Judicial charge on CNG prices - a populist strike on collusion
With the judicial order of a drastic reduction in compressed natural gas (CNG) prices in the country, the Supreme Court has once again intervened in market mechanism.
This decision, on technical grounds, reflects a pro-competition, anti-collusion and a limited government approach, though the language used during the observations made by the superior judges depicts a populist mindset, which is more interested in pleasing the common man rather than satisfying the course of law. Nevertheless, I endorse the decision of the Supreme Court, largely for its anti-collusion rationale – the collusion which has apparently taken place between the state and corporate sector.
It is obvious from the judicial proceedings that CNG station owners and regulators entered into an understanding in 2008 to not only fix the prices but also to fix the absolute profit earned. This is rent seeking on part of government officials and collusive behaviour on part of the private sector.
According to the understanding, the government earned Rs20.80 on each kg of CNG sold since 2008 as operating surcharge in addition to Rs17 as infrastructure surcharge. These are other than the 17% GST which all consumers pay. It leads us to a simple arithmetic solution – excluding the natural cost of gas, fixed around Rs18 per kg, the government earned Rs50 on each kg of CNG sold.
Normally, investors expect profit while the government facilitates – in return for reasonable taxes – whereas in this case, it seems that the government earns while the investors receive a sort of commission for facilitating the government to earn its rents. Consider again – the government earns Rs50 whereas the investors earn Rs11 per kg!
There should not be any doubt that the government expropriated and plundered the income of citizens in the name of surcharges and taxes. It continues to do so in sales of petroleum products, where it expropriates at least 25% on all litres sold in form of various surcharges and taxes.
While the action of the Supreme Court to annul the MoU between the regulators and CNG owners perfectly serves the function of market economy – which thrives on competition – its language disrupts the very fundamental of the market economy – the wealth creation.
For instance, the chief justice, in his trademark populist style, said, “In Pakistan, whatever will happen will happen for the interest of the consumer, not what the seth wants (interpreted from Urdu reports).” It is an irony that while the court correctly pointed out the core issue – collusion between the government and private sector – it failed to see whatever is happening is not what seth wants – but what the government wants the seth to deliver.
In the court room, when the chairperson of CNG association tried to explain the private investment that goes into setting up of a CNG plant, he got a well-known rebuke. “Did any spirit come to you to ask you to invest?...whoever does not find this business suitable, should simply quit…” (my translation from the Urdu press).
It is this appeal to populism – and not appeal to laws – which is very disturbing in the court’s order and observations.
In the final analysis, the collusion between the government and CNG association is not a unique incident. In my previous column, I analysed a similar collusion in the backdrop of formation of international clearing house in the telecom sector. Luckily, the tax imposed on incoming international calls has been suspended also by the high court.
This trend of collusion calls for reforms in the Competition Act, enabling the Competition Commission to take a corrective action where the government ministries are involved.
I suggest that the appropriate platform is parliament, which is the ultimate custodian – or should be - of citizens’ interest in the light of the constitution.
(The writer runs Development Pool, an economic research firm and is a member of Economic Freedom Network Pakistan)
Published in The Express Tribune, November 5th, 2012.
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Pakistan is a market economy, but it doesn't have free markets. Its market economy is manipulated by a nexus of private business & government officials. Judiciary doesn't have to adopt a rhetorical style for saving the consumers from the clutches of seth. It just remove impediments from smooth functioning of markets, they will themselves take better care of the consumers. Issue is not cheap prices, but price discovery through competitive mechanism.
Take the case of court fixing of sugar prices. It went flat on judiciary face, as they didn't focus on opening imports of sugar, which would have aligned the sugar prices with market demand & supply dynamics. It never realized that it is fighting a closed & cornered market.
Take the natural monopoly case of CNG. As gas supplies are limited, hence for economic sense, the regulator has to control the number of licenses in this business. It need to bid openly these licenses, where collected money will provide more fiscal space to government to reduce indirect taxes on CNG. Judiciary should probe criteria of CNG permits & pricing mechanism for gauging market manipulation. Otherwise, it will get stuck in the cartel of CNG operators, who have nothing to lose with little capital cost & investment recovered.
This brief comment by Ali Salman touches upon an interesting topic - the legal doctrine loosely known as judicial activism to protect public interest. Ali takes a quick critical position on "judicial activism" without limiting or further explaining the reasons of his criticism. Although his take on the economic parameters (pro-competition, anti-collusion etc.) of the judgement can be further developed (economic analysis of the judgement), his criticism of judicial activism is not well supported or even well developed. The judicial activist doctrines are well established in the constitutions of developed countries, including the US and the UK, and one can bring several similar decisions from higher courts around the globe interfering in the economic governance of representative governments.
The only argument Ali raises in the end of his article is the so-called "democratic deficit" in the judicial law making. This represents the early 20th century conservative attack on judicial activism. However, the judicial activist doctrines have well defended themselves against this attack and judicial activism has continued, and will continue, to play its role in the protection of public interest by balancing economic and non-economic duties of governments.