44405-012: tariff reform and inter-sectoral allocation of ...j joule (= 1 watt) of energy content w...
TRANSCRIPT
Technical Assistance Final Report
This report does not necessarily reflect the views of ADB or the Government concerned, and ADB and the Government cannot be held liable for its contents.
Project Number: 44405 September 2013
Bangladesh: Tariff Reform and Inter-sectoral Allocation of Natural Gas
TARIFF REFORMS AND INTERSECTORAL ALLOCATION OF
NATURAL GAS:
TABLE OF CONTENTS
TABLE OF CONTENTS .................................................................................................. ii CURRENCY EQUIVALENTS .......................................................................................... iii ABBREVIATIONS .......................................................................................................... iv List of Annexes ................................................................................................................ v List of Figures.................................................................................................................. v List of Tables ................................................................................................................... v CONVERSION FACTORS ............................................................................................. vii USEFUL CONVERSIONS .............................................................................................. vii Executive Summary ....................................................................................................... ix 1. BANGLADESH and GAS ......................................................................................... 1
A. Purpose of Report ............................................................................................. 1 B. Bangladesh ....................................................................................................... 1
2. GAS SECTOR OVERVIEW ..................................................................................... 3 A. Energy Sector Governance ............................................................................... 3 C. Energy Sector Overview .................................................................................... 3 D. Gas Institutions ................................................................................................. 5 E. Production Sharing Contracts ........................................................................... 6 A. PSCs and Taxes ............................................................................................... 8 F. Gas Market ....................................................................................................... 8 G. Gas Demand ................................................................................................... 11 H. Gas Supply ..................................................................................................... 12 I. Gas Reserves ................................................................................................. 13 J. Gas Supply Shortfall ....................................................................................... 15 K. Gas Exploration .............................................................................................. 16 L. Future Role of IOCs ........................................................................................ 17 M. Evaluation ....................................................................................................... 17 N. Recommendations .......................................................................................... 18
3. GAS TARIFFS ....................................................................................................... 19 A. Tariff Economics ............................................................................................. 19 B. Gas Pricing - Approaches ............................................................................... 19 C. IOCs and NOC Pricing .................................................................................... 21 D. IOC Gas Pricing .............................................................................................. 22 E. Gas pricing - other countries ........................................................................... 24 F. Retail Gas Pricing ........................................................................................... 24 G. Value of Gas ................................................................................................... 26 H. Gas Prices and Efficiency ............................................................................... 27 I. Evaluation ....................................................................................................... 28 J. Recommendations .......................................................................................... 29
4. GAS ALLOCATION ................................................................................................ 30 A. WTP ................................................................................................................ 30 B. Data Collection ................................................................................................ 31 C. WTP for CNG (for vehicles) ............................................................................. 38 D. Mean WTP for CNG ........................................................................................ 39 E. Productivity of gas in Production of electricity .................................................. 41 F. WTP for gas in Fertilizer production ................................................................ 43 G. Marginal benefit from using gas .......................................................................... H. Method of determining the value of natural gas ................................................... I. Marginal Benefits from different uses of Natural Gas ..........................................
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J. Allocation of Gas and benefits for its use ............................................................ K. Evaluation ....................................................................................................... 46 L. Recommendations .......................................................................................... 47
5. Efficient Use of Gas – Macroeconomic Impact ....................................................... 48 A. Economic Models ............................................................................................ 48 B. Aggregate Results ........................................................................................... 49 C. Impacts on Households ................................................................................... 51 D. Evaluation ....................................................................................................... 51 E. Recommendations .......................................................................................... 52
6. Opportunities for Best Use ..................................................................................... 53 A. Assessing Opportunity Cost ............................................................................ 53 B. Effects of Infrastructure Investment ................................................................. 99 C. Derivation of the SAM Multiplier .................................................................... 100 D. Simulation and Results ................................................................................. 102 F. Economy-Wide Effects of Investment: Results-Dynamic Cge Model ............... 53 G. Simulation and Results ................................................................................... 55 E. Results of Scenario 1 ...................................................................................... 55 F. Results of Scenario 2 .................................................................................... 104 G. Evaluation ....................................................................................................... 59 H. Recommendations .......................................................................................... 59
7. BANGLADESH TAXATION .................................................................................... 61 A. Taxation Base ................................................................................................. 61 B. Payments to National Budget .......................................................................... 62 C. Tax System ..................................................................................................... 62 D. Corporate tax in Bangladesh ........................................................................... 63 E. Bangladesh Oil and Gas Taxation ................................................................... 64 F. International Taxation of Oil and Gas .............................................................. 66 G. Ad Valorum Tax .............................................................................................. 68 H. Royalties ......................................................................................................... 68 I. Rent ................................................................................................................ 68 J. Other Options .................................................................................................. 69 K. Sovereign Wealth ............................................................................................ 71 L. Evaluation ....................................................................................................... 72 M. Recommendations .......................................................................................... 72
8. GAS IN THE FUTURE ........................................................................................... 73 A. Addressing the Gas Shortage ......................................................................... 73 B. ADB Assistance .............................................................................................. 74 C. Business Environment .................................................................................... 74 D. Service and Quality ......................................................................................... 74
10. Conclusions ........................................................................................................... 76 11. RECOMMENDATIONS .............................................................................................. 12. References ............................................................................................................ 79 13. Annexes ................................................................................................................. 81
CURRENCY EQUIVALENTS
(as of 27 March 2012) Currency Unit - Taka (Tk) 1.00 = 0.0122279 US$ 1 US$ = 81.7800 Taka (Tk)
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ABBREVIATIONS
Abbreviations Meaning
ADB Asian Development Bank APR Accounting Profits Royalty BAPEX Bangladesh Petroleum Exploration Company Limited BCF billion cubic feet BCFD billion cubic feet per day BERC Bangladesh Energy Regulatory Commission BGDCL Bakhrabad Gas Distribution Company Limited BGFCL Bangladesh Gas Fields Company Limited BGSL Bakhrabad Gas Systems Limited BPDB Bangladesh Power Development Board BTU British thermal unit CM (cm) cubic meter CNG compressed natural gas CPI Consumers’ Price Index EMRD Energy and Mineral Resources Division FY financial year GDF Gas Development Fund GDP Gross Domestic Product GIIP gas initially in place GJ Gigajoule GTCL Gas Transmission Company Limited HOBC high octane blended component HSD high speed diesel HSFO high sulphur fuel oil IOC international oil company IPP independent power producer JGTDSL Jalalabad Gas Transmission and Distribution System Limited KAFCO Karnafully Fertilizer Company Limited Kg kilogram KGDCL Karnafully Gas Distribution Company Limited KGOE kilogrammes of oil equivalent LNG liquefied natural gas LPG liquefied petroleum gas MCF millennium (thousand) cubic feet MCM millennium (thousand) cubic meters MMBTU million British thermal units MMCF million cubic feet MMCFD million cubic feet per day MMSCF million standard cubic feet MW megawatt NBR National Board of Revenue NOC national oil company OGDCL Oil and Gas Development Company Limited PDB Bangladesh Power Development Board PDF price deficit fund Petrobangla Bangladesh Oil, Gas and Minerals Corporation PGCL Paschimanchal Gas Company Limited POL Pakistan Oilfields Limited PPL Pakistan Petroleum Limited PSC production sharing contract RR resource rental SD supplementary duty SGCL Sundarban Gas Company Limited SGFL Sylhet Gas Fields Limited SWF sovereign wealth fund TCF trillion cubic feet TGTDCL Titas Gas Transmission and Distribution Company Limited TJ terajoule
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Abbreviations Meaning
Tk Bangladesh Taka VAT Value-added tax
List of Annexes
Annex 1: Bangladesh gas sector exploration history and gas discovery .......................................................81 Annex 2: Consumer Category Gas Consumption Pattern 2000-01 and 2010-11..........................................84 Annex 3: Losses of SOEs .............................................................................................................................85 Annex 4: Costs are Rising.............................................................................................................................86 Annex 5: Bangladesh Model PSC .................................................................................................................87 Annex 6: Current Pricing Framework and Conversions ................................................................................88 Annex 7: Landed LNG Prices US$ MMBTU..................................................................................................89 Annex 8: Fluctuations in Gas Prices 2011 and 5 year history .......................................................................90 Annex 9: Combined Cycle Generation ...........................................................................................................91 Annex 10: Allegations of Corruption in Petrobangla ......................................................................................92 Annex 11: Summary of selected oil and gas taxation regimes ......................................................................93 Annex 12: Process for Tax Law Reform .......................................................................................................96 Annex 13: BPDB signs deal with Santos for buying gas at high rate ............................................................98
List of Figures
Figure 1: Energy Production Bangladesh ...................................................................................................... 4 Figure 2: Per Capital Commercial energy Consumption / GDP Selected Asian Countries ............................ 5 Figure 3: Petrobangla’s Organization ............................................................................................................. 6 Figure 4: Flows of Gas and Money ................................................................................................................ 9 Figure 5: Natural Gas Revenue Distribution from 1996 ................................................................................10 Figure 6: Changes in Sectoral use of Gas in percent (2001 and 2011 ..........................................................11 Figure 7: Annual average growth rate of use of gas, 1991-2010 by sector ...................................................12 Figure 8: Sources of Annual Primary Energy Supply 2009 ...........................................................................13 Figure 9: Variations in Proven Gas Reserves (IEA figures) ...........................................................................14 Figure 10: Projected Supply and Demand .....................................................................................................15 Figure 11: Bangladesh Gas Demand compared with Real Gas Price ...........................................................22 Figure 12: Probability of Accepting Gas supply under different prices .........................................................37 Figure 13: Uptake rates by connected and non-connected households .......................................................37 Figure 14: Willingness to pay and Fuel Costs per month of all households ..................................................40 Figure 15: Willingness to pay and Fuel Costs per month of All households ..................................................40 Figure 16: Probability of accepting various bid prices for CNG .....................................................................40 Figure 17: Mean WTP for CNG by Vehicle type ............................................................................................40 Figure 18: Proportion of electricity produced since 2003 using different type of fuel ....................................41 Figure 19: Estimated MC function for different type of Fuel for production of electricity ...............................42 Figure 20: Total Cost, Marginal Cost and Average Cost Curves ...................................................................44 Figure 21: Gas Use Distribution (2010-2011)................................................................................................45 Figure 22: Productivity of Gas vs Allocation of Gas and its prices ................................................................... Figure 23: Petrobangla Transfer to the national Budget by Category (Million US$) ......................................62
List of Tables
Table 1: National Power Consumption Comparison ...................................................................................... 4 Table 2: Cash Distribution among GOB and PB Group from 19-09-2011 Tk/MCF .......................................10 Table 3: Annual Production Statistics and Cost of IOC Gas (MMSCF, cost in Tk million) ............................22 Table 4: Income Statement of Petrobangla Analyzed (Financial Years - Taka Millions) ...............................23 Table 5: Gas Prices in selected neighboring countries .................................................................................24 Table 6: Cost of Alternative Fuels for Various Categories of Consumer TK ..................................................25 Table 7: Percentage Increases required to equalise gas price to cheapest alternative ................................25 Table 8: Cost of fuel and power in selected industrial sector ........................................................................27 Table 9: Occupations of Head of Households ...............................................................................................28
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Table 10: Summary of Sample ......................................................................................................................31 Table 11: Distribution of Sample by Bid Prices and by one-time connection fee ..........................................31 Table 12: Monthly Income Distribution of the Households ............................................................................32 Table 13: Occupational Distribution of the members of the households .......................................................32 Table 14: Respondents by their educational level (Full sample) ...................................................................32 Table 15: Source of Fuel for Cooking at the Household ...............................................................................33 Table 16: Monthly cost of fuel for connected and non-connected households ..............................................34 Table 17: Actual fuel cost per month of Non-connected households ............................................................34 Table 18: Estimated Coefficients (Probit function) ........................................................................................36 Table 19: Descriptive statistics of variables used in WTP function ...............................................................36 Table 20: Estimated mean WTP for natural gas by connection fee ..............................................................38 Table 21: Estimated Mean WTP for households by monthly income ............................................................38 Table 22: Current monthly fuel cost for households ......................................................................................38 Table 23: Probit regression results of WTP for CNG for vehicle ...................................................................39 Table 24: Regression Results on Estimation of Cost Function for Electricity ................................................40 Table 25: Average Cost, Average Price and Marginal Cost of Production of Electricity ................................43 Table 26: Regression Results on Estimation of Cost Function for Fertilizer .................................................43 Table 27: VMB of natural gas in different sectors and WTP by households and CNG users ........................46 Table 28: Policy Scenarios............................................................................................................................48 Table 29: Macroeconomic Results (percent change from Baseline in 2030) ................................................50 Table 30: Household Real Consumption (cumulative % change 2012-2030) ...............................................51 Table 31: Disaggregation and Description of Bangladesh SAM Accounts ..................................................100 Table 32: Description of the Endogenous and Exogenous Accounts and Multiplier Affects .......................101 Table 33: Economy Wide Benefit of Infrastructural Investment...................................................................102 Table 34: Macroeconomic Impacts of Annual $ 6.7 billion Investment ..........................................................56 Table 35: Impact of Annual $ 6.7 billion Investment on Sectoral Domestic Prices ........................................57 Table 36: Impact of Annual $ 6.7 billion Investment on Sectoral Exports .....................................................58 Table 37: Impact of Annual $ 6.7 billion Investment on Sectoral Production ................................................58 Table 38: Impact of Annual $ 6.7 billion Investment on Household Real Consumption ................................58 Table 39: Macroeconomic Impacts of Annual $ 2.9 billion Investment (% deviation from Business-as-usual scenario) ......................................................................................................................................................104 Table 40: Impact Annual $ 2.9 billion Investment on Sectoral Domestic Prices (% deviation Business-as-usual scenario) .............................................................................................................................................105 Table 41: Impact of Annual $ 2.9 billion Investment on Sectoral Exports ...................................................106 Table 42: Impact of Annual $ 2.9 billion Investment on Sectoral Production ..............................................106 Table 43: Impact of Annual $ 2.9 billion Investment on Household Real Consumption ..............................107 Table 44: Consolidated Fund Receipts Estimates 2012-13 Economic Summary .........................................61 Table 45: Rates of Taxation ..........................................................................................................................63 Table 46: Profit Gas Share Schedule ............................................................................................................64 Table 47: Worldwide Revenue sources from Oil and Gas ............................................................................66 Table 48: Resource Pricing Options .............................................................................................................70 Table 49: Sector-specific Projected Demand for Gas during the Sixth Plan - billion cft ................................73
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CONVERSION FACTORS
Mass or volume gas Energy & other
J Joule (= 1 Watt) of energy content
W Watt (= 1 Joule), power rating
s Second, time unit
kW Kilo Watt (=1,000 W)
MW Mega Watt (=1,000 kW)
MJ Mega Joule (=1,000,000 joule)
GJ Giga Joule (=1,000 MJ = 277.8 kWh)
TJ Tera Joule (=1,000 GJ)
PJ Peta Joule (= 1,000 TJ = 1,000,000 GJ
US$ US Dollar (US$)
BTU British Thermal Unit
MMBTU 1,000,000 BTU (1.055 GJ)
SCM standard cubic meter (1m3 at 15 degrees C and 1.013 bara) metric volume
Bara Bar, absolute pressue (metric), (=100kPa = 100,000 Pa = 0.1 MPa)
Pa Pascal (=1 M/m2) metric pressure unit. It is a measure of force per unit area, defined as one newton per square meter.
SCF also scf. Standard cubic foot (1 ft3 at 60F and 14.696 psia) imperial measure of
volume Psia Pound per square inch, absolute pressure (imperial)
MMSCF Million scf (=1,000 MSC)
BCF billion cubic feet (=1,000MMCF)
TCF Trillion cubic feet (1,000 BCF)
Source AECOM – Bangladesh Gas Pricing Framework 2012
USEFUL CONVERSIONS
Mass or volume Measure Useful Conversions
1 cubic meter of gas 38 megajoules as methane
44 megajoules as W.A. NWS LNG
1 billion cubic meters natural gas 730 000 tonnes of LNG
1 Trillion Cubic Feet (TCF) Approx. 1 000 petajoules
Approx. 20 million tonnes
1 tonne of gas 1 333 cubic meters
1 terajoule 26 300 cubic meters of gas
0.929 million cubic feet of natural gas
17.63 tonnes of LNG
1 MCF (thousand cubic feet) of gas 28 317 cubic meters
19.39 tonne of LNG
1.057 Gigajoules
1MMCFD = 1 million cubic feet per day
1.1 Terajoules (1,057 Gigajoules) (1 MCF x 1000)
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Mass or volume Measure Useful Conversions
1 tonne of LNG 1 460 cubic meters (at 20ºC) (or 1 333 at 0ºC)
54.5 Gigajoules
9.5 bbl of Arab crude oil by energy equivalence
51.7 MMBTUs
1 tonne of crude oil 7.33 bbls
42.1 gigajoules
1 MMBTU 1.055 Gigajoules
3.6 gigajoule 1 MWh
1 petajoule (1 terajoule) ca. 20 000 tonnes (20 tonnes) gas
1 terajoule of gas per day ca. 7 200 tonnes per year.
1 million tonnes of LNG per year 1.333 billion cubic meters per year
3.65 million cubic meters of natural gas per day
100 MW power station (33% efficiency) ca. 25 terajoules per day (10 Gigajoules/1MWh)
Coal ca. 20 Gigajoules per tonne
Condensate ca. 32 Megajoules per Litre
Crude oil ca. 37 Megajoules per Litre
LNG ca 25 Megajoules per Litre
Natural gas ca. 38 Megajoules per Cubic Meter
Source: http://www.chemlink.com.au/conversions.htm
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EXECUTIVE SUMMARY
The principal finding of this research is that Bangladesh is at a decision point it terms if its natural gas resource management. A decade of abundant gas supported prices far below sustainable levels, discourage exploration and created rising demands for gas. Proper pricing and efficient allocation of gas amongst different sectors and help the country realize much better benefits of this scarce resource.
Gas Sector Overview
The Government of Bangladesh (GoB) has moved away from central planning, but the nation’s commercial energy infrastructure remains government owned, organized and regulated. International Oil Companies (IOC) supply more than 50% of gas. Energy state enterprises are multi-function agencies, responsible for regulation (including economic, environmental, health and safety), operations and ownership (i.e. maintenance of capital) as well as sometimes offering policy advice.
75% of Bangladesh’s commercial energy is provided by natural gas including gas fuel for the electricity sector. Bangladesh’s rural areas remain heavily dependent on biomass and commercial imports are mostly fuel oil. Scarcity of energy resources makes efficient use of gas vital. Bangladesh’s power consumption is lower than in neighboring of comparable countries and it also is the lowest consumer of commercial energy relative to GDP. Per capita electricity consumption in Bangladesh is also low relative to income per capita. To continue energy-intensive industrialization and urbanization, electrification and energy production in Bangladesh will have to expand.
Bangladesh aspires middle income status, but will require more energy than at present to attain it. Bangladesh’s gas industry is a group of major state owned enterprises under the Bangladesh Oil, Gas and Mineral Corporation (Petrobangla) formed from gas fields bought in 1974 very cheaply. Policy advice and analysis are in the Ministry of Power & Energy and Mineral Resources which has Energy and Mineral Resources Division (EMRD) and a Power Division. Petrobangla reports to the Ministry and the Minister of Energy. It also manages the government’s gas sector interventions and provides policy advice drawn from its technical experts.
Petrobangla is involved in onshore gas exploration, production and transmission. Its nominally independent subsidiary companies are involved in production, transmission, reticulation and retailing gas. Petrobangla is orientated to non-market objectives. It keeps energy prices low to promote development. As with many SOEs, Bangladesh’s gas companies face conflicts of interest due to politicization of decisions, soft budgets and lack of capital market scrutiny of share values.
Tariffs were first fixed by negotiations. Increases were on an ad hoc basis leaving minimal margins. A uniform tariff structure discouraged private investment in the sector so Bangladesh decided to offer Production Sharing Contracts (PSCs). Under PSCs International Oil Companies (IOC)s invest in exploration, appraisal and development of oil and gas at their own risk. PSCs allow mineral exploration and development without risking government losses. The host carries none of the risk. The quid pro-quo is that from the proceeds of successful discoveries IOCs recover their costs (cost gas) plus a margin on top.
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Gas Market
Flows of Gas and Money
The gas market’s principal features are:
53% of gas production is IOCs and 47% is by the National Gas Companies (NOCs);
Production Sharing Contracts (PSC)s between the GoB and the IOCs define IOC “Cost Gas” and “Profit Gas” the main components of the Bangladesh gas supply;
Of IOC production:
55% is Cost Gas (CG) to cover the costs of the IOCs during the cost recovery period including their profit until all costs are covered;
45% of IOC production is Profit Gas (PG),
PG is shared 50%-50% with Petrobangla during the cost recovery period;
Petrobangla’s profit gas sharing % increases to 80% following cost recovery period.
IOCs can, sell their PG to the highest bidder; in practice Petrobangla exercises its “first refusal” option and purchases virtually all CG and PG to meet shortfalls;
PB’s supplies its 50% of PG to Distribution Companies (DC)s free. DCs sell gas to consumers at retail prices (which include the transmission and distribution charges).
The 47% of gas produced by the National Oil (and Gas) Companies (NOC)s is sold to final consumers at retail prices including a transmission and distribution margin;
In the event that production by IOCs increases the oil companies are guaranteed a profit margin after tax, supplementary duty (SD) and Value Added Tax (VAT).
If IOC margin is eroded by a tax or duty increase Petrobangla indemnifies them (i.e. it pays their due taxes).
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Gas Demand
Natural gas in Bangladesh in addition to generating electricity is used in manufacture of urea fertilizer, industry, transport, particularly buses and small taxis and for household cooking. Power generation (grid, but excluding captive) in 2001 accounted for approximately 45% of all gas used in Bangladesh. The relatively new captive generation sector, now accounts for 17% of the total. These two uses now account for about 59% of total gas used.
The fertilizer industry accounting for 23% of consumption in 2001 has halved in importance and the brick industry no longer uses gas. CNG now takes 5.8% of the total available gas. Industry and commercial uses of gas have declined over time and there is intense competition for gas amongst different sectors.
Gas Supply
In 2009 gas comprised about 48% of total primary energy. Imported oil accounts for 12% of the country’s energy requirements, increasing with the widespread use of diesel generators since 2009. As of April 2012 there was a daily shortage of 500 + MMCF of gas. Indications are that in the immediate future, without significant policy changes there will be an ongoing disparity between demand and supply.
Gas Reserves
Petrobangla’s estimate of remaining recoverable reserve 16.63 TCF as of December 2011, if fully exploited, can meet gas demand at best up to 2026, if the demand growth rate of is constrained to 5% per year (although recent growth has been much higher). In 2001, Unocal anticipated proposed to build a pipeline to India, in order to export Bangladeshi gas. Political resistance motivated by uncertainty about reserves and by nationalist demands to meet domestic needs killed the idea.
Petrobangla’s exploration and development capacity is restricted and the involvement of IOCs is a vital in finding new gas for Bangladesh particularly offshore. Few IOCs have bid in recent rounds despite high success rates. Payments to the IOCs are related to levels rather than to costs of exploration.
Gas Tariffs
Natural gas being a finite resource, its cost of production should comprise at least production cost, a depletion premium (to provide financial flows when the resource is exhausted). Any benefits from state ownership are outweighed by the benefits of more flexible markets and prices determined with all costs included (operational, maintenance and capital) close to Long-Run Marginal Costs (LRMC).
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Inflation Adjusted Weighted Average Gas Price Index for Bangladesh
The diagram shows that in the last 10 years (inflation adjusted) prices for gas have fallen. The next diagram shows that while real gas prices have fallen since 1987, there has been an accelerating growth of demand for gas.
Bangladesh Gas Demand compared with Real Gas Price
IOC Gas Pricing
The basic objectives of energy pricing are Economic Efficiency, Social Equity and Financial Viability. Efficiency means prices such that the allocation of finite natural resources provides maximum benefits to the society. Equity considers income distribution considerations, such as ensuring all citizens have access to supplies at an affordable price. Financial Viability means that the cost of supplying energy should be covered, including the cost of capital and the cost of depletion.
A recent tariff study calculates a weighted average retail price of Bangladeshi gas as approximately US$ 1.62 per GJ of which currently 55 % is taken in tax. Petrobangla is paid approximately US$ 0.36 cents per GJ for gas to generate electricity. Much of the gas to generate electricity generation is PG from the IOC companies at between $2.50 and $2.82 a GJ
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1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
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Inflation Adjusted Weighted Average Gas Price Index for Bangladesh
10-year period where gas prices have not kept up with inflation, implying the changes to gas prices have either been too small or too infrequent to match changes in inflation
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Bangladesh Gas Demand versus Real Gas Prices
Consumption
Weighted Price
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(depending on the IOC and contract). The difference represents an implicit subsidy of nearly US$ 2.50 per GJ to the IOCs for the PG purchased from IOCs at the PSC price. A Price Deficit Fund (PDF) was created to cover the difference.
The PDF balances the Petrobangla cash account, but is opaque and represents a large subsidy to final users. PDF payments currently run at nearly 14% of total sales revenue. Petrobangla also bears the income tax liability of the IOCs under the PSCs. Petrobangla’s tax payments for IOCs increased from Tk146 to Tk4,637 million between 2003 and 2011. Its cumulative losses amount to Tk32.90 billion in June 2011. Petrobangla’s subsidiaries also have to pay corporate taxes (35%) and compulsory dividends.
For electric power production gas prices in Bangladesh are barely two fifths of the price in Pakistan and are less than 10% of the price in Singapore. The Bangladesh Energy Regulatory Commission (BERC) Act, 2003 (Act no. 13 of 2003) gave the Commission the mandate, to regulate downstream tariff setting. In 2009, and 2010 BERC rejected price increase applications from Petrobangla, on the grounds of the profitability of its retail, transmission and wholesale businesses.
BERC’s decision noted Petrobangla’s application did not deserve consideration as all the production, transmission and distribution companies had more than a 10% return on assets. This reflects the negligible cost paid for the gas fields in 1974, the failure to regularly revalue the assets in the meantime and the free supply of Petrobangla’s cost gas. In fact Petrobangla’s subsidiaries are in a dire state.
Tariffs can be measured against the cost of the next cheapest alternative. The percentage increases required to bring the current price of gas level to the price for the cheapest alternative range from 35% to 1945%. Citizens without access to gas and electricity pay far higher prices than those who do. Most consumers, especially households and captive power generators have no choice but to pay for the more expensive alternatives.
Industry is prepared to pay for captive power, which is expensive to install, but reliable. Rural families with no mains gas or electricity use batteries or traditional energy sources. The reluctance to increase prices means SOEs run at a loss. The major supply shortage is caused by a real price of gas falling rather than increasing. Gas has not been able to build income producing reproducible capital for the time when gas is no longer available. The divergence between prices and demand has deprived the sector of revenue to renew and expand gas production.
Value of Gas
For most users alternative energy supplies are either diesel fuel oil or LNG. A price increase of 1875% is required to bring the gas price to the cost of generating electricity from heavy fuel oil. Two other benchmarks include the March 2012 LNG landing in India at US$ 12.94 GJ or the prices paid currently in India and Pakistan.
At an imported cost per GJ of LNG of say US$10 the value of Bangladesh’s annual gas output to third parties would be in the region of $ 7.7 billion (wholesale). Alternatively, priced at the level of the average of gas prices in India and Pakistan, as much as $2.9 billion of extra gas sector revenue could be obtained Based on Petrobangla’s reported (retail) sales (From the 2010 Annual Report) the company obtains US$ 1.28 billion from its sales to customers. Therefore, US$ 7.7 billion minus US$ 1.28 billion means the sale value of 2009’s gas, was at least US$ 6 billion below its value on World Markets (less costs). In 2009, approximately US$ 300 million went from Petrobangla into the National Budget. As proportion of actual sales revenue was 23%. However, as a proportion of potential value, it was 4%.
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Gas Prices and Technical Efficiency
As a result of very low gas prices, power and industrial sectors depend heavily on gas as source of energy. Most national industry is in and around Dhaka and Chittagong. Even eligible domestic households and commercial users within the reach of gas distribution networks rely heavily on piped gas supply. But this gas is used very inefficiently.
Power generation plants of the Bangladesh Power Development Board (BPDB) consume an average of 11-12 CFT gas per kilowatt (KW) power generation as against a consumption of 6.5-7.0 CFT of gas by two large combined cycle power plants built by an independent power producer. BPDB is a major gas consumer inefficient use represents a serious loss of natural gas. There is no incentive to conserve.
The same pattern exists in the industrial sector where the cost of fuel and power as an input varies from less than 1% to 20%. The gains from efficient use are enormous. Some domestically produced burners consume 25% more gas than required. A GoB commitment to replace inefficient single cycle power stations with combined cycle gas electricity generation will increase efficiency. The potential for reinvestment and efficiency increases will help households in both urban and rural areas.
Economic Values and Gas Allocation
For consuming sectors such as households, and transport the economic value can be estimated as a willingness to pay (WTP). This reflects the benefit derived by the consumers using natural gas. The economic value or the price of gas as an input to produce electricity and fertilizer should be estimated as Marginal Value Product (MVP). Estimates of economic value of gas in different sectors provide guidance for efficient allocation of gas because this scarce resource should be allocated to the sector that generate highest economic values. A better understanding of the true economic value of gas is necessary to allocate gas to sectors which generate highest values.
The ADB commissioned a study to estimate the economic value of gas in domestic, transport, power and fertilizer sectors. A Contingent Valuation (CV) survey on households, and vehicle operators, to estimat WTP. MVP gas in power and fertilizer sectors were estimated to shed light on economic value of gas in these sectors.
WTP estimates for natural gas used as CNG is the highest, which is followed by gas used to produce fertilizer and for household cooking. In absence of a market price MVP of gas in the power sector was estimated at cost of production using coal and petroleum (diesel and furnace oil) energy sources. MVP of gas in the power sector also shows much higher economic value compared to the current price of gas in the power sector. Large range on MVP of gas in the power sector also indicate huge opportunity cost of gas when petroleum products are used for power generation, indicating the importance of diversification of energy source for power generation.
Current gas allocation and pricing does not reflect economic values at all. Only 21.5% of the value of gas is captured in the power sector when the lower bound of the economic value is considered. But the bulk of the gas is allocated for power generation. In the fertilizer sector only 12% of the economic value is currently captured. Currently highest price is charged for CNG but it is only 66% of the WTP. CNG sector gets only 6% of the gas. In the household sector current price is only about 36% of the WTP for gas. Household sector received only 12% of the gas. All these indicate severe under pricing and inefficient allocation of natural gas in Bangladesh.
If the economic efficiency is strictly followed more gas should be allocated to CNG and Fertilizer sectors. Government has already invested heavily to produce electricity with gas and reallocating gas to other sectors may be difficult. In this situation collecting proper resource rent from power
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sector by increasing the gas price for power companies is the only option to restore the efficiency. This would lead to power tariff increase too. At least the government should not commit more gas for new power plants if gas prices and power prices cannot be revised. Any new discoveries of gas should be allocated to more productive sectors.
Efficient Use of Gas – Macroeconomic Impact
Tariff reforms are generally constrained by lack of political will of developing country government with the assumption that higher process will make the government unpopular. Therefore public support for tariff reforms is critical. One avenue to gather public support is to show the public the long term benefits of proper pricing of energy resources. To assess the long term implications of gas tariff reforms a dynamic economic forecasting model (a computable general equilibrium model) was developed. Using this mode the following eight policy scenarios were tested:
Scenario 1: Baseline: the business-as-usual (no change);
Scenario 2 – MKT: with equalized natural gas prices across all uses, using reference market prices from India and Pakistan ($5/CM);
Scenario 3 – MKTEE: Scenario 2, combined with a 1% annual increase in average energy use efficiency.
Scenario 4 – Fert: Scenario 3, with fertilizer exempt from price reform;
Scenario 5 - Coal50: Imported coal is used to meet 50% of domestic electric power production.
Scenario 6 – GasExp: Natural gas marketing at world prices is permitted up to 10% of the total production.
Scenario 7 – GasCoal: Scenario 6 combined with domestic coal for 50% of domestic electric power.
Scenario 8 – InfDev Infrastructure investment increased with half of new natural gas marketing revenues.
Significant findings emerge from calculations based on these scenarios. Essentially, they suggest that removing Bangladesh’s long established gas consumption subsidy for domestic natural gas, while politically difficult, would not undermine the country’s long-term economic growth. What is clear is that, energy price subsidies are not essential to the country’s overall progress.
Even without the kind of private efficiency responses and complementary policies assumed, the economy’s overall GDP would only be one percent smaller two decades from now. However, the model also assumes an annual increase in efficiency of one percent. All evidence suggests that a one percent per annum increase in efficiency is a very conservative assumption. Of course there can be many dramatic structural adjustments required beneath the veneer of policy success from macroeconomic recommendations.
The scenario’s revenue impact suggests that the government could reduce tax rates by over 12% by 2030 if gas is priced at prevailing Pakistan Indian prices, while gas price increases would naturally promote gas conservation. An important message from the first two scenarios is that energy efficiency can produce savings that offset higher energy costs for every household category. Households cannot accomplish this alone, because part of the benefit is lower energy price trends from aggregate conservation. It does mean that conservation and energy efficiency promotion should be an integral part of any policies intended to achieve effective gas price reform.
