The delay in conducting a study has disrupted the government’s plan to increase margins of dealers and oil marketing companies (OMCs) on sale of petroleum products.
The Oil and Gas Regulatory Authority (Ogra) and Planning Commission have refused to bear the cost of study. The Covid-19 outbreak also caused delay in conducting the study.
The Petroleum Division informed the Economic Coordination Committee (ECC) in a recent meeting that the ECC, while considering a summary on October 7, 2019 for the review of margins on petroleum products, had approved the revision in margins of OMCs and dealers on petrol and high-speed diesel on the basis of average inflation, as recommended by the Planning Division for the whole period (April 2018 to May 2019) ie 6.58% effective from December 1, 2019.
The ECC also constituted a committee under the chairmanship of special assistant to the prime minister on petroleum.
The committee was to revisit the existing mechanism for determination of margins of OMCs and dealers on petrol and high-speed diesel in a holistic manner and devise a revised mechanism for the purpose of protecting the interests of all stakeholders, particularly the consumers.
The committee was to submit its report to the ECC within two months. The Petroleum Division was to provide secretarial support to the committee.
The ECC also directed that in future applicability of a formula should be from July to June. In light of the ECC decision, the Petroleum Division arranged three meetings of the committee in which it was decided to seek the consent/ willingness of Institute of Chartered Accountants of Pakistan (ICAP) and the Institute of Cost and Management Accountants of Pakistan (ICMAP) on conducting the proposed study.
Only ICMAP expressed its consent at a cost of Rs450 million while ICAP regretted. Therefore, Pakistan Institute of Development Economics (PIDE) was also requested as only a single institute had expressed its consent for the study.
PIDE expressed its consent at a cost of Rs2.5 million. The first study on margins was also conducted by PIDE in 2014.
Ogra, being the licensing authority of OMCs, was requested to fund the study but it regretted. Meanwhile, on account of coronavirus outbreak, nobody was willing to do field work until recently.
PIDE, being a government body, was asked through the Planning Commission to update its previous study based on the terms of reference (TORs) for devising a formula in order to revise the margins in future, by utilising the cost accountants’ expertise.
The Planning Division was also requested to meet the cost of study from its budgetary resources prior to the issuance of award letter to PIDE, as decided in the committee’s meeting held on June 29, 2020.
However, the Ministry of Planning has shown its reluctance for arranging funds for the PIDE study.
The Petroleum Division also said that in order to avoid any further delay, it had been proposed that the study cost may be met through the unspent training fund maintained by the Petroleum Division under the Petroleum Policy 2012 for hiring consultants, professionals and for preparing policies on development of the sector.
Therefore, PIDE may be advised to initiate the study, in order to evolve an effective policy on margins, to be funded by the training fund.
Meanwhile, OMCs explained in a meeting held on September 17, 2020, in the presence of SAPM on petroleum, that margins were required to be revised as per the ECC mandate in July of each fiscal year but it was still pending due to a lack of study on margins to be carried out by PIDE.
A letter had also been written by the Petroleum Dealers Association that called for continuing with the inflation-based method until the PIDE study was completed, rather than delaying or denying the increase since July 1, 2020.
Therefore, they requested for granting an interim relief prior to the completion of PIDE study, based on the existing method of Consumer Price Index (CPI), as the cost of doing business was much higher than the prevailing margins and most of the companies were facing losses due to a higher rate of turnover tax.
Accordingly, the revision in margins on petroleum products was worked out based on the CPI (prevailing from June 2019 to Oct 2020), published by the Pakistan Bureau of Statistics.
The Petroleum Division proposed that OMCs’ margins on petrol and high-speed diesel be revised upwards by Rs0.45 per litre while dealers’ margins on petrol and high-speed diesel be revised by Rs0.58/litre and Rs0.50/litre respectively.
During the ensuing discussion, the forum observed that the benchmark taken in order to determine margins of OMCs and dealers should be based on rational standards. Therefore, the ECC observed that there was a need to re-evaluate the proposals in a holistic manner.
Published in The Express Tribune, February 3rd, 2021.
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