October 20-26, 2008
SINCE the POL pricing has affected the entire economy and the consumers have to pay a heavy cost, its aberrations need be brought to light.
The first inquiry revealed many aberrations. The Cabinet vide its decision on June 13, 2001 had deregulated the oil pricing and assigned the task of oil price fixation to the Oil Companies Advisory Committee (OCAC) till the establishment of the OGRA and directed ministry of P&NR (ministry of petroleum and natural resources) to monitor and regulate the prices.
The ministry flouted the directions of the Cabinet and did not monitor / regulate price fixation by OCAC. It also did not independently verify its fortnightly calculation sheets with Platts Oilgram (an internationally accepted POL price journal). Even the attendance of OCAC meetings by DG (Oil) was discontinued with effect from May 1, 2004, a date when POL product prices first started registering increase.
The ministry, in its summary for ECC on February 20, 2002 while seeking increase in margins gave assurance that in case of abrupt increase, maximum ceiling on margins shall be placed. Whereas when margins abruptly increased on account of sudden rise in oil prices from 2004 on- wards, the ministry did not act despite recommending capping of margins in its working paper of March 2005.
Had the OMCs/dealers margins been capped on December 1, 2004, the amount of undue benefit of about Rs6.50B (HSD) and Rs2.75B (MS) could have been prevented. This further worsened when the prices of POL products touched all time high at $140 a barrel. These margins have substantially increased to the benefit of OMCs making POL products unjustifiably costlier for consumer and resulting in enormous unearned profits for the OMCs.
As per the approved policy, the dollar-rupee conversion rate for pricing of refineries products under IPP import parity price (IPP) was to be based on the SBP’s inter-bank floating rate, whereas OCAC adopted the National Bank of Pakistan’s exchange rate. On this account enormous benefit passed on to oil industry in the year 2004-05 which works out to Rs1.20 billion (HSD & MS) by applying monthly average SBP’s inter-bank rate. With the recent rupee depreciation and high POL prices, the amount of Rs1.20 billion has increased manifold as the aberration has not yet been rectified.
The IPP was approved for refineries to give them true import price of the products. It was found that since July 1, 2001 price of local HSD remained most of the time higher than that of the imported HSD. The ministry deliberately did not take notice of this development and enabled refineries to receive overcharge of Rs4.50B during the period from July 1, 2001 to December 1, 2005 viz. actual import price of HSD. The anomaly persists and if corrected can reduce the prices.
As per ECC’s decision on April 29, 1993, the products not appearing on Platts Oilgram were required to be priced as per the prescribed formula till they started appearing on Platts. MS (motor spirit) being one of them started appearing on Platt’s from January 1, 2002, thus requiring its pricing on the basis of Platts.
This did not happen. The ministry allowed the pricing of MS 87 RON on the basis of old naphtha formula which was higher than the price of MS 95 RON, a much superior product than produced by domestic refineries. In a meeting held with oil industry by the secretary on April 20, 02, after detailed financial analysis and discussion with chief executives of oil industry, decision was taken that “motor gasoline price of 87 RON should be based on published spot price for A.G. (Arab Gulf) Mean 95 unleaded which was being quoted since January 1,2002”.
Surprisingly, the very next month, the decision was withdrawn on another file without any cogent reasons. Thereafter, several times pricing of MS on Platts was considered but the matter was shelved on the excuse that this will reduce refineries’ revenues.
The pricing of MS still continues to be on old naphtha formula violating ECC’s decision which provided undue benefit to the oil industry to the tune of Rs1l.20 billion during the period January 1, 2002 to March 16, 2006. The government needs to work out the impact of redundant formula on the price with effect from March 17, 2006 till date and deduct the total amount from the subsidy being paid to the POL sector. Moreover, the prices of MS should be fixed as per the approved formula, which will considerably reduce the prices of the MS.
A careful analysis of OCAC data reveals that OMCs/dealer margins have been charged even on sales tax in addition to the price of the product. Margins are to be computed on the price of the product and not on GST which is not a component of price of the product. The OCAC during the period between July 1, 2001 to March 15, 2006 illegally computed margins on GST. The ministry rectified this illegality on March 16, 2006 after a delay of about 21 and a half months after preparing the summary for ECC on May 2, 2004.
This allowed undue benefits to OMCs and dealers to the tune of about Rs18 billion (OMCs: Rs8.50 billion and dealers: Rs9.50 billion) during the period between July 1, 2001 to March 15, 2006 in respect of MS and HSD alone: Similar working for other products al- so needs to be made. This amount needs to be adjusted against the so- called subsidy being paid to the POL sector instead of being paid from government revenues.
The ECC allowed import parity price to three refineries (NRL, PRL and ARL) with effect from July 1,1992 limiting the range of profits between 10-40 per cent of their paid-up capital i.e. profits up to 10 per cent were guaranteed while profits above 40 per cent were to be mopped up by the government.
Between 1992-93 and 1999-2000, the government picked up Rs4 billion profits above 40 per cent. In June 2002, the ministry through budget summary got approval of the Cabinet for removal of lower limit of 10 per cent and in lieu thereof allowed tariff protection by imposing import duty at 10 per cent on HSD and six per cent on kerosene, LDO and JP-4. The removal of upper cap of 40 per cent was neither sought nor approved.
