ISLAMABAD, June 14: The government has decided to withdraw Rs8 billion subsidy to the oil refineries in a three-year phased programme, starting fiscal year 2002-03.
“The first phase would begin with the announcement of the budget tomorrow, eliminating around Rs3 billion subsidy and remaining Rs5 billion will go next year and the year after that,” a senior government official told Dawn.
Along with this, oil import parity prices would be capped at a lower level instead of its current mechanism where parity is determined by the oil companies.
The slight cut in import duty rate on oil imports would partially offset the negative fiscal impact on refineries’ rate of return and on the retail petroleum products, the official said.
The petroleum and finance ministry officials, however, did not agree on a military surcharge on POL retail prices to raise strategic oil reserves to 90 days or to ensure that army always had sufficient funding for its fuel requirement in the aftermath of the privatization of Pakistan State Oil (PSO), which was going to be next major sale transaction.
Under the new mechanism, the guaranteed rate of return to three refineries — Attock Refinery Limited (ARL), Pakistan Refinery Limited (PRL) and National Refinery Limited (NRL) — would come down but parity pricing would partially absorb this loss. The country’s largest refinery Parco would remain unaffected because of its long term agreement.
Under the structural adjustment credit (SAC), Pakistan had agreed to with the world bank to do away with this subsidy in March this year.
“The government, in connection with FY2002/03 budget should formulate a policy of providing for gradual elimination of the subsidies over a defined time frame, such as, say within three years, the subsidy programme be terminated,” said a World Bank document signed by Pakistani authorities.
The donors believed that provision of subsidies to the refineries was unusual, and it gave their shareholders limited incentive to improve efficiency, invest and compete.
The bank has also criticised the government for providing customs exemptions and tax holidays on investments in refineries and an uncompetitive fuel oil market. These issues are being addressed in the forthcoming budget.
The World Bank suggested that the approach adopted in the case of fuel oil by industry was not fully competitive, particularly since it was based on actual cost of imports and did not provide for competition among the refineries.
The government had agreed that it should not allow the industry to determine import parity prices on the basis of actual import costs and should switch to a price cap system both at the level of refineries and the main depots.
In the fuel oil sector, Pakistan State Oil has the largest market share mainly because of the fact that it has long-term fuel supply agreements with the independent power producers.
The current practice 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 formally to the government and the other players.
The cost of transport is negotiated by the OMCs with the tanker owners which is also being raised through a phased programme.
The OMCs claim that they sell the products at a discount in relation to the prices publicised by the PSO. Wapda, the largest consumer of fuel oil, considers that it is better off importing fuel oil directly instead of purchasing from PSO, and is currently making arrangements for direct imports.
The bank has also advised the government to set in motion a phased programme for discontinuation of High Sulphur Fuel Oil (HSFO) and announce specifications for improved quality of fuel oil immediately and strictly enforce it to protect the environment.