The food oriented policy scenario (Fert) benefits households more uniformly. Rural dwellers are currently poorer. Monetized food costs are a larger proportion of rural household budgets,
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particularly so for the very poor. Consequently, all households benefit relatively equally from the indirect food subsidy coming from cheap gas applied to for fertilizer production. While subsidies do not generally enhance economic performances, a targeted input subsidy to a productive sector on which majority of the poor depends and be welfare improving.
Energy fuel substitution, implicit in scenario (Coal50), affects households differently, because of large differences in household electricity access. Until electrification is complete the benefits of more affordable electricity policies will fall quite unequally across Bangladesh.
The (GasExp) calculations, suggest essentially a macroeconomic impact on average domestic energy prices and long-term foreign exchange savings. Both of these have positive, but are fairly neutral, in terms of their impacts on households. This result can be achieved without exports if gas is sold to domestic 3
rd parties.
Combining the two energy trade scenarios i.e. gas exports (GasExp) and coal-gas substitution (CoalGas) result in higher benefits for all households. The most significant benefits accrue when the dividends of energy price reforms are reinvested in infrastructure (InfDev scenario). Infrastructure can improve market access, the main gateway out of poverty for both rural and urban poor, and increase the profitability of investment for higher income groups.
This model illustrates the long term implications of Bangladesh’s energy reform options and has shown that significant benefits can be captured by policy changes that focus on more efficient use of energy and that all options should be considered including price flexibility, energy efficiency and aligning the gas prices with world market prices.
Opportunities for Best Use
Pricing gas substantially below what it is worth means there is a large implicit gas subsidy for immediate sub-optimal gas consumption. A further study looked at the economy-wide impacts of withdrawing the subsidy and investment of money saved in physical and social infrastructure. It analyzed opportunities foregone; the opportunity cost of the subsidy.
The conclusion was that there is a high opportunity cost of the gas subsidy. Resources employed keeping retail prices at low levels will substantially boost economic activity and incomes if deployed elsewhere. Any negative effects are more than compensated by the large positive effects from the investment in the physical and social infrastructure. Two scenarios were considered in this a dynamic computable general equilibrium model.
Scenario 1: Studies the macro economic impact of $2.9 billion gas revenue, (assuming gas is priced at the average price of India and Pakistan) invested on physical and social infrastructure;
Scenario 2: Studies the macro economic impact of $6.7 billion gas revenue (by pricing it at the Indian wholesale LNG landing price) and investing this revenue on physical and social infrastructure.
Under the second scenario, in the short run, real GDP would rise by 9.23% above that achieved in the business-as-usual scenario, which in the long run would in any case be expected to increase by more than 10%. Exports would grow by 9.5% in the short run and 14.3% in the long run. A fall in the CPI would be higher in the long run than in the short run. Also, households would experience rise in real consumption both in short and long run.
Though the withdrawal of gas subsidy would lead in the short-term to reductions in growth of GDP, exports and imports and raise the CPI, increased investments in infrastructure would generate large positive benefits for the overall economy. The directions of the impacts of the
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second scenario would be the same as in the first scenario, though the magnitudes of the impacts would be lower under the second scenario.
In order to understand the growth impact of the investing gas revenue on infrastructure development we estimated the related per capita GDP up to 2030. The per capita GDP would be about $4,079 in 2030 if the augmented gas revenue is fully invested in social and physical infrastructure. This is about 54% increases from the base case scenario per capita GDP of $2,636. The base case assumes 7% economic growth (Government’s expectation) which is unrealistic without resolving the power sector crisis and removal of other infrastructure constraints. If more realistic base case of 4% growth is assumed, the GDP increase is about 158%. These numbers clearly show the highly significant growth impact of investing gas resource rents in the economy.
It may seem counter intuitive that price increases will lead to increased economic growth, increased exports and lower inflation. However, intuitive analysis overlooks the strong negative impacts of gas shortfalls with, outages, low quality supply, widespread waste and no incentive to eliminate low quality uses of gas and industrial inefficiency. With higher prices, there will be strong incentives to invest in economical equipment, to conserve gas and move gas usage to higher value production and consumption. Moreover, negative impact of higher energy prices, as shown in the analysis is sufficiently counteracted by the positive impact of removal of infrastructure constraint.
In the above analysis it was assumed that gas price increase and infrastructure constraint removal happens simultaneously. In reality there is a time lag between price increase and development impacts of infrastructure. In a variant to the basic model, it was assumed that gas prices increase in the year 1 and impact of infrastructure constraints removal occurs in the year 6. The results show that there are negative impacts on the economy during the transition period. Inflation increase by about 1% GDP show a decline by about 0.4% compared to business as usual scenario. Even though the magnitudes of the impacts not very high, these are politically sensitive issues. Therefore, supplementary policy measures are required to counteract these negative impacts of gas and power price increases during the transition period
Gas in the Future
Government thinking on how to address the gas shortage is the energy section of the Sixth Five Year Plan issued by the Bangladesh Government during 2011. The Plan states that unless steps are taken to make better use of the gas currently extracted, more intense use of existing fields as well as discovery and development of new fields, a serious shortage of gas will emerge. It proposed 17.3% of the total public sector investment program should go to the energy sector.
Being an energy deficit country, Bangladesh has limited options for fuelling its economic expansion. LNG terminals will be very expensive to build and are unlikely until at least 2016. Other imported energy options like oil are costly too. IOC Foreign Direct Investment (FDI) funds are harder to obtain. In this context, efficient use of natural gas is vital for sustainable development in Bangladesh. Several different problems can be addressed if Bangladesh collects some of the US$3 billion to US$6 billion of revenue lost by pricing gas significantly below what it is worth the economy.
Far from representing a decrease in Bangladesh’s attractiveness as a place to do business, realistic energy prices, lower budget deficit, more investment in infrastructure, leading to more reliable energy supplies will all make it a more attractive investment location. Other options for generating electricity, such as coal, will take the pressure off the gas supply and allow even more gas to be diverted to higher value uses such as fertilizer production and industry.
Independent observers see Bangladesh at a crossroads in terms of its natural gas policies. The nation has a history of using its natural endowments to address development challenges. These
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policies targeted a social agenda with national resource wealth, but there are concerns about the sustainability of such policies in the future. Bangladesh today faces a different future than it did even a decade ago when relatively abundant natural gas seemed to be the key to prosperity. Known reserves are not expected to last a decade on current use trends, energy price policies appear to seriously undermine economic efficiency, and the fiscal costs of those policies is being seriously questioned.
To support more evidence-based dialog on energy development, allocation and pricing reform, this study uses several forms of economic and institutional analysis to evaluate leading issues facing Bangladesh. We use the forecasting models evaluate a variety of policy options that are under active discussion and consideration by public and private stakeholders.
In particular setting gas tariffs below what it currently costs Petrobangla to purchase gas from IOCs, inhibits exploration and discovery of new gas fields. Uneconomic tariffs impose major costs on Petrobangla in terms of deterioration in the quality of infrastructure and processes and discourages efficient use of gas. Opaque pricing systems provide opportunities for corruption and significant theft of public assets and cash.
Prices lower for relatively fortunate consumers with access to gas than for the very poor foster inequality and inhibit policies designed to attack poverty. They inhibit energy conservation by sending the wrong signals to consumers. The subsidy to consumption from underpricing has undermined the finances of the government. Revenue that could have been for development has been diverted a consumption subsidy.
This report provides convincing evidence to support market oriented gas pricing policy in Bangladesh. It shows that pricing gas at international market rates and investing augmented revenue can not only solve current energy sector crisis but also open up a higher growth path for Bangladesh. Customers in Bangladesh will have to pay significantly more for gas and power, but the poorest customers are paying these higher prices already for alternative energy sources. Overall development impacts of infrastructure development sufficiently counteract the negative impact of higher prices and put the economy to a higher development trajectory. However, supplementary policies to handle the negative transitional impacts are necessary.
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1. BANGLADESH and GAS
A. Purpose of Report
1. This report aims to identify and discuss practical proposals that will enable Bangladesh to maximize the benefits it obtains from its natural gas resources. It analyzes and recommends changes in tariffs setting and the allocation of natural gas that will help achieve the country’s social and economic objectives. It contributes towards an evidence based dialog on gas’s role in the country’s energy future.
2. The principal finding of the research is that Bangladesh is at a decision point. The past decade of relatively abundant natural gas supported energy prices far below the true value of energy consumed. These prices are unsustainable, result in dwindling exploration and development and created rising demands for gas bringing forward depletion. The report assets that Bangladesh has sound policy options to deal with energy crisis and derive maximum benefits to the society but strong political will is required to implement these policies.
3. Bangladesh aims to graduate from a country characterized by widespread poverty into middle income status.1 This requires millions of thriving, successful businesses, but energy shortages are very bad for business. Shortages disrupt citizens’ lives and create major management issues for businesses handling food, perishables and managing continuous process. Increasing depletion rates to address the shortage will exacerbate the already rapidly dwindling gas reserves. While reserves are depleting, demand is growing exponentially, particularly to generate electricity. Unless major changes are made, failing gas, power and water supplies could lead to economic decline and social conflict. Bangladesh’s developing energy crisis could cause economic distress and security problems unless addressed urgently.
4. This report aims to stimulate debate about the future of the crucial gas sector. Natural gas is the most important natural resource endowment in Bangladesh. Wider understanding of linkages between pricing of gas, sustainable consumption patterns, efficiency in the enterprises responsible for securing and using energy supplies is vital for a forward looking policy dialogue. Achieving understanding and devising effective policies to deal with a looming crisis creates an opportunity for political leaders to show leadership and vision in addressing the nation’s needs.
B. Bangladesh
5. Bangladesh is the World’s 95th country by size, 143,998 square kilometers2 (sq km), but is the World’s
11th most densely populated nation. Estimated density is 1,198.84 persons per sq km. Arable land
comprises 55.39% of its total area, and is found on rich alluvial deltas of major rivers flowing from the Himalayas: Ganges, the Jamuna (main channel of the Brahmaputra), which joins the Meghna and empties into the Bay of Bengal. It is in these deltas that much of Bangladesh’s gas reserves are located. Arable land availability is 0.05 ha/person and Bangladesh is ranked 70 in the fresh water availability amongst 169 countries. Population growth and scarcity of land and water resources signify the importance of natural gas in the economy.
6. For the last 20 years Bangladesh’s macroeconomic environment has been stable and in 2011 real Gross Domestic Product (GDP) grew at 6.7 %.3 More than half of Bangladesh’s GDP is generated through the service sector, although half its labor force is in agriculture with rice, the single-most-important crop. Private investment is around 19.5% of GDP and the contribution of private investment to growth has increased. The nation’s private banks are well managed despite vulnerabilities from policy decisions, financing of loss-making State Owned Enterprises (SOEs) and other policy induced handicaps.4 The current account remained in surplus in 2011 although shrinking from 3.7% of GDP to 0.9%. 2011 saw strong tax collections offset by a rise in the fiscal deficit. Overall the country’s economy has performed well despite growing imbalances and many pressures.
1 The government has set development targets in its “Vision 2021” which are aimed at achieving a transformation in
the socio-economic and environmental areas that will help Bangladesh to graduate to a middle income country by 2021. To that end, a perspective plan to 2021 and a medium term plan, i.e. the 6
th FYP has been formulated and in due course, the 7
th
FYP will be formulated”. Rio +20 National Report on Sustainable Development, 2012-05 Page 6. 2 http://www.photius.com/rankings/geography/population_density_persons_per_sq_km_2010_0.html, based on CIA
Fact Book 20120 accessed 20-10-2012. 3 Bangladesh Economic Update, World Bank, September 2011, pages 1 and 3.
4 Ibid.
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7. Health, education and other social indicators have registered amazing gains. The number of girls in school now exceeds boys and is over 90%; twice the rate of 2000; Infant mortality has halved since 1990; fertility has dropped from 6.6 to 2.3 since 1975.5 New sectors of the economy have evolved, such as the garment and textile sector that is now a major export earner. Communications have seen dramatic improvements with an increase in telephone lines, between 2000 and 2011, of at least 80 million, mostly in the private mobile telephone companies.
8. Bangladeshis have prevailed in areas nobody anticipated. Bangladesh is leveraging its experience of the Common Law and its bright, young, English speaking graduates and professionals to become an active player in the export of legal and consulting services. In many areas, such as clothing and services, Bangladesh’s economy is meeting international competition and succeeding. The development of the gas sector from nothing in 1975 to a major contributor to the nation’s economy has been spectacular, despite concerns about the structure, organization and efficiency of the sector.
9. Gas is a sector where major decisions have long-term consequences for the wealth extracted from a finite natural resource and the proportion that is used to the best advantage of citizens. We identify major benefits from increasing the transparency of operation of the gas sector and from bringing gas prices closer to those in neighboring countries. The benefits arise from lower budget deficits, stronger cash flows in SOEs, refurbished infrastructure and generally from more efficient use of finite and precious gas supplies. The initial discussion focuses on an overview of the gas sector and obstacles to more efficient use of the nation’s gas.
5 See: Bangladesh and Development, The Economist, 3
rd November 2012, page 22.
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2. GAS SECTOR OVERVIEW
A. Energy Sector Governance
10. Bangladesh has joined the worldwide trend away from centrally planned nationalized economies, but much of the nation’s commercial energy infrastructure remains government owned. The introduction of International Oil Companies (IOCs) to the oil and gas sector is a success with more than 50% of gas currently supplied by international companies. The introduction of Independent Power Producers (IPPs) to the electricity sector was also an important milestone towards better sector management. However, high costs of IPP generated power is a concern. Despite progressive introduction of the private sector, major costs are created by interrupted and poor quality supplies of gas and electricity.
11. Governments usually make the major decisions on the use energy of resources like natural gas (Chapman, Robson, Weenink, 1987). Only a few countries regard all natural resources under private land as private property with government regulating only ownership of land. Resource use decisions have to be coordinated and Bangladesh seeks coordination by placing discovery, development, production, transmission, wholesaling and retailing of energy forms in the public sector. Energy sector agencies have responsibility for business management, ownership as well as offering policy advice and implementing government policies.
12. The deficiencies of the multi-function model lead most nations to adopt more transparent allocations of functions. In a multi-function agency, one organization is responsible for policy, regulation (including economic, environmental, health and safety), operations and ownership (i.e. maintenance of capital) it is hard to measure energy’s true contribution to national welfare and efficiency. Typically, resolution of issues is by default rather than design. If distinctions between administration, regulation and business are blurred; objectives may be mixed, commercial, environmental and social goals confused and objectives changed frequently, with coherent long-term policy decisions losing to urgent short-term fixes.
13. If transparency is absent, market information and incentives on which to base decisions can be weak or absent too. Governments are almost always short of cash and usually have more urgent uses for money than investing in needed sectors of the economy. By omission, not design, government ownership may deny the sector access to the capital it needs. Non-market objectives may gain priority over sound decisions; low prices gain priority over maintenance, investment or solvency. For natural resources, like gas, wastage can occur when prices are kept low to keep down measured inflation, or to conceal inadequate performance. In the process consumption triumphs over efficiency. Sub-optimal utilization may be the result.
14. Clarity of mission allows greater accountability of managers, generates more information for the government, parliament and it allows better decision taking and wiser use of resources. Incentives to use resources efficiently are as important as ownership to enable wise use of energy. Wise use is an appropriate balance between competitive market allocation and policies focused on sustainable use and equitable distribution. Wise use means prudent consumption of finite resources and incentives for efficient use of renewables.
15. Decision makers for the very large investments the sector needs require confidence that decisions will be aimed at maximizing long-term benefits to the nation. They need a framework for decisions that is stable and transparent and prices should reflect the long-term value of the resources used. Systems that increase transparency and the information available are a vital part of increasing the efficiency of gas use.
C. Energy Sector Overview
16. Figure 1 shows the growing importance of gas in Bangladesh’s energy consumption. At least 75% of commercial energy is provided by natural gas including the gas fuel for the electricity sector.6 Bangladesh remains heavily dependent on biomass for energy production particularly in rural areas and commercial energy imports are mostly fuel oil. Very small amounts coal and other energy forms are used.
17. Currently, the country has few domestic alternatives to gas and will continue to rely on gas as its major
6 Petrobangla Annual Report 2010, page 9.
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energy source to fuel much of its development. The lack of obvious alternatives makes efficient use of gas vital. Just as Figure 1 shows the importance of gas, Table 1 illustrates that among selected Asian economies Bangladesh’s power consumption per capita is much lower than in neighboring countries of comparable development. Bangladesh is also the lowest consumer of commercial energy relative to its GDP level. This suggests that economic growth to date has occurred despite serious constraints on energy.
Figure 1: Energy Production Bangladesh
World Outlook, International Energy Agency (IEA) 2011; Cited Roland-Holst 2012
18. Per capita electricity consumption in Bangladesh is low even relative to income per capita; it consumes energy at levels anticipated for an agrarian society, not for a rapidly industrializing nation, aiming at middle income status. To continue the path of energy-intensive industrialization and urbanization that has come to define developed countries, electrification and energy production in Bangladesh will have to expand substantially.
Table 1: National Power Consumption Comparison
Country 2009 Power Consumption (kwh per capita)
Bangladesh 252
India 597
Pakistan 449
China 2631
World Outlook, International Energy Agency (IEA) 2011
19. Despite the great success of its poverty reduction strategies Figure 2 shows that Bangladesh still suffers from endemic energy poverty and more than 90 million people remain without access to electricity.7 The country’s electrification rate of 45%-50% is far below that of its neighbor India at 75% and lack of access to electricity remains a challenge for development, and an essential criterion for success in Bangladesh’s energy policy.
20. Bangladesh’s aspiration for middle income status will require the consumption of substantially more energy than at present. It is now necessary to look at the institutions that comprise the gas industry, the market demand for and supply of gas, where future energy supplies may come from and the role of gas. This examination begins with the institutions that currently manage the gas sector and identifies sources of inefficiency.
7 World Outlook, International Energy Agency (IEA) 2011; cited Roland-Holst (2012).
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Figure 2: Per Capital Commercial Energy Consumption / GDP Selected Asian Countries
Source: Per Capita Energy BP (2009) / Percapita GNI (WB 2009)
D. Gas Institutions
21. The gas sector’s development path is described in Annex 1. From small beginnings before independence Bangladesh’s gas industry SOEs have grown into major organizations grouped under the Bangladesh Oil, Gas and Mineral Corporation (Petrobangla). Petrobangla’s institutional framework has not been revised fundamentally since its establishment in 1974. Petrobangla formed around gas field assets purchased from Pakistan Shell Oil Company Limited (PSOC) and Pakistan Petroleum Limited (PPL) in 1974 at a negligible cost. Competition came to the upstream sector with offshore exploration in 1974 when six IOCs were awarded blocks under Production Sharing Contracts (PSCs). Further private interest in the sector began with bidding for offshore exploration in 1994.
22. Policy advice and analysis are located in the GoB Ministry of Power & Energy and Mineral Resources which has an Energy and Mineral Resources Division (EMRD) and a Power Division. The gas sector expertise and gas specific skills are located in Petrobangla. Petrobangla reports to the Ministry and the Minister of Energy,8 but in addition to its commercial functions, it manages the government’s gas sector interventions and provides policy advice drawn from its technical experts.
23. Petrobangla is responsible for all the government owned assets in the gas industry. Its enterprises are involved in all stages of onshore exploration, production and transmission. Petrobangla’s organization and its relationships to the Ministry and IOCs, are illustrated by Figure 3. It shows Petrobangla is involved in the upstream (production) and downstream (transmission, reticulation and retail) sections of the sector. Nominally independent, all subsidiary companies are part of the Petrobangla Group and are subordinate to the Group, which in turn is guided by political directions. This organizational structure reflects the company’s mixed mandate.
24. Petrobangla’s gas pipeline network can be considered a natural monopoly (unlikely to have competition), but other functions the company performs are potentially contestable and competitive. Petrobangla has major commercial functions, but as an entity is largely orientated to non-market objectives, such as keeping energy prices low to assist the poor and to promote development. Because these objectives are not explicit, it is usually not possible to tell whether the outcomes are those intended or not. One example that is measurable is Petrobangla’s mandate to contribute to regional development. So far Western Bangladesh is without gas as there is no supply to that region, because of the lack of investment and the gas shortage. As with many SOEs, Bangladesh’s gas companies face conflicts of interest due to politicization of commercial decisions, soft budget constraints and lack of accountability
8 Currently, Sheikh Hasina, the Honourable Prime Minister is Minister of Power, Energy and Mineral Resources, as
well as being M/O. Public Administration, M/O. Defence and responsible for the Armed Forces Division and the Cabinet Division. She is assisted in this role by Dr Tawfiq-e-elahi ChowDhury, Bir Bikram appointed as Advisor (Minister) to the Prime Minister of the Government of Bangladesh in January 2009.
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through the lack of capital market scrutiny of share values.
Figure 3: Petrobangla’s Organization
E. Production Sharing Contracts
25. Petrobangla’s gas fields acquired from PSOC and PPL in 1974 were purchased very cheaply and tariffs for its first three Bangladeshi natural gas consumers were fixed by negotiations. Subsequent tariff increases were on an ad hoc basis leaving minimal margins for the gas sector entities. A uniform tariff structure was maintained across all Petrobangla’s franchises. Since there was no private production at that time, there was little urgency accorded to switching to other forms of tariff, based on the market value of gas or considerations of economic efficiency. This approach could not encourage private investment in the gas sector so Bangladesh, like many other developing countries decided to offer PSCs.
Advantages and Disadvantages
26. The principal advantage of PSCs is that IOC invest in exploration, appraisal and development of oil and gas at their own risk. If they find deposits, the proceeds of development are shared between the IOC and the government. If nothing is found, the host government pays nothing. PSCs allow developing nations short of capital to undertake mineral exploration and development without the possibility of seeing substantial losses incurred in unsuccessful exploration written off against other tax liabilities. PSCs are common because they do not require up-front financial commitments; if the exploration is unsuccessful, the host country carries none of the risk and weak host country budgets are not undermined by the need to deduct exploration costs against taxation revenues.
27. The quid pro-quo is that from the proceeds of successful discoveries IOCs recover their costs (cost gas) plus a margin on top to recognize the non-tax-deductibility of unsuccessful exploration. If the field is very prospective the PSC can gain a large profit margin on the oil and gas recovered from the particular deposit. Conversely, a company may engage in a massive drilling program and gain no income at all,
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let alone a profit. In general, disadvantages of PSCs are that they are: less transparent than standard disclosure and taxation rules, result in the host country gaining a smaller proportion of ongoing cash flows from a major discovery and are less flexible than normal tax arrangements when responding to unexpected situations.
28. The Bangladesh Petroleum Act of 1974 created a legal framework for PSCs. Under the National Energy Policy 1996 a bidding round began using PSCs to attract IOCs for exploration in all 23 onshore and offshore blocks. The Petroleum Policy, priced IOC gas production (purchased by Petrobangla) at 75% of the high sulfur fuel oil (HSFO) Singapore FOB price, on a heating value parity basis for onshore production, with a 25% premium over that for any offshore production under agreed floor and ceiling prices of HSFO negotiated and agreed in the contract. From 1996, the model contract offered created a greater degree of certainty for potential investors and the GoB and Petrobangla share in production according to the agreed terms. The model PSC is explained in Annex 5.
Pricing PSCs Gas
29. In 1993, the Asian Development Bank (ADB) was processing a loan9 for the Bangladesh gas sector. The ADB advice was that the government should enhance the price of NOC gas in phases to absorb the shock of higher prices for gas likely to be produced by the IOCs in future (as the IOC gas was linked to the World Price through the link with Singapore FOB price). The government agreed to align the price of domestic natural gas with HSFO price on a heating value parity basis by 1995. To achieve the objective, ADB simultaneously processed a piggy-backed technical assistance (TA) project10 with specific focus on tariff reform. The consultants engaged, proposed an average benchmark fuel oil parity price of US$1.75/MCF as wellhead price for National Oil and Gas Companies (NOCs) on the basis of prevailing HSFO price in Singapore hub in the light of pricing provisions of contracts with IOCs and arrived at a target end user price for various categories of consumers.
30. Given the need for big increases in retail prices to achieve target price, the consultants also recommended an adjusted tariff structure, equalization of prices for some consumer categories to minimize the burden of domestic consumers and a reduction of the government take simultaneously with increase in end user tariff. The consultant submitted a final report in July, 1996. The Government formed a high powered committee with Principal Secretary to the Prime Minister as convener to review the recommendations of the consultants and to recommend a tariff structure implementable by the government. The Committee submitted its report in March 1997, recommending gradual enhancement of the tariff over 3 years. But the Committee’s recommendations were never implemented in full.
Formula Agreed with World Bank
31. Six years later, 2003, the GoB agreed in principle, to a World Bank proposal to link the wellhead price of NOC gas to the HSFO price on a heating value parity basis. The proposal was to start with pricing NOC gas at 7% of HSFO price. An agreed formula was developed and approved, but did not link the NOC gas with the HSFP price. The formula was as follows:
Consumer end gas price = Gas purchase/production cost + transmission and distribution cost +Supplementary Duty (SD) + Value Added Tax (VAT)
In case of IOC gas, purchase /production cost will be determined in line with policy guideline linking HSFO, Singapore price and to cover future investment;
SD determined on the basis of saleable quantity of gas on volumetric measurement;
Based on the above formula gas price will be reviewed every month and gas price will be refixed at an interval of every six months. However, in case of more than 10% increase/decrease during monthly review, gas price can be adjusted before fixed time;
In case of supplying gas to a particular category of consumers at a subsidized price, due provision shall be kept in the national budget for providing subsidy directly to that category of consumers.
32. While the PSCs were to be based on a gas prices related to the World Prices through the Singapore HSFO Price, the wellhead price proposed for NOCs was significantly lower. The policy guideline, to bring the two into alignment, was not applied and subsequent increases in the wellhead price 2004 and 2005 were made ad hoc, unrelated to the policy.
9 Loan 1293 – BAN(SF): Third Natural Gas Development Project for $107.0 million approved on 21 December 1993.
10 TA 2024-BAN: Preparation of Gas System Development Plan and the Strengthening of the Organizational and Regulatory
Framework for Oil and Gas Sector, approved on 21 December 1993.
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A. PSCs and Taxes
33. PSCs Cost Gas is not subjected to income tax as such, but IOCs pay normal company taxes on their profits. Chevron maintains that it is the single largest taxpayer in Bangladesh. The application of the general Bangladesh taxation regime is discussed in more detail in Section 8 below.
Value Added Tax
34. Value added taxes (VATs) create a paper trail and is therefore, partly self-enforcing. Since the 2011 VAT Guideline, VAT is levied on goods and services at import, manufacturing, wholesale and retails levels. A VAT of 15% applies to all goods and services with an annual turnover of Tk2 million (US$ 24,000) and above; a turnover tax of 4% is levied on lower turnover. VAT is applicable to all domestic products (including gas) and services (with exemptions). Tax is collected at the import stage from importers of finished goods as a trade VAT. VAT is the least regressive of all other forms of expenditure taxes because the tax element does not “cascade”. VAT is payable by the final consumer at the time of supply and tax paid on inputs is credited against the output tax. Each party collecting VAT (note COLLECTING) receives an input credit against tax payments. Only the added value is taxed. The taxation does not build on top of the previous tax at each of the series of transactions from production to retail. Higher inflation adds companies to the VAT net. IOCs do not collect VAT on the gas they provide to NOCs. VAT is only collected on gas provided directly to industrial companies. Although the PSC overrides the general VAT law, VAT is paid in full on gas produced by the NOCs. There is an ongoing difference of opinion between the sector and the National Board of Revenue (NBR) as to the appropriate method to use to calculate the VAT payable. The issue turns on whether it should be paid on the Supplementary duty (SD) inclusive price. This has increased the taxation share of Petrobangla’s revenues by 5% to 55; a SD rate for gas of 40% and 15% VAT.
Supplementary Duty
35. SD is imposed at local and import stages under the VAT Act, 1991. Statutory SD rates on goods are: 20%, 35%, 65%, 100%, 250% and 350%. On services, SD rates are 10%, 15% and 35%. The NBR provides no information on the policy underpinning for the large number of different rates for SD. SD is an “ad valorem” duty a specific percentage of the value of the item (as opposed to specific duties, imposed as so much per item (per car, pair of shoes, dress etc.). In sectors such as mining or gas production an ad valorem tax is a way of measuring total production with penalties for under-reporting. The regressive impact of specific and ad valorem duties such as SD conflict with the “ability to pay principle” discussed on page 68 below. In the same way as with VAT, SD is not collected by IOCs on the gas they provide to NOCs. It is only collected on gas provided directly to industrial companies.
Customs
36. VAT has replaced customs on imports as Bangladesh's main source of revenue for the government. Rates vary from 7.5% for capital machinery, to 32.5% for finished products. This structure is subject to ad hoc alteration and in March 2012, for example, there were substantial increases in duties on several categories of finished goods classified as luxury items. The application of customs duties to the gas sector is determined in the PSC. While originally a common practice internationally, in more recent international PSCs it is less common, although gas industry importers may be compensated for customs duties they pay.
F. Gas Market
37. The gas market in Bangladesh is both complex and opaque. Figure 4 illustrates the flows of gas and money. The Market’s principal features are:
Of total gas production 53% is by the IOCs and 47% is by the National Gas Companies (NOCs);
Production Sharing Contracts between the GoB and the IOCs define IOC “Cost Gas” and “Profit Gas” the main components of the Bangladesh gas supply;11
Of IOC production:
55% is Cost Gas (CG) to cover the costs of the IOCs during the cost recovery period including their profit (Revenue + Depreciation = Profit) until all costs are covered;
45% of IOC production is Profit Gas (PG),
11
See the model PSC discussed in Annex 5.
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PG is shared 50%-50 % with Petrobangla during the cost recovery period;
Petrobangla’s profit gas sharing percentages increases to 80% following cost recovery period.
Figure 4: Flows of Gas and Money
Source: Petrobangla and the writer
38. IOCs can, in principle, sell their share of PG to the highest bidder; in practice Petrobangla generally exercises its “first refusal” option and purchases virtually all CG and PG to meet the shortfall (described from paragraph 58 below);
PB’s supplies its 50% share of PG directly to its Distribution Companies (DC)s. This gas is free of charge. DCs sell gas to consumers at prevailing retail prices (which include the transmission and distribution charges).
The 47% of gas produced by the National Oil (and Gas) Companies (NOC)s is sold to final consumers at retail prices including a transmission and distribution margin;
In the event that production by IOCs increases the oil companies are guaranteed a profit margin after tax, supplementary duty (SD) and Value Added Tax (VAT).
If IOC margin is eroded by a tax or duty increase Petrobangla indemnifies them (i.e. it pays their due taxes).
39. Figure 5 shows how the DCs sell the gas to consumers on behalf of Petrobangla and remit the proceeds net of their margins and a margin to the transmission company TDSL. The respective margins are allocated to the subsidiaries for O&M and any profits are consolidated at the group level. In the case of the IOC stream the balance remains with IOCs. It also illustrates the transfer from the NOC company revenue streams to the IOC revenue stream of payments for gas and a Price Deficit Fund (PDF), the Wellhead Margin for BAPEX and the Gas Development Fund (GDF), SD and VAT. Attention is drawn to the fact that DCs do not pay for the profit gas they sell for Petrobangla.
40. The GoB obtains 55% of the value of the proceeds from the sale of gas through VAT and SD.
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Petrobangla receives 45% through the PDF, BAPEX Margin, Deficit Wellhead Margin, Well-head Margin, Transmission Margin, Distribution Margin and Gas Development Fund (the largest single item is the Price Deficit Fund). This system results in a distribution of cash as outlined in Table 2. The average and average without CNG prices are shown. Without CNG’s inclusion, average prices are about US$ 1.60 a GJ.
Figure 5: Natural Gas Revenue Distribution from 1996
Source: Petrobangla and Ahmed 2012
41. The fact that the DCs receive their share of the profit gas free of charge substantially reduces their cost of supplying gas. This fact accounts for the NOC’s “profitability”. All the benefit of the profit gas appears on the accounts of Petrobangla’s subsidiaries and only the residual amount appears on the consolidated accounts and is subject to tax. The economic impact of prices is discussed in Section 3.
