What should be deemed unwise in the case of deemed duty?

Market was taken by shock on Friday on news reports suggesting a revised pricing formula for refineries with deemed duty being abolished. Panic set in the stock market as well, where three of the four listed refineries underwent decline in share prices in an otherwise bulls market.
The report, however, was clarified by the Petroleum Secretary who stressed on the point that the fate would be decided in the next meeting to be held on January 19, 2010.
Some circles are of the view that this report just might have been leaked a bit earlier but fear that there is every likelihood that refineries eventually end up meeting the similar fate as reported. If thats the case, Pakistan is definitely heading towards a serious crisis in the months to come.
Tracking back into events, refineries were entitled to charge 10 percent deemed duty on their products - until it was later reduced to 7.5 percent some time back. Unfortunately for the refineries, the timing of deemed duty reduction collided with that of a massive decline in gross refinery margins (GRM) owing to a sharp decline in oil prices - resulting in huge profitability losses.
Ever since, refineries have not been able to operate at their optimal efficiency. This situation has forced them to plead the government for an immediate revision in the pricing mechanism to provide them with the breathing space to at least make them able to sustain.
The point that refineries were supposed to invest the amount received in lieu of deemed duty in Euro-II implementation but has largely remained unfulfilled - deserves a mention. The refineries stress that the amount required to establish Euro-II plants needs investment in excess of what they have received all these years.
So, now the government faces a catch-22 situation. To reduce deemed duty or maintain status quo? And in case of an increase in deemed duty, should the government pass on the prices to the end consumer or to take the burden itself?
The answers to these questions are unfortunately not as simple as it may seem. None is an ideal solution, but it is not a perfect world either. There is an opportunity cost attached with exercising each option - so it essentially comes on how the government prioritizes and weighs each available option.
Assessing the first option, if the government decides to increase the deemed duty to 10 percent as per refiners demand or maintain it at 7.5 percent - it would address their concerns to some extent.
However, it would still require some serious efforts on the governments part to ensure that unlike the previous time, the money gets invested in Euro-II implementation instead of becoming a tool for survival.
This very recommendation was also given by the Energy Planning Commission - but it needs a timeline to be set and any failure in meeting the deadlines should result in severe penalties on refineries.
But there is a darker side of the picture as well - which exposes the end consumers as the victim of increased deemed duty in the form of higher petroleum products prices. Certainly, the public deserves better than paying for the inefficiencies of the past governments and refineries.
So what else could be done if the consumers are to be protected? There comes the case of government playing the sacrificing role and letting go the resultant increased GST from an increase in deemed duty. But will the government do it or not is a question which would be best answered by the economic managers. One fears that it will be hard for the government to let go its share and eventually the burden may well be passed on to the general public.
Taking the entirely opposite route - if the government straight away wipes out deemed duty - it would have catastrophic consequences for the all important strategic asset of the country. Certainly - there has to be a better way out than pushing the refineries to the fall and choking them to levels where it becomes impossible for them to operate.