Case of cheaper LPG for the poor in Pakistan

Subsidy can be provided to poor consumers by waiving, reducing taxes

ISLAMABAD: For a very long time, liquefied petroleum gas (LPG) business has been a symbol of power in this country.

There has been stranglehold of the powerful people who earned undeserved income due to constrained supply. LPG quotas have been used frequently to please powerful interests and individuals.

The LPG sector has sufficient number of buyers and sellers which are required for a competitive and transparent market. Both sincere and half-hearted attempts have been made in the past to make the LPG supply system competitive and transparent, but no meaningful impact has emerged.

Disguised oligopolies, if not outright mafias, have managed to have their stranglehold on the sector. The net situation was that only 20% of LPG marketing companies out of a total of 104-plus managed to receive supplies from producers and the remaining 80% were probably buying from the 20%, which added to the selling price.

A new LPG regime has been introduced recently, which has gone unnoticed by the general public.

As per new rules, all LPG marketing companies having terminals would get equal access to LPG, eliminating oligopolies and uncompetitive business practices. This simple step will lead to many improvements in the sector.

Some more changes are required. LPG is many times more expensive than piped natural gas and is used mostly by the rural poor, among others. We will make a case for targeted LPG subsidies for poor consumers by waiving or reducing some taxes including the petroleum levy and GST or by introducing cross-subsidies.

New policy - supplies for all

A variety of steps had been taken by earlier governments to introduce competition in the system but could not help control the development of oligopolies.

One probable solution was to enlist LPG in the commodity market exchange under a controlled/regulated retail price system. The other solution, which the government has adopted, is to completely regulate the LPG sector by controlling prices at all levels till the retail stage.

There are two major policy steps introduced by the Pakistan Tehreek-e-Insaf (PTI) government. One, both producer and consumer prices are regulated by the Oil and Gas Regulatory Authority (Ogra) and second, LPG is to be supplied equally to all marketing companies, accepting an old demand of the LPG association while solving one of the most intractable problems.

Consequently, there would be no need of LPG quotas and artificial measures like production bonuses for LPG producers, which unnecessarily jacked up prices and allegedly helped form oligopolies.

Targeted subsidy

Piped gas is available to only 20% of the people of Pakistan, living largely in urban areas where gas network is available. Rural areas do not get any benefit of gas subsidies that are otherwise available to the piped gas consumers.

Lifeline consumers get gas at very low rates which hardly cover distribution costs. In India, LPG is available to eligible poor consumers at highly subsidised rates.

Some very interesting research has been done in India. Following are its two very important conclusions:
Cooking fuel prices/expense should not be more than 4% of the monthly income of a poor household; and the social value of an LPG cylinder has been estimated to be varying between INR3,800 and INR18,000, which is equivalent to the health consequences of using biomass and other unclean fuels.

Even if these figures may be overestimated, this indicates the scope of offering LPG subsidies to the poor households and could be applicable, more or less, to Pakistani conditions as well. Preventing deforestation is yet another benefit of LPG, which probably has not been included in the aforementioned estimates.

Subsidy in India

It may be useful to have a review of the relevant policies in our neighbourhood. India has tried various LPG subsidy schemes. There was one free LPG cylinder scheme per month for deforestation-prone areas. One is not sure whether it continues to be there.

Currently, there is a direct bank transfer of LPG subsidy into accounts of eligible registered LPG consumers. Earlier, cheaper LPG cylinders were available to the registered eligible consumers. In January 2020, the LPG cylinder price for targeted customers was INR530 as opposed to INR714 per cylinder of 14.2 kg. One cylinder per month is available under the subsidy scheme.

Applying the formula of 4% limit on cooking fuel expense and assuming average income of PKR15,000 per month, and assuming that one LPG cylinder is required per month by poor households, the LPG cylinder price in Pakistan should not exceed Rs600.

Subsidies for the poor

LPG is expensive, much more than the piped natural gas. In terms of per million British thermal units, it currently costs Rs2,819 as opposed to the natural gas tariff under various domestic slabs varying between Rs369 and Rs1,106 per unit.

For March 2020, the price, announced to pass on some benefit of the plunge in international crude oil prices, for an LPG cylinder of 11.8 kg was Rs1,530, if available at controlled rates, which was highly improbable.

This is 250% of the 4% formula. Currently, petroleum levy and sales tax are imposed on LPG, yielding a per-ton revenue of Rs23,511. In terms of monthly revenue, this amounts to Rs2.065 billion.

The least one would expect is the withdrawal of petroleum levy and possibly 50% reduction in sales tax. The financial impact of this concession would not be more than Rs1.238 billion per month in lost revenue with the estimated revenue potential of Rs2.065 billion per month.

An alternative is to pass on the benefit created by the tax waiver to eligible poor LPG consumers only. It can be done through a ration card scheme, as is being proposed for food subsidy. The ration card system functioned successfully in the 1960s, when there was no IT.

With IT, its feasibility should have increased many times more. The IMF encourages direct subsidies to the target group as compared to untargeted subsidies.

This would mean that there would be savings of Rs333 per LPG cylinder per month sold to the targeted consumers under the proposed ration card scheme. Actual impact would be even higher as LPG is almost never available at controlled rates. In Islamabad, LPG was available at Rs1,700 per 11.8kg cylinder in March as compared to the controlled rate of Rs1,530. Thus, net savings would be Rs503 per cylinder (33% benefit).

An estimated 3.7 million poor LPG consumer households would benefit. This is no cash subsidy but is a result of some waiver in taxation. Alternatively, cross-subsidies can be introduced without sacrificing the taxation revenue, while doing away with the wasteful programmes.

The writer is former member energy of the Planning Commission.