Deregulating petroleum sector: curb smuggling first

EDITORIAL: Finance minister Mohammad Aurangzeb recently said in a conference that bold energy and taxation reforms should be the order of the day. Ironically, he noted this at a time when smuggling of petroleum products (mainly high-speed diesel - HSD) from Iran is rampant. Industry insiders claim that HSD smuggling is around one-third of the country’s total demand. How can the finance minister talk about bold energy taxation reforms when some state actors are reportedly involved in smuggling and are claiming that it helps precious foreign exchange?

“Smuggling is happening under official patronage”, lamented the chairman OCAC (Oil Companies Advisory Council), Adil Khattak. “All trucks used in smuggling diesel from Iran are painted blue, which is in stark contrast to Pakistani trucks, which are often known for their painted truck artworks. Reportedly, every blue truck gets a token against Rs 300,000 per trip to officials in order to cross border. Interestingly, however, a noted economist has remarked that smuggling of diesel is taking place to save dollars. That is, however, a myth which needs to be busted. There must be some mechanism of payment between Iranian and Pakistani smugglers involving foreign currency. The usual way is to go through Hundi/Hawala and that indirectly reduces the official workers’ remittances as payment is netted against inward remittances and raises the current account deficit.

Yes, there might be some forex savings in view of the fact that diesel from Iran is coming at a discount due to sanctions on Iran by the US-led West. However, that benefit is pocketed by smugglers and their handlers. The taxation loss of 10 percent customs duty and Rs 60 per litre petroleum levy is on top of it, which is approximately Rs 80 per litre. With around 6,000 tons (7.2 million litres) per day smuggling, the tax loss is computed at Rs17 billion per month. The state’s loss is gain for smugglers and others involved in the value chain. The question is: does it make sense to save a few percentage points discount on smuggled diesel, given the huge loss in tax collection? And even the dollar savings are washed away, as refineries reduce their throughput due to low offtake of HSD; and, in the process, the supplies of other products such as petrol (mogas) and jet fuel are falling. The country may have to import petrol and jet fuel to compensate for refineries’ lower production to offset the gain from smuggling diesel.

“Attock Refinery is currently operating at one-third of its installed capacity and may shut down in a few days if smuggling does not stop. In this case, who will supply jet fuel to Islamabad airport, and for air defence requirements?”, Adil Khattak.

One bold energy reform that Ogra (Oil and Gas Regulatory Authority) is currently discussing deregulation of the petroleum sector. That should happen, and uniform pricing should end where influential people make money by stealing on Inland Freight Equalization Margin. However, local refineries have serious reservations based on the consideration of disbanding the uplifting priority principle of local products. They think this would jeopardise their up-gradation plans. Competition with legal imports should be encouraged, and refineries should not be afraid of open competition from imports once they upgrade. However, like any other import substitution industry, refineries demand protection, which is against the spirit of industrial reform the country needs today.

The local players are afraid of the economies of scale that the Middle Eastern refineries can bring, which face lower income and other taxes in their home jurisdictions. They fear dumping by big traders. Some of their apprehensions are rational and require attention. It’s best to have consultations between the government and the local industry before finalising terms on deregulation. And it should not happen so long smuggling is allowed, albeit reluctantly, as no one can compete with smugglers.

Copyright Business Recorder, 2024