New gas tariff and circular debt

Finally, much-awaited new gas tariff has been announced by government under negotiations with the International Monetary Fund (IMF). The increase is up to 12-112% in various gas tariff slabs.

Earlier, Oil and Gas Regulatory Authority (Ogra) had recommended an increase of 74% in the average selling price of gas by SNGPL, increasing average price from Rs.545.89 per MMBtu to Rs 952.17 per MMBtu; similarly SSGC’s average price had been recommended to increase by Rs.469.28/MMBtu increasing from last year price of Rs.692.63/MMBtu to Rs 1161.91/MMBtu.

The Economic Coordination Committee (ECC) of the Cabinet organises the average price into sector-wise and slab-wise tariffs. If this is done to match total revenue from Slabs to the total gas cost, there is no accumulation of arrears called circular debt. If matching of cost and revenue is not done, it continues to add up.

There are other complications such as LNG diversion to domestic sector which remain unpaid and remain as part of the circular debt. It may be noted that this gas pricing is based on locally produced gas. LNG accounts are separate.

Ogra monthly determines LNG price which is a weighted average of LNG term contract and spot prices. Large consumers such as power sector, industries and fertilizer sector buy its additional requirements from LNG imports.

There are foreign exchange price volatility issues, which often require throwing the cash flow forwards. And finally, the tariff accounts begin from 1st January 2023, while we are in middle of February, which creates the arrear issue.

This, among others, should pave the way for finalization of the agreement with the IMF. Gas circular debt (GCD) has increased to an unusually high level of Rs.1.64 trillion. The new gas tariff would stop the further build-up of gas sector circular debt. However, the already built up amount would remain on the books.

Earlier, circular debt used to be in power sector only. Power sector Circular debt (PSCD) has reached a level of Rs 2.467 trillion. Thus together, it is a big total of Rs 4.1 trillion. There has been some control of PSCD lately. New addition to PSCD had been largely controlled.

There is monthly fuel adjustment charge that is collected from the electricity consumers. Recently, the government has been preparing a plan to deal with the circular debt under negotiations with the IMF.

We will investigate in the following the change in gas prices and its impact on circular debt. We will also discuss Bangladesh’s tariff, which has similar gas profile and circumstances and has undergone similar exercise with the IMF.

The issue of gas and electricity tariff adjustments in Pakistan is much more difficult than that of Bangladesh, as Pakistan suffered from an extra ordinarily high CAD (Current Account Deficit) which caused major currency depreciation and high inflation.

Gas prices have not increased in Pakistan for the last four years or more. There have been cosmetic changes. Special subsidized gas tariffs had been issued for export sectors such as textiles.

Inadequately low gas tariff, cross subsidies and increase in LNG prices have contributed to the accumulation of circular debt.

Bangladesh, the star performer until recently, with highest growth rate and per capita income, had to go to the IMF as well. And as usual and typical, one of the conditionalities is upward adjustment of energy prices, most importantly of gas. Bangladesh had to increase gas and electricity tariffs as per the IMF dictates.

There are several plausible reasons to compare Pakistan’s gas tariff with Bangladesh’s. First, the tariff structure is almost similar to be comparable. Second, Bangladesh is a competitor of Pakistan in textile sector. And, thirdly, Bangladesh has a comparable gas profile with Pakistan’s. It produces gas and imports LNG from Qatar.

It has two LNG terminals as Pakistan has. Bangladesh’s gas demand is 3500 bcft/yr as against gas supply of 2670 Bcft/yr. Bangladesh has increased gas prices from 14 to 178%. In Pak rupee, average prescribed price is around Pk.Rs 1700/MMBtu (1 USD=230 Pk. Rs?).

A very remarkable change in Bangladesh’s new gas tariff is that there is a near uniform tariff for all sectors of Rs 1850.32/MMBtu except power sector which has a lower tariff of Rs 863.48/MMBtu. Tariffs of Residential, Fertilizer and Tea garden sectors have not been increased.

