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The CNG dilemma: when and how should it end?

Published on 19th May, Edition 20, 2014

 

CNG was introduced in Pakistan to counter high price of fuel. As a new business venture, many businessmen opened CNG stations to reduce the cost of transportation. CNG kit import became a wide market and especially popular in the transport industry. Introduced in mid 1990’s no one predicted the issues arising out of CNG supply, which we witness today. As the price of fuel based on international oil prices increased, the demand for CNG in the country gradually increased. CNG kits even today are imported and sold at a premium where licenses were issued to establish CNG pumps country wide those who had the capital. The CNG industry thrived as a substitute to petroleum. Gas supply, which was intended for manufacturing and domestic consumption was diverted to the transportation industry without looking into macro impact of such a decision.

People in Pakistan today are so inclined towards gas especially the transportation network that phasing out CNG would result in loss of business of many. As gas supply is directed towards transportation sector, the biggest impact is on the fertilizer sector. Pakistan being an agrarian economy relies on fertilizer for agricultural produce. Fertilizer plants have witnessed loss in production and shutdown days due to non-availability of gas.

The government faces a dilemma in this regard, where should gas be directed i.e. towards transportation or towards manufacturing concerns and domestic household use. The situation now is that CNG is supplied few days in a week whereas the line to get a full tank is an ordeal on its own. People line up to have their CNG cylinders filled since 6 am which continues throughout the day. However, lines in front of the CNG station during these early hours is a common practice now.

SSGC and SNGPL frequently announces shut-down days for CNG supply and rescheduling days where CNG would be available. The transportation sector which was reliant on CNG now argues that in absence of CNG, they are forced to use diesel to increase fair for the commuters. People protest against non-supply of CNG to the transportation sector. Whenever there is top line pressure and revolt, the gas is directed accordingly. Based on latest figures available, Pakistan is the second largest country in the world with the highest number of CNG run vehicles. Iran has 2.86 million vehicles whereas Pakistan has 2.85 million vehicles running on CNG. The government introduced buses to run on CNG for Karachi. The problem is the transport mafia, which would never let such initiatives come to life, hence these buses are nowhere to be found. There have been talks that Metro bus will be introduced in Karachi. This again seems an impossible task under the existing transport mafia.

Globally, not just in Pakistan, it has now been argued and widely understood that gas used for transportation is a waste of this resource. Gas could be better utilized for the manufacturing industry, which would enhance production, create employment and increase GDP. With the quantum of vehicles moving towards CNG despite availability of pumps, long lines are witnessed which takes hours. The problem can be resolved if petroleum prices are made in line with CNG by reducing the taxation charged on petroleum as well as CNG. If only the taxation is removed, petroleum price can reduce by 40 percent whereas CNG price to the consumer can reduce by 60 percent. The selling price of CNG is being increased by OGRA consistently with no real justification. If one compares international oil prices with Pakistan, it can easily be calculated that the oil price does not correlate with movements internationally. There have been revolts from the CNG station owners against shutdown days; however, they primarily seek their own gain than the benefit to the economy. The pricing formula on CNG is beyond anyone’s understanding. In actual CNG to be the public should not be sold for more than PKR 15 per kg. Secondly, the CNG mafia is politically connected and easily able to influence the price as witnessed in the past. There have also been talks and pressure from CNG owners to further increase price considering the shutdown days and inflation. It is easy to say that CNG should be pulled back from the transportation sector, however, one cannot even comprehend the law and order situation it would create in the country. With CNG used heavily in transportation, the government and OGRA both are on a swing going to-and-fro with no solution visible expect keep the CNG independent of the impact it would bring on the industry.

 

With the current CNG prices, long lines to have a tank filled, cost of CNG to the buyer, the only winner is the government and the CNG owners make windfall profits. The CNG association themselves claim that even if rates are reduced, the business will still be profitable keeping with low costs. CNG owners do not want to lose the profit they have been earning and want the prices to be higher. Additionally the life of the vehicle also reduces running on CNG.

It is unfortunate that no clear policy exists how to manage CNG in Pakistan. The prime focus should be household and the industrial sector whereas CNG from transportation should be phased out. The government brings the prices of petroleum down removing the tax, which is currently averaging 32% to 35% per liter. Additionally, price of CNG should further be increased to the point where petroleum is a cheaper alternative. Lease of CNG stations currently with a tenor of 15 years should be removed with an option to have the station converted to petroleum for no additional charges. Import of CNG cylinders would be completely stopped with heavy fine for those who do import. Banks should be advised not to establish any LCs, which pertains to import of CNG cylinders. There have been discussions for rationing gas to different industries based on their requirement, which would once again include gas holidays. The textile sector has already been affected with non-availability of gas especially in Punjab.

Thinking on such lines would not yield any results as gas is required by every industry and the more available, the better it would be to keep the manufacturing facility running with production. Gas results in reduction in cost of production through reduction in expenses which in turn increases when industries switch to electricity and oil which is not suitable in the long run.

It was expected that the government will make corrective decisions on CNG. The problem continues to persist since a viable solution is not found, which is the phasing out of CNG used in transportation. The manufacturing sector including textiles and fertilizer has welcomed this initiative. The fertilizer plants have been running on sub optimal level, which needs to be increased. The loss in government revenue through petroleum could be adjusted with high duties and taxes on non-essential imports e.g. cigarettes and products already produced locally. This action would immediately result in closure of CNG businesses. Additionally, taxation on petroleum should be reduced, compensated through taxation on non-essential imports which will not hamper government revenue. Such an action would assist the economy through increase in employment, reduced manufacturing cost and increase in GDP through enhanced production. Significant gain will be in the fertilizer sector as uninterrupted supply of gas would help production of urea at a lower price, which in turn will reduce the price of agricultural produce and likewise reducing inflation.

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