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ECC okays 48% urea price differential

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ISLAMABAD:

The government on Friday approved the import of 160,000 metric tonnes of urea at two varying rates of $480 and $710 per metric tonnes under government-to-government (G2G) deals after a private bidder defaulted on its obligation.

It also succumbed to the demands of oil marketing companies (OMCs) and withdrew its earlier decision to cap the premium on high-speed diesel (HSD) at $16.75 per barrel, which will put an additional burden of billions of rupees on consumers.

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The Economic Coordination Committee (ECC) of the Cabinet, on Friday, had to take the difficult decision of importing urea with a 48% price differential in two different deals in a bid to meet the input needs of the agriculture sector. The total import value of the urea is $84.9 million or Rs19 billion.

On October 28th, the ECC had given the contract for the import of 300,000 metric tonnes of urea to M/s Makhdoom Logistic Services at the rate of $520 per tonne. The ECC was informed, however, that the party had defaulted on its supplies.

The Ministry of Industries submitted a summary on the procurement of 200,000 metric tonnes of urea. According to the Finance Ministry, the industries’ ministry also shared that it negotiated different options, including the option of importing from Chinese firms that committed to supplying the negotiated quantity of urea fertiliser at the lowest rate.

After discussions, the ECC allowed the Trading Corporation of Pakistan Limited (TCP) to proceed with importing 125,000 metric tonnes, on a G2G basis, from China to meet the demand for urea fertiliser, said the Finance Ministry.

The ECC also allowed the import of another 35,000 metric tonnes on G2G basis via M/s Socar from Azerbaijan. It further directed the TCP to explore feasible options to import the remaining quantity of urea to meet strategic reserves of 200,000 metric tonnes.

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China will provide the 125,000 metric tonnes of urea through M/s Sinochem and M/s CNOOC at $480 per tonne. The secretary industries had managed to convince the Chinese companies to reduce their price by $90 per tonne, saving the national exchequer about Rs2.5 billion. The country will also be given the provision of paying for the import three months after delivery.

The government, however, had to swallow the bitter pill of accepting the Azerbaijan deal at $710 per tonne for 35,000 metric tonnes, which was 48% more expensive than the deal struck with the Chinese companies. The ECC was informed, however, that Azerbaijan would provide the urea within five days.

Last month, the ECC allowed the import of 300,000 tonnes of urea at the price of $156 million. The TCP had been authorised to sign a contract for the lowest bid of $520 per tonne to import 300,000 tonnes of urea. The Ministry of National Food Security and Research had recommended the deal.

There is an immediate need to import urea to ensure that there is no shortage of the essential input especially for wheat sowing.

The ECC also considered a summary submitted by the Ministry of Energy on high-speed diesel (HSD)/gas oil premium.

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According to the decision, “Considering the increasing demand for HSD in the country, the ECC recommended that Pakistan State Oil’s (PSOs) weighted average premium (KPC and Spot) may be applied for HSD price computation as per the federal government’s applicable policy guidance. And in case of higher HSD premium paid by importing OMCs other than PSO, the differential of premium will be computed in the price.”

By virtue of the fresh decision, the ECC has withdrawn its previous decision to cap the OMCs margin first at $15 and then at $16.75. It is now expected that the OMCs will get a minimum $22 per barrel margin.

The ECC also approved a technical supplementary grant of Rs115 million in favour of the Ministry of Housing and Works for the construction of the Gujrat-Lalamusa Road – a scheme recommended by a politician.

 

Published in The Express Tribune, November 19th, 2022.

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Privatisation fails to meet objectives

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ISLAMABAD:

The success of Pakistan’s privatisation programme has remained limited to only generating $11 billion in sale proceeds, as the country could not achieve the post-privatisation objectives of improving efficiency and competition, says a new independent study.

The findings come amid the International Monetary Fund’s (IMF) push for approval of the State-Owned Enterprises (SOEs) Bill to improve efficiency and management of public sector firms. The finance ministry has requested the holding of a joint session of parliament to approve the law, after the bill was rejected by the Senate.

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In a study titled “Public Sector Enterprises (PSEs) in Post-Privatisation: Evidence from Pakistan”, authors Naseem Faraz and Dr Ghulam Samad concluded that the key objectives of the privatisation programme had remained unfulfilled. The study has been published in the Journal of Applied Economics.

“Our main finding is that the performance of firms has improved in the post-privatisation period but (it is) statistically insignificant,” said the authors. Privatisation has been carried out with the motive of reducing the fiscal burden and increasing the efficiency of the inefficient PSEs. Since 1991, the sale of PSEs has raised revenues of Rs649 billion, or $11 billion.

The $11 billion has been worked out by applying the exchange rate of the year when a privatisation transaction took place.

Pakistan is one of the developing countries where privatisation of a large number of PSEs has taken place, but the post-privatisation effect is yet to be analysed. Second, rather than focusing on one or a few sectors, the study considers all the privatised PSEs.

The study showed that the performance of a few firms improved in the post-privatisation period but it largely remained negative.

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“In particular, the privatised PSEs in energy, cement and chemical sectors do not show positive gains in the post-privatisation period. However, the telecom and textile sectors have experienced a positive change in the performance of the privatised PSEs.” “Similarly, the results also showed that the efficiency of firms did not increase significantly.”

