ISLAMABAD: Amid declining oil prices, the government is likely to increase profit margins of oil marketing companies (OMCs) and dealers’ commission by 16 per cent without completion of a market study as was promised last year.

The ministries of finance and planning and the Oil and Gas Regulatory Authority (Ogra) are currently examining a formal proposal, moved by the energy ministry’s petroleum division, before a meeting of the Economic Coordination Committee (ECC) of the cabinet takes a final decision.

Finance ministry sources told Dawn that the petroleum division had proposed 45 paisa increase in OMC’s margin on every litre of both petrol and high speed diesel (HSD). It has also recommended 58 paisa per litre increase on petrol and 50 paisa on HSD.

As such, the OMCs would now get Rs3.26 per liter margin on both products. The dealers would earn Rs4.28 per liter commission on sale of petrol and Rs3.62 on HSD. The 16pc increase, according to the petroleum division, has been worked out on the basis of consumer price index between June 2019 and October 2020.

Ministries of finance and planning, as well as Ogra, examining the proposal

The previous government had linked the OMC’s margin and dealer’s commission with CPI in 2013. In all these seven years, the dealer’s commission on petrol and HSD increased by 92 paisa per liter (33pc) and 82 paisa (36pc). The petroleum division is now seeking 58 paisa and 50 paisa per litre increase in margin on petrol and HSD, respectively, in one go.

Likewise, the OMC’s margin increased by 58 paisa per liter (26pc) on petrol and 95 paisa (50pc) on HSD in seven years. The petroleum division is now demanding 45 paisa per liter increase in the margin in one year.

An official said the fixing of margins for the oil companies and their dealers on the basis of CPI appeared to be unfair as it would keep on increasing infinitely and could cross the product price over a period of time unless checked and ascertained prudently.

Mainly because of this reason, the ECC had ordered the the stakeholders in the first week of November to have a new look at the formula through an independent study and get back to it within two months. This did not materialise in 13 months and the stakeholders were now taking refuge behind Covid-19 that hit the country four months after the ECC decision.

The petroleum division has now advocated continuation of the same CPI-based formula until the study ordered by the ECC is available sometime in future, saying the dealers were demanding that their margins be raised up to Rs5 per litre. It has argued that the OMCs were also claiming that their margins were required to be revised in July of each year.

The petroleum division has reported to the ECC that while reviewing the OMCs and dealers’ margin on Nov 6, 2019, the ECC had approved revision of margins for the OMCs and dealers on both petroleum products on the basis of 6.58 per cent average rate of inflation as recommended by the planning division for the period between April 2018 and May 2019, with effect from Dec 1, 2019.

Under the same decision, the ECC also constituted a committee led by Special Assistant to the Prime Minister on Petroleum Nadeem Babar and comprising the secretaries of petroleum, finance and planning and development and top members from Ogra and the Pakistan Bureau of Statistics (PBS) and an academic or retired practitioner from the private sector as members.

The committee was required to revisit the existing mechanism for determination of margins for the OMCs and dealers on petroleum products “in a holistic manner and devise a revised mechanism for the purpose of ensuring interests of all stakeholders particularly the consumers”.

The committee was to submit its report to the ECC within two months. The petroleum division was required to provide secretariat support to the committee. The ECC also directed that in future the applicability of a formula should be from July to June of each year.

The petroleum division has reported that as ordered it arranged three meetings of the committee. The committee decided to seek the consent or willingness of the Institute of Chartered Accountants to conduct proposed study. Only the Institute of Cost and Management Accountants of Pakistan (ICMAP) expressed its consent at the cost of Rs4.50 million, while the Institute of Chartered Accountants of Pakistan (ICAP) regretted. Therefore, the Pakistan Institute of Development Economics (PIDE) was also requested as only a single institute (ICMAP) expressed its consent for the said study. The PIDE expressed its consent at a cost of Rs2.50m.

The first study on margins was also conducted by the PIDE in 2014. The petroleum division said Ogra being the licensing authority of OMCs regretted to fund the study, while the planning division was also reluctant to meet the cost of the study from its budgetary resources. “Meanwhile, on account of Covid-19, nobody was willing to do field work until recently,” claimed the petroleum division, adding that the PIDE being a government body had been asked to update its previous study along the lines of terms of reference for devising a formula to revise margins in future, utilising cost accountants’ expertise.

In order to avoid any further delay, the petroleum division has now proposed that the funding be met through the unspent Training Fund maintained by the petroleum division under the Petroleum Policy 2012 for hiring consultants, professional and for preparing policies on development of the sector.

Published in Dawn, November 30th, 2020