Fuel market requires a paradigm change. Not subtly but by disruption aimed at creating an upheaval, leading to a creation of a competitive energy market.
The SIFC (Special Investment Facilitation Council) apex committee needs to commit to deregulation and a visible conducive business environment with judicial activism that does not cancel contracts or renegotiates them; but one that ensures an effective contract arbitration process, including educated and prudent deliberations by regulators and parliamentary committees/subcommittees.
Building a competitive market also requires confidence building by SBP (State Bank of Pakistan), FBR (Federal Board of Revenue), regulators such as Nepra (National Electric Power Regulatory Authority), Ogra (Oil and Gas Regulatory Authority), Ministry of Energy (MoE) and investigation agencies for facilitating establishment of an efficient transportation infrastructure to expand fuel, electricity and gas supply chain by road, rail, transmission lines and waterways across the country.
This would necessitate support to Pakistan Railways for laying a fibre line for data and fuel handling as part of ML1 by removal of noncompetitive clauses that monopolize HSD/MOGAS volumes to Pak-Arab Pipeline Company (PAPCO) and restricts Furnace Oil (FO) to Pak Railways. Due to reduced usage of Furnace Oil, Pak Railways’ business revival plan is a nonstarter.
Secondly, moving out regulatory functions from the two divisions of MoE has been initiated but their independence has not been assured.
Delays in appointments in Competition Commission of Pakistan, notification of gas price increase are examples but plans to link high-end customer price with 11.2kg LPG is a good step.
An integrated regulator as against provincial regulators needs to be thought through, based on how Pakistan intends to manage its energy and balance provincial autonomy.
Deregulation of oil industry requires release of frozen shares of PSO (Pakistan State Oil) and rescinding the Marketing Petroleum Act., allowing OMCs to set provincial or national retail prices. For the oil sector, this means doing away with IFEM (Inland Freight Equalization Margin) whose amount last year is estimated at around Rs 60-70 billion shared between cartage contractors, white oil pipeline and Pakistan Railways. The expense to transport from depots to retail outlets is additional.
IFEM Audit by auditors assigned by Ogra for 2012-20 for reconciliation had a completion target of Sept 2023. It is pending and TORs for 2020-23 are still not agreed nor audit initiated. Being the largest shareholder, it hurts PSO in terms of financing cost.
Transfer of RON differential and high sulphur penalty with regulatory duty transfer to IFEM has helped reduce the logistics cost to consumer (current pool is negative by Rs 1.53 billion as of May 2023) but has “subsidized” OMCs who should instead be settling gain/loss amongst themselves.
This amount should be used to build reserves and it is increasingly necessary to review the impact of the new Refinery Policy under which funds will increase till EPC award to upgrade the old units. This has to be expanded later by allowing margin setting by OMCs, as already being done for Kerosene, FO, Lubricants, RON 95.
Fourthly, a deregulated environment also requires removal of monopoly of FOTCO on import infrastructure in PQ (Port Qasim), rebuilding oil piers in KPT (Karachi Port Trust), connecting the two ports by pipeline pending close to a decade.
PRL should have taken lead much earlier, being a significant beneficiary.
Policy changes made to build bonded storage and its rules should assist OMCs in developing trading/commercial storages for oil but strategic storages need to be built and managed by GOP. This business as usual model continues to delay deregulation by repeated extensions, issuance of new/amended Refinery Polic(ies) and will one day improve competiveness, reduce demurrages and build our strategic and commercial reserves. Time-frame is uncertain!
The alternate requires reinventing, integrated planning and SIFC intervention for evolving a strategy with a 15-year horizon of building oil and gas “city” (refinery, petrochemical, storage, pipeline) in Gadani and/or Gwadar-based on regional play and energy security of the country. Third party participation in CPEC (China Pakistan Economic Corridor) will assist further.
The estimated investment of over $4-5bn under “new” Refinery Policy by existing refineries with the 1960s technology, despite their history of delaying upgrade over last 15-25 years and even more; knowing the changing fuel landscape of the country will reduce fuel oil and enhance refined products, including gross refinery margins.
But the elephant in the room is that why is Pakistan not expeditiously progressing a new and efficient refinery with local refinery participating with PSO and Aramco as equity partners in the $10-12 billion refinery/petrochemical project (new policy expected soon) instead of upgrading?
Additionally, building winter consumption of electricity is necessitated by our dwindling gas reserves and increasing dependency on imported gas. This requires building electricity transmission network in Baluchistan and KP (it will later support regional energy trade).
And dwelling on the bigger picture; first, North-South Gas Pipeline timing needs review in view of the fact that our existing pipeline available capacity will increase due to reducing local gas production, consumption as we switch consumers to electricity and due energy conservation.
If it is to be built, then it should be the mandate of ISGS who is responsible for imported gas infrastructure including Iran- Pakistan gas pipeline and Turkmenistan-Afghanistan-Pakistan-India pipeline with SSGC and SNGPL as subcontractors. This will build local talent and expertise as well.
The provincial gas companies (GAS Discos maybe integrated with E&Ps) with open access with above will encourage projected USD 150bn FDI (foreign direct investment) in the sector over the next decade.
The September 2023 order of SC after 53 hearings since Aug 2022 on the NAB law should be challenged by the GOP to rebuild confidence and encourage decisions that are necessary to undertake reforms and ensuring 7% GDP growth.
It is surprising that a law that has been assailed by courts has been upheld and reconfirms that an accused needs to prove his innocence instead of prosecution, that benami property or money laundering charge no longer requires confirmation of funds being of corruption, restores arrest at time of inquiry and without completion of investigation with period back to 90 days nor extends the law to those exempted, has undoubtedly diluted positive sentiments of decision makers that were encouraged by the passage of the law to safeguard constitutional rights of an accused.
The concern on the jurisdiction limit of Rs 500 million could have been revised in the 12 months of hearings to around Rs 300 million based on NAB recommending amount per its SOP in consultation with the court as was done per 2016 SCM 2031 2016/17 and 2017 YLR1, which states “we consider the figure of Rs 100 million to be significantly large to justify intervention of NAB.…” Furthermore, confirming FBR as being the forum for undertaking investigation of benami property identified (not from corruption funds) during investigation would have been prudent.
It is important that unless BODs or individuals taking decisions benefitted personally or extended favours to others with substantiated allegations of deceit, fraud or dishonesty with reference to loss exist, professionals be safeguarded while undertaking their responsibilities diligently as they tackle scenarios that evolve during reformation and as approaches get modified. The protection threshold for them has to be high for execution of the ambitious vision and concerted efforts of SIFC.
Talk of new refinery over past 6 years, transformation of energy sector, delay in privatization over many years, lack of ownership and delay in implementation, dependencies on external consultants/advisors, extended deliberation on policy lacking target, delayed decision and being raised to Cabinet, understanding of new dimensions, fear, lack of capacity of team and focus are glaring examples of pitfalls in the past but will future reflect same inability to transform, execute structural changes or will Rising Pakistan benefit from World Bank advocacy that ‘crisis’ can be the moment as it has been for others (e.g., India and Bangladesh in the 1990s, Indonesia 1970s, China 1979) who built long-term consensus around key features e.g. Commitment (Iran), Consistency and Persistence (Mauritius), Credibility Building (Singapore), Communication and Ownership (India), Reforms (Bangladesh)and transformed by taking the required steps and measures.
Copyright Business Recorder, 2023