The authors said that according to their assessment through the Key Informant Interviews, the malfunctioning of regulatory environment led to the market failure that eventually resulted in market exploitation.

Regulations and regulators are captured by the market, bureaucrats, judiciary and politicians. An effective regulatory environment does not exist to force the privatised entities to have higher efficiency and develop a competitive environment.

Government intervention in the regulatory sphere is dominant. Every regulatory authority has a board member from the government. This practice is clearly not aligned with the privatisation regulations.

The government intervention (secretary sitting as a board member) creates conflict of interest by having ownership and management together.

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The privatised banking and energy companies have failed to bring in the benefits of sell-off, according to the study. The process of privatisation and rewards distribution favoured mainly the buyers, while the government faced risk and cost.

According to the authors, the privatised companies earned a higher average rate of return on assets compared to their fully government-owned counterparts, as measured by the total net profits-to-sales ratio.

The higher returns on assets suggest a favourable effect of privatisation. On the contrary, the profitability or productivity measure (net profits-to-sales ratio) was relatively higher for the privatised firms but it was statistically insignificant compared to the period when the firms were fully government owned.

“The privatised firms experience a mild increase in productivity compared to their pre-privatisation period. This difference in performance is not statistically significant.”

Privatisation also did not enhance the efficiency of the privatised firms in terms of increase in sales. It suggested that the efficiency improvement was merely coming through the reduction in cost of production.

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The study identified weak regulators as a reason for the failure to achieve the privatisation objectives.

“Unfortunately, the regulator Pakistan Telecommunication Authority (PTA) did not influence PTCL and other related entities to work in a regulated market environment.”

The role of the PTA is limited to overseeing the determination of market prices. PTCL’s privatisation was not a fair deal. It lost $800 million and also did not improve the market in terms of competition.

“The government sold 26% shares to Etisalat and also transferred the management, which is against the rule, which requires 51% shares,” emphasised the authors.

The government had agreed that Etisalat would pay $2.6 billion by making upfront payment of $1.4 billion and the remaining $1.2 billion in nine installments of $33 million each. For the deal, the government received only $1.8 billion and the remaining $800 million was never paid.

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“The monopoly of the telecom sector persisted despite the privatisation and drove away billions of dollars.”

The privatisation of KESC, now KE, also did not achieve the objectives. Though the main reason of the privatisation was to get rid of the loss-making enterprise, unfortunately the government is paying more after privatisation, according to the study.

Published in The Express Tribune, November 24th, 2022.

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Tractor maker faces legal action over fraud

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KARACHI:

The Federal Tax Ombudsman (FTO) has ordered legal action against a tractor manufacturing company as the Federal Board of Revenue (FBR) reported a fraud of more than Rs10 billion.

According to FBR sources, the tractor company has allegedly committed a fraud of over Rs10 billion under the previous government’s initiative to provide tractors at a lower cost to the farmers.

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As part of the subsidy scheme, the government gave billions of rupees to the deserving and underprivileged farmers for the purchase of tractors.

Sources said that the tractor manufacturer had claimed sales tax refunds on fake documents and flying invoices. The FBR then referred the case to the FTO.

They added that the FBR recommended the application of the Benami Transactions Act while taking legal action against the tractor manufacturer.

“The respondent company misused pay orders of the complainant by issuing bogus and fake sales tax invoices to other persons for obtaining fraudulent adjustment and refund,” a notification of the FTO office read.

The FBR has initiated legal proceedings against the owners and dealers of the tractor manufacturing company for the recovery of money obtained through fraudulent means.

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The Directorate General of Intelligence and Investigation, Inland Revenue has been tasked with investigating the fraud and tax evasion case.

Published in The Express Tribune, November 24th, 2022.

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G7 looking at Russian oil price cap of $65-70

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BRUSSELS:

The Group of Seven nations (G7) are looking at a price cap on Russian sea-borne oil in the range of $65-70 per barrel, a European Union (EU) diplomat said on Wednesday.

Views in the EU are split, with some pushing for a much lower price cap and other arguing for a higher one. The G7, including the United States, as well as the whole of the EU and Australia, are slated to implement the price cap on sea-borne exports of Russian oil on December 5.

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“The G7 apparently is looking at a $65-70 per barrel bandwidth,” the EU diplomat said.

“Poland, Lithuania and Estonia consider this too high because they want the price set at the cost of production, while Cyprus, Greece and Malta find it too low, because of the risk of more deflagging of their vessels, which might mean the G7 has found a good middle-ground,” the diplomat said.

Some 70%-85% of Russia’s crude exports are carried by tankers rather than pipelines.

The idea of the price cap is to prohibit shipping, insurance and re-insurance companies from handling cargos of Russian crude around the globe, unless it is sold for no more than the maximum price set by the G7 and its allies.

Because the world’s key shipping and insurance firms are based in G7 countries, the price cap would make it very difficult for Moscow to sell its oil – its biggest export item accounting for some 10% of world supply – for a higher price.

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At the same time, because production costs are estimated at around $20 per barrel, the cap would still make it profitable for Russia to sell its oil and in this way prevent a supply shortage on the global market.

Brent crude front-month future oil prices initially fell to $86.54 from $87.30 on the news.

Published in The Express Tribune, November 24th, 2022.

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