BBBF should consider gas pricing issues: MCCI
Tuesday, 11 November 2008
FE Report
The Metropolitan Chamber of Commerce and Industry (MCCI) has urged that Bangladesh Better Business Forum (BBBF) to urgently consider the gas pricing issues.
Undue increase in gas prices will not only aggravate the inflationary pressure in the economy but will also cause handicaps for many industries in their present struggle to survive, it noted in an editorial comment in the latest issue of its Chamber News.
It called upon the government to reject the Petrobangla's proposal for an average price increase of gas by as much as 65 per cent. Instead, the increase must be in keeping with the trend of increases in the past, it felt.
The Ministry of Energy and Mineral Resources, the MCCI recalled, reportedly announced recently that price of natural gas would not be increased this year. "Earlier, the Bangladesh Energy Regulatory Commission (BERC) completed public hearings on the Petrobangla's proposals for a variable price increase for different categories of gas consumers. This Chamber submitted written comments on Petrobangla's proposals and also appeared in the public hearings", it said.
Mentioning the Petrobangla's proposals to increase the average price of gas by 53.76 per cent from the current average price of Tk.92.84 per unit (IMCF), it noted prices of gas are due to be enhanced by 26.82 per cent for power producers like Power Development Board (PDB), Independent Power Producers (IPPs) and Small Power Producers (SPPs), 47.81 per cent for fertiliser factories, 23.03 per cent for industrial consumers, 25.08 per cent for commercial users and 72.60 per cent for captive power plants. For domestic consumers, the proposals, the chamber stated, envisage a 50 per cent price rise for double burner oven, a 57.41 per cent increase for single burner oven and 60.0 per cent for domestic consumers using meters.
Stating that the MCCI was not opposed to upward adjustments, it noted that it would, however, be unfair to compel the consumers to pay high gas price to compensate the Petrobangla for its inability to manage its own affairs efficiently.
The price increases should be effected gradually so that it did not have undue adverse impact on the economy, particularly at this critical juncture of the world economy, the chamber said while pointing out gas tariff was increased by 15 per cent in August 2000, between 6.0-31 per cent in January 2002, 3.7 per cent in September 2004, and 2.5 per cent in January 2005. "In such a trend of increases, it was not clear why Petrobangla proposed for such an exorbitant enhancement," it stated.
According to chamber, such high increase at one instance will cause substantial increase in production costs and will also have a chain of impact as currently the power sector consumes about 41 per cent of natural gases.
"An electricity tariff increase will thus be inevitable. The large increase in gas tariff for fertiliser factories, which use about 17 per cent of the country's gas supply, would raise the fertiliser price significantly. Cost of food production would go up as a result, impairing the country's much-needed food security."
"The 72.60 per cent increase in gas tariff for captive power will raise the production cost of user firms considerably, in particular of the government units. The increase in gas tariff for domestic consumers by 50-60 per cent will affect the middle-class households very badly. The tariff hike will push the inflation rate further up, which already is at double digit. The 12-month annual average rate of inflation rose to 10.0 per cent in August 2008 from 7.78 per cent in August 2007", it said.
It stated: "The 23 per cent increase in the tariff for industrial consumers will raise production costs of all manufacturers. A longer moratorium on the government's move to raise gas tariff, at least for a year from now, might be necessary to allow the industrial sector opportunities to get away from the risk of contagion from the global economic crises."
While admitting justification for some increase in gas tariff as the current pricing of gas is considerably below the international levels, it noted the government has been deprived of the opportunity to raise significant amounts of revenue from this important natural resource because of this.
But the increases in gas-price, the chamber stressed, do need to be implemented in phases so that local industries, in particular the export-oriented ones, can absorb the resultant cost increase with the least of difficulties.
It stated: "Petrobangla seeks to justify the proposed price increase partly on the ground that the production cost of local gas companies has gone up by 15 per cent, and partly because it needs huge funding to meet the continuously growing deficits with the International Oil Companies (IOCs), the purchase cost from which has gone up by about 160 per cent.
"Petrobangla has not explained the reasons behind the disproportionately large increase in the IOC cost, which needs to be reviewed, but the large difference between local and IOC prices points towards the inescapable necessity for reducing dependence on the IOCs and enhancing the production capacity of low-cost local companies."
The Chamber stated, "this twin objective can be achieved by giving local companies a price equal to their long-run marginal cost plus a reasonable mark-up, say 15-20 per cent, which will enable them to invest more funds for development and expand their production capacity.
Pointing out that the international development organisations have long been pressing the government to raise the prices of natural gas, electricity, fertiliser, and petroleum products to reduce the losses of the state-owned enterprises (SOE), the chamber said the problems of the gas sector, however, are quite different from those of other utilities.
"Petrobangla has never incurred any operating loss. Its net profit has thus far increased consistently, from Tk.1.8 billion in FY1999-00 to Tk.7.6 billion in FY2006-07. The net profit fell slightly to Tk.6.8 billion in FY2007-08, perhaps because of making increased payments to IOCs. The sector's major problems are those of unrealised bills, failure to bring nearly a half of actual users under the billing network, and the huge systems loss," it observed.
According to Petrobangla statistics, the systems loss, the MCCI said, has been brought down significantly in recent years, from 7.67 per cent of total production in FY1999-00 to 3.38 per cent in FY2007-08, but the loss is still a staggering 21.1 billion cubic feet.
"The cash flow problem of the gas sector could be greatly solved if the non-paying users could be brought under the payment net and the systems loss could be limited within the acceptable 2.0 per cent level. The government may, therefore, seek solutions of the gas sector problems by taking steps to recover arrears, bringing all gas users under the billing network, and minimising systems losses instead of solely charging higher prices to the genuine gas consumers", it added.
