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Rs70b spent on LNG subsidy

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ISLAMABAD:

The government has given a hefty amount of over Rs70 billion in subsidy by providing liquefied natural gas (LNG) at discounted rates to two fertiliser plants over the past few years.

However, it does not seem to have made any difference in the lives of farmers, who continue to bear higher prices of urea fertiliser.

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According to sources, the government started supplying LNG at lower-than-market prices to Fatima Fertiliser and Agritech Limited in 2018 and it has continued to date. During the period from early 2018 to September 2022, a subsidy of Rs70.4 billion was doled out to the fertiliser plants on the supply of imported LNG.

Despite the subsidy, the prices of urea, a vital input for planting crops, have gone up as fertiliser manufacturers follow a uniform price policy. In 2018, a 50kg bag of urea cost Rs1,500, but the price has now surged above Rs2,300.

According to figures available with The Express Tribune, the fertiliser plants received a subsidy of Rs1.3 billion in 2018, which jumped up to Rs14.5 billion in 2019. Next year, the subsidy dropped to Rs3.7 billion but went up to Rs17.7 billion in 2021 and Rs33.7 billion in 2022 till the end of September.

The government has recently given an extension in the discounted LNG supply, which will add to the subsidy bill.

It was revealed in a recent meeting of the Economic Coordination Committee (ECC) of the cabinet.

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While considering the urea requirement of Pakistan, the Ministry of Industries and Production in 2018 sought the ECC’s approval for the supply of subsidised re-gasified LNG to Fatima Fertiliser and Agritech Limited. The government picked the gas tariff differential as a subsidy earmarked in the annual budget.

The provision of subsidised LNG has been extended from time to time with the ECC’s approval depending on urea stocks in the country, as assessed by the Ministry of Industries.

Earlier, the ECC, while considering a summary submitted by the Ministry of Industries, decided that the Petroleum Division might be directed to ensure the provision of locally produced gas to two urea plants running on Sui Northern Gas Pipelines Limited’s (SNGPL) network by March 31, 2022.

It would lead to the saving of funds, which would be utilised on LNG supply to both plants and would ensure their continuous operation throughout the year, it said.

The ECC approved a subsidised re-gasified LNG price of Rs839 per million British thermal units (mmbtu).

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In the last financial year, the government bore a subsidy of Rs33 billion. For the current year, Rs15 billion has been budgeted on the demand of Ministry of Industries for the supply of subsidised LNG to the fertiliser plants.

However, the allocated amount is insufficient when seen in the context of pending claims of Rs24 billion for the period June to October 2022. Apart from that, November’s subsidy claims are estimated at Rs5.2 billion.

The ECC meeting was informed that according to a latest tender for the import of 300,000 tons of urea, received by the Ministry of Industries, the price was quoted at $520 per ton (Rs5,980 per bag) whereas the local urea price in the country stood at $187 per ton (Rs2,150 per bag).

The combined urea production capacity of the two plants is 70,000 tons per month, which indicates a foreign exchange impact of the import of 70,000 tons at current international prices at $36 million per month besides a subsidy of around Rs6.20 billion per month on the supply of imported urea to farmers.

Keeping in view the situation and the expiry of deadline for subsidised LNG as per the ECC’s decision, the Petroleum Division submitted proposals for consideration of the economic decision-making body.

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In the first proposal, it recommended running the two fertiliser plants on subsidised LNG for another six months from October 2022 to March 2023.

Since the budgeted subsidy of Rs15 billion was insufficient to clear the claims of Rs24 billion till October 2022, an additional amount of Rs9 billion might be provided as a supplementary grant on the demand of the Ministry of Industries to clear the backlog, it said.

The continuation of operations of the fertiliser plants would be subject to the review of urea stocks by the Ministry of Industries along with the Ministry of National Food Security and Research every month during the six-month period, the division said and sought approval of the ECC.

The cabinet body extended the discounted LNG supplies till December 2022.

Published in The Express Tribune, November 18th, 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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