Table 2: Cash Distribution among GOB and PB Group from 19-09-2011 Tk/MCF
GOB
margin 55%
PB
margin 45%
Customer Category
End User Price Tk-
MCF
VA
T
SD
To
tal
GO
B
PD
F
marg
in
Bapex
marg
in
Deficit
WM
B
Well-
hea
d
Marg
in
TM
Marg
in
Dis
trib
ute
Marg
in
GD
F
Tota
l P
B
Power 79.82 10.41 33.49 43.90 8.97 1.36 1.13 6.37 9.06 6.37 2.66 35.92
Fertilizer 72.92 9.51 30.60 40.11 7.57 0.00 1.13 6.37 9.06 4.37 4.31 32.81
Gas CNG 651.29 84.95 273.26 358.21 172.74 3.12 5.66 8.50 9.06 4.42 89.59 293.08
Captive 118.26 15.43 49.62 65.04 12.92 1.36 1.13 6.37 9.06 16.75 5.62 53.22
Industry 165.91 21.64 69.61 91.25 21.69 1.36 1.13 6.37 9.06 27.04 8.01 74.66
Tea estate 165.91 21.64 69.61 91.25 21.69 1.36 1.13 6.37 9.06 27.04 8.01 74.66
Commerce 268.09 34.97 112.48 147.45 37.82 1.36 1.13 6.37 9.06 49.11 15.79 120.64
Domestic 146.25 19.08 61.36 80.44 20.10 1.36 1.13 6.37 9.06 20.56 7.24 65.81
Average 208.56 27.20 87.50 114.71 37.94 1.41 1.70 6.64 9.06 19.46 17.66 93.85
Av minus CNG 145.31 18.95 60.97 79.92 18.68 1.16 1.13 6.37 9.06 21.61 7.38 65.39
Source: Petrobangla DWMB: Deficit Wellhead margin for BAPEX; PDF: Price Deficit Fund; SD: Supplementary Duty; VAT: Value Added Tax
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G. Gas Demand
42. Gas is Bangladesh’s largest commercial energy input and demand for gas is growing. Economic development has been shaped by energy policy in a number of ways. The urban centers of Dhaka and Chittagong have benefited from growing industrial sectors due to the placement of gas infrastructure, and urban residents in general benefit from much higher electrification rates than their rural counterparts, a common feature in developing countries. Eastern Bangladesh, the source of all of the onshore gas fields, has benefited from an energy source that has not been distributed as widely in Western Bangladesh, where the cost of building gas-transporting infrastructure have constrained energy supplies.12
Figure 6: Changes in Sectoral use of Gas in percent (2001 and 2011
Source: Inter-sectoral Allocation of Natural Gas, Ahmed 2012 page 8, see Annex 2
43. Natural gas in Bangladesh is mainly used to generate electricity, manufacture urea fertilizer, sustain industry, power transport, particularly buses and small taxis (widely known as CNGs) and for domestic food preparation. Figure 6 shows the allocation of gas among the sectors in financial year (FY) 2000 and 2011. Power generation (grid, but excluding captive) in 2001 accounted for approximately 45% of all gas used in Bangladesh. The captive generation sector, which did not exist in 2001,13 now accounts for 17% of the total. These two uses now account for about 59% of total gas used.
44. Shortages of electricity led the GoB to authorize captive generation (i.e. enterprises with their own gas fired generators). Captive generation may generally be less energy efficient than grid generation (particularly if generation is from Combined Cycle generators). The fertilizer industry accounting for 23% of consumption in 2001 has halved in importance and the seasonal brick industry no longer uses gas. CNG in vehicles did not register in the usage statistics in 2001, but now takes 5.8 % of the total available gas. Both industry and commercial uses of gas have declined in importance and the proportions are unlikely to increase given the ban on new connections introduced in 2009. The fall in fertilizer generation has been replaced with fertilizer imports, which are expensive even before subsidies are applied.
45. Figure 7 shows the annual average growth rate in the use of gas from 1991 to 2010. It also shows that the average growth rate of the consumption of gas for power production between 1991 and 2010 was 7% and the amount of gas used in domestic, industry and captive power generation has been growing faster and growth rates in the use of gas for other purposes, with increases in CNG being the fastest. The lowest rate of increase (1%) has been for fertilizer and the highest growth rate (65%) for CNG with
12
The planned Padma Bridge, 40km south-west of Dhaka, is designed to carry four lanes for traffic, as well as a freight
railway and a gas pipeline. Troubled Waters, The Economist, Sep 8th 2012. http://www.economist.com/node/21562263 13
Captive generation is basically in fertilizer and industrial sector. Recording of gas consumption for captive power generation commenced from FY2003 only though captive power generation by fertilizer sector and some industries prevailed since gas use commenced in Bangladesh..
0.00
0.10
0.20
0.30
0.40
0.50
Pe
rce
nt
2000-01
2010-11
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captive power production coming close behind). The use of gas with the highest subsidy (fertilizer) has fallen and with the smallest subsidy has increased (CNG).
Figure 7: Annual average growth rate of use of gas, 1991-2010 by sector
Source: Energy and Mineral Resources Division (cited 6th 5 year plan)
H. Gas Supply
46. Bangladesh has supplies of energy from renewable and non-renewable sources. Bangladesh’s five year plan quotes an annual energy requirement of 36 million metric tons of coal equivalent.
47. Figure 8 shows that in 2009 gas comprised about 48% of total primary energy supplied. Thus about half of all energy used is from gas. Apart from natural gas and crude oil, coal is mainly used as fuel in the brick-fields and at the Barapukuria Thermal Power Plant, Bangladesh’s sole, coal fired power station. Biomas accounts just under half of Bangladesh’s annual primary energy requirement, mostly in areas where there is no gas reticulation.
48. Power is increasingly generated by using home solar systems, particularly among the 60% of the population who live in areas not connected to the power or gas grids. Some official efforts have been made to encourage generation of electricity by bio-mass gasification. There are poultry and dairy farms in which bio-gas plants are being set up and with this supply, electric power is generated for mainly for lighting and for cooking. Bangladesh also has potential to produce electricity from wind and mini-hydro or wave-energy. Recently, solar powered irrigation pumps have been deployed, but at present none of these options register in statistics.
49. Imported oil accounts for 12% of the country’s energy requirements, increasing in significance with the widespread use of diesel generators since 2009. However, at present and in the foreseeable future, 75 % of commercial energy in Bangladesh (more than 1.09 million TJ) will be provided by natural gas. The most recent update
14 shows that from daily gas production in January 2009 of as 1,750 MMCF (1,847
TJ); production by international oil companies (IOC) was approximately 903 MMCF (948 TJ). The total has increased to 2,156 MMCFD (2,279 TJ) in 2012. Despite this additional production as of April 2012 there was a daily shortage of 500 + MMCF. Indications are that in the immediate future, without significant policy changes there will be an ongoing disparity between demand and supply.
50. There are complaints from industrial groups and domestic consumers of gas supplies failing at critical times. Factories, hospitals, hotels, shops and even domestic residences now have standby electricity generators. Some of these may be not as efficient as some single cycle generators but captive power has become a factor in the shortage. Those without reliable access to gas are forced to use heavy fuel oil or diesel to generate their own electricity. Captive generation, diesel stand-by sets and power shedding are very expensive stopgap measures that fail to address the underlying problem. Overall,
14
Power and Energy Sector Road Map Update, Finance Division, June 2012.
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successive stopgap measures add further layers of costs to the sector. They reduce efficiency of the gas use and do not augment reserves or address the need for secure long-term supplies of gas.
Figure 8: Sources of Annual Primary Energy Supply 2009
Source: Energy and Mineral Resources Division (cited 6th 5 Year Plan)
51. In terms of thermal efficiency, direct use of gas in final use applications is considered the most energy efficient use of the finite resource. Uses such as CNG and domestic gas for cooking therefore rate highly. As gas is the major feedstock for electricity, that sector is also unable to keep supply up with demand and rolling power cuts are a daily occurrence. The switch from relatively efficient grid generation to less efficient forms reflects deterioration in the efficiency of the sector and represents a waste of gas (although most of current grid generation is based on single cycle generators, which are equally inefficient).
52. The government has recently made a commitment to replace inefficient single cycle power stations with combined cycle gas electricity generation.15 Funding for this development was to have come from a Development Banks: World Bank US$ 1.8 billion loan; and ADB 1.6 billion loan. It is now more likely to be from development partners or the government budget because the sector is not generating enough cash to service long-term funding. This problem is a further example of short-term considerations overriding a coherent policy with low gas prices leading to obsolete plants still used for electricity generation, increasing costs for the electricity sector and the demand for gas from the gas sector, Two existing long-term problems are exacerbated by a short-term solution to another .
I. Gas Reserves
Gas Reserves and Production
53. Petrobangla’s estimate of remaining recoverable reserve 16.63 TCF as of December 2011, if fully exploited, can meet gas demand at best up to 2026, with a conservative estimate of demand growth rate of 5% per year. In its 2010 annual Report16 Petrobangla shows:
Bangladesh’s gas initially in place totaled (GIIP) 28.8567 trillion cubic feet (tcf) or (28,856.7 Petajoules (PJ));
Of this total the recoverable reserve was estimated to be 15.037 tcf (15,037 PJ);
By June 2010, it was calculated that 8.548 tcf had been produced, and cumulative production up to 31 December 2011 was 10.1 tcf;
This would have left a proven reserve remaining of 6.489 tcf;
15
See Annex 9 16
Ibid, page 8
0
100
200
300
400
500
600
700
800
Total Gas Biomas Oil Others
TJ
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Since the 1960s demand for gas has increased dramatically from a projected 5% a year, increasing to 8.7% during the years 2009-2010;
54. Further developments have increased Petrobangla’s estimates of recoverable reserve to 16.63 TCF as of December 2011,17
Recently the growth rate of demand has been much higher than the anticipated 5% per annum;
In 2012, 17 gas fields with 80 producing wells were in production.
Since 2010 there have been further increases in demand, not sufficiently matched by increased production or discoveries;
Petrobangla’s 2010 Report (covering 2009) acknowledges a daily demand for gas of 2500 MMCF per day, with supply 2000 and a daily shortfall of 500 MMCF (approximately 529 TJ);
The additional supplies of gas have been largely overtaken by increases in demand;
The Bangladesh Energy Regulatory Commission (BERC) fixes energy (natural gas and electricity) retail tariffs in accordance with policy. GOB has yet to delegate oil pricing authority to BERC.
55. As of 2011, BP18 estimated Bangladesh’s available reserves at 12.8 tcf, with a reserve to production ratio of 18.3, meaning at existing capacity and domestic demand, reserves would be exhausted in less than 20 years.19 During 2012 Bapex announced the identification of a new structure estimated to have at least 1 tcf and perhaps as much as 2.4 tcf of gas. With reserved fluctuating annually by up to 15%, the supply side of the country’s gas market remains plagued by uncertainty and risk.
56. In 2001 a joint research project with the United States Geological Survey estimated the country’s total untapped potential at 30 trillion cubic feet (tcf), but it remains unclear how much of this will ever be recovered. IEA estimates show that after discounting for recoverability and past production available reserves may be as high as 25 or lower than 10 tcf. Figure 9 makes clear, the current estimate from the US Energy Information Administration (EIA) is that proven reserves may be as low as 6.489 TCF.20
Figure 9: Variations in Proven Gas Reserves (IEA figures)
Source: US Energy Information Administration (accessed 11-2012)
21
57. The French oil company, Total, discovered large offshore reserves in 2009, helping to improve prospects for the country’s reserves.22 Total later renounced exploration rights, citing “commercial unviability” in the area after a $30 million survey. Bangladesh’s national companies are restricted by
17
Petrobangla Estimate, cited Ahmed 2012 page 4. 18
BP Statistical Review of World Energy, June 2011 Page 20 (cited Roland-Holst 2012). 19
BP: 2011 op. cit. Page 20. 20
http://www.eia.gov/cfapps/ipdbproject/iedindex3.cfm?tid=3&pid=3&aid=6&cid=r7,&syid=2000&eyid=2012&unit=TCF, access 20/11/12 21
http://www.eia.gov/countries/img/charts_png/BG_dngres_img.png accessed 24-11-2012. 22
Total abandons Bangladesh oil exploration rights. Quadir, Serajul. Reuters, Last modified March 17, 2009. Accessed April 12, 2012 (see: Roland Holst 2012, Page 30).
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technical capacity to onshore gas fields and the country is almost completely dependent on international oil companies for the technology and investments to pursue offshore exploration.
Figure 10: Projected Supply and Demand
Source: Sarwar, M. (2008)
J. Gas Supply Shortfall
58. Estimates from BP, Petrobangla and the EIA reinforce the picture that Bangladesh is facing a growing domestic gas supply problem. Figure 9, presents a projection that the position will get worse and no policy developments since then contradict that conclusion. Financial constraints limit the prospect for locally financed investments of the size required for nuclear power and Bangladesh lacks resource endowments to consider other forms of domestic energy. As demand continues to grow, supply shortage will be of growing concern. If subsidizing all forms of domestic energy spills over into subsidizing much more expensive imports, particularly if LNG is imported, will place an increasing strain on government finances.
59. Bangladesh’s national companies are restricted by technical capacity to onshore gas fields and the country is almost completely dependent on international oil companies for the technology and investments to pursue offshore exploration. Reputable international companies have recently withdrawn and Bangladesh is now cooperating with Gazprom, the Russian SOE, in several exploration projects.
60. A lack of gas discoveries is not the only problem facing the energy sector. Losses are not confined to inefficient use of gas. Distribution losses are high and there is insufficient investment in modern, energy-efficient generation. The Bangladesh Petroleum Corporation (BPC) and Bangladesh Power Development Board (BPDB) report substantial losses.23 Even with large subsidies utilities in deficit cannot maintain and service their capital assets, their capacity for investment in their business and the development of facilities is minimal and they cannot pay taxes. BPC revealed that its request for a Tk10 billion subsidy for the last fiscal year (2011) remained unfulfilled. Despite several increases in tariffs it incurred losses of Tk120 billion in the current year.
Stop-gap Measures
61. The BPDB revealed that it cannot afford to purchase gas to replace the high cost fuel oil it is currently using. BPDB plants were unable to generate 1,000 MW at a time of acute power shortage because they were short of gas.24 The Finance Ministry budgeted subsidies for the current year worth around Tk110 billion to offset losses by state owned entities. Lack of funds for oil imports is a further factor resulting in overdependence on natural gas to meet the needs of generation at a time when the demand for commercial energy of all kinds is expanding rapidly and gas supplies are constrained.
62. On 31 July, 2012 Chevron, the largest single international gas company in Bangladesh announced its
23
See Annex 3 Losses of State Owned Enterprises Soaring. 24
Projects Taken to add 1650 MW of Power, New Age, 25 March 2012.
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intention to invest $500 million at Bibiyana gas field from 2014 to supply another 300 MMCF daily, reducing its earlier proposal to supply 940 MMCF.25 The investment will cover expansion of the gas plant to process increased natural gas from the Bibiyana field, additional development wells and an enhanced gas liquid recovery unit. Chevron's total natural gas production capacity will be 1,400 MMCFD, (1478 TJ) plus 4,000 barrels per day of natural gas liquid. Even the proposed increase in production will not be enough to resolve the daily shortage. As of July 2012, daily gas supply stood at 2,239 mmcf against an estimated demand of 2,500 mmcfd to 2,600 mmcfd. As this additional production is from an existing field with proven and recorded reserves, this step appears to be a short-term measure to ameliorate the current shortages. Longer term solutions are needed.
K. Gas Exploration
63. Petrobangla’s response to the shortfall should be an intensified drilling and exploration program, but its financial circumstances make rapid expansion unlikely. Large scale exploration onshore and in offshore areas are necessary for further discoveries, and systematic appraisal and development of discovered and existing, producing gas fields will be required to prove additional gas to sustain gas demand beyond 2026.
64. To tackle the shortage, Petrobangla has a modest program of exploration from its own resources. The 2010 Petrobangla Report notes that despite a long history of exploration “exploration density has remained very low.”26 69 exploration wells had been drilled until 2010, but with 23 finds, the success rate is high. Remaining areas may be less prospective. Currently, BAPEX only has sufficient capacity to drill three wells a year and no offshore capacity. With Petrobangla’s capacity for new oil exploration very limited the obvious option is to seek more investment by the IOCs.
65. The Power and Energy Sector Roadmap Update 2,27 reports measures to address its estimate of a 2016 daily shortage of 744 Billion Cubic Feet (781 TJ) of gas. It mentions the short-term strategies that have increased annual supply by 262 MMCFD (275.01 TJ). It then describes a Medium Term Plan with completion aimed for 2013. The Plan anticipates additional supplies of 400 MMCFD (420 TJ). It describes 13 projects under implementation by NOCs. Four are already in production (with maximum expected output of 105 MMCFD), five underway by NOCs have an anticipated maximum production of 90 MMCFD, 4 wells being drilled by Gazprom, two others on the Titas field, one on Bakhrabad have a maximum production of 345 MMCFD. Four IOCs wells could have production of about 400 MMCFD and a further three by NOCs under a fast track program could have a maximum output of 120 MMCFD.
66. Increased gas supplies discussed above will, according to the Plan, be supplemented by LNG imports of 500 MMCFD by the end of 2013 to avert a crisis. Bangladesh has no LNG importation facilities yet, although imports were foreshadowed in the 6
th 5 year Plan and referred to as a certainty in the Energy
Sector Roadmap. Any delays in the projects underway will create an even larger demand for LNG should that come ashore, widely expected to be no earlier than 2016, rather than the planned 2013 and regarded by many analysts as unlikely to happen.
67. Due to long-standing maritime disputes between Bangladesh, Myanmar, and India, investors avoided major commitments to offshore exploration and development. Therefore, little geological data is available on the deep sea of Bangladesh, so the extent of the reserves in the Bay of Bengal remains unknown. With the resolution of a maritime dispute with Myanmar in March 2012, outside energy firms have taken interest in buying exploration rights in the blocks on sale. So far, only two commercially viable gas finds have been discovered in offshore of Bangladesh, one in 1996 and one in February of 2012. As of April 2012, ConocoPhillips owns exploration rights to two deep-water blocks, and the Australian firm SANTOS is the only operator of an offshore gas field in the Sangu block of the Bay of Bengal. If very substantial new discoveries happen in the Bay of Bengal, Bangladesh’s proven reserves will increase, possibly creating capacity above expected domestic demand growth.
Gas Export Debate
68. In 2001, Unocal anticipated this development and proposed to build a pipeline from Bangladesh to India, in order to export Bangladeshi gas to the HBJ pipeline, the backbone of India’s infrastructure. Indian demand for gas would have built foreign exchange reserves, and the World Bank projected that
25
Daily Star Tuesday, July 31, 2012, accessed: http://www.thedailystar.net/newDesign/news-details.php?nid=244233 26
Petrpbangla Annual Report 2010, page 15. 27
Finance Division, Ministry of Finance, June 2012, P 39.
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Bangladesh would profit more from exporting gas than gas-intensive value-added products like electricity or fertilizer, which were then Bangladesh’s major gas product exports. The suggestion met with enormous political resistance from opposition parties, motivated both by uncertainty about the extent of domestic gas reserves and by nationalist demands to meet domestic needs first.
69. The prospect of exhausting current reserves has been the strongest argument leveled against gas exports. Current energy shortages have reinforced a political environment hostile to exporting in the short term. Finance minister, Abul Maal Abdul Muhith, has commented, "We do not have proven reserves of several trillion of gas, and the LNG system does not exist in the country. So, the question of exporting gas is nonsense.”28 The GoB ultimately declined to export, a policy that continues to this day. While this report does not take a stand on gas exports, it shows gas and power tariff reforms can lead to efficient use of gas within Bangladesh and provide impetus for economic growth and prosperity.
L. Future Role of IOCs
70. With Petrobangla’s exploration and development capacity restricted, the involvement of IOCs is a vital part of finding new sources of gas for Bangladesh. Even the existing role of IOCs remains controversial. IOC’s presence is a logical result of financial and technical capacity constraints among the SOEs, but they have been accused of pilfering Bangladesh’s natural resources to sell on global markets circumventing Bangladesh’s policy on LNG exports. These accusations overlook the fact that local demand is not being met and to be exported gas must be converted to LNG and exported through non-existent export facilities; the conditions for IOC gas exports do not exist. Accusations are unfounded, but the opposition to IOCs contends that enforcement mechanisms may not be strong enough to ensure that gas originating in Bangladeshi reserves actually comes to the domestic market (Bergman 2011).
71. Despite the widespread desire to increase exploration, the program to encourage IOCs to invest in finding additional gas, few IOCs have bid in recent rounds. This should be surprising given the high rate of success with exploration in Bangladesh. Senior figures in the sector attribute this to the unrealistic policy of relating payments to the IOCs to past payments rather than to the costs of exploration, including a margin to allow for unsuccessful drilling.29 However, the price offered in the most bidding round $3.00 Giggajoule (GJ) is only fractionally above the now very unrealistic prices arrived at many years ago. Few citizens would realize that Chevron, for example has just invested US$50 million in drilling for gas that was completely unsuccessful in finding commercial quantities of gas. Petrobangla does not have resources to finance a similar investment program for exploration. For private companies to accept such losses they need to make good profits on the successful wells, it will need to revenue stream that may approximate the World price for gas.
Direct Sales
72. An unusual and promising development took place during 2012 that goes some way to meet the needs of IOCs without the need for LNG exports. In June 2012, the BPDB agreed with the Australian IOC Santos, to purchase gas at US$4.50 (Tk 368) per unit (1,000 cubic feet), nearly four-times its current rate. The BPDB will purchase Sangu-11 gas to run a 150-MW power plant at Sikalbaha in Chittagong. The BPDB has agreed to purchase Sangu-11 gas at a rate set by Santos as the baseline price, up 55% from a previous rate of $2.90 per unit from the older Sangu well.
73. This is first time in Bangladesh that an IOC has sold natural gas to a third party, end-user at a market related price. Usually IOCs sell gas to Petrobangla at a rate fixed in the PSC. Petrobangla then sells the gas to state-owned gas DCs. Under the PSC, Santos had to give Petrobangla first option to buy its gas at market prices. Unusually, Petrobangla declined and Santos offered the gas to the BPDB. This is a win-win deal with Santos having the prospect of a regular client for gas to off- set previous losses and the BPDB obtaining the gas it needed to enable it to switch off some of the expensive diesel generation and provide more reliable supplies of gas to the Chittagong region. It is a strong pointer of a forward looking focus and realism forcing its way into the system.
M. Evaluation
74. This section has looked at the Bangladesh Energy Sector and the gas sub-sector specifically. It has described energy sector institutions, PSCs, taxation of PSCs, analyzed the gas market, including supply
28
"Muhith rubbishes talk of gas export" Daily Star April 2011. 29
Interview with CEO during 2012.
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and demand, reserves and the supply shortfall. It described gas exploration and the debate around gas exports and the proposals to import LNG to address the short-fall.
75. There is strong evidence that sector operations lack transparency compounded by lack of coherent long term policy for gas allocation and pricing. Undermining the transparency of sector operation is that Profit Gas is supplied DCs free of charge substantially, which reduces their cost of supplying gas. This fact accounts for the DC’s “profitability”. All the benefit of the profit gas appears on the accounts of Petrobangla’s subsidiaries and only the residual amount appears on the consolidated accounts and is subject to tax. There needs to be a much simpler and transparent way of collecting gas revenues
76. Developments in recent years show a persistent focus on short-term mitigation of persistent gas supply shortages. On several occasions the government has given undertakings that gas prices will be raised closer to economic levels, to encourage conservation, but this has not happened. The disparity between the prices paid to IOCs and the prices paid to NOCs has been addressed by a Price Deficit Fund, which now has grown to be the largest single item in the distribution of gas related cash within Petrobangla and is an implicit subsidy to the IOCs. Bangladesh does not need to subsidize gas consumption, but instead needs a strategy to moderate the growth in the demand for gas.
77. Another example was the authorization of gas fired captive power production, seen as a short-term response to unreliable power supplies. Captive power added costs to doing business and contributed to gas shortages. Expensive diesel generators were a further response to a short-term crisis coinciding with the election of the current government, but the BPDB cannot afford the necessary quantities of diesel fuel. The cost of diesel generation has doubled from 2.59Tk per unit in 2009-10 to 5.59 per unit in 2012-13. Diesels in particular are expensive to run and an inefficient use of energy. Costs for industry and consumers are higher than if measures to match supply and demand had been addressed.
78. For both main national grid power supply and for captive power, gas is the primary fuel. Fertilizer production has been substantially constrained and much of the sector’s production capacity has been out of commission, because of the shortage of gas. The inability to produce adequate fertilizer in Bangladesh is a significant issue socially and economically. The government has recently sought to plan for the future with Short, Medium term and Longer-term measures. The gap between feasible supply and growing demand requires long-term solutions. The decision by Petrobangla to reject Santos’s offer of gas, allowing it to be sold to BPDB, may in the longer-term prove to be the sector’s most significant decision in many years.
N. Recommendations
There should be a full review of Petrobangla’s accounting system to focus on increasing transparency of the corporations operations and reducing opportunities for commercial and non-commercial losses;
DCs should pay for the gas they market and make a full disclosure of all accounting information;
The various agreements on pricing between the GoB and the ADB and World Bank should be honored with urgency in order to eliminate the need for a Price Deficit Fund;
The supply shortfall should be addressed with long-term sustainable decisions, including urgent tariff adjustments, to avoid temporary stop-gap measures;
The government should develop a strategy to moderate the rate of growth in the demand for gas;
Increased investment by IOCs in the gas sector will remain an important part of a strategy to sustain supplies of gas and the GoB should ensure that financial terms in PSC offer sufficient cash flows to sustain investment.
Direct gas sales, such as the sale by Santos to the Bangladesh PDB should be encouraged as a means to foster a competitive environment in the sector.
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3. GAS TARIFFS
A. Tariff Economics
79. Appropriate gas tariffs can play the major role balance consumer gas demand with producer supply. Gas tariffs must in the long-run provide a revenue basis to cover the costs of the owners of gas producing, transmission and distribution assets. Forward looking tariffs reflect trends in demand and supply and can be used to guide the need for further investment and changes in the level of production.
80. The essential services gas provides to all sectors of the Bangladesh economy requires that gas prices are set prudently and efficiently. If for social or political reasons gas prices are held below market values or the cost of production, it can result in over-consumption, environmental degradation and wasted national resources. Conversely, if prices are held artificially high to ensure large resources are available for future generations, competitiveness of energy dependent sectors will suffer and many consumers will be deprived of essential energy.
81. While for many years it was assumed that finite natural resource prices would be on a continuous upward trend, experience over the last century has been that prices more closely reflect the international demand for and supply of energy.30 Therefore, a critical challenge of natural gas market development should be a policy framework, which encourages pricing so that gas entities face up to date information and incentives to guide their investment and production decision making.
82. Natural gas being a finite resource, its cost of production should comprise at least production cost, a depletion premium (to reflect the ownership interest of the nation) and a resource rent (to provide financial flows when the resource is exhausted). Conceptually, the depletion premium should include the resource rent. In many countries experience has shown that any benefits from state ownership are outweighed by the benefits of more flexible markets and prices determined with all costs included (operational, maintenance and capital) that is closer to Long-Run Marginal Costs (LRMC).
B. Gas Pricing - Approaches
83. The basic objectives of energy pricing are Economic Efficiency, Social Equity and Financial Viability.31 Efficiency means prices such that the allocation of finite natural resources fully reflects their values in alternative uses. Equity relates to welfare and income distribution considerations, such as ensuring all citizens have access to supplies at an affordable price. Financial Viability means that the cost of supplying energy should be covered, including the cost of capital and the cost of depletion. These objectives may be in conflict from time to time. Different approaches to energy price determination are in use and not all target LRMC:
Marginal Cost Pricing - The concept of marginal cost pricing aims to maximize social welfare by pricing gas at a level where, theoretically, the additional benefit of additional units of gas is compensated by the additional cost (short run marginal cost) of providing the extra unit of gas; LRMC is the easiest to estimate method of marginal cost pricing; it also includes sunk costs; devices like "Ramsey Pricing” where prices are increased most on good with inelastic demand, because consumers or users will buy them anyway - also called the inverse elasticity rule.
Historical Cost Recovery Pricing - Historical cost recovery involves gas suppliers pricing to permit an acceptable rate of return, along with recovery of past costs, such as exploration and construction of rigs; historic costing can result in incorrect economic signals if prices do not approximate marginal costs; incorrect signals cause fluctuations in charges (if the flow of investment is not constant); fixed rates of return cut incentives for efficiency, do not price over capacity requiring non-useful’ excess capacity to be excluded from the assets base on which rates of returns are allowed.
Market Pricing - Market pricing involves the creation of a central market where bundles of gas can be traded between suppliers and consumers of gas at the nominated market price; problems such as
30
The so called Hotelling Rule describes the time path of natural resource extraction which maximizes the value of the resource stock: the most socially and economically profitable extraction path of a non-renewable resource is one along which the price of the resource, determined by the marginal net revenue from the sale of the resource, increases at the rate of interest. It describes the time path of natural resource extraction which maximizes the value of the resource stoc. 31
This analysis is elaborated in Ahmed 2012.
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market dominance by large players can reduce competition and pricing efficiency; markets are also prone to periods of instability and natural variability that can increase the uncertainty of investments in the long term; promoters of market pricing argue that the market pricing issues are solvable if the impediments are removed.
Discriminatory Pricing - Price discrimination by suppliers can extract higher revenues by differentiating prices according to the consumer groups’ needs; price discrimination means income redistribution to foster developments by low energy prices for specific sectors; it can be a tool for encouraging efficient development, it may also facilitate the operation of a plant with excess capacity; it may raise enough total revenue to cover the long-run marginal costs but is susceptible to politicization.
Promotional Pricing - Promotional pricing is the temporary under-pricing to selected customer groups at levels below the LRMC aiming to increase market share and thereby expand utilization at a faster rate and reduce average costs; promotion may be economically efficient, providing energy supplies at the expected average lifetime LRMC instead of at an initial low volume, high cost; successful promotional pricing requires a rapid, load build-up; it was used extensively in the early days of electricity and gas – not the problem now.
Government Price Intervention - Government intervention usually aims at improving resource allocation efficiency; improving social equity and ensuring financial viability of the sector. Conflicts arise between these objectives. Most public and private enterprises in energy sectors are required to undertake non-commercial activities to satisfy a range of government policies and social goals; under-charging for political advantage is a common result leading to insufficient revenue, maintenance, eroded infrastructure and poor service.
Gas Taxation - Taxation of gas has been used by governments as a cost-effective method of raising revenues in situations where the demand for gas is inelastic, where higher gas prices do not lead to a significant decrease in consumption; taxes on relatively inelastic goods, such as gas has the benefit that the distortionary effects of taxation through efficiency losses, are minimized, but like all taxes are unpopular.
Cross-Subsidies - Cross subsidies involve prices greater than the cost of supply, paid by some users in order to subsidize other users of the same product (who the face prices less than the cost of supply); cross subsidies represent a consumption tax and consumption subsidy for different gas consumers and are very common, but create major problems of transparency and efficiency.
Concessional Domestic Tariff - Concessional domestic tariffs transfer income from a small number of high volume, low cost, industrial and commercial energy users to numerous small volume, high cost domestic users; concessional tariffs transfer income between tariff classes, so business owners and shareholders income is transferred to lower income domestic energy users; they are commonly used to minimize political opposition to tariff increases.
Uniform Tariffs and Connection Subsidies - In many countries legislation has been passed requiring all consumers to have access to energy at a 'reasonable' price. Electricity utilities may be prohibited from charging rural electricity users a higher tariff than consumers in urban areas; this is despite the higher cost of providing electricity to few users in less populated areas, and reflects the equity concerns that all consumers should have equal access to essential goods.
Setting Lower Rates-of-Return - Gas utilities are sometime required to aim at lower rates of return (and not exploit their producer surplus); lowering rates of return of public utilities is analogous to the public subsidizing the consumers who benefit from the lower gas prices; they share the problems of funding a cross subsidy in terms of cost transparency and accountability; this transfer of income has the same effect as subsidies.
Direct Subsidies - Direct budget subsidization involves government funding for selected
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beneficiaries directly from taxation revenue; direct budget funding avoids the distortionary effects associated with underpricing services; they are less popular as they have to be subjected to parliamentary scrutiny even though utility revenues are maintained at levels that reflect costs, achieving efficient resource allocation.
84. Each of these options has both positive and negative aspects (Annex 11). There has been an international trend towards wholly or largely market determined pricing. In Bangladesh the prices paid to IOCs are partly negotiated and partly dependent upon an HSFO price determined in Singapore. Prices determined by markets are less politically sensitive than tariffs determined by governments. Prices determined in markets usually are closer to LRMC and overall incentives for efficiency and effective delivery of services is improved. Retail tariffs in Bangladesh are determined by BERC, but it has yet to be tested following a price determination that reflects LRMC or agreed policies.32
85. Liberalized, forward looking tariffs aim to reflect trends in the interaction of demand and supply and can be used to guide the need for further investment and changes in the level of production. The introduction of the IOCs was a an important step towards liberalization of Bangladesh’s gas sector. On several occasions GoB has resolved to make further measures of liberalization, setting up BERC is the principal tariff related measure so far. Its mandate is restricted and confined to the retail sector. IOC’s gas is priced according to formula set out in each PSC.
C. IOCs and NOC Pricing
86. Gas supply from IOC operated fields commenced in June 1998. Petrobangla buys gas from the IOCs at contractual prices linked to international Singapore HSFO prices and sells it via DCs at prices fixed by the Government. Petrobangla supplies profit gas directly to the DCs. The relationship between the operating companies (in the Petrobangla Group with limited autonomy) is regulated through a web of transfer prices that lack transparency.
Figure 11: Inflation Adjusted Weighted Average Gas Price Index for Bangladesh
Source: Bangladesh Gas Pricing Framework 2012,(Draft) AECOM P. 16
87. In addition to gas tariffs being low to begin with, Figure 11 shows that over 10 years the real price of gas has been eroded by tariff increases that have either been too small or too infrequent to match changes in inflation. At a time when gas supplies are limited and there is a large shortfall between demand and supply Bangladesh has being doing the opposite of what basic economic principles suggest is necessary.