The ministry on the other hand, illegally removed the upper cap and transferred the government’s share in profits above 40 per cent to refineries. The removal of the cap of 40 per cent has deprived the government of its rightful share in profits amounting to Rs6 billion during 2002-03 and 2004- 05. This amount currently lying in the special reserves of the refineries should be retrieved and deposited into the government exchequer or adjusted against the PDC claims/subsidy.
Gross violation of the financial rules and procedures has been committed in the payment of price differential claims (PDC) by the minister of finance, ministry of NR and the OCAC. Up to January 31, 2006 the total PDC amounted to Rs20.5 billion against which a total amount of Rs16.30 billion was disbursed without adhering to audit and financial norms and practices,
The ministry required OCAC to submit audit certificates, but despite its insistence the OCAC did not furnish the requisite audit certificates in support of PDC claims. However, OCAC succeeded to maneuver PDC payments from finance ministry, with the assistance of the then advisor to prime minister on finance, without audit certificates thus violating financial procedure.
The inland freight equalization margins (IFEM) is the reimbursement of the actual cost of transportation incurred by the OMCs to ensure uniformity of the prices of POL products at 29 depots and forms the freight pool fund maintained by OCAC. Inland transport cost to 29 depots incurred by any OMC is adjusted monthly on the basis of actual claims against the amount collected by them, with the surplus deposited to the common pool fund and the deficit claimed from the OCAC.
IFEM has a great impact on sale price of POL. As can be seen from the fact that consumers had to pay about Rs58 billion on MS and HSD during the period between July 1, 2001 to February 28, 2006 (Source: Pakistan Energy Year Book -2005). The mechanism and the basis for fixation and determination of IFEM per litre for various POL products are not open to public. The IFEM account has never been audited by independent auditors.
The amount lying in the IFEM freight pool is public money. The annual amount of freight pool ranges between Rs8-11 billion during the years 2001-02 and 2004-05. The control and management of this public money should be exercised by the AGPR and not by OCAC, a private entity which is a direct beneficiary. Moreover, since this is public money, the detailed audit report should be made public.
The ECC on the ministry’s summary of June 4, 2002 approved pricing of POL products for the purpose of IPP on basis of Platts. The ministry in order to give undue benefits to oil industry annexed an illustration to the summary wherein it omitted mention of price of MS and allowed premiums on non- premium products under garb of white oil products. The ministry’s ill intention is evident from the fact that this illustration was got prepared from PRL, a direct beneficiary.
The ministry allowed refineries to charge premiums on HSD (with one per cent sulphur content) and MS which have never remained premium products. This resulted in undue benefit to the oil industry and the government to the tune of Rs34 billion. This aberration still continues and is generating undue and illegal profits for the POL sector. Its correction can reduce the prices by a substantial amount.
In July, 2002 a new duty protection element was added to the import parity price for four products (HSD, kerosene oil, LDO and JP-4) in lieu of the guaranteed minimum rate of return as stated above. OCAC adds the tariff protection to the import parity price for the said products to derive the ex-refinery price. Deemed duty levied in the guise “protective duty” was primarily collected for reconfiguration of desulphurization, which despite of the lapse of six years has not been under taken, as required by the policy contained in para 3 of TOR of the Advisory Council approved by the chief executive in December, 1999. Further, after three years the incentive of deemed duty becomes inadmissible.
The NAB’s inquiry, based on the scrutiny of the record of the ministry and statements of various officials, in the report concludes that intentional distortions / deviations were made in the laid down policy and procedures of oil pricing mechanism to benefit the oil industry. This all is duly supported by documentary evidence.
The inquiry established that the officials embezzled a colossal amount of about Rs80 billion by (i) deviating from the laid down policy and procedures of oil pricing mechanism to benefit the oil industry, and (ii) establishing a nexus between the ministry of P&NR and the oil industry for allowing undue benefits to the oil industry.
This was mainly resorted to by appending non-transparent/misleading illustrations to summaries, non-implementation and misinterpretation of ECC’s decisions, keeping the policy makers in the dark.
The other preliminary inquiry pertains to the supply of substandard diesel by PSO to the nation, which is imported at lower rates but supplied to the consumers as high quality premium product with less than 0.5 per cent sulphur contents and higher rates are charged from the consumers. The enquiry reveals a misappropriation of Rs90 billion annually.
The NAB’s inquiry report was forwarded to the then prime minister with a copy to the president. However no action followed.
The NAB’s detailed inquiry report may be made public and its financial implications be updated with the current international prices based on the actual ECC and Cabinet decisions so that the prices of POL products are fixed on the basis of parameters approved by the ECC and the Cabinet.
This will considerably reduce the prices of the POL products to the benefit of the economy and the consumers. Moreover, all those involved in the scam, directly or indirectly, should be taken to task.
The writer is former economic consultant NAB
and a member POL inquiry team.
Email: abbasraza55@gmail.com
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