ISLAMABAD, Aug 14: The World Bank has asked Pakistan to raise domestic gas prices and reduce industrial and commercial rates as part of gas tariff rationalization but the Planning Commission is opposing the move.
The commission sources told Dawn that while the proposal for reduction in industrial gas tariff had the logic to reduce the cost of doing business in Pakistan, the government could not buy every recipe from the bank in the name of open market economy and absolving itself of its social responsibilities.
These issues are currently being discussed and debated upon at various levels of the government as part of the preparation of upcoming five-year plan 2005-10.
"One should realize that government's prime objective is to reduce poverty and the bank's proposal not only contradicts this objective but is against its own policies," said a senior government official.
The officials of the commission are of the view that domestic gas prices are already on the increase due to dismantling of the gas price agreement of the Pakistan Petroleum Limited that would raise the consumer tariff by up to 80 per cent in three years from now on.
Hence, the lower consumer class should continue to have a subsidy as part of government's social responsibility, otherwise, the government's prime objective of poverty reduction would stand negated.
The bank has been putting pressure on the government to bring gas tariff in the country at par with international prices, both for domestic consumers as well as the industrial and commercial users.
The bank argues that Pakistan has been losing about $400 million (Rs24 billion) annually as a result of gas supply curtailment to the industrial and power sector due to higher household demand in winter, which the bank believes is comparatively a non-productive sector.
Another Rs14 billion is lost every year as subsidy to the fertilizer sector, which never reaches the farmer and is consumed by the fertilizer industry. Despite the subsidy, the fertilizer prices in Pakistan are at times higher than the international prices, the bank argues.
"Just for the power sector, the curtailment has been estimated at about 65bcf (billion cubic feet) equivalent to 1.5 million tons of fuel oil, resulting in incremental costs (cost of imports minus the cost of gas) of approximately $200-250 million, on account of additional fuel oil imports." Power sector consumes about 37.9 per cent and industrial sector around 19.1 per cent. The consumption of industrial sector and household is 23.3 per cent and 14.6 per cent, respectively.
If Pakistan could harness the full potential of its gas resources, fuel oil imports would be reduced by 4.5 million tons per annum for an annual saving of about $650 million. Pakistan's remaining gas reserves are estimated at 27tcf (trillion cubic feet) which are enough for 25 years at current production level but the consumption is increasing at the rate of seven per cent per annum.
Retail gas tariffs need to be made consistent with the cost of service to the different classes of consumers. Large subsidies are given to the minority of 18 per cent households who have access to about Rs9 billion annually in economic terms and the fertilizer industry gets about Rs14 billion in subsidies.
With respect to households, over 90 per cent of the volume of gas is sold under the subsidised tariff applicable to the first two slabs but which is applicable to high volume consumer as well. The World Bank wants that the slabs be brought down so that large domestic consumers do not enjoy this subsidy. The bank says that an average increase in tariff of approximately 70 per cent for the upper income household would be required.
The bank has asked the government to immediately implement a transparent and predictable gas pricing framework from the well-head to the retail levels in such a way that tariffs are consistent with the cost of supply, subsidies are gradually phased out, the cost of gas as a commodity becomes a pass-through item and the margins of gas companies are determined in advance so that they respond to efficiency incentives.
The bank has also suggested preparation of an annual indicative master plan at the national level to identify medium and long-term priorities through a comparison of different alternatives in such a way that the year-round demand is met in full from all possible sources.
In the medium term, the bank has insisted on removal of cross-sectoral subsidies and introduction of multi-year tariffs to provide incentives for efficiency improvements along the supply chain.
In the long term, the bank has proposed that competition should be promoted through the institution of third party access to the gas networks.