Pakistan should deregulate petrol, diesel — but get the sequence right

Pakistan has begun an important change in the way petrol and diesel prices are determined. The move to daily price adjustments is significant because it brings domestic prices closer to movements in international oil markets and reduces the large periodic adjustments that inevitably become political events. But we should be clear about what has and what has not changed. Daily administered pricing is still administered pricing. The government and its regulatory machinery remain deeply involved in determining what consumers pay at the pump. Pakistan has changed the frequency of price determination; it has not yet created a genuinely competitive petroleum market. The next logical step should therefore be deregulation of petrol and high-speed diesel prices. But Pakistan must get the sequence right. Deregulation should not mean simply telling oil marketing companies (OMCs) tomorrow morning that they are free to charge whatever they want. That would be price deregulation without necessarily creating competition — and the distinction is critical. The objective should be to deregulate competition, not merely prices. Why deregulation? Under the present system, almost every movement in international oil prices, freight costs or the exchange rate eventually becomes a political issue. When international prices rise, government comes under pressure to delay the increase or absorb part of it. When prices decline, consumers expect an immediate reduction. Commercial pricing decisions consequently become government decisions. This encourages precisely the wrong behavior. Instead of competing aggressively on procurement, logistics, inventory management, retail productivity and customer service, companies have an incentive to focus on regulated margins and government decisions. A competitive market changes that equation. An OMC that purchases more intelligently, manages inventory better, reduces logistics costs or operates its retail network more efficiently should be able to translate those advantages into a lower pump price — and win customers from competitors. That is how markets drive efficiency. This will also drive consolidation in the OMC market. With over 45 OMCs operating, we will witness industry consolidation. Pakistan market is too small for 45 OMCs. It should in normal course of competition reduce to 4-5. Just as we saw in telecom, we will see the consolidation here too. Government’s responsibility should be to ensure that companies compete fairly, maintain adequate stocks, sell the correct quality and quantity of fuel, disclose prices clearly and do not collude. It should not normally decide the commercial margin that every company is permitted to earn. Deregulation does not mean no regulation This is perhaps the most important misconception surrounding the debate. A deregulated petroleum market actually requires a stronger regulator in some areas, not a weaker one. Pakistan should deregulate commercial price setting while strengthening regulation of fuel quality, quantity, safety, strategic stocks, competition, infrastructure access, transparency and consumer protection. Government should continue determining taxes and petroleum levies. These are fiscal-policy decisions. Similarly, minimum stock requirements should remain mandatory. Fuel-quality testing should become more rigorous. Dispensers must deliver the quantity consumers pay for. Licensing requirements must protect consumers and national supply security. Competition law must be enforced vigorously. The transition Pakistan needs is therefore not from regulation to no regulation. It is a transition from price regulation to market regulation. PSO makes Pakistan different Any serious deregulation proposal must recognise the unusual structure of Pakistan’s petroleum market. Pakistan State Oil remains by far the country’s largest downstream petroleum company and is controlled by the government. This creates an inherent complication: the state is simultaneously policymaker, regulator and controlling shareholder of the largest competitor. Deregulation cannot succeed unless this issue is addressed transparently. PSO should not be weakened simply because it is large. Nor should it be protected because it is government controlled. It should compete. The same commercial pricing freedom, stock obligations, quality standards, import rules, taxes and disclosure requirements should apply to PSO and private OMCs. Equally important, the government must resist the temptation to use PSO as an unofficial price-control mechanism after deregulation. If private companies are theoretically free to determine prices, but PSO is quietly instructed to keep its prices artificially low, the market will simply follow PSO. Pakistan will have deregulation on paper and administered pricing in practice. There is another side to this principle. If government requires PSO to perform a public-service obligation — perhaps supplying remote areas, maintaining emergency stocks or performing another national function — the obligation should be clearly defined, costed and transparently compensated. This cat can be skinned in a different way without putting obligation on PSO. Let us look at the Pakistan Telecom Authority — how did they manage to expand coverage to underserved or remote and difficult areas that are not financially feasible or profitable