31.07.2005 & 06.08.2005
THE government announced the increase in POL products on the recommendation of the Oil Companies Advisory Committee (OCAC) raising price of all the products in the country w.e.f. July 1, 2005. The new prices being (i) motor spirit Rs.48.94 per litre, (ii) HOBC Rs. 54.33 per litre, (iii) kerosene Rs. 29.53 per litre and (iv) light diesel oil Rs. 27.84 per litre. The price of high speed diesel was communicated by the Oil Marketing Companies (OMC) at Rs. 31.74 per litre. According to the OCAC the prices of petroleum products showed an unprecedented increase over the last month in the international market. The price of crude oil touched an all-time high at $61/bbl. The OCAC stated that the Government of Pakistan had initially frozen the prices in May 2004 to December same year and then again during April 2005 till June 30, 2005, which has cost the government exchequer more than Rs 58 billion.
The prices of POL products are fixed under a prescribed formula. In terms of the decisions of the Cabinet dated 13 June, 2001 which, inter alia, entail that the fixed sales price shall be announced by the Secretary OCAC till the formulation of the Petroleum Regulatory Authority (PRA). The OCAC was formed as a forum of the oil companies for inter se relationship and the interaction with the government. Presently the OCAC comprise the four refineries, five oil companies and two gas distribution companies. The OCAC being a forum of oil refineries, marketing and distribution companies is the direct beneficiary of price escalation of POL products. The composition of the OCAC reveals that the government is not even represented in the Committee. However, in the past PSO and even other public sector companies used to play some role in protecting the interests of the government and the public at large. After the induction of private sector representatives in the OCAC, the committee has now emerged merely as a cartel of the oil and gas organisations.
The Ordinance No.XVIII of 2002 established the Oil and Gas Regulatory Authority (OGRA). The powers and functions of the authority described under Section 6 of the OGRA Ordinance, inter alia, include functions to (i) safeguard the public interest including the national security, and (ii) administer or establish prices, for those categories of petroleum for which the Federal Government establishes prices. In order to safeguard the interest of the public and the government the Ordinance, vide its Section 5 on Remuneration and conflict of interest, lays strict conditions on its members. The Ordinance, inter alia, states that (i) no person shall be appointed by the Federal Government as a Member if he has any direct or indirect financial interest in, or has any connection which might reasonably be viewed as giving rise to a conflict of interest with any person involved in any regulated activity, (ii) no person appointed as a Member shall during his term in office have or maintain any direct or indirect financial interest in any person involved in any regulated activity, (iii) no Member shall take part in any decision, if such Member is in any way, whether directly or indirectly concerned or interested in the decision, and (iv) any Member who knowingly contravenes any of the provisions of the OGRA Ordinance shall, on inquiry by the Government, be guilty of misconduct.
However, the factual position shows that the prices are still being fixed by the OCAC. It is quite obvious that members of OCAC who are engaged in the fixation of POL prices are not only on the pay role of petroleum companies but also direct beneficiaries of the price escalation. As such the fixation of price by OCAC is illegal and in direct contravention to Cabinet’s decision and the OGRA Ordinance. The oil companies are manipulating high and artificial prices by referring the international price hike to the price of POL products based on Western Texas Intermediate (WTI) origin. Whereas Pakistan imports Dubai or Arab Gulf origin based POL products. Therefore the prices of WTI are not relevant for increase in the prices in Pakistan. The prices of Dubai origin are much lower (US$8 to US$10/bbl) than what has been reflected by the ministry of petroleum / OCAC.
It is further understood that OCAC was earlier maintaining a web site which reflected the prices of POL products, however, because of arbitrary fixation of the prices based on WTI, OCAC has stopped updating its website w.e.f. September 2004. A glaring misappropriation of prices on the part of OCAC is visible from its website (www.ocac.org.pk) on account of calculation of sales price. The prices worked out by OCAC in the case of motor spirit which includes ex-refinery cost inclusive of excise duty, OMC margin, dealer’s margin and sales tax w.e.f. March 01, 2005 till date shows a difference of about Rs. 11 to Rs. 12 per liter on an average. In another words the total average price given by OCAC in its web site is Rs 45.53 / liter as against the actual total which works out to Rs. 33. The facts can be ascertained from the OCAC’s web site.
Not only this, the government on the request of OCAC on August 16, 2004 withdrew the petroleum levy of Rs 8.34 per liter on motor spirit to reduce the artificially fabricated loss to the petroleum companies to benefit the consumers. On the contrary the OCAC instead reducing the petroleum prices and passing on the benefit to the consumers increased the inland freight from Rs. 1.99 per liter to Rs 8.4 per liter. This increase in inland freight of about Rs.6.41 was unrealistic and uncalled for. All this is resulting in additional and unjustified price to the consumers of motor spirit by Rs.18 per litre. Moreover, this difference is neither going to the exchequer nor to the OCAC’s official bank account. Since there was no justification for increase in any cost component of the freight hence inland freight should not have been increased. How is this concealment in prices is being accounted for would be best known to the OCAC.
Apparently, the government also did not take any appropriate action against this increase in inland freight, although it had sacrificed colossal petroleum levy @ Rs. 8.4 / Liter. The oil companies are deceitfully sharing inland freight fund through a system known as fake dumping in the petroleum business. It is pertinent to note that even the World Bank in its report dated July 10, 2003 entitled “Pakistan: Oil and Gas Sector Review” has pointed that the average cost of inland freight cost of the main petroleum products is in the range of Rs1.0 to 1.25 per liter. It stated that one should recognize that without the freight pool, the difference between the price of diesel in Karachi and Peshawar would be about Rs1.25 per liter (about 6 percent of the High Speed Diesel retail price). The bank recommended that the freight pool should be phased out in 2 or 3 years, and cartage rates should thereafter be determined by the market. It further recommended that pending full phase out of the freight pool, the number of depots on which equalized prices exist should be reduced from 29 to say 18 in fiscal year 2004, and to 14 in fiscal year 2005. This will allow for greater competition among the secondary freight market and benefit consumers.
The issue was also raised in the Senate on the basis of which the Standing Committee took up an adjournment motion. One of the aspects raised in this regard was whether or not fortnightly prices announced by the regulatory body (OCAC) truly reflect the international price change? The findings were that the increase in price did not truly represent the International price. The prices are inflated and people of Pakistan over a period of 5 years have paid in excess of Rs 150 Billions approximately. The Committee further remarked that the worst part is that the excess paid by the people of Pakistan was not to the credit of national exchequer but was shared between Refineries, OMC’s, MNC’s and the shareholders. Further concerns were raised by the Standing Committee on account freight pool which needs to be monitored by an independent agency. OMC’s margins needs to be re-fixed. According to the report a refinery has benefited by Rs. 3 billon on account of freight which Pakistan paid for Badin crude transportation. The World Bank report identified and concluded this as uneconomic way and emphasized the need for an investigation. The Report of Sub Committee of Standing Committee on Petroleum & Natural Resources dated June 4, 2005, inter alia, recommended that the general public will only benefit if regulatory affairs were handed over to the OGRA with impartial members and participation of people who can protect the consumer. It is important to note that there are already some cases pending with the NAB in this regard.
The overall analysis reveals that the fixation of prices of POL products by OCAC is illegal and requires a detailed inquiry and investigation that why the prices are not being fixed by OGRA and instead still being fixed by the direct beneficiaries of petroleum price hike. Some body needs to determine the impact of the artificial increase in the prices of POL on various goods which in turn are creating artificial hyper inflation in the country for which the government is being unnecessarily blamed.
—The writer is Director IMDC, International Islamic University Islamabad.
