CNG price: Supreme Court bereft of economic analysis

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CNG prices. The court got it wrong. The Supreme Court's decision on controversial sale of Pakistan Steel Mills (PSM) unfortunately led to derailing the whole privatisation process to a point that no public sector unit has been successfully privatised since then. The judges, who ignorantly, albeit honestly, had based their decision on faulty premises.

The apex court's decision to intervene and fix sugar price in the country was a laughable non-starter. And, now the decision to lower the CNG sale price to an artificial level and delink it with the price of imported oil has not only disrupted the CNG supply to consumers but could lead to a dangerous collapse of country's energy cycle. Though, the higher court's judges want to maximise welfare, they are not vigorously interested in country's economic growth prospects. However, setting a price of a commodity by the court could mean that people may not have the commodity at the price fixed by the court or have the commodity at a price governed by supply-and-demand principle of free market economy. After all commodity transactions are all about price on which a seller and a buyer mutually agree to or come to terms under a regulatory umbrella.

The court's decision in such cases cannot be a substitute for sound policy-making. In economics, government has to make choices and avoid mismatches. The reality is that the country's natural gas reserves are depleting and various categories of consumers are fighting to gain access to domestically-produced gas as it is not only comparatively cheap than other sources of energy - furnace oil, diesel and even imported coal - but also the pipe gas network is in place for convenient delivery. Therefore, the executive branch has to decide the priority of natural gas availability to consumers. In some cases this also entails defaulting on earlier commitments. For instance, it was a governmental policy to encourage conversion of furnace oil-based generating units into gas; promote substitution of petrol-run vehicles to CNG through price differential; and also guaranteeing continuous availability to fertiliser units. All these decisions and guarantees have now gone haywire because the domestic supply-and-demand situation has completely changed. As a result, gas consumers are flocking to obtain court injunction when they are adversely affected. For instance, Engro has moved the court to save its billion-dollar investment in its new plant. CNG pumps owners are seeking court protection from possible losses due to governmental flip-flop.

Neither the executive nor the courts can enhance domestic gas production. Only the Exploration and Production (E&P) companies can do so. This involves attracting massive amount of fresh investment. Local effort (OGDC & PPL) has to be supplemented by foreign E&P enterprises. These companies base their investment on the well-head price available for production of crude oil and natural gas. The government has to attract investment and evolve a policy which justifies the risk involved such as drilled well going dry. There has to be a linkage with international price of oil and gas. The government has rightly put a floor and a ceiling to overcome volatility in long-term pricing and has not left the E&P companies at the mercy of market forces alone. The apex court in its decision on CNG has taken a populist approach; and it appears to have given no serious thought to adverse financial implications of this important decision.

CNG is mostly used in cars driven by middle class and upper-class segments of society. Restricting its usage to public transport alone would have benefited the masses, who use public transport in great numbers, in a prudent and judicious manner. Two-wheelers constitute middle and lower-middle class sections of society. CNG pumps have been licensed to powerful owners on the basis of cronyism, political linkages and kinship. Taking a one-time hit and compensating investment in CNG pumps is a better option than denying natural gas for electricity production to the other export earning industry. The governmental decision to close down CNG pumps on certain days of the week is to try and share the shortage of natural gas all around while giving top most priority to domestic users.

Judges are not equipped to make policies or fully understand the economics of a trade. That is why amicus curiae are always needed. These experts can deliver impartial and practical advice to court to help judges arrive at a more pragmatic decisions. But then courts are required to base their decisions on interpretation of laws made by the parliament and rules framed by the government. The government itself is not above the pressures exerted by different segment of natural gas users. The petroleum ministry has had to face policy reversals because the Prime Minister or the President has been approached to seek amendment or delay application of the energy policy. The poor perception of decision-making by this government has not helped either. The present policy to gradually raise the domestic price of natural gas and charge gas infrastructure surcharge is aimed at putting pipelines and the infrastructure at the port for import of gas. This would only be possible if this money is not frittered away by putting it in a common divisible pool. Courts cannot be a substitute for regulators such as Ogra or Nepra. Experts within these regulatory bodies are expected to create well-designed markets that satisfy the participants so they are not forced to go around it and there is very little incentive to game the system. Wherever the participants lie with their data the regulatory body is expected to catch it. The executive branch is accountable to an elected parliament. The court can only take piece-meal decisions. Therefore, they need to leave certain issues to regulators and be supportive and avoid over-reach. However, the executive needs to give the regulator full financial autonomy and man them with proper development economic experts aided by accounting and legal brains.

Let us examine the consequence of the Supreme Court's decisions. The CNG operators cannot bear the loss in the first place. Second, if the CNG prices drop to the level fixed by the court - the demand for CNG will soar to over 35 percent from the present level of under 20 percent and with the onset of winter the domestic users will be taking to the streets due to severe shortages of fuel to cook food. Fixing artificially low price for natural gas to CNG users also means less gas available for electricity and fertiliser production. Producing electricity from imported oil and gas will be more expensive, leading to more theft. The ongoing subsidy will create more circular debt, forcing the government to borrow more money and ask the central bank to print more currency notes. The logical outcome will be a dangerous rise in inflation. This is the worst form of taxation for the poor and disadvantaged. Certainly, this is not what the Supreme Court wants.

Realising and then correcting one's mistake instead of being stubborn is what the wise people do. The court was wrong to annul the privatisation of PSM. If it was based on the premise that a strategic investment should not be handed over to an Indian-origin businessman then that proposition from which another is inferred or follows as a conclusion (even if true, which it was not) was wrong. The PSM is one hundred percent located in Pakistan and cannot be shifted to any other sovereign territory. Origin of shareholding of a business should not be a source of concern. Fixation of price of sugar by the court was a wrong decision because it was not enforceable. The same would be the end-result of lowering the price of domestically produced CNG. Domestic gas production price has to be equated with the cost of imported gas. Regulators need to play a more intrusive role. Policy-making at best needs to be left to the executive branch. The government is required to make possible the fluidity and functioning of the businesses by enacting and implementing laws and policies that could guarantee the rights of the individuals to own properties and have these rights secured and respected. The government is also required to strengthen all regulatory institutions such as State Bank of Pakistan (SBP), Competition Commission of Pakistan (CCP), Securities and Exchange Commission of Pakistan (SECP) and Oil and Gas Regulatory Authority (Ogra). Last but not least. The court must not dictate the course the economy should or must take. However, it must continue to play its job of a watchdog to ensure that institutional structures are in place and strong to guarantee a strong economy.

Courtesy: B Recorder

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