The Metropolitan Chamber of Commerce and Industry (MCCI) has urged that Bangladesh Better Business Forum (BBBF) to urgently consider the gas pricing issues.
Undue increase in gas prices will not only aggravate the inflationary pressure in the economy but will also cause handicaps for many industries in their present struggle to survive, it noted in an editorial comment in the latest issue of its Chamber News.
It called upon the government to reject the Petrobangla's proposal for an average price increase of gas by as much as 65 per cent. Instead, the increase must be in keeping with the trend of increases in the past, it felt.
The Ministry of Energy and Mineral Resources, the MCCI recalled, reportedly announced recently that price of natural gas would not be increased this year. "Earlier, the Bangladesh Energy Regulatory Commission (BERC) completed public hearings on the Petrobangla's proposals for a variable price increase for different categories of gas consumers. This Chamber submitted written comments on Petrobangla's proposals and also appeared in the public hearings", it said.
Mentioning the Petrobangla's proposals to increase the average price of gas by 53.76 per cent from the current average price of Tk.92.84 per unit (IMCF), it noted prices of gas are due to be enhanced by 26.82 per cent for power producers like Power Development Board (PDB), Independent Power Producers (IPPs) and Small Power Producers (SPPs), 47.81 per cent for fertiliser factories, 23.03 per cent for industrial consumers, 25.08 per cent for commercial users and 72.60 per cent for captive power plants. For domestic consumers, the proposals, the chamber stated, envisage a 50 per cent price rise for double burner oven, a 57.41 per cent increase for single burner oven and 60.0 per cent for domestic consumers using meters.
Stating that the MCCI was not opposed to upward adjustments, it noted that it would, however, be unfair to compel the consumers to pay high gas price to compensate the Petrobangla for its inability to manage its own affairs efficiently.
The price increases should be effected gradually so that it did not have undue adverse impact on the economy, particularly at this critical juncture of the world economy, the chamber said while pointing out gas tariff was increased by 15 per cent in August 2000, between 6.0-31 per cent in January 2002, 3.7 per cent in September 2004, and 2.5 per cent in January 2005. "In such a trend of increases, it was not clear why Petrobangla proposed for such an exorbitant enhancement," it stated.
According to chamber, such high increase at one instance will cause substantial increase in production costs and will also have a chain of impact as currently the power sector consumes about 41 per cent of natural gases.
"An electricity tariff increase will thus be inevitable. The large increase in gas tariff for fertiliser factories, which use about 17 per cent of the country's gas supply, would raise the fertiliser price significantly. Cost of food production would go up as a result, impairing the country's much-needed food security."
"The 72.60 per cent increase in gas tariff for captive power will raise the production cost of user firms considerably, in particular of the government units. The increase in gas tariff for domestic consumers by 50-60 per cent will affect the middle-class households very badly. The tariff hike will push the inflation rate further up, which already is at double digit. The 12-month annual average rate of inflation rose to 10.0 per cent in August 2008 from 7.78 per cent in August 2007", it said.
It stated: "The 23 per cent increase in the tariff for industrial consumers will raise production costs of all manufacturers. A longer moratorium on the government's move to raise gas tariff, at least for a year from now, might be necessary to allow the industrial sector opportunities to get away from the risk of contagion from the global economic crises."
While admitting justification for some increase in gas tariff as the current pricing of gas is considerably below the international levels, it noted the government has been deprived of the opportunity to raise significant amounts of revenue from this important natural resource because of this.
But the increases in gas-price, the chamber stressed, do need to be implemented in phases so that local industries, in particular the export-oriented ones, can absorb the resultant cost increase with the least of difficulties.
It stated: "Petrobangla seeks to justify the proposed price increase partly on the ground that the production cost of local gas companies has gone up by 15 per cent, and partly because it needs huge funding to meet the continuously growing deficits with the International Oil Companies (IOCs), the purchase cost from which has gone up by about 160 per cent.
"Petrobangla has not explained the reasons behind the disproportionately large increase in the IOC cost, which needs to be reviewed, but the large difference between local and IOC prices points towards the inescapable necessity for reducing dependence on the IOCs and enhancing the production capacity of low-cost local companies."
The Chamber stated, "this twin objective can be achieved by giving local companies a price equal to their long-run marginal cost plus a reasonable mark-up, say 15-20 per cent, which will enable them to invest more funds for development and expand their production capacity.
Pointing out that the international development organisations have long been pressing the government to raise the prices of natural gas, electricity, fertiliser, and petroleum products to reduce the losses of the state-owned enterprises (SOE), the chamber said the problems of the gas sector, however, are quite different from those of other utilities.
"Petrobangla has never incurred any operating loss. Its net profit has thus far increased consistently, from Tk.1.8 billion in FY1999-00 to Tk.7.6 billion in FY2006-07. The net profit fell slightly to Tk.6.8 billion in FY2007-08, perhaps because of making increased payments to IOCs. The sector's major problems are those of unrealised bills, failure to bring nearly a half of actual users under the billing network, and the huge systems loss," it observed.
According to Petrobangla statistics, the systems loss, the MCCI said, has been brought down significantly in recent years, from 7.67 per cent of total production in FY1999-00 to 3.38 per cent in FY2007-08, but the loss is still a staggering 21.1 billion cubic feet.
"The cash flow problem of the gas sector could be greatly solved if the non-paying users could be brought under the payment net and the systems loss could be limited within the acceptable 2.0 per cent level. The government may, therefore, seek solutions of the gas sector problems by taking steps to recover arrears, bringing all gas users under the billing network, and minimising systems losses instead of solely charging higher prices to the genuine gas consumers", it added.