88. When the prices of a commodity such as gas falls, relative to other energy sources elementary economics demonstrates that the demand for that commodity will increase. Conversely, when the price
32
See the discussion in and before paragraph 32
0
200
400
600
800
1000
1200
1400
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Infla
tion
adj
uste
d w
eigh
ted
aver
age
pric
e in
dex
(198
7 =
1000
)
Inflation Adjusted Weighted Average Gas Price Index for Bangladesh
10-year period where gas prices have not kept up with inflation, implying the changes to gas prices have either been too small or too infrequent to match changes in inflation
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rises demand will fall and incentives are created to increase supply. Figure 11 shows that while real gas prices have fallen since 1987, there has been an accelerating growth of demand for gas.
Figure 11: Bangladesh Gas Demand compared with Real Gas Price
Source: Bangladesh Gas Pricing Framework 2012,(Draft) AECOM, P 17
D. IOC Gas Pricing
89. In July 2012 the pricing framework was as follows:
The current weighted average retail price of Bangladeshi gas is approximately US$1.62 per GJ (See Annex 6) of which currently 55% is taken in tax (Supplementary Duty) and VAT (very close to the average arrived at in Table 2);
For the gas used to generate electricity Petrobangla is paid approximately US$ 0.36 cents per GJ.33
A large proportion of the gas that Petrobangla uses to supply electricity generation is profit gas purchased from the IOC companies at a cost of between $2.50 and $2.82 a GJ (depending on the IOC and contract).
34
The difference is nearly US$2.50 per GJ to the IOCs for the PG purchased from IOCs at the PSC price.
Table 3: Annual Production Statistics and Cost of IOC Gas (MMSCF, cost in Tk million)
Production Share of IOC Production Payment
to IOC total
Per MCF
Income Tax by PB
for IOC
Weight-Av Cost MCF
IOC Tk/MCF
Weight Av Cost per MCF of IOC US$/MCF 1/9/Yr
Year NOC IOC Total Ratio IOC PB Ratio
2004 343068 109688 452756 75.80: 24.2 50,038 59,650 45.8: 54.4 8,380 167.48 146 77.73 1.33
2005 356201 130555 486756 73.28: 26.8 60,441 70,114 46.3: 53.7 10,548 174.52 1026 88.65 1.49
2006 357263 169662 526925 67.80: 32.2 79,068 90,594 46.6: 53.6 14,880 188.19 585 91.15 1.39
2007 358389 203824 562213 63.70: 36.3 94,621 109,203 46.4: 53.6 17,736 187.44 1485 94.3 1.36
2008 327792 289655 617447 53.10: 46.9 158,764 130,891 54.8: 45.2 30,179 190.09 1551 109.55 1.59
2009 325674 328240 653914 49.80: 50.2 158,956 169,283 48.4: 51.6 30,008 188.79 3082 100.81 1.47
2010 330139 373308 703447 46.90: 53.1 158,956 221,571 40.6: 59.4 28,471 187.63 5423 90.79 1.32
2011 340152 368833 708985 48.10: 51.9 151,737 205,122 44.4: 55.6 30,271 184.91 4637 94.64 1.37
Source: Petrobangla MIS June 2009 and December 2011 (Cited Ahmad 2012) ** Exclues Petrobangla’s income tax liability within Bangladesh on IOC’s profit
90. These figures are compatible with the Annual Production Statistics and costs of IOC gas report by
33
Gas retails at Tk 80 GJ, aprox US$ 1.00, less tax 55%, less transmission and distribution charges, aprox US$.36. See also Table 2. 34
See Annex 6.
0
1000
2000
3000
4000
5000
6000In
dex
1987
= 1
000
Bangladesh Gas Demand versus Real Gas Prices
Consumption
Weighted Price
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Petrobangla, with the Weighted Average cost per MCF of IOC gas converted into US$, in Table 3. Because the 1996 and 2004 recommendations and policy decisions have not been implemented, Petrobangla is still selling the entire amount of gas, including its share of Profit Gas, at the wellhead price allowed by the government for NOC gas (significantly lower than the price paid to IOCs).
91. Table 3 reveals that while in the 2004 Financial Year 76% of production was by NOCs and 24.2% by IOCs by 2011 the ratio had changed to 48% to 52%. The share of IOC production obtained by Petrobangla remained consistently above 50% (except in 2008) and peaked in 2010 at nearly 60%. Payments to the IOCs in Tk per MMSCF peak at 104.19 million in 2008 and were at their lowest point 2010. Income tax paid by Petrobangla to indemnify IOCs, peaked in 2008 but have never been less than Tk5,423 million (US$67.79 million) in 2010.
Implicit Subsidy
92. Currently, Petrobangla exercises its right to buy nearly all IOC production. It therefore pays the IOCs for 41.08 of the total gas (i.e. 55% of their 5 % share of cost gas, which is 29% of total gas production). Plus Petrobangla gains a further 12% of total gas produced by purchasing IOC share of profit gas by exercising its first refusal right. But Petrobangla also gets 12% of total IOC production free; its share of profit gas; a further 12% of the total gas produced. This 12% is passes to DCs free of any charge. This means, in cash terms Petrobangla pays for only 88% of the total gas it sells, but gets paid for 100%.
93. Even with this free gas the only way that the implicit subsidy can be covered without a government subsidy is by a very low revenue target. This arrangement may balance the Petrobangla cash account, but is an opaque arrangement and represents a large subsidy to final users. The PDF was designed to offset the imbalance (the difference between total cost of IOC gas, including the IOC share of profit gas purchased by Petrobangla under the “first refusal policy” and the wellhead price it is charging NOCs).
94. The PDF is analyzed in Table 4. The PDF is earmarked for meeting the cost of gas bought by Petrobangla from IOCs at prices linked to the Singapore HSFO price. The PDF margin was not adequate for the initial years covering the cost recovery period, when Petrobangla’s share of IOC gas was quite low.
Table 4: Income Statement of Petrobangla Analyzed (Financial Years - Taka Millions)
FY2005 FY 2006 FY 2007 FY 2008 FY 2009 FY 2010 FY 2011 FY 2012 Provisional
Total Revenue Sales 12945 16937 22050 33535 45110 50454 49838 60054
Total Cost of Sales 14749 20796 24343 43234 43986 45386 48776 61335
Gas Purchased from IOC 13260 18769 21374 36413 36068 36415 40120 51537
Gas condensate purchases: inter-company
0 0 0 0 0 0 0 0
Operational Profit -1803 -3859 -2293 -9699 1124 5067 1062 -1281
Net profit after Tax -2836 -4540 -3705 -9659 1216 5159 1157 -1202
Price Deficit Fund 3708 3912 4447 4414 5904 6180 7038 8300
Operational Profit as % of sales -12.22 -18.56 -9.42 -22.43 2.56 11.16 2.18 -2.09
Net Profit after tax % of sales -21.39 -24.19 -17.33 -26.53 3.37 14.17 2.88 -2.33
TR-TS as a % of TS -13.94 -22.78 -10.40 -28.92 2.49 10.04 2.13 -2.13
Cost of gas from IOC % TSs 102.43 110.82 96.93 108.58 79.96 72.17 80.50 85.82
PDF as % Operational Profit -130.75 -86.17 -120.03 -45.70 485.53 119.79 608.30 -690.52
PDF as % TR 28.64 23.10 20.17 13.16 13.09 12.25 14.12 13.82
Source: Petrobangla Annual Reports with PDF included
95. Table 4 shows the impact of PDF payments on the accounts of Petrobangla between 2005 and 2012, currently running at nearly 14% of total sales revenue. In addition, to SD and VAT payments to the government Petrobangla has to bear the income tax liability of the IOCs as per the relevant provisions of the PSCs. Expenditure on IOC tax has increased from Tk146 to Tk4,637 million between 2003 and 2011 (Ahmed 2012). As a result, Petrobangla incurred heavy losses. Cumulative losses incurred and carried over by Petrobangla amounted to Tk32.90 billion as of 30 June 2011.
96. Petrobangla’s nominally profitable subsidiaries have to pay corporate taxes (35%) and compulsory dividends. The government does not pay PB a subsidy to make up the difference between the revenue it receives and the PDF it has to pay in the years it is loss making. Either PB borrows to make up the difference (the 2009-2010 balance sheets show no evidence) or draws revenue from other sources. The
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2010 Pricing Study suggested that the supplementary duty and VAT Petrobangla collects on behalf of the government to offset the subsidy implicit in the different prices.35 No published evidence can support this assertion and NBR confirm it would be illegal under the taxation laws.36
97. The insufficiency of existing margins is a major reason why there are technical as well as moral hazard losses in the distribution system. Table 4 shows that Petrobangla’s Operational Profit (as a percent of sales) has never been larger than 11% (2010), Net Loss as been as high as 26% (2008) and currently the PDF as a percent of operational profit is nearly 700%. This situation is clearly unsustainable and contrasts remarkably with the position in neighboring countries.
E. Gas pricing - other countries
98. Bangladesh’s most significant price comparisons are those in its immediate neighboring countries. Table 5 illustrates that by contrast with all neighboring countries having major gas sector’s Bangladesh’s retail gas prices are significantly cheaper. For electric power production gas prices in Bangladesh are barely two fifths of the price in Pakistan and are less than 10% of the price in Singapore. Only in respect of CNG Prices does Bangladesh come close to prices prevailing elsewhere. They are approximately half the price in India and slightly above the price in Pakistan.
Table 5: Gas Prices in selected neighboring countries
Country Effective Date of Tariff
Bangladesh
19/09/2011
Pakistan
7/08/2011
India
1/12/2011
Malaysia
1/06/2011
Thailand
1/06/2011
Indonesia
1/06/2011
Singapore
1/06/2011
Consumer Category
Power 1.05 5.14 5.06 4.36 5.81 6.7 13.79 IPP 1.05 4.34
Fertilizer
Feed Stock 0.96 1.17 5.06
Power 1.56 4.99
Industry 2.19 4.99 18.19 5.12 6.2 5.97 35.21 Cement
7
Ice Factory
6.05
Captive Power 1.56 4.99
CNG 8.6 6.57 16.17
Large Commercial 3.54 6.05 18.19 5.12
Small Commercial 3.54 6.05 23.51 5.12
Domestic 1.93 1.24 12.27
Tea Estate 2.19
Source: Ahmed Annex 11. The extensive notes detailing minor exceptions have been omitted
99. The disparity between the prices in Bangladesh and those in neighboring countries is a measure of the difficulty that Bangladeshi governments face increasing tariffs. Bangladesh is a highly politicized society and many groups and citizens have inflated expectations of what governments can achieve. The line that low tariffs are necessary to protect the poor, also heard in India and Pakistan, shows there is nothing unique about being poor in Bangladesh, except the lower probability of having access to gas. At a time when real gas prices are falling and supply is short, effectively Bangladesh is subsidizing consumption. We have identified three instances where the GoB and the BERC failed to take action to keep gas prices at realistic levels and more specifically in step with prices in the region. It is necessary to understand how this situation developed and what remedial measures are possible.
F. Retail Gas Pricing
100. The BERC Act, 2003 (Act no. 13 of 2003) gave the Commission the mandate to regulate downstream gas operation including tariff setting. BERC initially was engaged in framing licensing regulations and tariff regulations for power sector. BERC issued the Gas Distribution Tariff Regulations only in 2008, which is based on cost-plus and allows 10% return on assets for the transmission and distribution entities.
101. In 2009, and 2010 BERC rejected price increase applications from Petrobangla, on the grounds of the apparent profitability of its retail, transmission and wholesale businesses. BERC’s decision noted that under the provisions of the tariff regulations, Petrobangla’s application did not deserve consideration as all the production, transmission and DCs had more than a 10 return on assets. This finding reflects the
35
Natural Gas Pricing in Bangaldesh: A Prelimiary Assessment, ADB, November 2010, pge 32. 36
Interview with NBR 1 April 2012.
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negligible cost paid for the PSOIC and PPL Gas fields in 1974, the failure to regularly revalue the assets in the meantime and the free supply of Petrobangla’s cost gas. In practice Petrobangla’s subsidiaries are in a dire state. BAPEX, the exploration company, receives support, from a levy, Tk2.15 per MCF from the end-user price. The production, distribution and transmission margins are barely sufficient to cover Operations and Maintenance (O&M) costs and debt-servicing liabilities (DSL). GTCL’s transmission margin is not sufficient to cover DSL.
102. In 2009 BERC approved an increase in the gas tariff by 10% on condition that the generated surplus fund shall be transferred to a fund titled “Gas Development Fund (GDF)” for investment in exploration, field development and gathering line construction. New tariff structure following BERC tariff order was made effective from 1 August 2009. In 2011, enhancement of price of feed gas to CNG stations raised in two steps from Tk9.97/cm to Tk23.0/cm, allowing a margin for refueling stations of Tk7.0/cm. In 2011, Petrobangla drafted a tariff policy and forwarded the same to the government for approval, but this has not yet been approved.37
Table 6: Cost of Alternative Fuels for Various Categories of Consumer TK
Category Cost Tk/mcf Product Hugh
Sulphur Fuel Oil
Motor Spirit
Premium Gasoline (HOBC)
High Speed Diesel
Superior Kerosine
Oil
Liquid Petroleum
Gas
Fuel Wood
Energy Equivalent:
26.28 liter 30.12 liter 30.12 liter 26.77 liter 27.14 20.5 kg 110 kg
Electricity 79.85 1,577 1,633 Industrial 165.94 1,577 1,633 1,148 Commercial 268.16 1,656 1,148 880 Captive Power 118.36 1,633 1,148 CNG for NGV 849.5 2,681 2831 1,633 1,148 Domestic 146.11 1,656 1,148 880
Source: Tariff Reforms and Inter-Sectoral Allocation of Natural Gas, Ahmed 2012
Table 7: Percentage Increases required to equalise gas price to cheapest alternative
Category Cost Tk/mcf Product Hugh
Sulphur Fuel Oil
Motor Spirit
Premium Gasoline (HOBC)
High Speed Diesel
Superior Kerosine
Oil
Liquid Petroleum
Gas
Fuel Wood
Electricity 79.85 1875% 1945%
Industrial 165.94 850% 884% 592%
Commercial 268.16 518% 328% 228%
Captive Power 118.36 1280% 870%
CNG for NGV 849.5 216% 233% 35%
Domestic 146.11 1033% 686% 502%
Source: Ibid and Author
103. An alternative method to assess an appropriate tariff is to measure the existing tariff against the cost of the next available alternative. Table 6 shows the prices of gas on an energy equivalent basis and compares these prices with the cheapest or most common substitute. It illustrates the cost of alternative fuels that have to be purchased by the 90% of the community without access to mains gas supplies. Table 7 illustrates the problem more dramatically. It calculates the percent increase required to bring the current price of gas level to the price for the cheapest alternative. Price increases required range from 1945% (i.e. X 20) to 35 %.
104. Both of these tables show that citizens without access to gas and electricity pay far higher prices that those who do. Most consumers have no choice but to pay for the most expensive options. Industry is prepared to pay for captive power, which is expensive to install, but reliable. Rural families with no mains gas or electricity use car and torch batteries or traditional energy sources. From another point if view, the Table 7 illustrates that when gas reserves are fully depleted, the kind of price increases experienced by the Bangladesh economy. If gas tariffs are not gradually increased, the economy will face a major shock through energy price hikes.
105. The energy industry has argued that tariff and price controls have prevented them from raising end-user prices while input prices have gone up. The reluctance to increase prices to levels where SOEs make profits and can pay significant taxes means they run at a loss, obscured by the very low prices paid for the initial gas fields. The practice of running Petrobangla and similar SOEs at a loss means they have
37
Ahmed (2012) provides the details of Historical data on end use tariffs in his Annex 8, and the distribution of the latest tariff amongst stakeholders in his Annex 9. Salient features of the policy are in Ahmed Annex 10.
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insufficient funds for maintenance, refurbishment and investment in new generation, transmission and distribution which long term has caused real costs to be higher than they would otherwise be.
106. At the same time, however, widely publicized scandals have led to allegations of widespread mismanagement and corruption38 causing governments to be reluctant to increase prices awarding larger cash flows to organization where theft is rife. With large policy driven commercial losses commonplaces, losses through moral hazard are more difficult to detect. No matter how large the theft, if the enterprise is loss making it is hard to distinguish theft from trading losses. Large commercial losses mean it is almost impossible to hold management to account. Poor financial performance by SOEs is a major contributor to the national budget deficit and government non-tax revenues from SOEs shrank significantly in 2011.39
Crisis
107. The findings above suggest that more than 40 years after independence the Bangladesh gas sector is not only facing dwindling reserves it is fast approaching a financial crisis. In the face of a major supply shortage the real price of gas has been falling rather than increasing. Gas was underpriced to begin with and the real price of gas has been eroded. Changes to gas prices have either been too small or too infrequent to match changes in inflation.
108. The result of this divergence is that an opportunity has been lost to secure the real benefit of the gas: optimal use of a non-renewable resource. Consequently, gas has not played the role of building up income producing community assets for the time when gas is no longer available. In the short term the divergence between prices and demand has deprived the sector of revenue to renew and expand production and pay the due taxes to the exchequer.
G. Value of Gas
109. The critical issue in gas pricing is that most industrial consumers lack realistic alternatives sources of energy. The alternatives are currently, either diesel fuel oil or LNG. Table 7 shows that a price increase of 1875% is required to bring the gas price to the cost of generating electricity from heavy fuel oil.
110. Two other benchmarks include the March 2012 LNG landing in India at US$12.94 GJ or the prices paid currently in India and Pakistan. At an imported cost per GJ of LNG of say US$10 the value of Bangladesh’s annual gas output to third parties would be in the region of $7.7 billion (wholesale). Alternatively, priced at the level of the average of gas prices in India and Pakistan, as much as $2.9 billion of extra gas sector revenue could be obtained and additional total revenue to the government would close to US$2 billion.
111. Based on Petrobangla’s reported (retail) sales (From the 2010 Annual Report) the company obtains US$ 1.28 billion from its retail sales to final customers. Therefore, US$ 7.7 billion minus US$ 1.28 billion means the nation’s sale value of gas’s at 2009 values, was at least US$ 6 billion below its potential value on World Markets (less costs) as LNG.
112. In 2009, approximately US$ 300 million went from Petrobangla into the National Budget. The value of the payments to the government as proportion of actual sales revenue was 23%. However, as a proportion of the Potential real value of gas, it would be only 4%. So even on the reduced figure, taking the average of prices in India and Pakistan, nearly US$ 3 billion of additional revenue would be obtained and would represent about 10% of the revised total sales to domestic consumers.
113. These ballpark figures show returns from the sales of Bangladesh’s valuable, non-renewable resource are far too low compared with their third party value. It is strong evidence that the nation is substantially undercharging itself for its gas and suffering major economic distortions as a result.
114. If some of this loss to the national budget could be recovered it would help eliminate the budget deficit, could pay for the rehabilitation and refurbishment of Petrobangla, finance substantially increased gas exploration, lower inflation, encourage energy conservation (extending the life of gas fields), supply more electricity and even reduce traffic (if petrol prices increase in line). Most importantly, Bangladesh could
38
From gas worker to multi-millionaire (6 February 2008). Mumbai Mirror. Retrieved from http://m.mumbaimirror.com/index.aspx?Page=article§name=News - World§id=4&contentid=2008020620080206020816887884c25f4 39
See page 87.
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begin to make long-term investments to cope with the transition that will be required when gas runs out.
H. Gas Prices and Efficiency
115. It is clear that gas tariffs in Bangladesh are very low compared with the intrinsic value of the gas and with the prices it fetches in other Asian countries. All these countries have other source of primary commercial energy, and their share of natural gas in primary energy consumption is significantly lower than in Bangladesh. From the data in Table 6 and Table 7 above, it is clear that the price of gas in Bangladesh is heavily underpriced compared to any alternative fuel sources. As a result, power and industrial sectors depend heavily on gas as source of energy. Virtually the entire national industrial base centers in and around Dhaka and Chittagong. Even eligible domestic households and commercial users within the reach of gas distribution networks rely heavily on piped gas supply.
116. In absence of any other source of indigenous energy, high prices of oil products, high price of fuel wood (due to rapid depletion of forestry resources) combined with the very low prices for private and industrial natural gas consumers compare the prices and use gas if they can. Industries within the reach of gas transmission and distribution networks use natural gas as source of feedstock for urea fertilizer, and fuel. Fertilizer factories built in 1960s, 1970s and 1980s are still in operation where gas consumption is as high as 45-100 MMCF/ ton of urea production as against a consumption of about 22-24 MMCF/ton in the private fertilizer factory (KAFCO) in Chittagong.
117. Similarly, power generation plants of Bangladesh Power Development Board (BPDB) consumes an average of 11-12 CFT gas per kilowatt (KW) power generation as against a consumption of 6.5-7.0 CFT of gas by two large combined cycle power plants built by an independent power producer. In view of the low cost of gas, the BPDB is continuing construction of inefficient gas turbine and steam turbine power plants using gas. BPDB being a major gas consumer, its gas use pattern represents a serious depletion of natural gas resources. Until the gas price increases there will be no incentive for anyone to conserve it.
118. Major gas consumers of industrial sector – steel bar re-rolling mills, glass factories, brick manufacturers, lime kilns etc. – are mostly using indigenous kilns and gas burning system with high gas consumption. Recent studies on brick manufacturing and lime kiln shows that gas consumption can be reduced by 40-50 % by simply changing kiln design at a marginally higher cost. The cost of fuel and power in the cost of various products varies from less than 1 % to 20 %. A comparative analysis of fuel and power cost for some selected segment of industries is given in Table 8. Details are in Ahmed 2012, Annex 14.
Table 8: Cost of Fuel and Power in Selected Industrial Sector
119. Fuel and power cost are grouped together because most of industries now use sophisticated electronic control system and cannot afford to lose quality and production from unreliable power supplies. All
Name of Industry Products
Manufacturing Total Fuel & Power Manu. Cost Total cost
1 Square Pharmaceutical
Ltd.
Various kind of drugs 6.9 billion tablets, 0.9
billion capsules and
syrup and injectable
items
6,645.84 9,362.90 84.03 1.26 0.90
2 BSRM Steels Ltd. 0.55 million MT 20,953.05 22,144.26 353.73 1.69 1.60
3 Square Textiles Ltd. 30,000 MT 3,694.83 3,976.70 105.51 2.86 2.65
4 Shinepukur Ceramics Ltd. Tableware 5,460 MT 1,217.39 1,584.89 81.05 6.66 5.11
5 Sonali Paper & Board
Mills Ltd.
Various kind of paper from
waste paper
30,000 MT 556.62 697.94 54.47 9.79 7.80
6 RAK Ceramics Ltd. Floor/wall tiles &
sanitarywares8.0 million m2 of tiles
and 1.1 million m2 of
sanitaryware
2,499.17 3,132.45 377.82 15.12 12.06
7 Usmania Glasssheet
Factory Ltd.
Sheet glass 22.5 million ft2 of
sheet glass
204.43 246.73 48.45 23.70 19.64
1/ All costs are based on 3 years average except for RAK Ceramics. For RAK Ceramics data are of 2 years average.
Source: Annual reports of all these industries for 2010 and 2011
Serial
No.
Annual Production
Capacity
Cost, Tk million 1/ Fuel & Power Cost, % of
Various count yarns (for
consumption in the RMG
units of Square Group)
Steel bars for reinforced
concrete cement
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industries needing continuous supplies of power and gas now have gas fired captive generation to ensure uninterrupted production and quality. The selection is typical of the trend of industrial growth in Bangladesh. Usmania Glass Sheet Factory Ltd. is a 40 years old plant still 51% government owned, and may not be representative of the sector; where new, very large industries have been in operation they generally employ better, fuel efficient manufacturing processes.
120. The figures in Table 8 illustrate the relatively small cost factor represented by gas for industry. It is a relatively a small portion of production costs in the examples selected. The concerns expressed of a loss of competitiveness for exporter, caused by a significant gas price increase, are not tenable. In fact, by providing cheap fuel and electricity to export oriented industries, Bangladesh is effectively subsidizing the cost of goods produced inefficiently and used by the more affluent societies of the developed world.
121. A flat billing base without meters for domestic consumers at a very low price level compared to alternative fuel cost is a major deterrent to efficient gas use. It provides very little incentive to minimize waste of gas when equipment and boilers can run beyond necessary operating hours for next to nothing. As a direct result of low prices for commercial gas, electricity prices have been held below efficient levels. Low prices have enabled the BPDB to keep inefficient single cycle gas generators in operation, postponing replacement by more efficient combined cycle units. This in turn adds to the demand for scarce gas and denies gas to sectors where the prices are higher, such as CNG or community benefits are great, such as fertilizer.
122. The gains from efficient use are enormous. Domestically manufactured burners (cookers) are, it seems, poorly designed and are highly inefficient. Some burners are consuming more than 25% more gas than required. The government has recently made a commitment to replace inefficient single cycle power stations with combined cycle gas electricity generation.
40 Funding for this development will have to
come from loan from development partners or the government budget because the sector is not generating enough cash to service long-term funding. Low gas prices mean obsolete plants still used for electricity generation, increasing costs for the electricity sector and the demand for gas from the gas sector.
123. The surest way to minimize waste of gas and to increase efficiency of its use is to price gas at a price that reflects its market price; a level where the value of the resource is recognized. In the cases cited if the cost of gas became a more significant part of the cost of production, it would be economic to invest in efficiency measures. By saving money for the consumer, investment in efficiency measures will quickly minimize the demand for gas and increase efficiency of its use for minimal net increase in cost. Pricing of gas close to the cost of alternative fuels will also give choice to the users to select fuel based on the best use of each. Efficient pricing will promote innovation in efficiency measures. The gap between demand and supply has to be filled. It can be filled by importing expensive LNG, exploration drilling, trying alternative fuel sources or by greater efficiency. The latter is the cheapest and most enduring option.
124. There is a need to prepare consumers to absorb the cost of higher tariffs and imported energy. Minimizing the subsidy and gradually increasing prices to the level of alternative fuels will achieve this goal. Evidence presented suggests that currently gas costs are a trivial source of costs for most industrial users and substantial increases will be required to make investment in energy efficient equipment and processes. Short-term resolving them with a substantial program of phased tariff increases will have short-term costs. Long-term there could be major benefits to the people and the government from doing what is required. The following chapters will attempt to analyze how gas can be used better; they will assess benefits to be gained from more realistic gas pricing. They will also assess options that will extend for many years the gas resource available.
I. Evaluation
125. This section has explored the various methodologies that can be used to price finite natural resources. As none of the analyzed economic methodologies are employed in Bangladesh, three pragmatic alternatives are explored. Evidence was shown that the real price of gas is falling rather than increasing. The growing gap between the demand for gas and the supply is strong evidence that prices are too low. From official figures the calculations of the weighted average cost of gas are shown. These and other authoritative figures show how the payments to the IOC are arrived at and the very substantial implicit
40
See Annex 9
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subsidies set out now running at close to 14% of total revenue, also suggesting prices are too low.
126. A reasonable approach to tariffs is arrived at by benchmarking Bangladeshi prices against those in India, Pakistan and other neighboring countries. Bangladesh prices are the lowest in the region and this can be seen as a further evidence of a wasteful subsidy, this time to the users of gas. At a time when prices are falling and supply is short, effectively Bangladesh is subsidizing consumption. The failure of the current price setting mechanism to address the situation has been described and the role of low asset valuations and free delivery of gas to DCs are noted. Further evidence is provided by setting out the prices currently paid by the poor without access to gas compared with payments by those using gas wastefully. To emphasize this point the percentage increases required to bring gas prices up to the level of the energy alternatives are between 35%-1945%. Sooner or later Bangladesh’s leaders have to make the case to citizens that to secure gas supplies in the future, the rich must pay as much for energy as the poor.
127. To obtain a measure of the value being foregone, current prices were compared with the substantial price shock incurred if and when LNG starts to come ashore in 2016. Tariffs related to the true value of gas will raise revenues for producers and allow for realignment towards energy efficiency by industry. Furthermore, Petrobangla is currently paying a tiny fraction of the tax and dividends to the government it could. If the taxes are used to provide an implicit subsidy to the gas price, then an organization that could produce revenue to balance the national budget is in practice subsidized by it.
J. Recommendations
There should be an urgent revaluation of Petrobangla’s assets based on the real value of its anticipated future cash flows, the World market prices for the energy assets it manages and a commitment to setting tariffs to cover all costs including reasonable profit;
All gas supplies should be paid for by the DCs receiving gas in order to ensure BERC can fully reflect the cost of gas consumption in their tariff decisions;
Gas prices should be set at levels no lower than the prices prevailing in India and Pakistan and should be regularly adjusted so that consumers of gas pay no less for gas than they would pay for feasible alternatives;
BERC should be authorized to undertake a planned and published program of gas tariff increases over the next 3-5 years to encourage elimination of wasteful uses of gas, the installation of energy efficient infrastructure, equipment and processes;
There should be a concerted effort made to convince citizens of the justice of gas consumers paying the same for energy as the alternative energy users (mostly poor) and the wisdom of valuing gas at levels that will raise sufficient revenues contribute to conservation, efficient use and enhance the nation’s development;
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4. ECONOMIC VALUES AND GAS ALLOCATION
128. We have shown that natural gas is one of Bangladesh’s few natural resources and in Figure 6, showed how this resource is allocated to the various sectors of the economy. Table 2 has shown the distribution of cash between the government and Petrobangla. We have also shown that BERC fixes prices, based on a) cost of production of gas per unit including cost of transmission to the gas pipeline from gas fields, b) cost of transmission and distribution of gas. However, as set out in Table 6, prices are not same for all users.
129. Price differences among users are meant to promote economic growth and distributive justice in the country. For example, lower price of gas for power production is meant to reduce the cost of production of electricity, which is not only an input for production in agriculture and industry but also a benefit to relatively poorer households because more households have access to electricity than natural gas. In reality however, the good intentions are tot at work because of limited access to power particularly by rural poor. Similarly, low price of gas for fertilizer factories is meant to reduce the market price of fertilizer which is used for agricultural production. As shown in earlier chapters, gas allocation for fertilizer production has declined over time and in recent times, gas supplies for fertilizer have been cut whenever there were power shortages.
130. While there is are genuine reasons to charge differential prices for use of national resources like gas, the prices should be related to some objective based on sound economic principles in order for efficient allocation to ensure the economic development of the country is not compromised. To do this, one needs to understand the economic value of gas for natural gas use by different users.
131. In gas consuming sectors such as households and transport, economic value can be estimated as a willingness to pay (WTP) which reflects the maximum benefit derived by the consumers for use of natural gas. In sectors where gas is used as an input, such as fertilizer and other industries, the economic value or the price of gas should be equal to Marginal Value Product (MVP). Estimates of economic value of gas in different sectors will provide an economic rationale for gas allocation among the sectors.
132. There are several distinct groups of consumers and the ability of these consumers to substitute other resources in case of price changes are not same. Economic efficiency dictates that resources should be allocated to the sectors that generate highest value. In a perfectly free market system this will happen automatically through price signals. In Bangladesh the gas price is determined administratively and a better understanding of economic values is necessary to allocate the scarce gas resource amongst competing sectors. WTP
133. As there is no off-the-shelf information on the economic value of gas as measured by MVP the ADB commissioned a study with the objectives of estimating the economic value of gas in domestic, commercial and industrial sectors. These objectives required three specific tasks:
A Contingent Valuation (CV) survey on households, and vehicle operators,
Estimation of value addition of gas in power, fertilizer and industry sectors.
134. This section reports on the CV study results based on a survey of 2,290 households residing in 4 major metropolis of Bangaldesh, namely, Dhaka, Sylhet, Rajshahi and Khulna. The first two cities are connected with natural gas supplies at the household level and the other two are not connected with natural gas pipelines. The objective of the CV study is to estimate the willingness to pay for the household users.
CV Study Design
135. Only 10% of households are of the country are connected with natural gas supply. Bangladesh is divided into 7 divisions. Of the major cities of Bangladesh, Dhaka, and Sylhet are cities connected with natural gas (eastern region) and Khulna, and Rajshahi are cities not connected as they are in western and coastal zones. The similarities of these cities and their access or lack of access to gas give a unique opportunity to study the willingness to pay for households who are connected and who are not connected to natural gas supply. It also gives an opportunity to study alternative means of fuel for cooking used by households who live in urban centers in Bangladesh.
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Household sample
136. Two cities with gas connections and two cities without gas connections were selected for household surveys: Dhaka and Sylhet with gas connection and Rajshahi and Khulna without gas connection. Based on the distribution of households in these cities and occupational distribution of major income earners, the sample was selected. Accordingly, a total 275 households (15% of the total sample) were surveyed in Dhaka and Sylhet (among household level natural gas users) and a total of 1,538 were surveyed from Khulna and Rajshahi (among non-gas users). The sample was distributed among the corresponding cities (Dhaka and Sylhet for gas connected households and Rajshahi and Khulna for non-gas connected households).
