Mozambique, Senegal, Turkey, Portugal, Finland, Netherlands, Taiwan, Belgium, Cote d Ivoire, France, Armenia, Germany, Cameron, Luxembourg, Denmark, Poland, Italy, Austria, Japan, Kenya, Sweden, Spain, Greece, Columbia, South Africa, Mexico, Czech Republic, Zimbabwe, Uganda, Togo, Norway, Tanzania, Hungary, Canada, Namibia and Slovak Republic.

Some major policy changes to be introduced over the next few months as envisaged in the world bank guidelines would be as under: The relative taxation policies of CNG, gasoline and HSD would be reconsidered. Gaps in the prices of various products would be reduced by increasing taxation of CNG and HSD and reducing that of gasoline.

The refineries and OMCs would be encouraged to compete on gasoline sales, with the government determining price caps and floors within which ex-refinery prices would be fixed. Also clear cut directions would be provided for production of unleaded gasoline and for future specifications pertaining to Benzene and aromatics.

The fixation of prices by the industry body (oil companies advisory committee-OCAC) would be discontinued very shortly. All players would be encouraged to compete through the institution of a price cap mechanism both at the level of import parity level, applicable also to refineries, and at the retail level. HSD with not more than 0.5 per cent sulphur would be implemented before June 2002 at all costs.

For fuel oil, the existing approach of pricing fixation is under criticism on the ground that it is not fully competitive, particularly since it is based on the actual cost of imports and does not provide for competition among the refineries.

On this account, the government would allow the industry to determine import parity prices on the basis of actual import costs and would switch to a price cap system both at the level of refineries and the main depots. In order to protect the environment, phased programme for discontinuation of high sulphur fuel oil (HSFO) and improvement of specifications would be announced and strictly enforced before June 2002.

The Pakistan State Oil (PSO) has the largest market share of around 86 per cent in the fuel oil sector mainly because of its long term agreements with independent power producers (IPPs).

The current practice in place is for PSO to determine the actual price of imports in the past fortnight to which margins are added so that a reference price ex-depot is determined and communicated to the government and the other players.

The OMCs sell the products at a discount in relation to the prices publicised by the PSO. Wapda, the main consumer of fuel oil considers that it is better off importing fuel oil directly and is presently making arrangements to that effect though effectively being thwarted by the petroleum ministry to protect Fauji Oil Terminal Company (FOTCO) from losses through increased taxation at Keamari port.

On refineries, the government in connection with the budget 2002-3 would formulate a policy providing for the gradual elimination of the subsidies over a defined timeframe,say, within three years the subsidy programme would be completely terminated and then encouraged to compete for the market share.

All retail outlets would be required to post their product prices, under rules specifying the size and the height of the signs, to be completed. Measures would be taken to improve the legal framework applicable to the competition policy.

The three old refineries (ARL, PRL and NRL) benefit from a guaranteed return of 10-40 per cent and one Parco from a 25 per cent guaranteed return.

The bank believed that high price of gasoline in Pakistan was one of the major reasons encouraging the smuggling of the product from Iran. Ultimately, the refineries produced gasoline in excess of demand further exacerbated by the commissioning of Pak-Arab Refinery Limited (PARCO).

Subsequently, the government had to force all the refineries to run at their 70 per cent capacity that obviously caused losses to three refineries namely Attock Refinery Limited (ARL), Pakistan Refinery Limited (PRL) and National Refinery Limited (NRL). In the world banks words: “Pakistan now exports naphta at a great loss to the economy”.

A positive development may it seem but it is ironic that once again the government is taking a major policy shift on the directive of the World Bank although it has never been able to justify high taxation on petrol that is surplus in the country.

It was in fact against the basic economic principle of taxing highly a product that is in excess instead of minimising taxes to encourage local consumption. It was even more uneconomic when seen in the context that a product being sold in the local market at Rs30 a liter was being exported at around Rs10 per liter and consumed around Rs3-4 billion annual subsidy.

Notwithstanding the presence of surplus, the refineries are fixing the selling prices on the basis of estimated CIF prices of would-be gasoline imports.

As a result, a situation emerges where consumers are being charged a price higher than the opportunity cost. In addition, the refineries operate in a cartel-type fashion in which they all charge identical prices. The uniform pricing system is attributed to the fact that all the refineries in Pakistan benefit from subsidies.

The subsidy under this head in the federal budget 2001-02 is projected at Rs8 billion. Hence there is an incentive to keep the price of gasoline at an artificially high level to reduce state support.

Despite a much talked about deregulation and partial elimination of federal freight pool system at the secondary stage (from 29 main depots to the retail outlets), this accounts for only 0.5 per cent of the final price of gasoline and the approach does not promote any visible competition since the price differential is in few paisas per liter.

At present, the diesel prices are fixed by the OCAC on the basis of average cost of imports in the previous fortnight where the importers have no incentive to minimize the import bill.

On a whole, the OMC’s would finally be entitled to charge from consumers 3.5 per cent of total sale price and petroleum dealers would charge 4 per cent of total sale price. On a cumulative basis, the dealers and companies share in sale price would increase from existing 5 per cent to 7.5 per cent.

According to petroleum ministry’s calculations, total impact of first (March 15) price revision inclusive of both - OMCs margin and dealers commission - would come to 45 paisa per liter increase in motor spirit (petrol) and 24 paisa per liter increase in high speed diesel (HSD).

Another 30 paisa per liter increase in motor spirit and 15 paisa per liter in diesel when second phase comes into effect in June this year.

The increase in dealers commission and OMC’s margin is being advocated on the basis of deregulation process to increase market competition for better service to the consumers.

Another argument being advanced by the government circles is to encourage multinational companies (MNCs) to further investment and competition but claimed that upper limit on both OMC’s margin (3.5 per cent) and dealers commission (4 per cent) has been fixed so that they have equal opportunity to compete.

This decision would ensure a hefty 40 per cent return on equity to the oil marketing companies. OMCs margin currently stands at 70 paisa, 85 paisa, 25 paisa and 35 paisa per liter of petrol, HOBC, Kerosene oil and high speed diesel respectively.

Similarly, the dealers’ commission is Re1.10, 99 paisa and 47 paisa per liter of HOBC, petrol and high speed diesel respectively.

After a couple of initial increases, the deregulation of petroleum prices had resulted in reduction in prices as a result of decline in international oil prices. This benefit of international market decline would however cease to be available with this increase.

Pakistani surplus petrol is sold at around Rs10 per liter abroad while the same is supplied to local consumers at Rs30 per liter. The increase in dealer’s commission and OMC’s margin is a pass-through item in the sale price.

At present, the federal government is earning around Rs17.25 to Rs20.71 on every litre of petrol in the form of various taxes and charges against original (ex-refinery) price of Rs10.81 to Rs11.29.

In January this year, the federal government increased petroleum development levy by 75 paisa per litre on diesel and 25 paisa per unit increase on all other petroleum products including petrol.