By Saad Hasan
KARACHI: The government has taken a bold step to save thousands of people in Azad Kashmir and Northern Areas from freezing to death by withdrawing custom duty on import of liquefied petroleum gas (LPG) that would translate into sacrificing Rs80 million in indirect taxes.
The decision was taken after LPG marketing companies had skinned the consumers to the teeth. The deregulation of LPG sector and officially permitting use of LPG in taxis and rickshaws had given LPG marketing companies full sway to raise prices of locally produced gas in accordance with price hike in international market.
During January-November 2006 about 40,000 tonnes of imported LPG was offloaded at Karachi. At end of last month, one tonne of the imported fuel was priced at Rs42000, which has come down to Rs40000 with abolishment of 6 percent custom duty.
But this is not enough for LPG marketing companies and their distributors who want government to do away with the remaining 15 percent sales tax and 6 percent income tax on imports to bring down the retail price. For this the government would have to bear an increased fiscal deficit.
They support their argument citing low price of domestically produced LPG. Marketing companies receive gas from nine local producers- OGDC, PARCO, JJVL, PRL, NRL, ARL, PPL, POL and OPI- at Rs28847 per ton (all taxes included) and so they ask how can costlier imported LPG be a benefit to consumer?
One tonne of LPG fills 85 cylinders of 11.8kg capacity. This reflects that marketing companies buy one kg of locally produced LPG at Rs28.7 for onward supply to their distributors who through retailers decant the gas into rusty cylinders of rickshaws and taxis, in case of urban areas, at Rs40-45 per kg.
However, this calculation does not take into account the price factor of imported LPG. Marketing companies calculate onward sale price on weighted average cost of both- local produce and imports.
According to some estimates, 84 percent of LPG demand is being met from local sources and remaining from imports. This shows a larger contribution of local LPG over imports.
What the LPG Association of Pakistan (LPGAP) does not mention, too often, is the system of quotas. As per the government policy, marketers have been allotted quotas from local production. Moreover, they are bound to supply certain quantity of LPG to rural areas.
The LPG sector is deregulated and prices are determined by demand and supply conditions. Deregulation fosters market competition, which helps to stabilize consumer price but marketing companies who enjoy larger share over locally produced LPG, leave those who rely on imports uncompetitive.
A senior executive of a LPG marketing company complained that those who have control over LPG supplies from domestic production could easily manipulate the market. “How can we compete when they (companies with large domestic quotas) will always have space for reducing their margins,” he said on condition of anonymity.
Advisor to finance ministry Dr. Ashfaq Hasan Khan, while speaking to The News, acknowledged that zero-rated imports might not immediately reduce retail price but said it will help augment domestic supplies. “Increase in supply will stabilize the price, which might also come under pressure in coming days.” Indeed supplies might increase but it will not create market competition, which as per the government policy for this sector, is vital for reducing price.
Just before the advent of winter season, some marketing companies drastically reduced LPG price on pretext of falling international prices.
But if imports have a nominal share in satisfying demand and import parity price mechanism is not enforced then how can price come down?
At start of November 2006, LPG retail price was Rs50 per kg, which came down to Rs40 within next seven days.
During last summer, LPG rate surged to Rs70 per kg because use of poor man’s alternate for kerosene oil - LPG - was increasing in automobiles.
Interestingly, price of LPG in rural areas, deprived of natural gas infrastructure, is more than urban centres despite the fact that producers have to allot quotas for consumers in such far-flung areas.
Oil and Gas Regulatory Authority (OGRA) is contemplating to address this issue. It plans to approach government officials in rural districts to inquire if LPG was reaching people who otherwise would resort to deforestation.
Unfortunately, the regulatory authority cannot do much to check LPG price because government deregulated the sector but forgot to empower OGRA accordingly.
A senior OGRA official expressed his helplessness in doing anything about the situation. “Government has adopted a deregulated policy for the sector. We can not do anything about it.”
However, he derided the perception about LPG being a poor man’s fuel.
There are only two possible solutions to stabilize price. Either producer price in linked with landed cost of imported LPG or its use in automotive sector is taxed.
Both steps will discourage use of LPG in automotive sector, which he believes consume almost 50 percent of available fuel in the market.
With surplus quantities in hand, marketing companies are ought to dump LPG in rural areas, he added.
And he did not agree that import parity price would help producers make more money. “There is even a possibility that import parity price might even force local producers to push down LPG price after they fail to find enough customers.”
As far as the people in up country areas are concerned, he suggested that government could make special arrangement for them on subsidized rates.