137. A contingent valuation (CV) question was administered for the households to estimate their WTP for cooking gas. At the same time, another CV question was asked in order to capture WTP for CNG for running vehicles. A total of 593 vehicle owners were surveyed, of them 227 had CNG connections in their vehicles and 366 had no CNG connection in their vehicles. Distribution of the sample is given in Table 9.
Table 9: Summary of Sample
Household Users Vehicle Owners
Dhaka 179* 147**
Sylhet 96* 80**
Gas/CNG 275* 227**
Rajshahi 575 204
Khulna 963 162
Non Gas Users 1538 366
Total Sample 1813 593
NOTE: * Use gas as a cooking fuel, ** use CNG as fuel for vehicles Source: Haque 2012
K. Data Collection
138. In order to ensure that samples were selected at random, sampling was by systematic random methodology based on randomized starting point for every day of sampling for each team of field data collectors. As such, every 10
th households in each street on each day were requested to fill up the
questionnaire. The definition of the sample included a house/apartment under a single roof. This means only one house in an apartment complex can be interviewed. As a result the sample was spread over a reasonable space and all types of income group were captured.
139. In order to ensure the quality of data, enumerators were trained in a day-long workshop with mock testing during the training workshops. Since most of the households using natural gas are currently used to paying on a per month basis and they do not have any idea on how much gas they use per month. Asking them to respond against a bid price per cubic meter might have confused them and the responses distorted. In the pre-test of the questionnaire this was observed and so alternative bids were proposed on a per month basis under a meter-based system. The bids are 425, 850, 1,275, 1,700, 2,125 and 2,550 per month. For households without natural gas connection four alternative initial one time installation fees were also tested, these are 2,000, 3,000, and 5,000. The sample was divided equally among all these alternatives. The administration of the questionnaire was done sequentially based on these alternatives. Accordingly, around 16% of questionnaires had one of the bids and approximately 33% of the unconnected households received questions with one time installation fee in their CV question, shown in Table 10.
Table 10: Distribution of Sample by Bid Prices and by One-time Connection Fee – Household Use of Gas
Bid Price per
month in Tk
Connected Household
Un-connected households Total
Sample Percent
2000 3000 5000
425 46 84 86 82 298 16.5%
850 46 89 85 87 307 17.0%
1275 45 83 85 83 296 16.4%
1700 45 84 90 83 302 16.7%
2150 46 89 85 83 303 16.8%
2550 47 86 83 82 298 16.5%
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Total 275 515 514 500 1804 100.0%
Percent 15% 34% 34% 33%
Source: Field Survey, 2011
140. The income distribution of the sampled household is shown in Table 11. It shows that households connected to Natural Gas in Dhaka and Sylhet are relatively richer than households in Rajshahi and Khulna cities. This is not surprising because both Dhaka and Sylhet are among the list of few cities associated with higher income groups in Bangladesh. About 30% of the households amongst connected have income higher than Tk75,000 while the same group in unconnected is only about 5.5%. In percentage wise and actual numbers more poor households are in non-connected group.
Table 11: Monthly Income Distribution of the Households
Monthly income
Connected Households
Non-connected Households Total
Dhaka Sylhet Rajshahi Khulna
0-5000 3.4% 1.0% 6.1% 3.0% 3.9%
5001-10000 5.4% 1.0% 23.2% 23.2% 20.5%
10001-15000 9.4% 13.5% 21.4% 24.6% 21.7%
15001-20000 10.1% 13.5% 19.1% 17.5% 17.1%
20001-25000 10.7% 10.4% 9.5% 9.5% 9.6%
25001-35000 13.4% 22.9% 12.4% 8.4% 10.9%
35001-45000 9.4% 16.7% 3.1% 5.5% 5.7%
45001-55000 12.8% 7.3% 3.2% 2.6% 3.9%
55001-75000 5.4% 4.2% 1.1% 1.1% 1.6%
75001 above 20.1% 9.4% 0.9% 4.6% 5.0%
Total Households 149 96 556 961 1762
Source: Field Survey Aug-Oct, 2011; Haque 2012
141. In terms of the occupational distribution of the members of the households the following table (Table 12) shows the distribution of occupation by male and female members in the household. . The occupation of the head of households in labor force survey of 2005 generally matches with the sample results indicating the representativeness of the sample.
Table 12: Occupational Distribution of the members of the households
Male Female Total Percent
Child (0-5 years) 259 256 515
Occupational groups Age group (5 + years)
Student 1439 1292 2731 35%
Not working/Housewives 314 1770 2084 26%
Looking for work 134 68 202 3%
Agriculture 29 1 30 0.3%
Industry, Business, Manufacturing 942 19 961 12%
Service 845 157 1002 13%
Transport 140 14 154 2%
Professional 155 62 217 3%
House or shop owners / traders 134 19 153 2%
Others 82 291 373 5%
All 4214 3693 7907 100%
Source: Field Survey, 201; Haque 2012
142. Average household size in the sample is 5.03 which is 5.0 (BBS, Pocket year book 2008) for the urban population of the country. Educational qualifications of respondents are in Table 13, which includes respondents from both groups (household users and vehicle owners).
Table 13: Respondents by their Educational Level (Full sample)
Education Level Freq. Percent
Illiterate 91 4.01
Primary(1-5) 258 11.38
High School(6-10) 461 20.33
SSC/Dakhil/eqiv 347 15.3
HSC/Fazil/equiv 417 18.39
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Education Level Freq. Percent
Bachelor 353 15.56
Masters 271 11.95
Med or Engr 38 1.68
Diploma or technical 19 0.84
Others 13 0.57
Total 2,268 100
Source: Field Survey, Haque 2012
143. Table 14 shows the distribution of fuel-type for households in the survey.
Table 14: Source of Fuel for Cooking at the Household
Source: Haque 2012
144. Dhaka and Sylhet cities are connected to gas while Khulna and Rajshahi are not. Data shows that Gas dominates as cooking fuel in Dhaka and Sylhet. LPG, fuel wood, crop residue, leaves and twigs usage is minimum when gas is available. Even in Dhaka and Sylhet, households are using electricity, LPG, kerosene and others for cooking. This is either due to households which are not connected (poor households) and also due to the fact that gas supply in Dhaka is not fully functional due to low pressure and so households have alternative arrangement for cooking.
145. Monthly cost of fuel for cooking at the household level varies between connected and non-connected households. While a majority of the connected households use natural gas for cooking, there are many who are currently using alternative fuel to avoid occasional loss of pressure and for not being connected due to temporary ban on new connections. Table 15 shows that although average cost of fuel for connected household is much lower than that of non-connected households, there are many households who use other types of fuel for cooking in the connected area. This is due to the fact the gas pressure is not homogeneous in all areas and that there are a few who are not-connected due to an embargo on provision of new connections in the connected cities.
0.00% 10.00% 20.00% 30.00% 40.00% 50.00% 60.00%
Biogas
Briquette
Other Fuels
Cowdung
Leavs/Twigs
Electricity
Residue (crop/wood)
Kerosene
Natural Gas
Fuelwood
LPG
All Khulna/Rajshahi Dhaka/Sylhet
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Table 15: Monthly cost of fuel for connected and non-connected households
Source: Haque 2012
146. Table 16 shows the monthly fuel cost by income group. It shows that as income grows average monthly cost of fuel also increases and the average fuel cost for cooking goes up from Tk784.15 per month to Tk2,382.45 per month. On the contrary, average cost of fuel for households connected to natural gas is around Tk579.11 per month and the same for unconnected households is Tk1,421.05Tk.
Table 16: Actual Fuel Cost Per Month of Non-Connected Households
Income per month Fuel Cost / month Percent of response
No reported 1,541.24 2.15 1-5000 784.15 3.98
5001-10000 1,011.97 22.57 10001-15000 1,275.61 22.96 15001-20000 1,453.99 17.68 20001-25000 1,596.56 9.20 25001-35000 1,953.04 9.78 35001-45000 2,173.23 4.57 45001-55000 2,198.51 2.80 55001-75000 2,047.65 1.11
75001+ 2,382.45 3.20
Source: Haque 2012
Estimate of willingness to pay for natural gas
147. The household survey of 1,813 households in 4 major cities in Bangladesh – Dhaka, Sylhet, Khulna and Rajshahi included 7 modules in the questionnaire. Modules 1-3 are related to household characteristics, Module 4-5 were related to the CV questions using referendum style or in take-it-or-leave-it format. Module 4 was used for non-connected households and module 5 for gas-connected households. Non-connected households were asked the following questions.
CV Questions
148. During the survey, households which are not connected to gas supplies were asked whether they are willing to pay a specific amount per month for connecting to a meter-based gas network on a meter-based system. Monthly payment for gas were 425, 850, 1,275, 1,700, 2,150, or 2,550 Tk. In non-connected households, questions included additional part where households were asked also to pay an initial one- time payment as connection charges.
Question for non-connected household:
There is a growing demand for use of gas for cooking purposes. This means expansion of gas distribution network to your city. However, with growing population in cities, the network of gas
0 500 1000 1500 2000 2500 3000 3500
Cowdung
Fuelwood
Leaves and twigs
LPG
Kerosene
Electricity
Crop residue
Improved fuel
Biogas
Otheers
N Gas
Undefined
Average
Connected Not connnected
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distribution needs to be maintained in such a way that all connected households are assured of sufficient supply of gas for their needs. This also means that the gas distribution company needs to expand the gas pipe network and ensure proper maintenance of the pipelines. As such households will be connected with gas supplies for 24 hours a day. The authority also decides to use meters instead of fixed monthly payment to reduce misuse of natural gas. You will be provided with accurate bill based on your consumption. If this offer is given to your household, are you willing to pay _____ TK one time to get the connection and _____ TK per month for gas?
Kindly note that your current cost of fuel for cooking purposes is ____ TK per month and also note that the one time initial payment will realized in 24 months with equal monthly installments so that your monthly bill for the first 24 months will be ____ TK month and ____TK per month after the first 24 months.
CV question for the households currently connected with natural gas for cooking purposes is: There is a growing demand for use of gas for cooking purposes. This means expansion of gas distribution network in your city. However, with growing population in cities, the network of gas distribution needs to be maintained in such a way that all connected households are assured of sufficient supply of gas for their needs. This also means that gas distribution company needs to expand the gas pipe network and ensure proper maintenance of the pipelines. As such households will be connected with gas supplies for 24 hours a day. The authority also decides to use meter instead of fixed monthly payment to reduce misuse of natural gas. You will be provided accurate bills based on your consumption. If this offer is given to your household, are you willing to pay ____ TK per month for gas? Kindly note that your current monthly bill for use of gas is _____ TK per month.
Willingness to pay for N.Gas at the hosehold
149. CV method has been increasingly being used to elicit willingness to pay for commodities sold in regulated markets. In this study, each respondent was given a bid and was asked to respond whether he/she is willing to pay for the supply of natural gas at that price. The bid has been associated with a change in the quality of the product so that households can associate their bid with the changed situation. The probability of willingness to accept the bid is estimated using a probit function. STATA has been used to estimate the coefficients of the equation. From a theory perspective, the probability function is given as:
P(WTP>bid) = Prob ( exp (XB+ε), ε ~ N(0, σ2) (1)
150. Where, P(.) is the probability function, X’s are a set of variables that includes a) household characteristics like income, household size, housing type, kitchen location, awareness level on health effects due to use of non-clean fuel in cooking, etc., b) connection fee (one time) and bid price, c) price of similar other products, d) connected household (1 for household connected to the natural gas lines, 0 otherwise).
151. Following Loomis et.al. (2000) it is possible to estimate the mean WTP from the probit function using the following formula:
Mean WTP = 1/B1 * ln (1 + eB0) (2)
where B1 is the co-efficient estimate on the bid amount and Bo is either the estimated constant (if no other independent variables are included) or the grand constant calculated as the sum of the estimated constant plus the product of [the coefficients
41] of the other independent variables times their respective
means (Loomis, et al. 2000, 112). The estimated probit equation from the household data is shown in below. Estimate shows that the level of awareness of the household about health-effects of using other fuel is not significant in their decision making to buy natural gas for cooking. However, cooking hours per day is an important determinant of their WTP. So are the factors like income, connection fee, size of household, type of dwelling, location of the kitchen inside the house, are important determinants of their WTP. The connected households to the gas pipes are willing to pay less compared to un connected households. Thus the Probit regression confirms the construct validity of the CV scenario.
152. Descriptive statistics of the variables used in the probit regression and the expected relationship of the variables to WTP are shown in Table 17. It shows that nearly 49% of the households accepted the bid prices, mean bid values in the survey was Tk1,460 per month, 69% of the household had kitchen located inside the building, and also 14% of the household surveyed are connected to natural gas
41
Corrected by (Giraud, et al. 2002).
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supplies.
Table 17: Descriptive statistics of variables used in WTP function
Variable Expected
sign Mean Std. Dev. Min Max
Agree to pay the bid price 0.488966 0.500024 0 1
Bid value (TK per month) (-) 1490.026 728.8254 425 2550
One time connection fee (for non-connected households)
(-) 2847.271 1631.124 0 5000
Monthly income of the household
(+) 22468.06 19308.55 2500 85000
Location of the kitchen inside the house (=1, 0 otherwise)
(?/+) 0.692218 0.46171 0 1
Aware of the ill-effects on health due to fuel use (=1, 0 otherwise)
(+) 0.333914 0.471746 0 1
Cooking hour per day (-) 3.655923 1.299529 1 11
Size of the household (?) 5.02439 2.363898 1 40
Type of Dwelling (0 = high-rise {above 6 floors, 1 = 2-6 floors, 3=Tin roof, 4 = thatched roof)
(-) 1.249129 0.501088 0 3
Price of CNG (for vehicle – per m
3)
(?) 25.18583 0.946118 25 30
Gas Connected Cities (=1, 0 otherwise)
(?) 0.141115 0.348241 0 1
Source: Field Survey 2011;
Table 18: Estimated Coefficients (Probit function)
Dependent variable= Willing to Pay a ‘Bid’
Coef.* Std. Err. z P>|z| [95% Conf. Interval]
Bid (TK/month) -0.00116 5.49E-05 -21.08** 0 -0.00126 -0.00105
Connection Fee -8.9E-05 2.94E-05 -3.02** 0.003 -0.00015 -3.1E-05
Monthly Income 1.42E-05 2.43E-06 5.83** 0 9.41E-06 1.89E-05
Kitchen Inside (=1, 0 otherwise) 0.166705 0.08447 1.97** 0.048 0.001148 0.332262
Health Awareness -0.02948 0.076784 -0.38 0.701 -0.17997 0.121013
Daily Cooking Hour 0.066967 0.029913 2.24** 0.025 0.00834 0.125595
Size of the Household 0.037231 0.016838 2.21** 0.027 0.00423 0.070232
Type of Dwelling -0.32182 0.079788 -4.03** 0 -0.4782 -0.16544
Price of CNG for vehiclesa -0.01462 0.042339 -0.35 0.73 -0.0976 0.068363
Gas Connected -0.68924 0.161703 -4.26** 0 -1.00617 -0.37231
Constant 1.959442 1.0892 1.8 0.072 -0.17535 4.094235
Probit regression Number of obs = 1722, Wald chi2(10) = 464.59;
Prob > chi2 = 0.0000
Log pseudo-likelihood = -857.82778 Pseudo R2 = 0.2811
Note: ** statistically significant at 0.05 significance level; a price of CNG was expected to remain constant during the survey, but it did change in between and so price before and after the increase was included in the regression equation.
Source: Consultat’s Estimates
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Figure 12: Probability of Accepting Gas supply under different prices
153. The probit function illustrates the following probabilities with respect to different bid values. It shows that as the bid value increases, probability of accepting it becomes lower and lower (Figure 12). At the same time Figure 13 illustrates that there is no significant difference in the probabilities based on households connected and not connected to the gas lines. These figures show that gas consumers are highly responsive to price; if the monthly payment is above Tk2,000, only about 30% will be connected to gas pipe network.
Figure 13: Uptake rates by connected and non-connected households
154. Mean WTP42 for natural gas supplied at the household is shown in Table 19. It shows that mean WTP
(monthly per household) is about Tk1,612 for all households in Bangladesh. It is Tk1,202 for households currently connected to gas supplies (whose current monthly payment on average
42
Calculated using equation (2).
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1
0 500 1000 1500 2000 2500 3000
Pro
bab
ility
of
acce
pti
ng
the
bid
Bid value in Taka per month
Prob (WTP < = X) -1 sd + 1 sd
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1
0 500 1000 1500 2000 2500 3000
Pro
bab
ility
of
acce
pti
ng
the
bid
Bid value (taka per month)
Connected Non-Connected
38 | P a g e
is about Tk586), and it is Tk1,684 for households currently not connected to gas lines (whose
current monthly fuelcost on avarage is Tk1,441). Household’s response to changes in connection fee is as expected, with higher initial connection charges less and less households are interested and their willingness to pay drops.
Table 19: Estimated Mean WTP for Natural Gas by Connection Fee
One time connection Fee Mean WTP**
Non-Connected
2000 1734.061
2847.271* 1676.545
5000 1533.291
8000 1341.487
11000 1160.349
14000 991.5834
17000 836.7597
20000 697.1418
Note: * mean value, ** predicted at mean values of the explanatory variables except connection fee.
Table 20: Estimated Mean WTP for Households by Monthly Income
Income per month Mean WTP**
All households
Connected Not-Connected
5000 1440.528 1056.737 1508.253
10000 1487.291 1097.64 1555.799
15000 1534.601 1139.303 1603.858
22468.06* 1606.232 1202.896 1676.545
25000 1630.769 1224.815 1701.424
35000 1728.847 1313.083 1800.772
45000 1828.661 1403.91 1901.734
65000 2032.836 1592.461 2107.875
75000 2136.898 1689.805 2212.769
85000 2242.095 1788.953 2318.709
Note: * mean income, ** WTP at mean values of variable. Source: Haque 2012, Author’s estimate
155. Table 20 illustrates changes in the predicted mean WTP at different levels of income for households. It also shows a gradual increase in their mean WTP as income rises. Fuel costs by connected and unconnected households in the cities are shown in Table 21 . It shows that households connected to gas are only paying marginally more than their usual fixed price of Tk500 per month (for gas) in order to compensate for supply disruption. Households not connected to natural gas lines pay nearly three times the amount of connected households in order to cook their food.
Table 21: Current Monthly Fuel Cost for Households
Mean Monthly Expenditure Std. Deviation N
Gas unconnected 1441.675 865.85 1524
Gas connected 586.1455 502.40 275
Total sample 1310.897 876.54 1799
Source:
L. WTP for CNG (for vehicles)
156. A similar approach was adopted to elicit willingness to pay for owners of vehicle to use of condensed
natural gas (CNG). Four separate bids (Tk25, Tk35, Tk45 and Tk55) per cubic meter of CNG in all of
these cities. In order to capture owners/operators (on daily/monthly lease basis) the survey was divided into two parts: a) survey of households and b) survey of commercially operated vehicles. Surveys on households were carried out along with the survey on household for natural gas (for cooking purpose). As such households with ownership of vehicles were asked to fill-up the CV module on vehicles. Surveys on commercially operated vehicles were carried out at selected stands/stops and only owners/leased operators were asked to fill -up the CV module on vehicles. The CV question on CNG were as follows:
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For vehicle owners in un-connected cities There is a growing demand for CNG in your city. This means expansion of gas distribution network to your city. This also means that the gas distribution company needs to maintain gas pressure in order to supply CNG to city fuel stations. Already, government is rationing CNG in Dhaka so people are not receiving CNG all the time. The authority decides to introduce CNG to your city and ensure that CNG is available 24-hours a day in city fuel stations with sufficient pressure. If this offer is given to you, are you willing to pay Tk ____per m
3of gas? [please note that authority need to invest more in the gas
infrastructure also. Furthermore, please also note that you will need a onetime investment between 60,000-200,000 (depending on your vehicle (car, bus, truck, etc.) to convert your vehicle into a dual fuel mode.] For vehicle owners in connected cities There is a growing demand for CNG in your city. However, currently government is rationing supply of CNG in Dhaka and so people are not receiving CNG 24-hours a day. There is a long queue for CNG in fuel stations. Now, the authority decides to improve CNG supplies in the city and ensures that CNG is available 24-hours a day in city fuel stations with sufficient pressure. If this offer is given to you, are you willing to pay Tk ____per m
3 of gas?
157. Using the probit regression analysis, the following results are set out in Table 22 and a probability function was estimated for Bangladesh for CNG users. It shows that income of the household remains an important determinant of their willingness to pay. For commercial operators only bus and mini-bus owners are ready to pay higher amount per cubic meter of CNG. The probability of accepting a bid varies with the amount of the bid and it is shown in Figure 14.
Table 22: Probit Regression Results of WTP for CNG for Vehicle
Probit Regression: Dependent Variable – Willingness to pay a bid for CNG
Coef. Std. Err. z P>|z|
[95% Conf. Interval]
Bid Price ( Tk / m3) -0.05749 0.005437 -10.57 0 -0.06815 -0.04683
Monthly income of the household
9.00E-06 2.41E-06 3.74 0 4.28E-06 1.37E-05
Owner/operator of a bus/minibus
0.764644 0.26056 2.93 0.003 0.253957 1.275332
Constant 1.829817 0.225663 8.11 0 1.387525 2.272109
Probit regression: Number of obs = 574; LR Chi2 = 146.81 ; Prob > chi
2 = 0.0000;
Log likelihood = -322.28111 Pseudo R2 = 0.1855
Source: Results of probit regression using STATA; Haque 2012.
M. Mean WTP for CNG
158. Figure 14 shows, a smaller and smaller proportion of people are willing to use CNG as fuel for their
vehicles as the bid value increase. For example, with price at Tk25 nearly 75 % of vehicle owners are ready to pay for CNG (including paying for conversion of the vehicle into dual-fuel mode), while only
15% are ready to pay for CNG if prices are up to Tk55 per cubic meter. There is no difference in their willingness to pay for people who has already converted their vehicles into CNG.
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Figure 14: Probability of accepting various bid prices for CNG
Source: Haque 2012
159. Mean willingness to pay for various types of vehicle owners (commercial and non-commercial) were estimated. Although no statistical difference exists in the mean WTP43 for commercial and non-commercial vehicles owners/operators, public passenger transportation like (bus and mini/micro bus owners) are willing to pay a slightly higher amount than others given the relative prices of other fuel. No differences in WTP were also observed between owners of vehicles which are already converted vs which are not. The mean WTP for different type of vehicle operators are shown in Figure 15.
Figure 15: Mean WTP for CNG by Vehicle type
Source: Author’s calculation; Haque 2012
43
Using Giraud, et al. 2002, and Loomis, et al. 2000.
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
20 30 40 50 60
Pro
bab
ility
Bid per cu.m. of CNG
Prob -1 sd + 1 sd
36.96 37.55 36.39
49.71 48.55
36.84
0
10
20
30
40
50
60
At
mea
n
Alr
ead
y co
nve
rte
d
No
n-c
on
vert
ed
Co
nve
rte
d B
us
& M
ini
No
n c
on
vert
ed
Bu
s &
Min
i
Co
nve
rte
d o
ther
veh
icle
s
Taka
per
cu
. M.
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N. Economic Value of Gas in Power Sector
160. Figure 16 shows that natural gas has been the major source of fuel for production of electricity. About 83 % of the electricity produced since 2003 is produced using natural gas. Of the rest 6% has been produced using Furnace Oil, 5% using hydro, 4% using coal and the rest, 3% using diesel. In Bangladesh, the government controls both the input price and the output price of electricity.
Figure 16: Proportion of Electricity Produced Since 2003 Using Different Type of Fuel
Source:
161. Efficient utilization of natural gas implies that it is used in the sector where it has the highest productivity. Economic value (price) of gas as an input for electricity production can be estimated as the marginal value product (MVP). Conventionally the MVP is estimated by using production functions. In this study, we use cost function to estimate marginal product using duality theory. Panel data on data on total costs, and output were available from 2003-2010 35 electricity producing plants44.
162. Table 23: Estimated cost function for power production
Regression Statistics Multiple R 0.864364 R Square 0.747125 Adjusted R
Square 0.736213 Standard Error 5351747 Observations 141
Coefficients
Standard Error t Stat P-value
Q 0.011172 0.001680 6.650204 6.30E-10
Q2 -3.3E-12 1.22E-12
-2.724820 0.007267
Q3 5.36E-22 2.05E-22 2.617946 0.009834
163. The total cost of production of power was deflated using GDP deflator of Bangladesh to obtain real values of cost of production and was used in estimations. The intercepts of the cost function were
44
For 2010 data were available from 35 plants. For earlier years data was availabe from only 10-14 plants.
5%
83%
4%
6% 3%
Hydro Gas Coal Furnace Oil HSD
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restricted to be zero and the equation specified in (13) was estimated using Ordinary Least Squares. The estimated cost function for the power plants is shown in table 3. The results indicate that all the coefficients are statistically significant and the model explains 74% of the total variation (R
2 =0.74).
Small difference between R2
and adjusted R2indicates that there are sufficient number of observations
given the number of independent variables in the model. The cost function estimated using the panel data is shown in Error! Reference source not found..
164. The corresponding marginal cost (MC) and average cost (AC) were calculated using the parameter estimates in Table 23. They are plotted in Figure 17 . Both MC curves and AC curves are having their expected U shapes. The points of intersections of MC and AC curves show the quantities of production at which decreasing returns to scale commences in production technology. The quantities of production of power at the intersections points is 3.2 billion kWh. Figure 18 shows the marginal product curve associated with the total cost curve. The maximum value of the marginal products for power industry reaches when it uses 1.8E+09 cubic meters of natural gas.
Figure 17: Estimated MC function for electricity production
Source: Estimates by consultants
Figure 18: Estimated MP function for electricity production
165. As shown in Figure 18 MP varies as input level changes. Therefore what level of input should one use the corresponding MP to calculate MVP is a difficult question in absence of market determined price for electricity. Efficient firms
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operate in the decreasing returns to scale (DRS) portion of the MC curve. Here we used the median value of the MP in the range of DRS for estimating the MVP. Another difficult question is what price should be used in estimating the MVP in absence of a market determined price. Here we use the proxy of the cost of power generation together with a margin of 1% for transmission and distribution. Table 5 shows the cost of producing power in Bangladesh. We estimate the MVP at two prices: i) cost of coal power generation; ii) cost of petroleum based (diesel and furnace oil) generation. Coal represents the cheapest alternative for replacing gas powered generation while diesel and furnace oil are currently used high cost electricity generation options. These two will provide lower and upper bound of the economic value on gas in electricity generation. In the case of diesel and furnace oil weighted average (weights are the capacity) cost was used to estimate the economic value of gas. MVP is estimated to be Taka 13.03 and 30.13 respectively for coal based and petroleum based generation. These two number represent lower and upper bounds of economic value of gas as an input in power generation.
Table 23: Cost of Production of Electricity (FY2011)
Generating Plant/Fuel Installed Capacity Generation Plant Factor
Generation Cost
Generation Cost
MW GWh % Tk Million Tk/kWh
IPP 1231 8564.02 79.53 30,142.30 3.52
Furnace Oil Based 105 748.58 81.39 8,877.75 11.86
Gas Based 1126 7,815.44 77.66 21,264.55 2.72
SIPP Rental 1709 6,247.63 42.69 45,635.60 7.30
Furnace Oil Based 410 740.97 23.18 6,684.81 9.02
Diesel Based 535 1899.17 43.17 28499.54 15.01
Gas Based 764 3607.48 61.73 10451.25 2.90
Public 864 8,788.08 80.92 15,846.28 1.80
Gas Based 864 8,788.08 80.92 15846.282 1.80
BPDB 2687.7 9,212.69 33.50 23,988.33 2.60
Hydro 230 875.60 43.46 894.43 1.02
Coal 220 779.60 46.98 4,318.06 5.54
Furnace Oil Based 170 290.54 19.51 4,517.49 15.55
Diesel Based 160.7 274.96 13.89 6,294.73 22.89
Gas Based Plants 2297 8,062.13 43.16 16,799.17 2.08
Source: Bangladesh Power Development Board Annual Report
O. WTP for gas in Fertilizer production
165. Major input for production of urea fertilizer is natural gas. Since natural gas the key input for production of fertilizer, fertilizer factories receive gas at a special price (which is lower than other prices). Data from 6 fertilizer factories operated by BCIC (Bangladesh Chemical Industries Corporation) from 2000-01 to 2010-11 has been used to estimate the cost function for production of fertilizer. The total cost of production of fertilizer was deflated using GDP deflator of Bangladesh to obtain real values of cost of production and was used in estimations. The intercepts of the cost function were restricted to be zero and the cost function was estimated using Ordinary Least Squares. The results of the estimation of the fertilizer function are shown in table 25. The results indicate that all the coefficients are statistically significant and the model explains 96% of the total variation. Table 24 shows the results of cost function estimation.
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Table 24: Estimated Cost function for Fertilizer E
Regression Statistics
Multiple R2 0.983058
R Square 0.966403
Adjusted R Square
0.94919
Standard Error 2832362
Observations 65
Coefficients Standard Error t Stat P-value
Q 90.82334 9.909306 9.165459 3.87E-13
Q*Q -0.00018 5.32E-05 -3.41335 0.001136
Q*Q*Q 1.7E-10 7.09E-11 2.3945 0.01968
166. The corresponding MC and ACs were calculated using the estimated parameter. They are plotted in Figure 19. As indicated earlier, both MC curves and AC curves are having their expected U shapes. The points of intersections of MC and AC curves show the quantities of production at which decreasing returns to scale commences in production technology. The quantity of production of fertilizer at the intersections point is 531,719.00 MT. The plants were also classified by production technology, i.e., IRS, CRS and DRS. The results reveal that only 2 fertilizer plants exhibit DRS technology, i.e., MC>AC. Figure 20 show the marginal product curves associated with the total cost curve. . The maximum value of the marginal products for fertilizer industry reaches when it uses 283,786,497 cubic meters of natural gas. Using the market price (FOB) of fertilizer and the average MP of the DRS firms the MVP is estimated to be Taka 21.42 per M
3.
Figure 19: Marginal and Average Costs for Fertilizer
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Figure 19: Marginal Product Curve for Fertilizer
167. Theory of efficiency in resource use stipulates that resources be used in such a way it gives the maximum social benefit. This means to efficiently allocate any limited resource we should look into the economic value of using gas for alternative uses. Table 26 Shows gas economic value of gas in different sectors. It also shows an indicative price of gas in the international market.
Data source: http://www.petrobangla.org.bd/data_marketing_natural_gas.php
Power 38%
Fertilizer 9%
Industrial 17%
Captive Power 17%
Domestic 12%
CNG 6%
Commercial 1%
Te Garden 0% Brick Field
0%
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Table 25: VMB of Natural Gas in Different Sectors and WTP by Households and CNG Users
If Natural gas price is equivalent of prices
paid by the
Price paid by producers or consumers
(Tk / mcf)
Price paid producers or consumers
(Tk/m3)
VMPϮ Tk/m3 WTP Tk/m
3
Power, Coal
Based
Power, Petrolium
Based Fertilizer Cooking Vehicle (CNG)
Power plants 79.82 2.81 13.03 30.13
Fertilizer plants 72.92 2.57 5. 21.42
Domestic (metered) 129.55 4.57***
12.59
CNG gas price 688.00 24.28
36.96
International Gas price @ Singapore
390.67* – 997.49**
13.79 -35.21
Source: Consultants’ estimate.
NOTE: * Power sector price; ** Industrial sector price, ***WTP for cooking gas was estimated assuming 4.5 mcf/ month use of gas and Taka 583/month payment
168. According to the estimated economic values, CNG shows the higher value and gas in power generation can have values between 13.03 -30.13 Tk/m
3 depending on the alternative energy sources available in
Bangladesh. Economic value of gas in fertilizer production is also considerably high. However current gas allocation and pricing does not reflect economic value at all. Only 21.5% of the value og gas is captured in the power sector (considering the lower bound of the economic value. In the fertilizer sector only 12% of the economic value is currently captured. Currently highest price is charged for CNG but it is only 66% of the WTP. Because WTP is the total benefits to the consumer price should be lower than WTP. Yet, the CNG current price can be further revised by considering the price of petrol and diesel. In the household sector current price is only about 36%. All these indicate severe under pricing of natural gas in Bangladesh.
169. Furthermore, current allocation of gas does not reflect efficiency at all. The highest values use of gas – CNG – received lowest allocation. Despite its potentially high value, gas allocation to fertilizer sector is declining. Power sector dominates in gas use but despite potentially high value generate in the sector a minimum price is charged for gas. Households are willing to pay 3 times of what they pay for gas now but only about 12% of natural gas is allocated for household cooking.This has other serious implications on power sector too. Thus our analyses clearly show that there is large inefficiency in both gas pricing and allocation in Bangladesh.
170. Government has already invested heavily to produce electricity by natural gas and so there is a degree of fixity in allocating gas for power sector at the moment. However, for all future allocations, Bangladesh should allocate more gas for other sectors which generate more benefits to the society. This implies a search for alternative, efficient fuel sources for Bangladesh for electricity generation, intensive measures to improve the efficiency of the gas currently used (including prices that properly reflect the opportunity cost (or lost benefit) of using gas in a sub-optimal use.
