The Ministry of Petroleum and Natural Resources (MNPR) in a statement issued last week has nullified the points raised in the gas tariff report presented by Zubair Motiwala with reference to textile sector.
According to the statement of MNPR, "Zubair Motiwala made a presentation to National Assembly Standing Committee on Textile Industry 6th November, 2006 in which several incorrect statements regarding gas tariffs were made and conclusion was drawn on the basis of incorrect statistics".
Ministry of Petroleum and Natural Resources (MNPR) was requested later in December by a sub-committee on textile to furnish written reply to the contents of the presentation made by Zubair Motiwala. Accordingly, point-wise replies, based on the published annual accounts and determination of revenue requirement by OGDA in respect of both utility companies, are submitted as under:
As regards producer gas price policy it is worth mentioning that in order to attract investment in oil and gas exploration, the Government has to provide incentives, which are globally competitive, as otherwise the investors will divert their investments to other parts of the world offering incentives better than Pakistan.
In doing so, oil and gas wellhead prices have to be kept globally competitive for drawing more investment. If no new investment is forthcoming, there will be no option but to import oil at the price prevailing in the international market to meet domestic demand which will not only be drain on country''s forex reserves but will also make supply of energy to local consumer more expensive. Following table clearly indicates that domestic gas is still the cheapest energy source: (See table 2)
Therefore, Pakistan has no option but to offer globally competitive gas prices to upstream, investor to lure in investor. The notion or misconception that domestic gas has to be at low cost, as is being done by net exporter of energy, is not correct. Net energy exporting countries cannot be compared with energy importing countries as their domestic consumer price polices are based on different paradigms. It must be noted that domestic gas does not come free of cost.
Notwithstanding the above comment, despite the Law & Justice Human Rights Division''s clear opinion that economic hardship provision cannot be invoked, the Government has initiated discussion with Kadanwari joint venture to re-work gas price. Kadanwari field is any how under depletion and is producing around 50 MMCFD of gas which constitutes to be about 1.3 % of country''s gas production.
In the presentation, a comparison of SSGCL revenue determination for 2005-06 and 2006-07 has been made as under: (See table 4)
This is not a fair representation of actual position as OGRA did not allow the T & D cost as requested by SSGCL and reduced the same as under: (See table 5) Therefore, the increase in the T & D cost is proportionate to the increase in gas sales volume.
It may be noted that gas sector has registered significant growth during the last few years, as is evident from the following table, and extension of gas facilities to more people required expansion of network, which was only possible with additional investment. (See table 6)
If comparison of financial highlight of the both companies is done for the last four years, following situation emerges which clearly indicates that both companies are rather making modest return for their shareholders and over amplified statement to the effect that these companies generate 17%-17.5% ROA does not hold good as effective ROA as report in the annual audited accounts of both companies is less than 5% as shown. (See table 7)
This point is well illustrated by the example that has been quoted in the introduction of the presentation. It has been stated that OGRA had determined Rs 227.96/MMBtu price for SSGCL in January 2006 whereas the Government had notified consumer price of Rs 240.91/MMBtu. This was done to maintain uniformity in gas price in the country. Had this policy not been vogue, SSGCL''s consumers might have to pay more when gas prices for 2006-07 were notified as can be seen from the following table.
In absolute terms, GDS revenues from the system for 2005-06 were Rs 4.2 billion which work outs to be 2% of total revenues generated by SNGPL and SSGCL as can be seen form the following table. (See table 8)
Therefore GDS, which is mainly acting as cushion to bring uniformity in gas prices across the country, can not be termed in isolation as source of revenue for the Government. Anyhow, GDS revenues are disbursed to the provincial government as per NFC award and therefore, can not be treated as a source of revenue for the federal government.
Therefore, additional revenues generated form textile sector during the said period was only Rs 4.269 billion out of which Rs 3.746 billion was used for cross-subsidisation while remaining Rs 0.524 billion was GDS.
As regards World Bank''s suggestions in respect of subsidy, it may be noted that World Bank has mainly suggested that the subsidy being given to domestic and fertiliser sector consumer may be picked up by the Government from the budget.
MPNR supports this suggestion but this is a policy matter requiring approval of Finance Division who has so far not consented to this arrangement.
It may also be added that Zubair Motiwal, a renowned textile industrialist, was directed by Prime Minister to prepare a report on "Cost of doing business", which he presented to Prime Minister in May 2006 titled as "Recommendations on Reducing Cost of Doing Business in Textile and Clothing Sector of Pakistan".
A comprehensive report was prepared by him, which stated that if an input cost of Rs 50 billion was borne by the government in facilitating the sector in shape of subsidies, rebates, zero-rating, capacity building, market access, duties on import of machinery etc, the return for Pakistan would be $24 billion under present world market share of 3%.
His report was supported by comparisons with India, Bangladesh, and Indonesia, where the incentives and facilities to the textile industry as compared to Pakistan are much better. The gas tariff sector was just one aspect of the report and it also covered comparison of gas tariff with Bangladesh, which is less than Pakistan.
=============================================================
Revenue requirement Allowed by OGRA % AGE
Rs in Million
=============================================================
2002-03 2005-06 INCREASE
-------------------------------------------------------------
Cost of Gas 60,629 150,478 148%
T & D Cost 7,255 11,132 53%
Depreciation 4,810 5,900 23%
Other Charges 299 363 22%
Contingency Reserve 850 -100%
Other Income
(including non-Admissible) -2,642 -6,468 -145%
Net Revenue Requirement 78,047 170,319 118%
=============================================================
==================================================
Rs/MMBtu Ratio
==================================================
Natural gas-Industrial 264.87 1
Furnace oil-ex refinery 612.87 2.31
High Speed Diesel 1,049.92 3.96
LPG 1,091.90 4.12
==================================================
================================================================
Weighted Average Ratio
Wellhead Price
(Rs MMBtu)
================================================================
State owned companies 35%) 105.17 1
Private and foreign
companies (65%) 220.59 2.1
Total Weighted Average 192.55 1.8
================================================================
================================================================
2005-06 2006-07 % age increase
================================================================
Gas Sales Volume 33,945 360,741 6.43%
T & D Cost 4,073.439 5,153.405 26.51%
================================================================
================================================================
2005-06 2006-07 % age increase
T & D Cost 4,073 4,359 7%
================================================================
================================================================
2002 2006 % age increase
================================================================
Consumers (Million) 3.73 4.55 22.0%
Distribution network (Kms) 56,955 74,186 30.3%
Transmission network (Kms) 7,922 9257 16.9%
================================================================
================================================================
SSGCL
2002 2006 % age Change
================================================================
Effective ROA 8.64% 4.3% -4.34%
Earning per Share (Rs) 2.14 1.3 -0.84
Return on Capital employed 8.28% 4.5% -3.78%
================================================================
================================================================
SNGCL
2002 2006 % age Change
================================================================
Effective ROA 4.14% 4.82% 0.68%
Earning per Share (Rs) 3.78 7.46 368
Return on Capital employed 9.92% 9.53% - 0.39%
================================================================
=================================================
SNGPL SSGCL
Prescribed Price (Rs MMBtu) 234 243
=================================================
================================================================
SNGPL SSGCL Total
================================================================
Gross Revenue 107,897 68,487 176,384
GDS 2064 2,184 4,248
GDS as % age of gross revenues 2%
================================================================