yet the services were made available. This requires will and vision at the policy making body, a vision that calls for out-of-box thinking or finding out how other service industry or countries have dealt with such challenges. PSO should neither receive hidden privileges nor carry hidden government burdens. That is competitive neutrality. Competition requires access There is little value in freeing retail prices if only a handful of companies have genuine access to supply. Smaller OMCs must have reasonable and non-discriminatory access to ports, terminals, pipelines, depots and storage facilities where these operate as essential or common-user infrastructure. I expect that with consolidation in the market, this issue will resolve by itself. Import rules must also be predictable. If only the largest companies can reliably finance imports, obtain foreign exchange, secure terminal capacity or move product efficiently across the country, price deregulation could actually strengthen concentration rather than competition. Pakistan therefore needs to deregulate access alongside price, but it does mean putting in place special treatment for smaller OMCs. Smuggling presents another major distortion. A legitimate OMC paying taxes, maintaining stocks, complying with product-quality requirements and operating licensed retail stations cannot fairly compete with illegal, untaxed fuel. Controlling petroleum smuggling is therefore not separate from deregulation. It is one of its prerequisites. The difficult question of IFEM The Inland Freight Equalization Margin, or IFEM, presents perhaps the most politically difficult issue. IFEM has been misused both by OMCs, Regulators and Policymakers. It has become a necessary evil for solving many financial industry issues — stuff anything and everything under IFEM. All and sundry are aware of it. Pakistan has historically sought relatively uniform petroleum prices across the country despite very different transportation costs. There is an understandable social argument for this arrangement. A citizen living far from Karachi should not necessarily be penalised simply because fuel has travelled farther. But genuine deregulation means allowing logistics efficiency and location to influence prices. Pakistan therefore has to make an explicit choice. It cannot simultaneously have completely competitive geographic pricing and guarantee exactly the same pump price everywhere. The better long-term solution would be to progressively replace IFEM with competitive geographic pricing while establishing a transparent Remote Area Service Mechanism for genuinely high-cost or strategically important areas. If government wants to subsidise those areas, it should do so openly but under a policy where OMCs earnings or revenue fund it without putting burden on government exchequer as is done in Telecom industry. Social policy should appear as social policy — not remain hidden inside commercial petroleum margins but can be a part of taxes on OMCs earnings or revenue. OGRA must change with the market Deregulation will make OGRA more important, not less. But its role must change fundamentally. OGRA should gradually cease being perceived primarily as the institution that calculates or administers petroleum prices or issues licenses. It should become a modern, independent and data-driven market regulator and enforcer of license conditions and government petroleum policies as mandated in the policy. Its central questions should become: – Are companies who have been given licenses to operate meet the license conditions? – Are companies maintaining adequate stocks? – Are consumers receiving the correct quantity and quality? – Are companies reporting prices and inventories accurately? – Is infrastructure access fair? – Are there unexplained shortages? – Are new competitors facing artificial barriers? – Are consumers able to compare prices? – Is market behavior suggesting possible manipulation or anti-competitive conduct? OGRA already possesses institutional experience in licensing, technical standards, product-quality oversight, petroleum data and enforcement. But supervising a deregulated market requires additional capabilities — economists, competition specialists, petroleum supply-chain professionals, data scientists and sophisticated real-time market surveillance. OGRA should therefore establish a dedicated Petroleum Market Monitoring and Economics capability. It should also work closely with the Competition Commission of Pakistan. The roles must remain distinct. OGRA should monitor sector behaviour, stocks, quality, licensing, transparency and relevant infrastructure-access obligations. The CCP should investigate cartels, prohibited agreements and abuse of dominance. Together they should create a Petroleum Market Observatory capable of seeing what is happening across the market virtually in real time. Let consumers see the market Transparency is one of the most powerful forms of consumer protection. Every petrol station should prominently display its current petrol and diesel prices before a customer purchases fuel. OGRA should operate a public digital price-comparison platform showing prices at individual stations, together with product availability. Consumers should be able to look at their phone and see which nearby stations are selling petrol at what price. Receipts should clearly distinguish the commercial component of the price