P. Evaluation
171. The study reveals that economic value for natural gas used as CNG is the highest, which is followed by gas used for fertilizer and household cooking. Economic value of gas in the power sector can be in the range of 13.03 – 30.13 Tk/m
3. This range reflects Bangladeshe’s choice for alternative energy sources.
If Bangladesh diversify its power generation using the least cost option opportunity cost of gas is as low as 13.03 Tk/m3. However if the country uses more petroleum products to generate power like it does now, opportunity cost of gas will be much higher. The study did not estimate WTP for use of natural gas for industrial and commercial sector because of heterogeneity in the sector and since it requires a larger sample of industries and commercial enterprises.
172. This implies that Bangladesh economy will benefit more if the allocation of gas could be changed in future. This implies that allocation of gas should be increased for CNG, fertilizer, and households to reap the maximum benefits,. In future, power production should be organized using alternative fuels, perhaps coal. This study also showed that coal-fired electricity plants are the least cost option for Bangladesh. Considering this, future power plants should be coal fired, given Bangaldesh’s limited scope for production of power using hydro-generation.
173. At the same time, it is true that due to current sunk investment in the power sector the current power plants will continue to use gas as their fuel until these plants retire. It also implies a need to examine
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closely practical alternatives. It is possible to allocate natural gas according to its most productive use while imposing a price rationalization scheme. This implies charging higher prices to users like households who use gas for cooking and for vehicles and then cross-subsidize use of natural gas for fertilizer. Stronger justifications for subsidizing fertilizer sector are given later in this report. Power sector generate reasonably high value for gas and only a very small fraction is recovered now. Therefore higher gas prices for power sector can be charged to collect sufficient revenues for gas for development purposes in Bangladesh.
174. These conclusions harmonize with the earlier conclusions of this study: there are major economic and social benefits to be had from increasing the price of gas to reflect its best economic value. The question that will arise is: given that Bangladesh has gas resources but very little coal is it a practical option to move gas into fertilizer production and if so is it possible to produce a significant proportion of the nation’s electricity using coal? We then attempted to answer the question in a study of the macroeconomic impacts. The next section presents these results.
Q. Recommendations
The Government should adopt as a matter of policy that gas will be utilized in its most efficient uses and reallocate the gas to more productive sectors.
Also the Government should consider recovering reasonable portion of the value of gas from the sectors where gas is being severely underpriced.
The government should consider power sector energy diversification as a urgent policy. Given that most of the power plants are gas fired reallocation of gas may not be practical. However, government can correct this problem by: i) allocating new discoveries of gas for the sectors that generate higher values; ii) revising the gas and power prices to recover reasonable amount of resource rent; iii) avoid committing gas for new power plants, if gas price cannot be revised; iv) diversify energy source for power generation, particularly using affordable sources like coal.
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6. ENERGY POLICY OPTIONS: MACROECONOMIC IMPACTS
175. To assess the long term macro economic implications of gas tariff reforms and allocations a computable general equilibrium (CGE) model was used. This inter-temporal (i.e. multiple time periods) decision tool is designed to trace detailed interactions between demand, supply and resource use within economies and in their trade with the global economy.
176. In today’s world, economic linkages are so complex that it is unlikely that policy makers relying on intuition alone will be able to formulate sound policies. Indeed, much evidence now suggests that indirect effects of many policies outweigh direct effects and, if not adequately understood, can substantially offset or even reverse them. The CGE model used in this analysis properly capture the complex interactions in the economy and provide much better understanding on the economy wide impacts of gas tariff reforms.
A. Economic Models
177. Because of their ability to capture such linkages, CGE models have become the preferred tools for tracing supply and demand linkages across extended chains of price-directed exchange. Because of their detailed behavioral specification, these models are particularly good at explaining adjustments in income distribution and economic structure.
178. The model described here was calibrated to a new Social Accounting Matrix (SAM), estimated for Bangladesh as of the year 2010. The general structure of the Bangladesh CGE and SAM are summarized below. The present research uses it to evaluate several previously discussed issues related to the country’s natural gas policy, although these comprise only a few of the issues that can be addressed with this framework. Table 26 presents seven scenarios considered in the context of natural gas issues raised in the preceding sections.
Table 26: Policy Scenarios
Scenario Description
1 Baseline Business-as-usual reference trends. No policy changes.
2 MKT Equalize natural gas prices across all uses, using reference market prices from India and Pakistan (Taka 5/CM)
3 MKTEE Scenario 2, combined with 1% annual increases in average energy use efficiency.
4 Fert Scenario 3, but Fertilizer is exempt from price reform.
5 Coal50 Imported coal is used to meet 50% of domestic electric power production.
6 GasExp Natural gas marketing locally at world prices is permitted up to 10% of domestic use.
7 GasCoal Scenario 6 combined with domestic coal for 50% of domestic electric power.
8 InfDev Infrastructure investment increased with half of new natural gas marketing revenues.
Source: Guntilake and Roland-holst (2012)
Scenarios Tested
179. The model was used to test the results from seven different scenarios:
A Baseline or Business-as-Usual scenario is evaluated across the forecast period (2010-2030). This assumes no change in current policies and stable trends in global prices, and it is used as a dynamic reference case for the policy alternatives considered.
In the Second Scenario (MKT), it is assumed the government removes administered price interventions in domestic natural gas markets, eliminating the price differences shown in Table 6 and Table 25 above. This achieves a situation approaching an economy wide average gas prices similar to prices in India and Pakistan.. Because Bangladesh both subsidizes and taxes gas, depending on the use, removing price distortions will increase prices for some economic actors and lower them for others. The net result for the economy as a whole is an empirical question (an interesting one in itself) that is of great relevance to the country’s overall economic performance. The conclusions of previous sections that gas is currently a relatively insignificant cost element for many industries and that consumers are prepared to pay more support the relevance of this assumption. The patterns of price adjustment that emerge from the MKT scenario suggest that energy costs will rise for the economy as a whole, conferring small welfare costs under existing patterns of technology and use. If however, the economy were to react to higher energy prices by increasing efficiency, these costs could be averted. This result is also supported by previous analysis. Historically, energy subsidies in
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most countries have been associated with low efficiency levels, while higher energy prices appear to induce conservation behavior and technology adoption that can substantially improve energy efficiency, saving money while stimulating innovation and growth. To assess the potential of such responses to offset the welfare costs removing of Bangladeshi subsidies, as well as contribute to sustainable growth objectives,
The Third Scenario (MKTEE) implements the same gas pricing policies but assumes the economy responds with very modest, but sustained, 1% annual improvements in overall energy efficiency. In many industrial economies, these rates of improvement have been easily exceeded 1% for decades. Given the relatively low initial energy efficiency levels in Bangladesh today, this is a very modest expectation for induced conservation and new technology adoption following a tariff adjustment. It is used for illustration only and is likely to produce a result that is conservative, in the sense that it understates the benefits of the policy changes.
A Fourth Scenario is intended to represent another important dimension of the country’s natural gas policy dialog, price policies for the fertilizer industry. As mentioned in previous sections, natural gas is a primary input to another primary input (fertilizer). Fertilizer contributes to food security and many believe that existing subsidies for natural gas in this use should be retained. The fourth (Fert) scenario is the same as MKTEE, except that Fertilizer gas subsidies are retained at Baseline levels.
Scenario Five (Coal50) addresses another leading energy policy issue, the argument that less expensive coal should be used as a substitute for natural gas to generate the country’s electric power. Diversification if the fuel mix is an important policy priority for Bangladesh. Although this would increase Bangladesh’s import bill, it would also holds the potential reduction of costs across the economy, improving export competitiveness and raising real incomes. For this scenario, we assume that electric power investments shift at comparable fixed cost from gas to coal over the 20 year period under consideration, achieving 50% replacement of gas-fired capacity by 2030.
The Sixth Scenario (GasExp) represents the obverse of the coal import story. Even though global natural gas prices have fallen substantially in recent years, they remain well above domestic prices and significantly on a trend line basis. For this reason, domestic gas use in Bangladesh has a high opportunity cost, in terms of foreign exchange and government revenues that might be earned by taxing exports of gas to foreign markets. The sixth scenario is intended to support dialog on this important choice facing the country with better evidence. However, third party sales, described in paragraph 72 above have a similar economic impact to exports, but all gas is consumed domestically. For the sake of illustration, the assumption is made that Bangladesh limits its third party sales to 10% of annual total supply at the LNG landing price in India..
The Seventh Scenario combines all the components of a new energy agenda for the country, uniform domestic market prices for gas (except to the fertilizer sector), modest energy efficiency, natural gas sales at LNG landing price in India up to 10% of domestic supply, and partial coal substitution for gas in electric power generation, but this time with domestic coal. Because this substitution would require a very substantial increase in domestic coal production, we estimate it can only be competitive to about a 25% fuel share, with the rest imported.
The eights scenario address another key policy issue of gas revenue management. There is no proper gas revenue management regime at present. Economic theory of exhaustible resources suggests investment of resources rents on reproducible capital to sustain the economy at the full depletion of the resource (Hartwick’s Rule). Following this, the 8
th scenario assumes that 50% of the
augmented gas revenue is invested on physical and social infrastructure.
B. Aggregate Results
180. A number of significant findings emerge from these results of running the respective scenarios. The results would be robust against reasonable uncertainty regarding external events and the degree of behavior response.
Removing Bangladesh’s long established price supports for domestic natural gas, while politically difficult, would not significantly undermine the country’s long-term economic growth;
Even without the kind of private efficiency responses and complementary policies considered here, the economy’s overall GDP would only be 0.5% percent smaller two decades from now.
181. Of course there can be many dramatic structural adjustments required beneath the veneer of policy success from macroeconomic advocates. That said it is clear that, energy price subsidies are not essential to the country’s overall progress. Indeed, the Baseline assumes stable resource costs, while we know that the country’s gas reserves are threatened by continued subsidies for consumption.
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182. These two facts, combined with fiscal sustainability questions, suggest that the Baseline itself may be too optimistic. The revenue impact of this scenario suggests that the government could reduce tax collections over 12% by 2030 if gas subsidies were abolished, while gas price increases would naturally promote gas conservation. The complete set of results are summarized in the Table 29. Quite contrary to the generally held belief, gas price increase does not lead to inflation. In the long run the economy will experience minor decline in CPI due to contractionary effects of high gas prices.
Table 27: Macroeconomic Results (percent change from Baseline in 2030)
MKT MKTEE Fert Coal50 GasExp GasCoal InfDev
Real GDP -0.5% 1.5% 4.0% 4.5% 7.7% 24.6% 81.9%
HH Real Income -0.5% 1.1% 3.7% 3.7% 6.5% 20.2% 63.0%
Real Consumption
-0.5% 1.1% 3.8% 3.8% 6.8% 21.6% 71.9%
Exports 1.4% 1.0% 3.3% 4.7% 10.6% 27.9% 80.5%
Imports 0.5% 0.6% 2.2% 1.9% 9.4% 22.1% 59.3%
CPI -0.3% -0.1% -1.0% -1.3% 2.1% 0.1% -6.7%
Real Wage -0.3% 0.5% 1.5% 1.1% 5.6% 10.2% 21.7%
Rental -3.5% -1.3% -1.3% -2.7% 0.6% 0.5% 2.9%
Revenue 12.5% 13.2% 6.5% 14.1% 17.2% 24.2% 62.9%
CO2 Emissions -3.1% -5.8% -3.5% 19.5% 23.1% 34.1% 121.3%
Notes: “Revenue” measures the change in government revenue collection, assuming a constant real government budget balance across scenarios. Source: Authors’ estimates.
183. The second scenario (MKT) is a reminder that raising average resource costs has an adverse aggregate welfare effect on the economy as a whole. It raises the question of the level of conservation and new energy efficiency needed to offset welfare costs. The answer might be surprising to subsidy advocates. In fact only very modest EE improvement (MKTEE) of 1% per year for electricity use, would convert unsustainable price supports and resource depletion into a more sustainable, growth oriented path. These levels of improvement are well within reach of even the most advanced economies (e.g. California averaged 1.4% annual EE improvement over 1972-2006). For a developing country like Bangladesh, where inefficiency is a widespread and chronic legacy of underinvestment and adverse incentives, the potential for improvement is far greater. So too would be the attendant growth benefits.
184. Without EE improvements, exempting the Fertilizer (Fert Scenario) sector from high gas prices would more than offset the aggregate welfare costs of natural gas price reform. The reason for this is simple: fertilizer is not merely an input to agriculture but something that increases its productivity. It is important that this indirect (gas input) subsidy not promote unsustainable patterns of fertilizer application, but making this productivity tool less expensive has pervasive cost of living benefits, especially for lower income groups for whom food is a dominant budgetary category (note the relatively large Consumers’ Price Index (CPI) decline).
185. Intuitively, many people dismiss the idea of generating electricity from coal. However, despite the need for new generators and coal handling facilities, many have concluded that coal would be a more cost effective fuel for Bangladesh’s electric power sector. Even though it may take time to transition the country’s stock of gas-fired generators, the energy density per Taka of coal is far greater, and gas can then be used for higher value activities such as fertilizer, transport and domestic heating/cooking.
186. The results under the 4th
Scenario, Coal50, strongly support this reasoning, suggesting that gas has a high domestic as well as international cost, and that using coal in the electric power would free the government from subsidies to electricity generation with fewer energy cost increases. Indeed, making coal a primary electric power fuel would reduce domestic gas costs and allow it to be allocated to other sectors which generate better economic returns. Switching to more cost-effective electric power, while reforming gas prices to respond to market forces would take real Bangladeshi GDP 5%-25% higher by 2030, depending on the source of coal, with lower costs for enterprises and households, stimulating domestic demand and export competitiveness. It would also address concerns that Bangladesh’s gas supplies could be exhausted between 2020-2030. It may also be observed that, despite its negative environmental reputation, electric power would be a good place to introduce coal, as its emissions would be concentrated and thereby easier to monitor and manage. In distributed use, e.g. transport, household heating and cooking, gas would be more appropriate for the opposite reasons.
187. The sixth scenario asks the energy trade question from the opposite perspective, what is the growth opportunity cost of restricting export sales for Bangladesh natural gas (GasExp). Again, the results are unambiguous on this point. Even modest sales concessions (10% of domestic supply) would significantly increase the country’s aggregate income, employment and trade. By realizing market prices
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for at least a fraction of the nation’s mineral resources, Bangladesh increases national wealth while promoting more sustainable domestic resource use.
188. The seventh scenario (GasCoa) deploys in concert all the gas policy reform measures considered and the long-term benefits for real growth and incomes, combined with domestic coal sourcing, are more than additive. This finding makes it clear that energy policy reform, to be most effective, should be a multi-faceted exercise. This will more effectively distribute adjustment burdens and animate new economic potential, allowing the country to rise to a higher long-term trajectory of livelihood and mutually beneficial engagement with the global economy.
189. Finally, an eighth scenario (InfDev) investment in public infrastructure scenario reminds us of the productivity and growth dividends from infrastructure investment. Reducing trade and transport margins (the CPI drops nearly 7% and real incomes rise accordingly) improves private profitability across the economy, resulting in substantially higher GDP. This strategy also appears to be very beneficial to the public sectors whose fiscal revenues increase over 60% by 2030.
190. Environmental impacts of the policies considered would vary, with atmospheric emissions depending on fuel switching, efficiency measures, and aggregate growth. In the event, both gas market reforms and energy efficiency reduce CO2 and other greenhouse gas (GHG) emissions, while coal substitution increases emissions intensity and growth (ceteris paribus) does too. These tradeoffs represent a dilemma for all developing countries, but there are now a wide range of technology choices to address this. The growth and revenue dividends in some of these scenarios suggest that there could be substantial opportunities for complementary mitigation and clean-up policies.
C. Impacts on Households
191. Even though Bangladesh’s population is predominately rural and predominately low income, there are important sources of economic diversity in the country. Measured in Table 28 by a basic aggregate welfare indicator, real consumption, the eight scenarios will affect different households according to where they are in income distribution, in supply chains, labor markets, and where they live. Note that these results are cumulative, measuring the change in total household real consumption over the whole period considered (2012-2030). This can be contrasted with the macroeconomic results in Table 27.
Table 28: Household Real Consumption (cumulative % change 2012-2030)
MKT MKTEE Fert Coal50 GasExp GasCoal InfDev
BariRur -0.5% 0.7% 2.2% 2.2% 4.1% 12.0% 37.1%
BariUrb -0.6% 0.5% 1.9% 1.8% 4.0% 11.6% 36.3%
ChitRur -0.5% 0.7% 2.3% 2.3% 4.2% 12.6% 38.7%
ChitSMA -0.6% 0.5% 1.7% 1.6% 3.8% 11.5% 36.5%
ChitUrb -0.5% 0.6% 2.0% 2.0% 4.1% 12.2% 38.0%
DhakaRur -0.5% 0.7% 2.2% 2.3% 4.3% 12.1% 36.9%
DhakaSMA -0.5% 0.5% 1.9% 1.9% 3.8% 11.6% 37.4%
DhakaUrb -0.6% 0.5% 1.8% 1.7% 3.8% 11.4% 36.0%
KhulnaSMA -0.5% 0.6% 2.1% 2.1% 4.2% 12.4% 38.6%
KhulnaUrb -0.6% 0.5% 1.8% 1.7% 3.9% 11.6% 36.4%
KulnaRur -0.5% 0.7% 2.4% 2.5% 4.5% 12.7% 38.4%
RajRur -0.5% 0.8% 2.5% 2.5% 4.9% 14.3% 42.8%
RajSMA -0.7% 0.6% 1.9% 1.8% 4.1% 11.8% 36.6%
RajUrb -0.6% 0.5% 1.9% 1.9% 4.5% 13.4% 41.0%
SylhetRur -0.6% 0.7% 2.1% 2.2% 4.2% 12.1% 37.5%
SylhetUrb -0.6% 0.3% 1.4% 1.2% 3.4% 10.3% 33.2%
Wgt Average -0.5% 0.7% 2.2% 2.2% 4.3% 12.6% 38.8%
Source: Guntilake and Roland-holst (2012)
192. The model’s results are difficult to generalize, but it can be said that households belong to different categories benefit more or less similarly form the discussed policy interventions. Some regions have relatively high electrification and some have access to cooking gas. Infrastructure constraints vary widely amongst these groups. Despite these differences income increase are quite similar among the groups. This results also cast doubts about poor being adversely affected by the gas price increase.
D. Evaluation
193. An important message from the first two scenarios is that energy efficiency can produce savings that
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offset higher energy price costs for every household category. Households cannot accomplish this alone, because part of the benefit is lower energy price trends from aggregate conservation. It does mean that conservation and energy efficiency promotion should be an integral part of any policies intended to achieve effective gas price reform.
194. A food oriented policy (Fert) falls somewhat more uniformly on households. Of course rural dwellers are poorer. Monetized food costs are a larger proportion of Rural household budgets, particularly so for the poor. Consequently, all households benefit relatively equally from the indirect food subsidy coming from cheap gas applied to for fertilizer production.
195. Energy fuel substitution implicit in option (Coal50) affects households quite diversely because of large differences in baseline household electricity use. Combining the two energy trade policies (i.e. GasExp and CoalGas) results in higher benefits for all households, which are less than additive, but about average in terms of distributional incidence.
196. The most significant benefits accrue when the dividends of energy policy reform, i,e., augmented gas revenues, are reinvested in infrastructure (InfDev scenario). Here we see that infrastructure can improve market access, the main gateway out of poverty for both rural and urban poor, and increase the profitability of investment for higher income groups. In order to ensure this revenue management regime however, conserted efforts by the government is required on governance improvement
197. This section has shown that a dynamic economic forecasting model can illustrate the long term implications of Bangladesh’s energy reform options. The inter-temporal tool traced detailed interactions between demand, supply and resource use within Bangladesh and the impacts of its trade with the global economy. It has shown that significant benefits can be captured by policy changes that focus on more efficient use of energy and that all options should be considered including price flexibility, energy efficiency and strengthening Bangladesh’s linkages with the World economy by encouraging gas trading with third parties.
E. Recommendations
The GOB should note that increases in energy efficiency can offset most if not all the socially and politically adverse impacts from withdrawal of the Bangladesh gas consumption subsidies;
An energy conservation and efficiency promotion program should be an integral part of policies intended to achieve effective gas price reform;
Gas applied to fertilizer production is a food production oriented policy that will benefit all households in Bangladesh and is therefore consistent with the social objectives of use of gas resources;
There should be a detailed feasibility study of substituting coal for gas in up to 50 % of electricity generation to reduce the real cost of electrical energy and conserve gas resources;
Revenue saved by withdrawal of the gas subsidy should be allocated to high priority infrastructure development to achieve better economic benefits from the scarce gas resources;
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7. OPPORTUNITY COST OF UNDER PRICING
198. The previous chapter showed that all options should be considered and that their primary focus should be energy efficiency achieved in large part by linking prices in Bangladesh with those in the World Economy. The last policy scenario that sells 10% gas at world market price and investing the revenue on infrastructure provided the highest benefits. We further amplify this results in this section assuming more aggressive pricing policy – pricing total amount gas at international market price
199. By looking at the economy-wide impacts of withdrawing the gas subsidy and investment of the money saved in physical and social infrastructure the section analyses the opportunities foregone, that is the opportunity cost of current policies. To undertake this analysis two different economic modeling techniques are used. The general conclusion is that there is a high opportunity cost of the gas subsidy. In other words the resources employed keeping retail prices at uneconomically low levels will substantially boost economic activity and incomes if deployed elsewhere.
A. Assessing Opportunity Cost
200. Despite the fact that withdrawal of gas subsidy would have some negative effects on the macro economy and some sectors, any negative effects are more than compensated for by the large positive effects generating from the investment of saved money in the physical and social infrastructure. We analyze two main scenarios. It is assumed that $6.7 billion extra revenue from the gas sector can be obtained (by pricing it at the wholesale LNG landing price in India). It asks the question, what will be the impact of this additional revenue if it is invested annually over a period between 2013 and 2030 (18 years).
201. In a second scenario, a lower figure of $2.9 billion of extra revenue from the gas sector is obtained (assuming gas is priced at average gas price in India and Pakistan) and this additional revenue is invested annually for infrastructure over the same period.
202. As in the previous section a SAM multiplier model is employed. The SAM multiplier model explores the economy-wide effects of any exogenous
45 shock (an event external to the “business as usual”
economy). The shock analyzed is from changes in aggregate demand brought about by augmented revenue. The simulation using the SAM multiplier model indicates significant annual increases in gross output, commodity demand, household consumption and value-added from increased investment in physical and social infrastructure.
203. In the first scenario, there could be increased investment in physical and social infrastructure that would lead to a 15.8% annual rise in gross output, a 15.4% annual rise in commodity demand, 17% annual rise in value-added or gross domestic product and a 15.3% annual rise in household consumption.
204. Under the second scenario, even under a relatively lower annual investment increase than that in the first scenario, the gross output of the economy and the commodity demand would increase annually 6.8% and 6.7% respectively compared to the base year values. Value-added or gross domestic product of the economy would increase annually by 7.5% compared to the base case. Finally, total household consumption would increase by 6.6% annually compared to the base case.
205. The research also used a dynamic Computable General Equilibrium (CGE) Model. The exercise using the dynamic CGE model suggests that withdrawal of gas subsidy and increased investments in physical and social infrastructure would lead to significant positive macroeconomic and sectoral effects. The results from the SAM multiplier analysis is given in appendix …
F. Economy-Wide Effects of Investment: Results-Dynamic Cge Model
206. Majority of CGE models are static in nature and thus unable to account for growth effects in the long-run analysis of the economic policies. The dynamic CGE models, by contrast, can include accumulation effects and can allow the study of an economy’s transition path where short-run policy impacts are likely to be different from those in the long-run. In this study, we use a sequential dynamic CGE model. This kind of dynamics will not be the result of inter-time period optimization by economic agents. Instead, the model attributes short-sighted behavior to these agents. It is a series of static CGE models that are
45
Exogenous (from the Greek words "exo" and "gignomi", meaning "outside" and "to come to be") refers to an action or influence coming from outside a system. In this case economic impacts from outside the steady state scenario of the model.
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linked between periods by updating procedures for exogenous and endogenous variables. Capital stock is updated endogenously with a capital accumulation equation, whereas population (and total labor supply) is updated exogenously between periods. Below we present a brief description of static and dynamic aspects of the model.
Static Module
207. In each sector there is a representative firm, which earns capital income, pays dividends to households and pays direct income taxes to the government. Each sector’s output is depicted as a Leontief function of value added and total intermediate consumption. Value added is in turn represented by a CES function of capital and composite labor. The latter is also represented by a CES function of two labor categories: skilled labor and unskilled labor. Both labor categories are assumed to be fully mobile in the model. Capital is fully mobile only after the first year. In different production activities it is assumed that a representative firm remunerates factors of production and pays dividends to households.
208. Households earn their income from production factors: skilled and unskilled labor, agricultural and non-agricultural capital. They also receive dividends, intra-household transfers, government transfers and remittances and pay direct income tax to the government. Household savings are a fixed proportion of total disposal income. Household demand is represented by a Linear Expenditure System (LES) derived from the maximization of a Stone-Geary utility function.
46 The model includes nine household
categories according to characteristics of the household head, as identified in the Bangladesh HES household survey. Five categories correspond to rural households and four to urban households. Minimal consumption levels are calibrated by using guess-estimates of income elasticity. The elasticity (or flexibility) of the marginal utility of total expenditure with respect to total expenditure is called the Frisch parameter.47
209. The model assumes that foreign and domestic goods are imperfect substitutes. This geographical differentiation is introduced by an assumption made by Paul Armington (1969) that products traded internationally are differentiated by country of origin with a constant elasticity of substitution function (CES) between imports and domestic goods. On the supply side, producers make an optimal distribution of their production between exports and local sales according to a constant elasticity of transformation (CET) function. Furthermore, a finitely elastic export demand function expresses the limited power of the local producers to influence the world market. In order to increase their exports, local producers may decrease their free on board (FOB) prices.
210. The government receives direct tax revenue from households and firms and indirect tax revenue on domestic and imported goods. Its expenditure is allocated between the consumption of goods and services (including public wages) and transfers. The model accounts for indirect or direct tax compensation in the case of a tariff cut. Furthermore, general equilibrium is defined by the equality (in each period) between supply and demand of goods and factors and the investment-saving identity. The nominal exchange rate is the unit of value in each period.
Dynamic Module
211. In every period capital stock is updated with a capital accumulation equation. We assume that the stocks are measured at the beginning of the period and that their flows are measured at the end of the period. An investment demand function determines how new investments will be distributed between the different sectors. This can also be done through a capital distribution function.
48 Investment here is
not by origin (product) but rather by sector of destination.
212. The capital accumulation rate (ratio of investment to capital stock) is increasing with respect to the ratio of the rate of return to capital and its user cost. The latter is equal to the dual price of investment times the sum of the depreciation rate and the exogenous real interest rate. The elasticity of the accumulation rate with respect to the ratio of return to capital and its user cost is assumed to be equal to two. By
46
A Stone-Geary Function uses a natural log function to model household demand related to its utility. One term, is subsistence consumption; a consumer will always consume this amount irrespective of budget or price. Another term is income the consumer has left over, after subsistence is met, is residual income. The goods residual income can buy, is negatively influenced by price and positively by the good’s importance providing the a measure of utility. 47
The Frisch parameter (ξ) measures money flexibility. It is total expenditure/supernumerary Income. It measures the willingness of consumers to substitute between consumption of essential and non- essential goods. 48 Abbink et al (1995) use a sequential dynamic CGE model for Indonesia where total investment is distributed as a function
of base year sectoral shares in total capital remuneration and sectoral profit rates.
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introducing investment by destination, we respect the equality condition with total investment by origin in the SAM Matrix. Investment by destination is also used to calibrate the sectoral capital stock in base run.
213. Total labor supply is an endogenous variable. It is assumed to simply increase at the exogenous population growth rate. Note that the minimal level of consumption in the LES function also increases (as do other nominal variables, like transfers) at the same rate. The exogenous dynamic updating of the model includes nominal variables (that are indexed), government savings and the current account balance. The equilibrium between total savings and total investment is reached by means of an adjustment variable introduced in the investment demand function. Moreover, the government budget equilibrium is met by a neutral tax adjustment.
214. It is, however, important to note that, in contrast to the static CGE models, which make counterfactual analysis with respect to the base run (generally the initial SAM) a dynamic CGE model allows the economy to grow even in the absence of a shock. This scenario of the economy (without a shock) is termed as the Business-as-Usual (BaU) scenario. The BaU model is formulated as a static model solved sequentially.49
215. The BaU model is homogenous in prices and calibrated in a way to generate "steady state" paths. In the baseline all the variables are increasing, in level, at the same rate and the prices remain constant. The homogeneity test (for example, a shock on the nominal exchange rate – with the “steady state” characteristics) generates the same shock on prices, and unchanged real values, along the counterfactual path. This method is used to facilitate welfare and poverty analysis since all prices remain constant along the BaU path.
216. The counterfactual analysis of any simulation under the dynamic CGE model is, therefore, done with respect to this growth path. One of the salient features of the dynamic model is that it takes into account not only efficiency effects, as also present in the static models, but also accumulation effects. The sectoral accumulation effects are linked to the ratio between the rate of return to the capital stock and the cost of investment goods.
G. Simulation and Results
217. In the dynamic CGE model the Bangladesh SAM 2007 is used, but the sectors are aggregated into 15 sectors. Two scenarios are considered, where in the first scenario, the $6.7 billion extra revenue from the gas sector (if gas is priced at LNG landing price in India) is invested in the physical and social infrastructure annually over a period between 2013 and 2030 (18 years). In the CGE framework, such scenario is introduced by increasing the capital stocks in the physical (construction) and social infrastructure (services) by 13.4% and 55.8% annually. Under the second scenario, the $2.9 billion extra revenue from the gas sector (if gas is priced at average gas price in India and Pakistan) is invested in the physical and social infrastructure annually over the same period and the capital stocks in the physical (construction) and social infrastructure (services) are increased by 5.8% and 24.2% annually.
218. In both these scenarios an added simulation is conducted considering the withdrawal of gas subsidy. That scenario would lead to reductions in growths in GDP, exports and imports and rise in CPI. However, when the scenario of withdrawal of gas subsidy is added to the scenario of increased investments in the physical and social infrastructure the combined scenario produces overall positive results.
B. Results of Scenario 1
219. The macro impacts of the first scenario are reported in
220. Table 29. The growth path of real GDP, exports and imports would be significantly higher than those of the BaU paths and they will have increasing trends. Households’ welfare (expressed in terms of equivalent variation) would rise significantly higher than the BAU path in the short run and it would continue to rise in the long run. Such scenario would lead to reduction in CPIs in all years with larger reduction in the long run.
49
The model is formulated as a system of non linear equations solved simultaneously as a constrained non-linear system
(CNS) with GAMS/Conopt3 solver.
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Table 29: Macroeconomic Impacts of Annual $ 6.7 billion Investment
(% deviation from the Business-as-usual scenario)
Year GDP Exports Imports Equivalent Variation CPI
2013 9.23 9.56 2.42 7.22 -1.97
2014 9.28 9.76 2.45 7.36 -2.01
2015 9.32 10.12 2.49 7.53 -2.04 2016 9.36 10.37 2.51 7.68 -2.09
2017 9.40 10.65 2.55 7.84 -2.13
2018 9.44 10.93 2.58 7.99 -2.18
2019 9.48 11.21 2.61 8.15 -2.22 2020 9.52 11.49 2.64 8.30 -2.27
2021 9.57 11.77 2.67 8.46 -2.31
2022 9.62 12.05 2.71 8.61 -2.36
2023 9.67 12.33 2.74 8.77 -2.40 2024 9.72 12.61 2.78 8.92 -2.45
2025 9.77 12.89 2.82 9.08 -2.49
2026 9.84 13.17 2.85 9.23 -2.55
2027 9.91 13.45 2.89 9.39 -2.60 2028 9.98 13.73 2.92 9.54 -2.65
2029 10.05 14.01 2.96 9.70 -2.69
2030 10.12 14.29 3.00 9.85 -2.63
Source: Dynamic CGE Simulation Results
221. In order to understand the growth impact of the investing gas revenue on infrastructure development we estimated the related per capita GDP up to 2030. As shown in the figure 8, the per capita GDP would be about $4079 in 2030 if the augmented gas revenue is fully invested in social and physical infrastructure. This is about 54% increases from the base case scenario per capita GDP of $ 2636. The base case assumes 7% economic growth which is the Government’s ambitious target in its planning documents. This is an unrealistic assumption because without resolving the power sector crisis and removal of other infrastructure constraints it is unlikely that Bangladesh will grow at 7%. If more realistic base case of 4% growth is assumed, the GDP increase is about 158%. These numbers clearly show the highly significant growth impact of investing gas resource rents in the economy.
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Figure 8: Growth Impact of investing gas revenue on infrastructure.
222. The impacts on sectoral domestic prices are reported in Table 30. The results show that prices in almost all sectors would decline over the years relative to the base case.
