Fuel pricing reform could lower inflation, power generation costs: CPD study

A reform in the pricing formula could reduce diesel and petrol prices by Tk10.50 and Tk11.32 per litre, leading to lower inflation and power generation costs, according to a CPD study.

Energy experts and the Bangladesh Petroleum Corporation's chairman agreed with the think tank's findings unveiled at a dialogue titled "Market-Based Fuel Prices: Government-led Initiatives and Possible Amendments".

They, however, emphasised the need to increase efficiency and maintain a steady supply of foreign currency to make this reduction feasible.

At the event organised by the Centre for Policy Dialogue at a city hotel today, the experts and stakeholders in the energy and power sectors said the current method of determining fuel oil prices is not entirely market-based.

To establish a truly market-based mechanism, they suggested that the price-setting process be entrusted to the Bangladesh Energy Regulatory Commission (Berc).

The CPD, in collaboration with the Australian High Commission in Dhaka, conducted the study using the Neural Network Model on the automatic pricing structure, which has been in place in Bangladesh for more than six months.

The government introduced the formula in March in line with the International Monetary Fund's condition involving a $4.7 billion loan programme.

CPD Research Director Khondaker Golam Moazzem, who presided over the dialogue, said while prices are being adjusted, the fluctuations in international market prices are not fully reflected in the current pricing structure.

Berc Chairman Jalal Ahmed said, "If the pricing for diesel, petrol, and kerosene is left to the market, there may be pressure on consumers in special circumstances. In such cases, the government can support consumers if it chooses to do so."

He also said that by analysing the audit reports of various companies in the energy sector, it is possible to determine whether the companies are imposing any unnecessary costs on consumers.

BPC Chairman Aminul Ahsan said the government has introduced dynamic pricing, noting that fuel oil prices are changing constantly in developed countries.

"There are several components in Bangladesh's pricing formula with niches where cost reductions can be achieved through increased efficiency. These include insurance premiums, lighterage charges, tax calculations, and operational, financial, and administrative costs," he pointed out.

He emphasised that to reduce the price of oil, theft and waste must be minimised, which is why automation should be pursued. He added that no party would be harmed if Berc sets the prices.

Ahsan also stated that the BPC could make a profit of Tk3,500 crore in the fiscal 2023-24.

Professor M Shamsul Alam, energy adviser to the Consumers Association of Bangladesh, said the current pricing formula is not consumer-friendly. He pointed out that it is unclear who has determined the standard by which the BPC sets the price.

"The 2012 draft rules are expected to be gazetted soon. There is much more profit in the system followed by the government, which should be corrected," he emphasised.

Khalid Ahmed, additional secretary (Operation) of the Energy Division, said the decision on diesel prices lies with the head of government.

"A formula is currently being followed, and BPC's profits are approved by the government. There is no possibility of a special price reduction. It is difficult to reduce prices [here] compared to neighbouring countries," he added.

Jet fuel prices are never set higher than in Kolkata, following such a standard. Regarding quality, he emphasised that jet fuel cannot be supplied without ensuring its quality.

Additionally, he pointed out that not only should the price be considered, but due to the country's foreign exchange crisis, additional expenses must also be accounted for. Bargaining power as a buyer would be reduced. On the other hand, determining the price of jet fuel is often beyond the responsibility or authority of the parties concerned.

Abu Bakar Siddique Ali, director of Emma Power Investment, said the current pricing is claimed to be market-based in principle, but in reality, it is not. He stated that it is normal for an investor to make either normal or excessive profits or take advantage of the market.

"Investors are market players, and they will take advantage of the market. It is not right to blame investors. The government has to decide how to manage the market and how to protect consumers or the public interest," he said.

He pointed out that the pricing system for fuel oil in a country like Bangladesh is a political agenda, and it cannot be solely determined by the market. There needs to be stability in government policies. 

Humayun Rashid, vice president of the Bangladesh Independent Power Producers Association, said the availability of fuel at the right price is important, and there needs to be clarity on how local fuel supply prices are determined.

"What we want as investors is energy security. Business loss compensation should be paid if fuel is not provided," said Humayun Rashid, expressing his opinion on leaving pricing to the Berc.

Open discussion

World Bank Senior Energy Specialist Tauhid Mawla said the main problem lies with diesel, as 50% to 60% of diesel is used in transportation and 25% to 26% in agriculture.

He suggested that the current pricing policy may need further review and proposed the upper and lower guard method for fixing prices, with a maximum 5% increase and a maximum 10% reduction in prices.

Mohammad Nazmul Haque, president of the Petrol Pump Owners Association, said there are many opportunities to reduce the price of fuel oil, and lower prices would benefit consumers at all levels.

Md Alauddin, former executive director of the Sustainable and Renewable Energy Development Authority, said it is not right for the government to set the price alone.

CPD recommendations in study

BPC has always fixed the price, but the BPC Act does not mention price-fixing. It no longer requires subsidies since FY15, with the corporation having made a profit of Tk4,586 crore in FY23.

However, subsidies are still being provided for LNG imports, leading to an unequal distribution of subsidies.

The market-based pricing system still has room for a price reduction of Tk10 to Tk15.

CPD Senior Research Associate Helen Mashiyat Preoty and Program Associate Faisal Qayyum presented keynotes at the dialogue.