It's time to take advantage of low oil prices
The government yesterday hiked the electricity and gas prices -- by 2.93 percent and 26.29 percent on average. The new rates will be effective from September 1. Zahid Hussain, a lead economist at the World Bank's Dhaka office, however, says Bangladesh has so far missed out on taking advantage of the current low oil prices to move initially to an automatic price adjustment mechanism. He thinks upward adjustment of retail power prices, as experienced in recent years, should not be the only means of reducing subsidies. Here is his take on the latest price adjustment.
Natural gas prices in Bangladesh have been regulated at very low levels. Natural gas was priced as low as $1 per mmBtu (one million British thermal unit) for fertiliser and power producers. Upward adjustment in gas prices is a powerful means of rationalising the use of our rapidly depleting proven gas reserves. From this point of view, the hike in gas prices is a long overdue step in the right direction. However, we need to move away from the ad hoc price adjustment system with arbitrary timings to a pricing policy that is transparent, predictable and market based. The absence of clear indications from the government—that tariffs will be raised to levels that would enable cost recovery with reasonable returns for efficient operators, accompanied by a firm timetable for such tariff adjustments—has led to abandonment of some very large gas development projects, exacerbating gas shortages.
Cash loan and subsidy to Bangladesh Power Development Board is estimated at Tk 9,000 crore in the FY2015 revised budget, equivalent to nearly 78 percent of the revised budget allocation to health (both development and non-development). Subsidies in the power sector have serious repercussions upstream of power generation, which can boomerang. Cash-strapped power utilities all too frequently do not pay gas producers in time even when gas tariffs are kept artificially low. Payment arrears cause cash-flow problems for gas producers. At the same time, a monopoly state-owned company in control of gas pipelines may be struggling to invest in the requisite infrastructure.
However, upward adjustment of retail power prices, as experienced in recent years, should not be the only means of reducing subsidies. It is about time the operational inefficiencies of the state-owned enterprises in the energy sector are assessed and addressed. There is a need for rethinking the continuation of public monopoly along the lines of gradually deregulating the energy sector in order to allow private players to compete with the energy SOEs. Liquid fuel prices in particular should be deregulated in a competitive market. Such a market would need to be governed by sound technical, environmental, health, and safety regulations that are effectively enforced, and companies face level playing field and vigorous competition.
This cannot happen overnight, but we need to ignite the reform process. Elements of natural monopoly are present along the natural gas supply chain, requiring economic regulation. Ad hoc energy pricing makes it easy to politicise price adjustments. The more formally the decision to move to market-based pricing is communicated, the more public accept new price announcements. Also the higher the frequency of price changes, the more likely will the implementation of the announced pricing policy reform be sustained.
Generalised underpricing of energy is not the most efficient way of addressing equity concerns. One option is to introduce energy vouchers for the poor which they can get free from the government and use these vouchers to buy energy products at market prices. Metering of each customer makes it easier to provide targeted subsidies for natural gas than for liquid fuels. Using rising block tariffs, lifeline rates as offered for the first block in Bangladesh, is another way. However, one political challenge is to keep the block relatively small so as not to subsidise richer households disproportionately.
There is ample evidence that generalised subsidies are inefficient and inequitable, but they are popular, easy to introduce, and difficult to dismantle. This is all the more so with subsidies for goods that are purchased by a large segment of the population, such as fuel, and electricity. A number of countries had mounting subsidies financed by the government until a year ago. The sharp decline in world prices in late 2014 automatically reduced fuel price subsidies without governments' having to take significant action. This has happened in Bangladesh as well.
Several governments have announced the decision to eliminate price subsidies for certain fuels and to move to market-based pricing or pricing based on cost recovery. For example, India eliminated the diesel subsidy in October 2014, earlier than anticipated. The subsidy for gasoline had been removed some years earlier.
Malaysia announced in December 2014 that it had moved gasoline and diesel to a “managed float” and terminated price subsidies. Morocco ended most fuel subsidies by the end of 2014. In December 2014, Indonesia announced that it was ending the price subsidy for gasoline and limiting the diesel price subsidy $0.08 per litre. Kerosene and LPG subsidies were untouched. With the exception of LPG, Jordan has been adjusting fuel prices in line with the world price movement every month since the end of 2012.
Bangladesh has so far missed out on taking advantage of the current low oil prices to move initially to an automatic price adjustment mechanism and eventually to a deregulated system of pricing with competition from a well regulated private players. Coordinated price adjustments of all energy products would have made the financial burden on the public more bearable. The time to act is now.
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