Table 30: Impact of Annual $ 6.7 billion Investment on Sectoral Domestic Prices
(% deviation from the Business-as-usual scenario) CROP COMC LIVS FORS RATM FOOD LEAT CLOT GARM CHEM MACH PETR OIND CNST SERV
2013 -0.58 -0.54 -1.79 -2.37 -1.19 -1.13 -1.12 -0.79 -0.21 -0.18 -0.25 -0.10 -0.34 -0.43 -0.15
2014 -1.13 -0.89 -2.07 -2.44 -1.36 -1.24 -1.25 -0.86 -0.42 -0.22 -0.30 -0.13 -0.39 -0.49 -0.20
2015 -1.36 -1.04 -2.23 -2.37 -1.39 -1.33 -1.38 -0.94 -0.29 -0.26 -0.36 -0.16 -0.44 -0.55 -0.24
2016 -1.43 -1.09 -2.46 -2.54 -1.42 -1.44 -1.51 -1.01 -0.21 -0.3 -0.42 -0.20 -0.49 -0.62 -0.30
2017 -1.61 -1.21 -2.64 -2.54 -1.47 -1.53 -1.64 -1.09 -0.16 -0.35 -0.48 -0.24 -0.55 -0.69 -0.36
2018 -1.76 -1.31 -2.84 -2.58 -1.50 -1.61 -1.75 -1.16 -0.14 -0.4 -0.56 -0.29 -0.62 -0.77 -0.44
2019 -1.91 -1.41 -3.03 -2.63 -1.54 -1.73 -1.86 -1.24 -0.14 -0.46 -0.63 -0.35 -0.69 -0.85 -0.53
2020 -2.06 -1.51 -3.23 -2.67 -1.58 -1.83 -1.97 -1.31 -0.15 -0.53 -0.72 -0.41 -0.77 -0.93 -0.62
2021 -2.21 -1.61 -3.42 -2.72 -1.62 -1.93 -2.04 -1.39 -0.18 -0.61 -0.81 -0.50 -0.85 -1.01 -0.75
2022 -2.36 -1.71 -3.62 -2.76 -1.67 -2.04 -2.08 -1.46 -0.21 -0.7 -0.91 -0.51 -0.95 -1.09 -0.76
2023 -2.51 -1.81 -3.81 -2.80 -1.73 -2.13 -2.14 -1.54 -0.25 -0.8 0.14 -0.56 -1.05 -1.17 -0.83
2024 -2.66 -1.91 -4.01 -2.85 -1.78 -2.21 -2.20 -1.61 -0.29 -0.92 -1.12 -0.60 -1.16 -1.23 -0.91
2025 -2.81 -2.01 -4.20 -2.89 -1.83 -2.33 -2.25 -1.69 -0.34 -1.06 -1.22 -0.65 -1.27 -1.28 -0.98
2026 -2.96 -2.11 -4.40 -2.94 -1.89 -2.43 -2.31 -1.76 -0.38 -1.23 -1.29 -0.70 -1.37 -1.29 -1.05
2027 -3.11 -2.21 -4.59 -2.98 -1.94 -2.54 -2.36 -1.84 -0.43 -1.44 -1.32 -0.75 -1.45 -1.26 -1.12
2028 -3.26 -2.31 -4.79 -3.02 -1.99 -2.63 -2.42 -1.91 -0.47 -1.68 -1.41 -0.80 -1.49 -1.19 -1.20
2029 -3.41 -2.41 -4.98 -3.07 -2.05 -2.75 -2.47 -1.99 -0.51 -1.94 -1.47 -0.85 -1.52 -1.13 -1.27
2030 -3.56 -2.51 -5.18 -3.11 -2.10 -2.83 -2.53 -2.06 -0.56 -2.07 -1.54 -0.89 -1.55 -1.4 -1.34
NOTE: CROP = CEREAL CROP, COMC = COMMERCIAL CROP, LIVS = LIVESTOCK AND POULTRY, FORS = FORESTRY, RATM = RICE AND ATA MILLING, FOOD = OTHER FOOD, LEAT = LEATHER AND LEATHER GOODS, CLOT = MILL CLOTHING, GARM = READYMADE GARMENTS, CHEM = CHEMICALS, MACH = MACHINERY, PETR = PETROLEUM PRODUCTS, OIND = OTHER INDUSTRIES, CNST = CONSTRUCTION, SERV = OTHER SERVICES
Source: Dynamic CGE Simulation Results
223. Impacts on sectoral exports are reported in Table 31. There would be significant expansion of exports from the major export-oriented sectors both in the short and long run and larger positive impacts would be observed in the long run. In the case of impact on production, much higher trajectories of growth path are observed for all sectors compared to the business-as-usual scenario.
0
500
1000
1500
2000
2500
3000
3500
4000
4500
2013 2015 2020 2025 2030
Per
Cap
ita G
DP
, $
Year
Predicted
Business-as-Usual 7%
Business-as-usual 4%
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Table 31: Impact of Annual $ 6.7 billion Investment on Sectoral Exports (% deviation from the Business-as-usual scenario)
CROP COMC LIVS FORS RATM FOOD LEAT CLOT GARM CHEM MACH PETR OIND CNST SERV
2013 0 4.57 8.34 0 0 8.92 10.62 6.89 7.11 14.15 10.19 13.38 6.36 0 10.19
2014 0 7.49 10.42 0 0 10.29 12.8 8.87 7.53 14.25 10.27 13.64 6.62 0 10.55
2015 0 8.85 10.93 0 0 10.44 13.27 9.58 7.79 14.39 10.44 13.85 6.88 0 11.12
2016 0 9.31 11.44 0 0 10.59 13.74 9.64 8.16 14.50 10.55 14.09 7.14 0 11.55
2017 0 10.37 11.95 0 0 10.74 14.21 10.13 8.50 14.62 10.68 14.33 7.40 0 12.02
2018 0 11.28 12.46 0 0 10.89 14.68 10.52 8.84 14.74 10.80 14.56 7.66 0 12.48
2019 0 12.19 12.97 0 0 11.04 15.15 10.90 9.18 14.86 10.93 14.80 7.92 0 12.95
2020 0 13.1 13.48 0 0 11.19 15.62 11.29 9.52 14.98 11.05 15.03 8.18 0 13.41
2021 0 14.01 13.99 0 0 11.34 16.09 11.67 9.86 15.10 11.18 15.27 8.44 0 13.88
2022 0 14.92 14.5 0 0 11.49 16.56 12.06 10.20 15.22 11.30 15.50 8.70 0 14.34
2023 0 15.83 15.01 0 0 11.64 17.03 12.44 10.54 15.34 11.43 15.74 8.96 0 14.81
2024 0 16.74 15.52 0 0 11.79 17.5 12.83 10.88 15.46 11.55 15.97 9.22 0 15.27
2025 0 17.65 16.03 0 0 11.94 17.97 13.21 11.22 15.58 11.68 16.21 9.48 0 15.74
2026 0 18.56 16.54 0 0 12.09 18.44 13.60 11.56 15.70 11.80 16.44 9.74 0 16.20
2027 0 19.47 17.05 0 0 12.24 18.91 13.98 11.90 15.82 11.93 16.68 10.00 0 16.67
2028 0 20.38 17.56 0 0 12.39 19.38 14.37 12.24 15.94 12.05 16.91 10.26 0 17.13
2029 0 21.29 18.07 0 0 12.54 19.85 14.75 12.58 16.06 12.18 17.15 10.52 0 17.60
2030 0 22.2 18.58 0 0 12.69 20.32 15.14 12.92 16.18 12.30 17.38 10.78 0 18.06
Note: CROP = cereal crop, COMC = commercial crop, LIVS = livestock and poultry, FORS = forestry, RATM = rice and ata milling, FOOD = other food, LEAT = leather and leather goods, CLOT = mill clothing, GARM = readymade garments, CHEM = chemicals, MACH = machinery, PETR = petroleum products, OIND = other industries, CNST = construction, SERV = other services
Source: Dynamic CGE Simulation Results
Table 32: Impact of Annual $ 6.7 billion Investment on Sectoral Production
(% deviation from the Business-as-usual scenario) CROP COMC LIVS FORS RATM FOOD LEAT CLOT GARM CHEM MACH PETR OIND CNST SERV
2013 6.43 6.13 6.92 4.21 7.98 9.56 11.23 6.97 7.33 12.09 10.58 12.88 10.34 6.29 9.21 2014 6.66 6.32 7.11 4.56 8.22 9.69 11.35 7.12 7.53 12.29 10.72 13.15 10.76 6.46 9.40 2015 6.89 6.46 7.23 4.72 8.31 9.76 11.49 7.31 7.78 12.43 10.88 13.68 10.92 6.53 9.71 2016 7.12 6.63 7.40 5.01 8.50 9.87 11.62 7.47 8.00 12.61 11.03 14.04 11.25 6.67 9.95 2017 7.35 6.80 7.55 5.26 8.67 9.97 11.75 7.64 8.22 12.78 11.18 14.44 11.54 6.79 10.20 2018 7.58 6.96 7.71 5.52 8.83 10.07 11.88 7.81 8.45 12.95 11.33 14.84 11.83 6.91 10.45 2019 7.81 7.13 7.86 5.77 9.00 10.17 12.01 7.98 8.67 13.12 11.48 15.24 12.12 7.03 10.71 2020 8.04 7.29 8.02 6.03 9.16 10.27 12.14 8.15 8.90 13.29 11.63 15.64 12.41 7.15 10.96 2021 8.27 7.46 8.17 6.28 9.33 10.37 12.27 8.32 9.12 13.46 11.78 16.04 12.70 7.27 11.21 2022 8.5 7.62 8.33 6.54 9.49 10.47 12.40 8.49 9.35 13.63 11.93 16.44 12.99 7.40 11.47 2023 8.73 7.79 8.48 6.79 9.66 10.57 12.53 8.66 9.57 13.8 12.08 16.84 13.28 7.52 11.72 2024 8.96 7.95 8.64 7.05 9.82 10.67 12.66 8.83 9.80 13.97 12.23 17.24 13.57 7.64 11.97 2025 9.19 8.12 8.79 7.30 9.99 10.77 12.79 9.00 10.02 14.14 12.38 17.64 13.86 7.76 12.22 2026 9.42 8.28 8.95 7.56 10.15 10.87 12.92 9.17 10.25 14.31 12.53 18.04 14.15 7.88 12.48 2027 9.65 8.45 9.10 7.81 10.32 10.97 13.05 9.34 10.47 14.48 12.68 18.44 14.44 8.00 12.73 2028 9.88 8.61 9.26 8.07 10.48 11.07 13.18 9.51 10.70 14.65 12.83 18.84 14.73 8.12 12.98 2029 10.11 8.78 9.41 8.32 10.65 11.17 13.31 9.68 10.92 14.82 12.98 19.24 15.02 8.24 13.24 2030 10.34 8.94 9.57 8.58 10.81 11.27 13.44 9.85 11.15 14.99 13.13 19.64 15.31 8.36 13.49
Note: CROP = cereal crop, COMC = commercial crop, LIVS = livestock and poultry, FORS = forestry, RATM = rice and ata milling, FOOD = other food, LEAT = leather and leather goods, CLOT = mill clothing, GARM = readymade garments, CHEM = chemicals, MACH = machinery,
PETR = petroleum products, OIND = other industries, CNST = construction, SERV = other services. Source: Dynamic CGE Simulation Results
224. The impacts on households’ real consumption are reported in Table 33. It appears that all household categories would experience rise in real consumption both in the short and long run with larger impacts observed in the long run. In the short run, the richer households would have higher rises in real consumption than the poorer households; however, in the medium and long run, the gains of the poorer households would be higher than their non-poor counterparts.
Table 33: Impact of Annual $ 6.7 billion Investment on Household Real Consumption (% deviation from the Business-as-usual scenario)
H1 H2 H3 H4 H5 H6 H7 H8 H9
2013 8.59 8.25 8.72 8.88 8.11 8.73 8.83 8.95 9.11
2014 8.78 8.31 8.86 8.92 8.16 8.93 8.99 8.99 9.15
2015 8.94 8.35 8.93 8.95 8.27 9.11 8.98 9.05 9.19 2016 9.12 8.40 9.05 8.99 8.34 9.30 9.08 9.10 9.23
2017 9.30 8.45 9.15 9.02 8.42 9.49 9.16 9.15 9.27
2018 9.47 8.50 9.26 9.06 8.5 9.68 9.23 9.20 9.31
2019 9.65 8.55 9.36 9.09 8.58 9.87 9.31 9.25 9.35 2020 9.82 8.60 9.47 9.13 8.66 10.06 9.38 9.30 9.39
2021 10.00 8.65 9.57 9.16 8.74 10.25 9.46 9.35 9.43
2022 10.17 8.70 9.68 9.20 8.82 10.44 9.53 9.40 9.47 2023 10.35 8.75 9.78 9.23 8.9 10.63 9.61 9.45 9.51
2024 10.52 8.80 9.89 9.27 8.98 10.82 9.68 9.50 9.55
2025 10.70 8.85 9.99 9.30 9.06 11.01 9.76 9.55 9.59
2026 10.87 8.90 10.10 9.34 9.14 11.20 9.83 9.60 9.63
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H1 H2 H3 H4 H5 H6 H7 H8 H9
2027 11.05 8.95 10.20 9.37 9.22 11.39 9.91 9.65 9.67
2028 11.22 9.00 10.31 9.41 9.3 11.58 9.98 9.70 9.71
2029 11.40 9.05 10.41 9.44 9.38 11.77 10.06 9.75 9.75
2030 11.57 9.10 10.52 9.48 9.46 11.96 10.13 9.80 9.79
Note: H1 = Landless households, H2 = marginal farmers, H3 = small farmers, H4 = Large farmers, H5 = rural non-farm households, H6 = urban no-educated households, H7 = urban low educated households, H8 = urban medium educated households and H9 = urban high educated households.
Source: Dynamic CGE Simulation Results
C. Evaluation
225. This section has explored the opportunity cost of gas subsidy in Bangladesh by looking at the impacts of withdrawing gas subsidies and investment of the saving in physical and social infrastructure. It has used two different techniques. The general conclusion is that there is a high opportunity cost of gas consumption subsidies.
226. Despite the fact that withdrawal of the gas subsidy would have some negative effects on macro and economies of individual sectors, such negative effects can be well compensated by the large positive effects generating from the investment of saved money in the physical and social infrastructure.
227. In the first scenario the $6.7 billion extra revenue from the gas sector (if gas is priced at LNG landing price in India) is invested annually over a period between 2013 and 2030 (18 years). In the second scenario, the $2.9 billion extra revenue from the gas sector (with gas priced at average gas price in India and Pakistan) invested annually over the same period. The SAM multiplier model indicates significant annual rise in gross output, commodity demand, household consumption and value-addition because of increased investments in physical and social infrastructure.
228. In the first scenario, increased investment in physical and social infrastructures would lead to 15.8% annual rise in gross output (over the base case scenario), 15.4% annual rise in commodity demand, 17% annual rise in value-added or gross domestic product, and 15.3% annual rise in household consumption.
229. Under the second scenario, even under a relatively lower annual investment demands than that under the first scenario, the gross output of the economy and the commodity demand would increase annually by 6.8% and 6.7% respectively compared to the base year values. Value-added or gross domestic product of the economy would increase annually by 7.5% compared to the base case. Finally, total household consumption would increase by 6.6% annually compared to the base case.
230. The exercise using the dynamic CGE model suggests that withdrawal of the gas subsidy and increased investments in physical and social infrastructure would lead to significant positive effects at the macroeconomic level and in individual sectors. Under the first scenario, real GDP would rise by 9.23 % compared to the business-as-usual scenario, which with no policy changes would still have increased by more than 10 %. Exports would grow 9.5 % and 14.3 % in the long run.
231. The fall in CPI would be higher in the long run than in the short run. Also, households would experience rise in real consumption both in short and long run. Though withdrawal of gas subsidy would lead to reductions in growth of GDP, exports and imports and a rise in the CPI, increased investments in the physical and social infrastructure would generate large positive effects to produce net positive effects for the overall economy. The directions of the impacts of the second scenario would be the same as in the first scenario, though the magnitudes of the impacts would be lower under the second scenario.
232. It may seem counter intuitive that price increases will lead to increased economic growth, increased exports and lower inflation. However, intuitive analysis overlooks the strong negative impacts of gas shortfalls with, outages, low quality supply, widespread waste and no incentive to eliminate low quality uses of gas and industrial inefficiency. With higher prices, there will be strong incentives to invest in economical equipment, to conserve gas and move gas usage to higher value production and consumption. With increased growth, incomes, exports and greater efficiency, revenues to the government will increase and the reduction in the government’s need to borrow will be a critical factor in restraining inflation.
H. Recommendations
The GoB should note the very high opportunity cost of gas consumption subsidies;
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GoB should note that withdrawal of gas subsidies will allow increased investment in infrastructure, increased exports and higher economic growth;
There should be a phased program to withdraw subsidies and replace these with a major program of infrastructure improvement;
233. We now look at the current taxation of gas and other natural resources and look for methods to increase the efficiency of the collection system and how taxation burdens can be released.
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8. BANGLADESH TAXATION
A. Taxation Base
234. Taxation of Oil and Gas is important not only as a source of government revenue, but also to promote gas and environmental conservation, influence consumer choice, improve efficiency of energy use and improve energy supply security. This report has demonstrated that Bangladesh’s gas tariffs are substantially below those in neighboring countries. Priced closer to the prices of LNG imports or retail prices in neighboring countries, substantially greater revenue will be obtained and that invested in infrastructure that additional revenue will bring substantial benefits to Bangladesh. We now assess the impact on the national budget and look at the efficiency of current sector taxation.
Table 34: Consolidated Fund Receipts Estimates 2012-13 Economic Summary
Code Range
Description
Estimated Budget
Taka 000 2012-13
Revised Taka 000 2011-12
Budget Taka 000 2011-12
Estimated Budget US$ 000 2012-13
%
Tax Revenue
NBR
100 Taxes on Income and Profit 35300,00,00 28061,00,00 27561,00,00 4,412,500.00 13.37
300 Value Added Tax (VAT) 40465,55,00 34304,00,00 34304,00,00 5,058,193.75 15.32
400 Import Duty 14528,38,00 12634,00,00 12634,00,00 1,816,047.50 5.50
500 Export Duty 40,00,00 30,00,00 30,00,00 5,000.00 0.02
600 Excise Duty 997,10,00 450,00,00 450,00,00 124,637.50 0.38
700 Supplementary Duty 19968,97,00 16220,00,00 16220,00,00 2,496,121.25 7.56
900 Other Taxes and Duties 959,00,00 671,00,00 671,00,00 119,875.00 0.36
Total - NBR: 112259,00,00 92370,00,00 91870,00,00 14,032,375.00 42.51
Non-NBR Tax 0.00
1000 Narcotics and Liquor Duty 72,00,00 65,00,00 70,00,00 9,000.00 0.03
1100 Taxes on Vehicles 1100,00,00 900,00,00 975,00,00 137,500.00 0.42
1200 Land Revenue 608,20,90 550,00,00 569,70,60 76,026.13 0.23
1300 Stamp Duty (Non -Judicial) 2785,00,00 2400,00,00 2300,00,00 348,125.00 1.05
Total - Non-NBR Tax : 4565,20,90 3915,00,00 3914,70,60 570,651.13 1.73
Total -Tax Revenue : 116824,20,90 96285,00,00 95784,70,60 14,603,026.13 44.24
Non-Tax Revenue 0.00 0.00
1500 Dividend and Profit 3142,82,26 2517,22,27 1845,37,50 392,852.83 1.19
1600 Interest 1070,55,93 696,49,76 2277,97,09 133,819.91 0.41
1700 Royalties and Property Income 28,00,00 25,00,00 25,00,00 3,500.00 0.01
1800 Administrative Fees and Charges 3774,03,45 2782,24,55 2888,56,85 471,754.31 1.43
1900 Fines, Penalties and Forfeiture 379,08,39 288,04,00 237,88,60 47,385.49 0.14
2000 Receipts for Services Rendered 1044,66,44 938,66,82 891,37,22 130,583.05 0.40
2100 Rents, Leases and Recoveries 149,37,75 124,60,55 138,37,30 18,672.19 0.06
2200 Tolls and Levies 465,00,00 350,00,00 385,00,00 58,125.00 0.18
2300 Non-Commercial Sales 368,63,86 339,58,29 342,22,55 46,079.83 0.14
2400 Irrigation Receipts 60 60 2,50 0.75 0.00
2500 Defence Receipts 2745,07,92 1883,77,51 2504,36,09 343,134.90 1.04
2600 Other Non-Tax Revenue and Receipts 8653,94,52 7879,01,15 9974,22,62 1,081,743.15 3.28
3100 Railway 740,00,00 518,00,00 778,00,00 92,500.00 0.28
3200 Post Offices 243,00,00 223,00,00 281,00,00 30,375.00 0.09
3600 Sale of Assets 41,78,88 34,29,70 31,00,50 5,223.60 0.02
Total -Non-Tax Revenue : 22846,00,00 18599,95,20 22600,38,82 2,855,750.00 8.65
Total - Receipts : 139670,20,90 114884,95,20 118385,09,42 17,458,776.13 52.90
Food Operation, Grants, Loan etc. 0.00 0.00
3000 Food Operation -357,62,49 -384,43,97 -630,97,06 -44,703.11 -0.14
3700 Foreign Aid Grants 6044,33,17 4460,14,96 4938,00,00 755,541.46 2.29
3800 Loan Repayments 1500,44,20 1297,56,05 2519,40,90 187,555.25 0.57
3900 Repayments of Advances to Government Employees
32,06,67 31,37,02 110,21,24 4,008.34 0.01
4000 Term Loan Receipts 23624,00,00 23489,09,35 20080,00,00 2,953,000.00 8.95
4100 Floating Loan Receipts 72439,61,97 56705,25,48 49956,34,83 9,054,952.46 27.43
4200 Foreign Loan Receipts 20398,00,00 14036,00,00 18685,00,00 2,549,750.00 7.73
4300 Transaction with IMF 700,00,00 700,00,00 700,00,00 87,500.00 0.27
Total - Food Operation, Grants, Loan etc. : 124380,83,52 100334,98,89 96357,99,91 15,547,604.40 47.10
Total Receipts : 264051,04,42 215219,94,09 214743,09,33 33,006,380.53 100.00
Source: http://www.mof.gov.bd/en/budget/12_13/cfr/en/economic_summery_en.pdf?phpMyAdmin
=GqNisTr562C5oxdV%2CEruqlWwoM5&phpMyAdmin=XRGktGpDJ7v31TJLuZ5xtAQmRx9
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235. It is now necessary to assess how the current taxation system facilitates the development of the gas sector whether the taxation regime is internationally competitive and what if any changes should be made. National Budget Consolidated Fund Receipts Estimates 2012-13 Economic Summary is found in Table 34.
236. The Finance Division supply figures for the Consolidated Fund Estimates for Receipts 2011-12, revised figures for 2011-12 and Estimates for 2012-13. Set out in Table 34 these figures show that next year’s estimated NBR tax collections are Value Added Tax (15.3% of total revenue), Income and Profits Taxes (13.4%) and supplementary Duty (7.6%). Import duties traditionally a large source of revenue account for only 5.5% of total revenue. Non-NBR taxes will account for only 1.73% of revenue. Under Non-Tax revenue the largest single item is “Other” and dividends and profits will it is estimated account for only 1.2% of total revenue.
237. These figures show the success of the VAT system in collecting substantial revenues for the government budget. With total anticipated VAT revenue collection of US$5 billion a year it also shows that additional revenue obtained by more realistic pricing of gas could very easily begin to match the revenue collected by the successful VAT collection. Revenue figures add further strength to this point by emphasizing dividends and profits (SOEs) account for only US$393 million in a budget of US$33 billion.
B. Payments to National Budget
238. In addition to the normal company taxes paid by the gas sector, Petrobangla’s annual reports show other payments to the budget. Paragraph Error! Reference source not found. discusses the ccumulation of evidence that its operations result in real losses of revenue and as well as the many development opportunities foregone.
239. Transfers are made up of Supplementary Duty and VAT, DSL, Income Tax, Dividends, Customs (plus VAT on customs liable items) and more recently a Royalty (on coal extraction and unrelated to the gas sector). Figure 18 shows the figures broken down by category revealing that the significant transfers are SD and VAT.
50 Annual dividends by Petrobangla amount to about US$50 million a year, a trivial sum
compared with the company’s annual sales which top at least US$1.2 billion.
Figure 18: Petrobangla Transfer to the national Budget by Category (Million US$)
Source: Petrobangla Annual Report 2010, Taka amounts are converted to US$ and deflated for the change in the value of the TK against the
US$ from http://www.xe.com/currencytables/.
C. Tax System
240. It is widely accepted that a framework of tax policy principles is needed to guide analysis of a complex tax system and suggestions for reform and at the heart of a good tax system is certainty. If taxpayers can understand what has to be paid, have plenty of advanced notice, believe that other similar taxpayers
50
It is questionable whether DSL should be included as it is services debts owed to the National Budget.
0.00
50.00
100.00
150.00
200.00
250.00
300.00
350.00
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
SD and VAT
Debt ServiceLiabilities DSL
Income Tax
Dividend
Customs/VAT
Royalty
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will be paying similar amounts and that the money collected will be spent on necessary goods and services, then the chances of the taxpayer paying their due is enhanced. The objective of good system design is to enhance the overall economic well-being of citizens. Well-designed tax systems seek ways to collect the revenue necessary for essential expenditure and maximize economic efficiency, while reducing the costs of collection.
241. Good systems make tax collection efficient while promoting fairness and raising revenue for programs endorsed by voters. Generally accepted design principles include fairness: people and businesses in the same position should be treated similarly; people should contribute in accordance with their ability to pay; and tax rules should be transparent and forward looking.
D. Corporate tax in Bangladesh
242. Taxes induce individuals to make decisions that they would not have made in the absence of tax. The costs of taxes become excessive when they induce the misallocation of scarce economic resources. Excessive taxation can cause tax avoidance; taxes that increase the retail value of natural resources too far above the cost of extraction can encourage excessive conservation of natural resources and force users into more expensive options. Clear objectives and careful design of tax systems are crucial.
243. In “Income Tax at a Glance51” the Bangladesh NBR state the underlying principle of Bangladesh’s taxation policy: Income tax is imposed on the basis of ability to pay. The more a taxpayer earns the more he or she should pay''. The principal aims of the tax system are revenue and ensuring equity and social justice. The concept of progressive taxes is carried through for companies. Currently applicable rates of taxation are in Table 35. There is no explanation of the principles behind the different rates, but at a first glance the policy appears straightforward.
Table 35: Rates of Taxation
Taxpaying Entity Tax Rate
Publicly Traded Company 27.5% Non-publicly Traded Company 37.5% Bank, Insurance & Financial Company 42.5% Cigarette manufacturing company (not listed with stock exchange) 42.5% Cigarette manufacturing company (listed with stock exchange) 35% Mobile Phone Operator Company 45% Publicly Traded Mobile Operator Company 35%
Source: See NBR, site, Footnote 51 below
Tax Rebates
244. The actual incidence of taxation is altered from the policy rate by the large number of rebates and deductions available, which can reduce significantly any private or corporate taxpayer’s liability. Publicly traded companies (excluding cell phone company) declaring a dividend of more than 20% can claim a 10% rebate on total tax (a form of imputation to reduce double taxation). The amount of deductible investment expenses are either limited to either the actual investment in a year or up to 20% of total income or Tk1,00,00,000/- (i.e. US$122,000) whichever is less. Many Investments and donations also qualify for tax rebates. These include insurance premiums, contributions to annuities, provident funds, self and employer's contribution to provident funds, contributions to superannuation, investments in debentures, debenture stock, stocks or shares, sponsored pension schemes and benevolent funds. Donations to Zakat funds52, approved charitable hospitals and many philanthropic or educational institutions.
245. In addition to rebates, investments also gain concessions. There are incentives, often tax holidays for industrial undertakings and physical infrastructure facilities engaged in pharmaceuticals, contraceptive manufacture, basic chemicals, dyes and chemicals, electronic components, bio-fertilizers, biotechnology, boilers, compressors, computer hardware, energy efficient appliances, insecticide and pesticides, petro-chemicals, processing locally produced fruits and vegetables, radio-active (diffusion), textile machinery, tissue grafting, and other designated categories of industrial undertakings.
51
http://www.nbr-bd.org/IncomeTax/Income_Tax_at_a_Glance.pdf accessed 1/4/12 52
Zakat Funds are charity organizations to help generous people reach out to those in need. Their goal is to address immediate needs and ensure the self-reliance of the poorest people around the world with Zakat and Sadaqa (charity) dollars of privileged Muslims and the support of other generous donors.
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246. Bangladesh also makes extensive use of withholding taxes, usually termed as tax deductions collected at source. Under this system both private and public limited companies or any other organization specified by law are legally authorized and bound to withhold taxes at some point of making payment and to deposit the same with the exchequer. The taxpayer receives a certificate from the withholding authority and gets credits of tax against assessed tax on the basis of such certificate.
247. A large array of physical infrastructure is also eligible for tax holidays including sea and river ports, elevated expressways, export processing zones, flyovers, gas pipe lines, Hi-tech parks, information and Communication Technology (ICT) technology zones, Information Technology (IT) parks, large water treatment plant and pipe lines. Also qualifying are: liquefied natural gas (LNG) terminals and transmission lines, mono-rails, rapid transit, renewable energy appliances, toll roads, underground rail, waste treatment plants.
248. Income derived from several activities is exempt from tax and these include small and medium enterprise (SME) engaged in production of any goods and having an annual turnover of not more than Tk24 lakh (US$30,000) and industries set up in EPZ. Bangladesh has also signed Avoidance of Double Taxation Agreements with 28 countries.
E. Bangladesh Oil and Gas Taxation
Bangladesh Policy and Taxes
249. The current set of taxes, rentals, levies and charges represent the high water mark of ad hoc policy making rather than a consistent program to provide a fair share of the economic benefits of energy development and promote future investment in the sector. PSC are the main determinant of income streams to the government and IOCs respectively and which income stream is taxed and which is not. The 1996 Energy Policy provided for the preparation of a model PSC. PSCs are widely used internationally and since 1996 have been the primary vehicle for encouraging foreign investment in the Bangladesh petroleum sector and attracting foreign capital and expertise.
Model PSC
250. The Bangladesh model Production Sharing Contract (2008)53
shows how the concept works. Article 14 of the model contract sets out the rules for the allocation of production, recovery of costs and expenses and production sharing. The Contractor has the right to use petroleum produced from the Contract Area to the extent reasonably required for its operations under the contract. All remaining oil, natural gas, condensate and natural gas liquids (NGL) produced and saved from the Contract Area is measured at the applicable Measurement Point and allocated as described in the Model Contact Profit Schedule set out in Table 36.
Table 36: Profit Gas Share Schedule
Natural Gas produced and saved from Contract Area and not used in Petroleum operations
PROFIT ALLOCATION
Production tranches Petrobangla Share (%) Contractor Share (%)
Up to 75 mmcf per day ♦ ♦
Portion in excess of 75 mmcf
per day and up to 150 mmcf per day.
♦ ♦
Portion in excess of 150 mmcf
per day and up to 250 mmcf per day.
♦ ♦
Portion in excess of 250 mmcf
per day and up to 400 mmcf per day.
♦ ♦
Portion in excess of 400mmcf
per day and up to 600 mmcf per day.
♦ ♦
Portion in excess of 600 mmcf per day. ♦ ♦
Source: Model Production Sharing Contract 2008, table 14.6B, page 37
251. As noted on page 6 above, the contractor recovers all costs and expenses out of a maximum of 55% per year of all available oil, natural gas and other valuable resources from the assigned Contract Area, referred to as "Cost Recovery Petroleum (i.e. Gas)". Expenses incurred in commercial production,
53
http://www.petrobangla.org.bd/MODEL%20PRODUCTION%20SHARING%20CONTRACT%202008-FEBRUARY.pdf accessed 11-04-2012
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planned capital expenditure costs, exploration costs, exploration and appraisal program costs before commercial production as well as all other expenses related to operations, are recovered at the agreed rate on a straight-line basis from the time commercial production commences.
252. Production Sharing begins when the Contractor is recovering costs and expenses under Article 14 the balance of petroleum or gas remaining after cost recovery, is referred to as "Profit Petroleum") and allocated between Petrobangla and the contractor in proportions based on total average daily production over the Month. The proportions denoted by the ♦ are bid by the contractors during the selection process.
253. Proportions vary from one contract to another. Contractors may separately dispose of their individual shares of the Cost Recovery Petroleum and of Profit Petroleum. Title and risk of loss passes to each contractor at the outlet of the measurement point. This freedom extends also to the right to export freely petroleum received. Petrobangla may receive its shares in kind or in cash, as mutually agreed between the Parties.
254. As noted above, in PSCs, Petrobangla retains the first refusal on the purchase of any gas produced by the IOC over and above its contractual entitlement. The first refusal system has the benefit of providing the IOCs with a guaranteed market for their gas. The arrangement gives Petrobangla a captive, low cost gas supplier. This is a feature that has allowed Petrobangla to survive despite its financial weakness.
Possible Changes
255. The principal problem with PSCs is that they collect revenue for the government, but violate the principles enunciated for an efficient tax regime. Prices are related to the HSFO price in Singapore and the PSC has no reference to the current world price of gas. Quantities and prices can be manipulated by either party with possible losses of revenue to the government. Furthermore, as contracts between the government and a producer and as with all contracts are inflexible unless the parties are in complete agreement on how they should be changed.
