EDITORIAL: After long deliberations and numerous announcements of intent, gas prices have finally increased. However, this delay does not come without a cost. The prices which were supposed to increase by July are not effective from November. However, the notorious circular debt tap had to be turned off from July onwards.
Hence, the cost of delay by four months, which is estimated at Rs 65 billion, is to be recovered from consumers and, consequently, the increase is higher to compensate it.
That is not the first time a delay has happened. In fact, the gas price increase has been postponed since 2013-14. There were some attempts to increase here and there but were not enough.
The supply of RLNG started increasing with decline in the production of natural gas. The higher cost could never be recovered. Today, the gas circular debt, which was almost non-existent a decade ago, now represents a whopping Rs 2100 billion amount without late payment surcharges.
There were adverse consequences due to this. The debt accumulation is mostly parked in the state-owned energy companies such as OGDC (Oil and Gas Development Company), PPL (Pakistan Petroleum Limited) and PSO (Pakistan State Oil).
The balance sheets of these companies became hollow, and the E&P (exploration and production) companies stopped exploring new wells and the number of oil and gas discoveries came down to close to zero. That has exacerbated the problem and the reliance on imported RLNG began to rise. That started putting a huge strain on the balance of payment and accelerated the accumulation of circular debt.
With the recent round of increase, the tap of circular debt is said to be turned off. Well, there is no doubt about it if one sees the complex spreadsheet mathematical model. But like any model, it has assumptions. One assumption is to have timely revision of prices based on the RLNG import and PKR/USD parity.
The other is not having any misuse of sectors that are still protected. For example, the tariff for tandoors has been kept low and unchanged, as the government does not want roti to become more expensive as it is already becoming unaffordable for marginal consumers. The intent is right but there could be risk of misuse as the past is full of instances where gas was rerouted for other purposes than actually intended.
The fertilizer prices have been kept low on the premise that urea prices should be kept low to ensure food security. Urea prices in Pakistan are half (or less) than the international prices, as the price of gas being supplied to fertilizer companies is a small fraction of international gas prices. This implies part of the benefit is being enjoyed by fertilizer companies which is evident by their high EBITDA (earnings before interest, taxes, depreciation and amortization) margins.
However, there is a problem of smuggling of fertilizer from Pakistan to Afghanistan and beyond. This is like smuggling out of cheap local gas and importing the expensive RLNG to fill the gap.
There is nothing in the gas pricing model to cover this abuse. One can understand that abrupt change in subsidy mechanism by direct provisioning to farmers can trigger a crisis in view of the poor governance structure, and the fact that the recent experience of DAP subsidy was an abject failure. However, that does not mean that reforms in urea pricing are not warranted.
The bottom-line is that price rationalisation of gas is a welcome move; but the work doesn’t end here. There is much more to do, and the next government has to continue the reforms and should sway away from the idea of pricing benefit to anyone and try to be innovative in providing sasti roti and urea.
Copyright Business Recorder, 2023
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