Pakistan’s exchange rate has been quite volatile lately. It has increased from Rs.230 per USD to Rs.275. Hopefully, the IMF agreement may help stabilize the exchange rate to a lower level, which many experts have estimated to be around Rs.250. For a variety of reasons, we have made comparison with Bangladesh at Rs.230 per USD which may not make much difference if the expected exchange rate in Pakistan stabilizes at Rs 250.

There are two possible measures that can be adopted to bring down GCD to a manageable level: 1. Suitable increase in gas tariff; 2.Reducing and parking of cross-subsidies to the end-use sector. For example, gas tariff for fertilizer sector is inordinately low.

It is meant to keep fertilizer’s prices low and resultantly keep food prices low. Although, gas is sold to the fertilizer plants at varying prices, the selling price of fertilizer is the same for all plants. Admittedly, there is a level of undue profiteering in fertilizer sector.

Some reform is required in this. Also, the gas prices to fertilizer sector have to be adjusted upwards and the increase is to be charged to agricultural sector wherein the subsidies are more acceptable.

Fertilizer gas tariff of Bangladesh has almost been thrice of Pakistan’s — Bangladesh Pk.Rs 992/MMBtu vs Pk.Rs 320/MMBtu. In the new gas tariff, fertilizer gas price has been increased from Pk.Rs 302 to Pk. Rs 510. Engro tariff has been kept untouched due to historical contractual reasons. Pakistan’s fertilizer tariff is now 50% of the corresponding tariff in Bangladesh.

Fertilizer gas pricing is a complicated issue related with agricultural prices. Fertilizer is being sold at identical prices despite significant differences in their gas prices.

We have raised this question earlier in this space. Such a heavy cross-subsidy may be transferred to subsidy in agriculture sector to increase the viability of gas sector. In future, this issue will become even more serious with the fall in local gas production.

Major difference in gas tariffs in the two countries (Pakistan-Bangladesh) has been in power sector. In the old gas tariff, power sector gas rates in Bangladesh were a mere Pk. Rs. 337/MMBtu as opposed to Pk.Rs.1050 in Pakistan.

Under new gas tariffs in the two countries, the tariffs are almost comparable; Pakistan’s tariff (Rs.1050) vs Bangladesh’s of Rs 939, only 12% higher than that of Bangladesh. Although power tariff is not the subject of this piece, it is quite probable that power tariffs in the two countries may have become closer as well.

This is expected to positively impact the energy tariff difference in the two countries. In the case of captive power, Bangladesh has almost doubled it over the old tariff, trying to discourage inefficient captive power.

Industrial gas tariff in Bangladesh is now the same as that of industry (Pk. Rs 2011), eliminating the anomaly. Pakistan’s captive power tariff is Rs 1200, only 60% of the corresponding gas tariff in Bangladesh. It appears that there is a scope of further adjustments in this respect in Pakistan.

The new industrial gas tariff in Pakistan has been enhanced from Rs 1054 to Pk.Rs 1200 — a minor increase of 14%. The corresponding tariff in Bangladesh has been increased by 88% to Pk. Rs 2011. Thus Pakistan’s new industrial gas tariff is only 60% of Bangladesh’s.

Bangladesh had three industrial gas tariffs earlier: large, medium and small. These have been merged into one slab. Apparently, there is no separate slab for export sector in Bangladesh. In Pakistan, there is one for which the tariff has been increased by 34% — from Pk.Rs 819 to Pk.Rs 1100.

The major issue is the gas tariff in the residential sector. For good reasons, the poor class of consumers is charged extremely low gas price. Lowest gas tariff slab in this category is Rs.121 per MMBtu as against the average gas price of Rs 1200. This slab has a share of 40-50% in the total residential gas sectors consumption.

There are other low tariff slabs as well of Rs 300 and Rs.553 per MMBtu. Put together, the share of highly subsidized gas for residential sector is more than 90%. How much the highest slab consumers can be squeezed is a question.