from government taxes and levies. This would have another important benefit. Today consumers frequently blame petroleum companies or government without knowing how much of the pump price represents international product cost, commercial margins or taxation. Transparency would make everyone accountable for the component they actually control. Why Pakistan should not do it overnight There has been understandably calls or desire for immediate deregulation. A “Day One” approach has advantages. It would end political micromanagement quickly, force companies to take responsibility for procurement and inventory decisions and send a powerful signal that Pakistan is serious about market reform. This is like diving in the pool without knowing “how to swim”. Has its advantage, it would not be possible to wind it back. We will learn to swim. But the risks are substantial. If the first weeks of deregulation coincide with rising international oil prices, the public may conclude that deregulation itself caused the increase. Remote locations could experience significant price increases. Large OMCs could initially enjoy advantages because of their procurement capacity, infrastructure and network density. Dealers could experience working-capital problems and inventory gains or losses. Most dangerously, if government panics during the first major international oil shock and reimposes controls, the credibility of the entire reform would collapse. Pakistan should therefore choose phased deregulation — but fast phased deregulation. There is an important distinction. “Phased” must not become another word for “postponement”. Government should announce the final destination and timetable at the beginning, with clear milestones and sunset dates. Over approximately 12 months, Pakistan should first strengthen market surveillance, establish PSO competitive neutrality, improve logistics access, resolve IFEM and remote-area arrangements, strengthen stock monitoring and introduce complete price transparency. Next, fixed OMC margins and dealer commissions should be freed so companies can begin competing commercially. Geographic pricing and the IFEM replacement can then be introduced. Finally, OMCs and retailers should be allowed to determine their own petrol and diesel prices. If the necessary conditions are achieved earlier, the timetable should be accelerated. Protecting consumers without destroying the market There will inevitably be periods when international oil prices rise sharply. That is when the credibility of deregulation will be tested. Government must resist the temptation to suppress prices for everyone. If vulnerable households or important transport users genuinely require assistance during an exceptional oil-price shock, assistance should be targeted, transparent and funded through the budget. Suppressing the market price creates shortages, distorts consumption and eventually produces unpaid obligations somewhere in the supply chain. Social protection should protect the vulnerable. It should not destroy the price signal for the entire economy. The first 100 days The government does not need years of additional studies before beginning. Within the first 30 days it can announce the 10-12 month roadmap, establish the Petroleum Market Observatory, issue PSO competitive-neutrality principles and publish transparent market-data requirements. Within 60 days it can complete assessments of market concentration and infrastructure access, present options for replacing IFEM and begin station-level price reporting. Within 100 days it can publish open-access rules where required, finalise the remote-area mechanism, stress-test national stocks and emergency procedures, and announce the date on which OMC and dealer margins will become commercially determined. That would demonstrate that deregulation is no longer merely an idea under discussion. It is government policy being implemented. Government must change its role Pakistan’s petroleum sector does not need government to disappear. It needs government to perform a different role. Government should be extremely strong when ensuring competition, protecting consumers, enforcing product quality, maintaining national supply security, preventing smuggling and ensuring fair access to infrastructure. But it does not need to determine the commercial selling price of every litre of petrol and diesel every day. Companies should compete. Consumers should choose. OGRA should regulate. CCP should protect competition. Government should determine taxes and social policy. And PSO should compete commercially on a level playing field. If Pakistan gets that institutional architecture right, deregulation can attract investment, encourage efficiency, improve transparency and eventually produce a healthier and more competitive petroleum market. If it merely frees prices without creating competition, it risks replacing government price control with private market power. That is why the sequence matters. Pakistan should deregulate petrol and diesel – but first make sure that what it is creating is genuinely a competitive market. A serious threat to deregulation stems from FBR and may be Ministry of Finance. It cannot be derailed by Tax Administration or ease of Tax Collection. This can be easily overcome by using technology and automation. This could be built in the 100 days plan.

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