When the urban population is squeezed already by inflation, and facing frequent electricity breakdowns together with an irregular water supply, the rise in gas prices announced by the government on 2nd July, 2006 would naturally attract widespread criticism from the vociferous gas users.
The increase of about 9.95 percent in gas rates to be effective from 1st July covers all consumer categories, including domestic, commercial, industrial, CNG stations, cement, fertiliser, ice factories and power sector. Minimum charges have been raised by five percent for domestic consumers.
The first slab of (100 units) domestic consumers has been divided into two, thus increasing the number of slabs to five from the existing four. The first 50 cubic meters per month would now be charged at Rs 85.03 per MMBTU, an increase of five percent, while increase for all other slabs would be 9.95 percent.
Minimum charges for all domestic consumers have been fixed at Rs 114.69 per month as against Rs 109.22, showing an increase of five percent. The new rates for commercial consumers have been fixed at Rs 298.03 per MMBTU as against Rs 271.07.
These consumers have been defined as cafes, bakeries, milk shops, tea stalls, canteens, barbershops, laundries, tandoors, cinemas, clubs, theatres, clinics, maternity homes and private offices. Minimum tariff for ice factories has been fixed at Rs 1406.91 instead of Rs 1279.65 per month.
Gas tariff for fertiliser sector, including Pak-Arab, Dawood Hercules, Pak-American, Pak-China and FFC Jordan has been increased by 9.95 percent to Rs 264.87 per MMBTU from Rs 240.91. Similar increases have also been announced for industrial sector and cement manufacturers.
The increase in tariff was approved by the Prime Minister, after three days of hectic consultations, to comply with a World Bank demand to reduce subsidy especially for the first slab of domestic consumers. The notification was, however, issued by the Oil and Gas Regulatory Authority (OGRA) which is reported to have determined 15 percent increase in tariff for industrial, commercial and CNG and power sector but had kept the increase of domestic tariff much lower.
The revised tariff would be applicable for both Sui Southern Gas Company Limited (SSGC) and Sui Northern Gas Pipelines Limited (SNGPL). It is expected to yield about Rs 9.4 billion and Rs 10.7 billion respectively to the two gas distributors.
The precise impact of across-the-board increase in gas tariff, covering all categories of consumers, would, however, depend on the use of gas as an input in various enterprises. Nonetheless, we feel that such a step was essential to remove distortions in the fuel pricing system.
The price of other fuels in Pakistan is much higher compared to natural gas and only 15 percent of the households in Pakistan have access to piped natural gas. That is, the facility is available only to the affluent households, while the poor still have to depend on firewood and kerosene, which is more costly. This amounts to discrimination in favour of those consuming gas.
Also it needs to be noted that under the Petroleum Policy-2002, the gas wellhead price is equated with international price of crude oil. It is capped within a range of $10-$36 per barrel of oil. This is much less than the prevailing crude oil price of over $70 per barrel in the international market.
This capping is a blessing for the country, as the gas from the existing wells costs equivalent to $36 per barrel of oil. However, it is a great disincentive for fresh exploration. Some kind of flexibility in pricing is needed to attract more investment in exploration and development. Declaration of force majeure in Balochistan, due to the ongoing trouble with the 'Sardars' is also hampering the exploration effort.
OGDCL plans to dig 50 wells in 2006-07. Nine are located in the affected area. Unless we settle the issue politically, fresh drilling in Balochistan is highly unlikely. Islamabad's assertion that trouble in Balochistan is localised and involves 'only three Sardars' is a simplistic explanation for a thorny problem.
The feeling of deprivation, having a raw deal in development projects, with no participatory element - is widespread among the Baloch people. Without dialogue and political accommodation the ground situation is likely to get worse and not better.
Back to the new tariff, it would have been far better if, like other countries, ordinary households were made to pay a higher rate for gas than the commercial and industrial sectors. In our view, the cross subsidisation of domestic users by industrial sector is self-defeating. There is no need to protect 15 percent households of the rich and middle urban class.
The very poor in this country generally don't have piped natural gas, while our industrial sector has to compete in the world market. Introduction of an additional scale in the tariff for textile processors is another urgent necessity. Cotton textiles still dominate our exports. It is these which earn most of the foreign exchange.
A lower increase in tariff on small domestic consumers was probably dictated by political imperatives rather than any economic justification. But it would neither provide political mileage nor would it end the distortions in the gas tariff.
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