It cannot possibly absorb the cross-subsidies of the 90% residential consumers. However, upward adjustments would be necessary in the tariff slab of well-to-do people. Where to draw the line would be a complicated issue.

Gas tariff for residential sector in Pakistan is quite complicated and variegated. There are 8 slabs in residential sector and now two categories-protected and unprotected have been added to the new tariff, making the total number of slabs to 12.

For lifeline consumers (protected), gas tariff has not been increased and is kept at Rs 121. In the unprotected category, the same slab has been enhanced to Rs 200, an increase of 65%. In the medium (lower middle class) tariff, the increase is modest-8.5-33.3%. In the middle-class consumer category, there are two slabs: Rs 800 and Rs 1100. Increase in these slabs has been of 44.7-49.1%.

There are two tariff slabs in the large consumer category. The highest gas tariff for large residential consumers has been increased from Rs.1460 to Rs.3100; an increase of 112%. It may be compared with the alternative of LPG price which is Rs 4400.00 per MMBtu.

And in the other slab, there is an 80% increase, from Rs.1107 to Rs 2000. Thus there is a ratio of 26 times between highest and the lowest tariffs. It is amazing that in Bangladesh, there are fixed charges for small residential consumers; single burner Tk 990 (Pk. Rs 2168) and double burner Tk. 1080 (Pk.Rs 2365) per month.

How the IMF will deal with this strange rate is not known. Also what happens to gas wastage when there is a fixed charge is also a big question.

A lifeline consumer pays an average of Rs 500 per month. There are 4.3 million residential consumers out of which 0.4 million have prepaid meters. The Bangladesh government has reportedly provided a subsidy of Rs 131.4 billion (1.25 billion USD).

In Bangladesh, the poor class consumers have a fixed monthly rate of Pk.Rs.2019 which if compared with the lifeline consumers in Pakistan who pay Rs 500 per month or even less. In that way, Bangladesh’s poor pay 3-4 times more than their counterparts in Pakistan.

Metered residential consumers pay Pk. Rs 1117 per MMBtu. In India, residential consumers pay Pk.Rs 4223 per MMBtu. There are no tariff slabs in residential sector in India. LPG is consumed by the poor in Pakistan which has a rate of Rs 4403/MMBtu. These numbers provide an upper limit for highest slab of residential sector.

In India, LPG prices are the same as those of piped natural gas (PNG). There are no tariff slabs for poor consumers. India had a subsidized LPG programme of 1 free cylinder per month which has been changed to a charge of 50%.

This was for all-rich and poor. The Indian government is now encouraging the well-to-do not to avail the subsidized LPG facility. Also, efforts are being made for direct subsidy transfer in this respect. There is a subsidy amounting to IRs.5812 Crore (726 Million USD) to the residential LPG sector.

In Bangladesh, gas sector subsidies amount to 1.2 billion USD. Thus subsidies are common in South Asia to the residential gas sector due to wide- spread poverty. It is hoped that the IMF would understand this.

CNG tariff in Pakistan has been increased in the new tariff from 1371 to Pk.Rs 1805, an increase of 32%. CNG tariff in Bangladesh is Pk.Rs 2668. No change has been made in the new CNG tariff. At revised rates, CNG tariff in Pakistan is not different what is in Bangladesh.

It means that this tariff disparity was there in earlier tariff in the two countries. Thus, rooms for upwards adjustment may be there in this respect. Upper limit is set by comparative gasoline price. Usually, a 20-25% margin is maintained.

Had Pakistan gas tariff been increased and adjusted yearly in the last four years, circular debt in gas sector would not have accumulated. A reasonable increase in gas tariff, however, was due under or without IMF pressure.

It will further hike inflation and increase difficulties which, however, may be lesser than the consequences that may have to be faced otherwise. Populism in economic policy has to have some limits in order to be sustainable. Consideration should be given to bring wage levels to a reasonable level as opposed to playing with commodity prices.

Copyright Business Recorder, 2023