Oil marketing companies, dealers: mechanism for margin determination to be revisited

The Economic Coordination Committee (ECC) of the Cabinet has constituted a committee to be chaired by Prime Minister's Special Assistant on Petroleum, Nadeem Babar, to revisit existing mechanism for determination of margin of OMC and dealers on Motor Spirit (MS) and High Speed Diesel (HSD), official sources told Business Recorder.

The ECC has also fixed the margin at 6.58 per cent instead of 9 per cent as was sought by the OMCs. The Federal Cabinet in its meeting held on November 12, 2019 endorsed the decision of the ECC taken on November 6, 2019.

Petroleum Division stated that the margins of OMCs and dealers on Motor Spirit (MS) and High Speed Diesel (HSD) are revised annually based on the Consumer Price Index (CPI). Accordingly, the margins on MS and HSD were revised upward effective from July 1, 2018 under the ECCs' decision of May 30, 2018. In this regard, Oil Marketing Companies requested through Oil Companies Advisory Council (OCAC) for timely revision of the margins due to substantial increase in the cost of doing business owing to an increase in inflation and devaluation of Pak Rupee in 2018-19. Accordingly, the revision in margins on MS/HSD for OMCs and dealers had worked out based on the CPI for the respective period (i.e. April 2018-May 2019).

Petroleum Division proposed Rs 0.25 per litre increase in the OMC's margin in MS from Rs 2.64 per litre to Rs 2.89 per litre whereas an increase of Rs 0.34 per litre has been sought for dealers to Rs 3.81 per litre from Rs 3.47 per litre.

For High Speed Diesel, Petroleum Division has sought Rs 0.25 per litre for OMC and Rs 0.29 per litre for dealers.

During ensuing discussion in the ECC, Ministry of Planning, Development and reform maintained that average inflation for the entire period (April 2018 to May 2019) was at 6.58 per cent and may be taken into account for determination of margin for OMCs and dealers on MS (petrol) and HSD instead of taking 8.8 per cent for April 2019. However, the response was that the proposed point of views is contrary to the mechanism approved by the ECC on October 30, 2014 for revising margin on CPI basis, which is in line with "Monthly Review of Price Indices" published by Pakistan Bureau of Statistics (PBS). It was further stated that PBS published three main types of indices under CPI for April 2019 as follows: (i) CPI General-8.8 per cent YoY;(ii) CPI Food- 8.6 per cent and ;(iii) CPI non food- 9 per cent.

It was argued that CPI (food) is irrelevant in the case while other indices are higher than the CPI (general). Therefore, the CPI has been taken as base for determination of proposed margins. Planning Commission has also opined that average does not fall in any of the three categories of indices.

Chairperson OGRA opined that any increase in OMCs and dealers margin may affect the consumers. However, substantial increase in exchange rate has also affected OMCs/ dealers. Finance Division stated that the proposed increase in MS appears to be on higher side when compared with the increase as approved last year. It was suggested that the proposed increase in MS is required to be rationalized as inflation in recent times is being attributed to increase in petroleum prices.

The ECC observed that proposed margins are more than 9 per cent which are quite high and it will affect consumers badly. It was further observed that average inflation of the whole period (April 2018 to May 2019) at 6.58 per may be taken into account for determination of margins of OMCs and dealers on MS and HSD. It was also suggested that a committee may be constituted to revisit existing mechanism for determination of margins.

After deliberations, the EC approved revision of margins for OMCs and dealers on MS and HSD on the basis of average inflation for entire period (April 2018 to May 2019) i.e. 6.58 per recent effective from December 2019.

The ECC also constituted a committee under the chairmanship of Special Assistant to the Prime Minister on Petroleum, with Secretaries of Petroleum, Secretary Finance, Planning, OGRA and PBS and an academic or retired practitioner from the private sector as members.

The committee will revisit existing mechanism for determination of OMCs and dealers margins on MS and HSD in a holistic manner and devise a revised mechanism for the purpose of ensuring interest of stakeholders particularly the consumers. The committee will submit its report to the ECC within two months. The ECC also decided that in future the applicability of margins' revision formula should be from July to June.