ARTICLES

POL Pricing Aberrations

Posted on by Abbas Raza

The government keeps giving the impression that the POL price increases or decreases due to fluctuation in international prices of POL products and foreign exchange fluctuation. However, in Pakistan there are intrinsic factors which determine the Import Parity Price (IPP). These factors pertain to ECC and government decisions. Since POL pricing has affected the entire economy and consumers have to pay a heavy cost, its aberrations need be brought to light.

The Supreme Court of Pakistan took notice of the POL pricing mechanism in April 2009 and formed a Commission under late Mr. Justice Rana Bhagwan Das. The Commission considered the details of the inquiry conducted by the NAB in 2006 and submitted its report to the SCP. The NAB’s inquiry report identified legal, financial and procedural aberrations besides quantification of financial loss to the exchequer and the public due to corruption and corrupt practices by the POL sector. Since the TOR of the Commission, determined by the SCP, was confined only to the POL pricing mechanism, it did not look into the corruption aspects.

NAB’s inquiry report, revealed that the ministry flouted the directions of the Cabinet and did not monitor/regulate price fixation by the Oil Companies Advisory Committee (OCAC). The Ministry also failed to independently verify the fortnightly calculation sheets with Platts Oilgram, an internationally accepted POL price journal. The NAB report identified areas which were and are even now causing undue and arbitrary price escalation in MS and HSD and pertain to (a) non-performance of monitoring/regulatory function by DG Oil (b) pricing of motor spirit on redundant formula (c) illegal charge of margins of OMCs and dealers on GST (d) adoption of wrong basis for exchange conversion for Import Parity Price (e) depriving GOP of profits above 40% rate of return (f) violation of financial rules/procedures in the payment of price differential claims (PDC) (g) Inland Freight Equalization Margin (IFEM) (h) local HSD price higher than imported HSD (i) import incidentals wrongly charged at 2% (j) non-capping of OMCs and dealers’ margins (k) addition of inadmissible/non-existent premiums on HSD, MS, and other POL products, (l) inflated premiums paid on import of HSD by PSO and (m) allowance of deemed duty in the guise of tariff protection to refineries without seeking specific legal approval.

These aberrations have led to undue profits for the OMCs, dealers and the refineries. The findings of the report placed the responsibility of aberrations on OMCs, dealers, refineries and OGRA besides the officers of the Ministry of Petroleum.

The NAB report observed that 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, in its summary for ECC on February 20, 2002 while seeking increase in margins, gave the assurance that in case of abrupt increase, a maximum ceiling on margins shall be placed. When margins abruptly increased on account of sudden rise in oil prices from 2004 onwards, no action was taken.


As per the 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, and the Ministry allowed the pricing of MS 87 RON on the basis of the old naphtha formula which was higher than the price of MS 95 RON, a much superior product than produced by domestic refineries. The pricing of MS continues to be on basis of the old naphtha formula violating the ECC’s decision.

 

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. 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. 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 billions. The disposal of this amount aggregated till date needs to be put to strict audit by the AGP. This amount, lying in the special reserves of the refineries, should be retrieved and deposited into the government exchequer or adjusted against the subsidies to the sector.

Correction of deliberate legal aberrations can bring down the prices of MS and HSD by at least Rs. 20 to Rs. 25 per liter even at the current international prices and dollar parity.

Gross violation of the financial rules and procedures are being committed in the payment of price differential claims (PDC) by the Ministry of Finance and Petroleum and the OCAC on account of disbursements without adhering to audit and financial norms and practices.

The NAB also identified Inland Freight Equalization Margin (IFEM) as one of the causes of arbitrary POL pricing and involving deviation from rules and regulations. Moreover, the mechanism and the basis for fixation and determination of IFEM for various POL products was not open to the public and has never been audited by independent auditors.

The NAB also pointed out that the ministry allowed refineries to charge premiums on HSD, with one per cent sulphur content, and MS, which have never remained premium products. This aberration continues and is generating undue and illegal profits for the POL sector.

In July, 2002 a new duty protection element was added to the import parity price for four products viz. HSD, kerosene oil, LDO and JP-4, in lieu of the guaranteed minimum rate of return as stated in the foregoing. 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 of “protective duty” was primarily collected for reconfiguration of desulphurization and continues.

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 NAB also pointed out 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 content and higher rates are charged from the consumers.

It is being argued that the POL prices are the lowest in Pakistan as compared to other similar countries. However, this fact needs to be confirmed by independent sources along with the breakup of prices to determine as to what the government and POL industry get per liter.

It is understood that NAB’s inquiry report was forwarded to the then prime minister with a copy to the president. However, no action followed. The issue was also taken up by the incumbent government, but it soon became hostage in the hands of the oil mafia due to severe shortage, which was removed the next day after the increase in prices. Moreover, accentuation of the pricing issue in the respective high courts has also yet to yield results.

Correction of deliberate legal aberrations can bring down the prices of MS and HSD by at least Rs. 20 to Rs. 25 per liter even at the current international prices and dollar parity, which can further be reduced if the SBP is able to restore the Rupee to Dollar parity at a reasonable level.

Abbas Raza