256. Suggestions have been offered for changes to this system. Both academics and gas industry specialists believe that the private partners would favor alterations to the Model PSC to facilitate IOCs marketing portions of gas production to third parties. The only change would be that instead of Petrobangla having the first refusal to purchase gas at existing prices, the IOCs should be encouraged to market a small but growing portion of gas to 3
rd parties with Petrobangla having the option to match any third party price
received and having the option to purchase at that price.
257. The downside for Petrobangla would be that if it decided to purchase the gas it would have to pay something closer the current World Market price. Customers in Bangladesh would have to pay more for gas, but as has been pointed out in Table 6 and Table 7, many are already paying these prices already (e.g. standby generation) and would be happy to pay the extra to Petrobangla if it can guarantee reliable supplies.
258. The more significant upside for Bangladesh is that IOCs with this option would be far happier to make new investments in the gas sector. There would be a financial incentive to engage in new exploration both on shore and off-shore. Another upside would be greater private sector interest in building the LNG export and import handling facilities the nation needs. From the government’s point of view there would also be significantly enhanced taxation revenues from taxation of the IOCs additional profits.
259. Even if this rule change is made, it is improbable any gas would be exported. The effect of this change in policy would be to bring the Bangladesh price closer to the World Market. Private and SOE electricity and fertilizer producers would be able to pay market prices for the feedstocks they urgently need. Many will gladly pay a premium for security of supply. Additional revenue to Petrobangla or the IOCs will provide the revenue required for exploration, refurbishment and development of discoveries.
260. The gas price will be more market related without the need for government intervention and the costs incurred will flow through to subsequent tariff increases. Overall there will be long-term benefits to the gas sector and to the whole Bangladesh economy. Additional revenue opportunities will provide major incentives for investment by the major international companies, something significantly lacking at the present time. The policy change and the new discovery combined may be sufficient incentive to encourage the significant new investment the sector needs.
261. The lack of flexibility of PSC and the increasing sophistication of the Bangladeshi economy could
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stimulate interest in moving to a more flexible tax and royalty based system for Bangladesh to recover value from its natural resources. In the next section reviews practices in other countries are examined and subsequently options are explored for using general taxation measures, an ad-valorum tax, plus Resource Rentals (RR) are discussed as options.
F. International Taxation of Oil and Gas
262. PSC,54 Resource Rentals (or Royalty Regimes) and income tax are the major methods of revenue collection in the oil and gas sector. Annex is a summary of the taxation regimes for oil and gas in 93 different countries. The table is indicative and should be used with some caution as it is derived from several different resources each prepared for different reasons using different methodologies. At least 52 countries are using PSCs to a greater or lesser extent. Reliance on the PSCs is particularly strong in the developing world. No examples have been identified in developed countries or the oil rich countries of the Middle East. Taxation systems vary with the level of country development, the ease with which oil and gas can be extracted and the objectives of the government at the particular time. A variety of techniques are used to extract cash from the oil and gas sector. Table 37 analyses some of the most common methods governments use.
Table 37: Worldwide Revenue sources from Oil and Gas
Method of Taxation Benefits Drawbacks Incidence
License Fees
Exploration May cover the cost of licensing regime
An additional cost, very small amounts levied
Few instances recorded
Production May cover the cost monitoring regime
Additional cost, relatively small sum involved
Few instances recorded
Cash Bonus Bidding (CBB) A source of revenue Practical where there is good knowledge of geology
Only one instance noted (however CBB was not the focus of either study)
Inspection-Compliance
Safety inspection fees A cost fo the industry functioning should be borne by the industry
A small amount involved and can be regarded as an annoyance
Not recorded in surveys but widespread charging for inspections
Royalties
Specific (i.e. so much per tanker)
Simple, a good revenue flow, measure production and provide information
Discourages investment in high cost deposits
Classed as royalties in Annex , not cost sensitive
Ad Valorem (AV) Simple, a good revenue flow, measure production and provide information
Discourages investment in high cost deposits
Classed as royalties in Annex
not cost sensitive
Accounting Profits Royalty (APR) – annual deduction of costs against gross revenues
Part sensitive to fixed costs, full sensitive to variable costs, only tax profits not production
Can be a high cost method of taxation unless collected by tax authorities
Difficult to distinguish from Resource Rent in the analysis in Annex
Resource Rent Royalty (RRR) – costs accumulate until production begins, inflation proofed
Encourages high cost production, can reduce the royalty payments for producers
High cost to monitor and administer. May not produce much revenue.
The various sources do not distinguish the APR and RRR
Cash Bonus Bidding Where information is good, success rate is high and provide good revenue
Produces very low bids where there is little information
Use is very seldom recorded
Carried Interest See below
Production Sharing
PSC Avoids host putting up cash, avoids the need to allow costs of unsuccessful wells to be deducted
Results in a higher share of the profits going to the partner. Not transparent, PSC not published
Used in more than 50 developing countries.
Profit Share Simple, easy to administer, may be hard to distinguish from PSC
Loss of royalties to host country No instance recorded
Carried Interest Government has an equity stake in successful exploration
Government needs to participate in development financing, or sell its
Examples in Brazil, Cameroon and Equatorial Guinea, New Zealand
54
The term is used interchangeably with the term Production Sharing Agreements. While there are differences between the two styles of document their effects are sufficiently similar to be regarded as identical. The Bangladesh terminology of PSC is used in this report.
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Method of Taxation Benefits Drawbacks Incidence
stake
General Taxation
Corporate tax (CIT) Requires no special regime, simple and low cost
CIT rates are too low to recover a fair share of gas value for a nation. Usually combined with royalty.
Bangladesh does not subject cost gas to CIT. 9 other jurisdictions seem to have a similar approach
State Income Tax (SIT) States where oil and gas is located can share benefit
Complication. May resolve political problems, but may create others
Only 2 instances noted
VAT Familiarity, strong revenue flow, simple and no special collection required
Many jurisdictions exempt oil and gas from VAT
42 of 61 countries (E&Y analysis) impose VAT, some with lower rates
Excise Tax Simple revenue source on imports Regressive, revenue only Few examples noted
Dividend Tax Tax on payments to successful investors
Discourages private investment Venezuela is an example
Capital Gains Tax (CGT) Community gains the benefit of unearned gains from progress
Discourages investment, difficult to collect except as part of general CGT
30 of 61 countries (E&Y Analysis) use some form of CGT
Withholding Tax Reduces tax evasion, easy to collect
Refunds may be hard to obtain 73 92 countries examined use WT types
Branch Tax To get oil-gas company to open local branch
Ineffective way to encourage development
Only 2 examples
Windfall Profit Tax Obtains community benefit from community resource
May be unfair to investor, yet another tax
Several examples, difficult to distinguish from royalties
Local taxes Gives the local community a stake in the development
Adds a complication to the management of project
Not analyzed in detail
Levies
Social and Training Creates long-term benefits for the industry labor force
Not a core responsibility of the developer
A few examples
R&D Creates long-term benefits for the research community
Not a core responsibility of the developer
Likely to be ineffective development tool
Sector Specific Rules
Ring Fencing Aims to stop oil and gas development costs from being deducted against other income
Boundary issues are difficult to resolve. No evidence that it is an effective tax measure
The E&Y analysis shows 9 examples of ring fencing
Farming in and out Enables new capital to brought in to develop a deposit
May result in new parties not committed to original agreements
Not analyzed in detail
Surface Rentals Often aims to benefit the local community and secure their commitment
Despite its aim, often just another source of revenue for central ministry
25 of 61 countries in E&Y analysis have some form of surface rent or fee
Negative Taxes
Deduction for expenses Deductions of costs against income streams are one of the core features of tax systems
Relies on the honesty of the taxpayer and the diligence of tax officials
PSC are designed to allow developing countries to escape this liability
Deductions for losses The ability to carry forward losses improves the cash flow of developers
Reduces the incidence of high tax rates. The higher the rate the more valuable the deduction
21 of 61 countries allow losses to be carried forward
Tax Incentives Aim to encourage investment in the oil and gas sector
Generally ineffective – overall regime is important
Carrying forward of losses is the most important tax incentive
Source: Global Oil and Gas Tax Guide, Ernst and Young 2011, Sunley, Baunsgaard and Simard ibid
263. In a cross country analysis of the taxation of oil and gas terms with different meanings are often used interchangeably and the same word is used to describe different things. For example in Annex the table distinguishes between Royalties and Resource Taxes, but these terms are often used inter-changeably. Table 37 emphasizes the variety of methods used to extract taxes from the sector. Even in those jurisdictions where PSC are employed, governments use other ways to extract additional revenue from the sector.
264. The Oil and gas sectors analyzed are characterized by broad-based taxes. Developed and oil rich country regimes have one or two major taxes, expressed simply and clearly with minimal deductions enabling rates to be low and uniform. In developing countries the regimes tend to be complex and in some cases abound with rules requiring interpretation creating opportunities for moral hazard. However, most pervasive example of oil and gas taxation in developing countries is the use of PSCs. While these have some advantages for developing countries, their problems, some of which have occurred in Bangladesh have already been analyzed.
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G. Ad Valorum Tax
265. The case for an ad valorum tax on all gas extracted is primarily to create a management tool by which the government can measure in monetary terms as well as volumetric terms the quantities of gas extracted. The typical ad valorum duty is charged on every PJ of gas extracted. As noted in paragraph 35 above an ad valorum duty on a mineral resource is a regressive tax, an in that capacity it resembles the Specific Duty.
266. However, the Bangladesh SD is collected along with company taxation only on the cost gas, whereas an ad valorum duty would be charged on all gas. The combination of an ad valorum duty on every PJ extracted and the principles of a PSC sit uneasily together. Such a combination could be achieved, but in the study of 61 countries, the information provided seems to suggest that it would be a unique regime. An ad valorum tax on every PJ would only make sense if combined with a royalty regime and that would require abandoning the concept of PSCs.
H. Royalties
267. The timing and rate of development and prices of resources such as oil and gas are determined by the pricing policies established by resource owners. In Bangladesh, as in most former Common Law Countries, the owner is the nation with its interests managed by the government. The objective of a resource rental is to recover for the long-term benefit of the nation some of the value of the resource that would otherwise be captured by the developer.
268. The design of the Resource Rental (RR) is critical as investors and producers must be able to plan for it in their investment planning. They know the costs of production and have a view in respect of future commodity prices. They know energy and mineral resources are both finite and scarce and it is scarcity and finite supply that give rise to the charge for the use of the resource. They can plan to comply with policies aimed at wise use of resources.
269. Some mineral explorers and developers contend a mineral resource is an asset created by the investment required to exploit it. The argument contends the resource’s value is the license to exploit that resource, accordingly the government as owner should receive only the proceeds of the income tax system in revenue from resource production. But Royalties are not taxes in the normal sense. They transfer the scarcity value, (also known as the consumers’ surplus) from resource producers to the resource owner. Failure to price a resource like gas at its opportunity cost biases production and consumption in favor of the present generation as opposed to future generations. This is the position in Bangladesh today.
270. At least 50 of the 93 regimes analyzed in Annex use of some form of royalty. A royalty imposed by the government extracts rent and prevents consumers from over-consuming a national resource in preference to privately held substitute resources. Alternative arrangements similar to those in developed economies will comprise normal taxation of income, VAT, and other taxes (as they apply to all other businesses) and a Royalty designed to reward the resource owning government (on behalf of the nation) for the use of the resource. As reserves around the World decline the post-oil future is of growing importance.
I. Rent
271. The appropriate amount of economic rent to charge depends on the availability and scarcity of the resource, and the number of bidders for the resource as well as the quantity demanded. As a matter of practical reality, the cheaper the resource is to extract the higher the taxes and royalties imposed can be. For high cost resources, the additional taxes possible will be minimal. The criteria used to determine how the royalty should apply need to consider a wide range of issues, in addition to the revenue stream. These include:
efficiency (bureaucratic and market);
site specificity (ease of access and extraction can increase potential for revenue);
optimizing revenue (balance between investor and owner);
international competitiveness (must be competitive with other resource owners);
competition (will ensure that the best possible price obtained for extraction);
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consistency (all bidders need to be treated equally and similar decisions on similar issues)
coherence (design, administration and administration need to point in the same direction)
corporate scale (tiny projects and majors may need different rules); and
respect for existing contracts (changes should only occur with support from both parties).
272. These design elements are essential if the resource pricing regime is to have the respect of the investing community, local and international. The exact details will need to be worked through. These proposals are a package and substantial moves away from the principles enunciated, could soon end up in compromises representing no improvement over PSCs.
J. Other Options
273. Two RRs are analyzed above. Option 3, the accounting profits royalty (APR) is basically a tax on profits that recognizes that the resource user must cover all costs and make a profit before a tax can be charged. It has lower cost of administration if managed by the income tax authority, it enhances productive efficiency given its sensitivity to variable costs, enhances dynamic efficiency given its partial sensitivity to fixed costs, and full sensitivity to variable costs, optimizes rent efficiency owing to the sensitivity to fixed and variable costs;
274. Option 4, Resource Rent Royalty (RRR) is imposed irrespective of profit and consequently is usually at a lower rate. Is more costly to administer because it requires a special monitoring regime, and will often
require high cost re-negotiations. It can only be applied to new projects, encourages high cost production and thus undermines productive efficiency, creates a strong incentive for investment in high cost marginal deposits and thus discourages dynamic efficiency and Promises efficient rent collection, but is undermined by the excessive sensitivity to fixed and pre-profit operating costs, which lead to productive and dynamic in-efficiency.
275. The best option is the APR because it avoids RRR's excessive sensitivity to costs and does not encourage production in high cost areas. Despite the APR’s advantage of greater transparency and easier administration than a PSC an APR will not have the benefit immediate benefit of bringing pricing in Bangladesh closer to the World market. Prices are so low in Bangladesh that any RRs would need to be greater than the existing price paid to the private sector and substantially greater than current retail prices. This would mean an RR significantly higher than levels generally applied around the World. Such a RR would also have the effect of discouraging the private sector as future discoveries could be substantially more expensive to develop than existing fields.
276. In the immediate future Bangladesh is committed to the PSC. Abandoning the concept of a PSC now will be a lengthy and fraught process. Depending on the detail of a PSC it may have many of the characteristics of a RRR. For these pragmatic reasons the consideration of a regime based on RRR is one for the medium-term to long-term rather than an urgent priority.
Reform Process
277. Table 38 analyses six resource tax options in detail. The choice of the best option is a matter of judgment. To improve this judgment a now internationally tried and tested process of taxation reform can be employed. The objective is to gain the widest possible involvement in the drafting of the law so that anomalies and misunderstandings are removed, gaining kudos for the government as well as putting a robust statute in place. Annex demonstrates a successful example of applying the now internationally used process.
278. In this process the government spells out its objective. It calls on all citizens to express their opinions. These opinions are then digested by a small team of expert taxation specialists chaired by an internationally recognized expert in taxation. The team’s report is then published with the Finance Minister’s decisions attached. At this point a draft bill is prepared and tabled in Parliament and the public and interested groups are again invited to make submissions on the bill. Submissions are heard by a Parliamentary committee and if any changes are required the revised bill is forwarded back to the full Parliament for debate and passage.
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Table 38: Resource Pricing Options
valuation criteria 1. Specific royalty(sr) 2. Ad valorem Royalty(avr)
3. Accounting profits royalty(apr)'
4. Resource rent royalty (rrr)
5. Cash bonus bidding(cbb)
6. Carried interest
A Minimization of administration and compliance costs (cost of rent and information collection, reviews and renegotiation)
Low costs; increases with the number of rate changes made
Low costs; increases with the number of rate changes made
Low costs if administered by the income tax authority; high costs, if not
High costs from monitoring project costs and revenues; Could require high cost re-negotiations; Can only be applied to new projects
Low cost if one-off; if CBB is the only rent it will require re negotiations every 5 years or so and thus becomes costlier
Lowest cost method; much higher costs if it is used as only resource pricing option
B Maximize productive efficiency (minimize operating costs of production)
Encourages productive inefficiency because of insensitivity to costs; possible premature closure if applied to existing mines,
Encourages productive inefficiency because of insensitivity to costs; possible premature closure if applied to existing mines;
Enhances productive efficiency given its sensitivity to variable costs
Encourages high cost production and thus undermines productive efficiency;
Potentially very discriminatory given the lack of information about the costs of the future project; this potential is minimized if CBB is not relied on as the main RRCM.
Same as # 6. If modified as proposed
C Maximization of dynamic investment efficiency (encourages the next unit of production in a timely fashion with appropriate scale and technology at least cost)
Discourages investment in high cost production and thus enhances dynamic efficiency
Discourages investment in high cost production and thus enhances dynamic efficiency
Enhances dynamic efficiency given its partial sensitivity to fixed costs, and full sensitivity to variable costs
Creates a strong incentive for investment in high cost marginal deposits and thus discourages dynamic efficiency;
Discourages dynamic efficiency because it adds directly to fixed costs
Same as # 6. If modified as proposed
D Optimization of rent collection efficiency
Low; improves if there is an adjustment for inflation; flow of revenue creates perception the community is being compensated; in general; does not create equitable rent extraction.
Variable: takes too much from high cost producers - under taxes low cost producers; raising rate captures more rent from low cost producers and creates additional costs for high cost producers
Optimizes rent efficiency owing to the sensitivity to fixed and variable costs; best option because it avoids RRR's excessive sensitivity to costs and does not encourage production in high cost areas.
Promises efficient rent collection, but is undermined by the excessive sensitivity to fixed and pre-profit operating costs, which lead to productive and dynamic in-efficiency.
Not an efficient rent collection mechanism because of lack of information
Same as # 6. If modified as proposed
Source: With acknowledgement to Generation to Generation, Dr P Caragata, Ministry of Energy, Wellington 1989, page 23
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K. Sovereign Wealth
Providing for the Future
279. In many countries royalties simply find their way into the national budget and are used for general everyday expenses. In the United Kingdom, since the first discoveries of oil and gas in the early 1970s and the commencement of production in the middle 1970s this was the case. The lack of provision for the future is a driver of independence campaigns in Scotland where the country’s oil wealth is located.
280. In another resource rich country, Nigeria the government has earned over US$ 450 billion in oil revenues since 1970, standards of living or ordinary Nigerians have declined. In Nigeria there is also concern about revenues vanishing, because corruption is significant problem facilitated by lack of transparency in the PSCs used by the oil sector. Money set aside to renovate the nation’s refineries and reduce oil imports simply vanished. During military rule, in Nigeria most licenses were awarded on a discretionary basis by the head of state. Upon taking office, a recent president cancelled contracts awarded to senior military officers.
281. A further driver of corruption in Nigeria is the consumption subsidy on petrol resulting in smuggling and fat profits for middlemen.55 As much as US$400 billion has been lost to corruption since independence.56 In 1999, the government advertised the available blocks, selection criteria and disclosed the bids received, but avenues for corruption remain, including favored contractors, smoothing the path of transactions and bunkering (loading more oil into vessels than paid for). Oil and gas wealth has been a driver of corruption.
Heritage Movement
282. Increasingly, Royalties are seen as the source of money to put aside for the time when the resource is exhausted. The objective is to make some provision for future generations as well as providing for the current. Resource owners, seeking optimal revenue over-time price their resources to ensure investment, production, rent collection and administrative efficiency. If the resource owning government also contemplates a future without access to the finite natural resources there is the option of setting aside capital or other assets, invested on behalf of the nation. Subsequently, interest payments and perhaps even some annual royalty will go some way towards paying for the higher costs likely to be incurred without the natural resource.
283. The conservation movement began to lobby for recognition of the competition between generations implicit in resource use. The Canadian Heritage Fund Movement started in response to a sudden increase in wealth following the “first oil shock.” It raised the issue of taking account of the interests of both current and future generations. The moral issue addressed is sharing the benefits of resource development between generations and a solution has been Sovereign Wealth Funds (SWF).
284. The Norwegian Sovereign Wealth fund is the most prominent example, based on oil and gas, but other nations, including many in the Pacific have also “capitalized” windfalls and aid in this way. In Bangladesh, such a fund, created from the additional revenues we have proposed, could for example provide scholarships to children from poor families to attend advanced education as an investment in the next generation. A recent study of the role and effectiveness of redistributive fiscal policies and for 150 countries with data between 1970 and 2009 confirms international empirical findings for Asia that expenditures on health and education were found to reduce income inequality in Asia as in the rest of the world.57
55
See for example: Nigeria’s subsidies, End them at once! The Economist, 31-12-2011. 56
Nigeria Capping the well-heads of corruption, Economist 19-10-2006 print edition. 57
Government Fiscal Policies and Redistribution in Asian Countries, Claus, Martinez-Vazquez and Vulovic, 02-2012.
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Fiscal Stability - Mongolia
285. One recent instance of creation of a SWF was on in June 2010, when the Mongolian Hural (Parliament) passed the Fiscal Stability Law. Several Mongolian governments have spent beyond their means. Parliament agreed a law aiming at fiscal stability with robust provisions was required to overcome rules where Parliament can change the law at short notice. The Mongolian economy is beginning to benefit from huge revenue inflows from the Oyu Tolgoi mine, increasing from 2016 onwards. Fiscal stability is important to potential investors because affects the level of access to loans, venture capital availability, soundness of banks, access to financing and corruption. In effect, the Law establishes a SWF. The law’s authors are aware of the requirements of an appropriate structure for a SWF. However, the creation of a SWF in Bangladesh presupposes a pricing structure that generates revenue surpluses, profitable SOEs and a fair taxation regime.
L. Evaluation
286. In Bangladesh, tax rates are high and progressive but the plethora of exemptions mean that few wealthy people who make judicious donations and investments need pay tax. Standard tax rates are progressive, but with so many exemptions and tax holidays, high income earning people will paying the highest tax rates is voluntarily. For companies, the large number of exemption, deductions and tax holidays mean that taxation is also all but optional. The ineffectiveness of these exemptions is clear. LNG terminals, transmission lines, mono-rails, rapid transit, renewable energy appliances, toll roads, underground railways, waste treatment plants and other notified categories of physical infrastructure are all subjects of tax holidays. However, to date none of the above has been able to take advantage of the tax concession because other factors are far more important. A regime with few exemptions and lower rates would produce higher revenue totals.
287. Despite design failings, strong revenue collection performance in 2011 helped Bangladesh contain its budget deficit.
58 Relative to the 2011 target, overall revenues grew by 24.5%. As a percentage
of the total national budget tax revenues rose from 9% to 10.1%. Achieving a tax collection in excess of 10% of GDP is a significant accomplishment for Bangladesh. The gains in tax revenue reflected nominal GDP growth and better implementation of administrative reforms in the areas of automation, registration and tax enforcement. Non-NBR and non-tax revenue collection, particularly revenues from SOEs such as Petrobangla performed poorly. If energy prices were cost reflective, the collections from SOEs in particular would be significantly greater than the 1.2% of the total recorded.
M. Recommendations
The taxation based in Bangladesh should be reviewed with a view to lowering rates and reducing exemptions and deduction, thereby broadening the system’s base and increasing revenue collections;
.
58
World Bank Bangladesh Economic Update, September 2011, page 6.
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9. GAS IN THE FUTURE
A. Addressing the Gas Shortage
288. The serious gas shortage reported by Petrobangla, illustrated by daily power cuts and gas supply interruptions has been caused by rapid growth in demand, inadequate investment in exploration and inefficient use, caused by the falling real price of gas relative to other fuels. Shortages throw the spotlight on plans for the future. Shortages of gas and electricity are reflections of an even bigger challenge in terms of increasing the supply of primary energy.59
289. Bangladesh’s optimism on the future of gas extended to discussion of gas exports. However, inadequate planning and investment is a cause of the current shortage of primary energy. As a result, energy shortage has emerged as the principal constraint on economic growth in Bangladesh and an impediment to revenue growth. Without major policy changes, within 16 years existing gas reserves could be exhausted.60
290. A recent indication of government thinking on how to address the shortage is the energy section of the Sixth Five Year Plan issued by the Bangladesh Government during 2011. Estimated demand for natural gas during the plan period is shown in Table 39. These figures are based on the projected expansion in power generation during the Plan period and the increase in the average rate of consumption in the past 17 years for other sectors. Under these projections, the demand for gas will expand from 783 billion cft (861 TJ) in FY2009/10 to 1335 billion cft (1469 TJ) by the end of the plan period.
Table 39: Sector-specific Projected Demand for Gas during the Sixth Plan - billion cft
Sector 2010-11 2011-12 2012-13 2013-14 20014-15
Power 300.5 324.5 350.5 378.5 415.8
Captive Power 142.6 164 188.6 216.9 238.6
Fertilizer 94 94 94 94 94
Industry 160.7 184.8 214.4 246.5 271.1
Household 99.5 111.4 124.8 139.8 153.8
CNG 44.7 51.4 56.5 113 124.3
Others 30.8 31.9 32.7 33.7 37.4
Total 872.8 962 1061.5 1222.4 1335
Source: Energy and Mineral Resources Division – cited 6th 5 Year Plan
291. The Plan recognized that unless steps are taken to make efficient use of the gas currently extracted, obtain more domestic gas through more intense use of existing fields as well as discovery and development of new fields, a serious shortage of gas will emerge in the coming years. It proposed 17.3% of the total public sector investment program should go to the energy sector. This is the plan’s second highest allocation of investment potential and contemplates major investments in power, gas and coal sectors.
292. The plan proposes installation of an additional 15,357 megawatts of power generation during the 2011-15 financial years. Construction of a 2,000 MW nuclear power plant is proposed to begin during 2012. The plan anticipates that the unit production cost of electricity is expected to rise by 50%-60% in the next two to three years due to installation of high cost fuel-based peaking plants. The plan also commits the GoB to increasing the power tariff by phase. In the most recent Bangladesh Budget there were significant increases in allocations to Petrobangla and the energy sector in general. However, given the already large and growing national budget deficit, long-term financing will be conditional on significant tariff increases.
59
The follow section draws on the 6th
5 year plan numbers and analysis, Section on Primary Energy. 60
Cited frequently, particularly by S Ahmed (2012).
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293. To attain the above supply targets for natural gas, a number of policy actions were proposed. These included a commitment to ensure adequate provision of funds, arrangements for speedy bidding procedures for off-shore blocks, the purchase of higher quality equipment using advanced technology and strengthening BAPEX human resources, streamlining work procedures and monitoring of the IOC drilling and development of new wells as per plan and speedy resolution of the demarcation of maritime boundary issues with India and Myanmar for the blocks located at the deep sea areas.
B. Business Environment
294. Bangladesh now operates in an environment where development assistance budgets are constrained and the World Bank loans for new combined cycle generation units have not yet been signed. Domestically, there is insufficient internal accumulation of capital for major investment projects to be supported by existing utilities. Firms that cannot pay for their fuel cannot make profits or pay taxes. LNG terminals will be very expensive to build and are unlikely until at least 2016. IOC Foreign Direct Investment (FDI) funds are harder to come by following the World economic crisis. The number of IOCs involved in Bangladesh has fallen. Investors are acutely conscious of where it is safe to invest their money. Bangladesh’s reputation for having a difficult business environment (not to mention its shortages of gas and electricity) is a big constraint.
295. Several different problems can be addressed if Bangladesh decides to collect some of the US$3 to 6 billion of revenue lost by pricing gas significantly below what it is worth. The price increases required range from 35% to 1,945% if gas is replaced with other energy sources. However we have shown that citizens without access to gas and electricity pay these or higher prices already. Household pay more for inferior energy sources such as fuel wood. Industry is prepared to pay more for captive power, which is reliable. Families with no electricity use expensive batteries or traditional energy sources. .
296. Local gas prices aligned with international prices will help in solving many of the nation’s and the gas sector’s problems. Far from representing a decrease in Bangladesh’s attractiveness as a place to do business, realistic energy prices, a lower budget deficit, more investment in infrastructure, lower inflationary pressures (even reduced traffic congestion if liquid fuel prices are adjusted as well) leading to more reliable energy supplies will all make it a more attractive investment location. Other options for generating electricity, such as coal, will take the pressure of the gas supply and allow even more gas to be diverted to higher value uses such as fertilizer production and industry.
297. Price increases need to be introduced in a managed and measured way so that is a period of 5 years the pricing will move to an economically sustainable level, this may not mean it is high as international pricing due to the “stranded” nature of the Bangladeshi gas (i.e. currently lacking international links or LNG terminals). By setting realistic prices now, in the future Bangladesh will have an ongoing comparative energy cost advantage to its regional competitors.
C. Service and Quality
298. Newspapers, private conversations and business journals are full of the energy crisis affecting Bangladesh in 2012. It is not a new situation; the crisis has been developing over several years and causes are complex. Causes can be traced back to the climate for economic dialogue that existed at the time of India’s independence in 1947. Soviet economics appeared to have credibility and offered a quick development path, subsequently India, Sri Lanka, Pakistan and now Bangladesh have followed development models strongly influenced by concerns about equality and where the government plays a major role in development activities;
299. Experience has shown us that enterprises making large losses are unable to invest or provide good service. Large losses make it impossible to hold management to account. All attention focuses on prices charged for gas and electricity rather than the quality of service and who is
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gaining the benefit from subsidies. As a result the privileged have poor services and the poor have no access to services at all.
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10. Conclusions
300. Most independent observers see Bangladesh at a crossroads in terms of its natural gas policies. The nation has a history of using its natural endowments to address extensive development challenges. Bangladesh today faces a different future than it did even a decade ago when relatively abundant natural gas seemed to be the key to prosperity. Known reserves are not expected to last a long on current use trends, energy price policies appear to seriously undermine economic efficiency, and the fiscal costs of those policies are significant.
301. To support more evidence-based dialog on energy development, allocation and pricing reform, this study uses several forms of economic analysis to evaluate leading issues facing Bangladesh. After an overview of natural gas sector experience and policy, we use the computable general equilibrium models to evaluate a variety of policy options that are under active discussion and consideration by public and private stakeholders. In particular, we consider reforms that would make gas prices more market determined and uniform across private uses, as well as energy efficiency potential, the special nature of the fertilizer sector, coal substitution for electricity generation, and the prospect of pricing natural gas at international market price and investing the augmented revenues in physical and social infrastructure development.
302. In contrast to widely held belief, gas price increase does not adversely affect the economy. Removal of infrastructure constraint by investing the augmented gas revenue complete off-set the negative growth and inflationary pressures. The per capita GDP would be increased by about 54% from the base case scenario. With a more realistic assumption on business as usual growth the GDP increase is about 158%. This gas price increase and investing augmented revenue on infrastructure development can take Bangladesh economy to a significantly higher growth path.
303. In particular setting gas tariffs below what it currently costs Petrobangla to purchase gas from IOCs, inhibits exploration and discovery of new gas fields. Uneconomic tariffs impose major costs on Petrobangla in terms of deterioration in the quality of infrastructure and processes and discourages efficient use of gas. Opaque pricing systems provide opportunities for corruption and significant theft.
304. Prices that are lower for relatively fortunate consumers with access to gas than are available to the very poor foster inequality and inhibit policies designed to attack poverty. They also inhibit energy conservation by sending the wrong signals to consumers. The effective subsidy to consumption represented by the implicit subsidy from under pricing has undermined the finance of the national government. Scarce revenue that could have been used for development has been diverted to a low quality, damaging consumption.
305. Bangladesh’s gas sector is “stranded” at present in that the nation has no international gas pipelines or gas terminal. Planned LNG terminal will be a further step to open up Bangladesh to international gas markets. Customers in Bangladesh will have to pay significantly more for gas in the future when gas resources are fully depleted. , The poorest customers are paying these higher prices already.
306. The principal recommendation of this report is that the retail price needs to be adjusted progressively with a view to bringing the price closer to the value of the gas in international markets. Current policy settings have been supported with minor variations by government across the political spectrum. There is therefore clearly a need for the political process to improve public awareness on the benefits from withdrawing the subsidy and investing the augmented revenues on infrastructure development that this research has amply analyzed. .
307. So far, little has changed since the ADB noted “the present policy of making the country’s gas resources available to users at a minimal price is unsustainable. There is scope for significant increases in gas and electricity prices as a means to ration the demand for gas in the short to medium term. This is an economically more efficient way of controlling the demand for gas and electricity than the prevailing practice of load shedding during peak hours and cutting off gas
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supply to industrial consumers and power plants”61.
308. The conclusion of this study is unequivocal. Current policy settings are unsustainable and harmful to the long-term supply security and prosperity of Bangladesh and its people. The pricing and taxation policies applied to the gas sector have important implications for the country’s energy sector, particularly in terms of economy wide efficiency, equity, and sustainability. Our results suggest that, although its energy future is more challenging than in the early days of gas abundance, Bangladesh has many options for energy policy reform that could facilitate higher, more equitable, and more sustainable levels of economic growth in the economy. To realize the vast human and economic potential of this country, more balanced consideration of political and economic criteria will be essential. This study offers support for a more objective, evidence-based approach to sustained prosperity for Bangladesh through tariff reforms.
309. Energy price increase will have initial negative affects because compensating effects of infrastructure development will take some time to realize. These negative effects in terms of slow economic growth and inflation are not very large but they demand supplementary policies to reduce the economic hardships of vulnerable groups.
310. Political economy of energy price revisions in developing world is dominated by fear of unpopularity and public protest for price increases. This research quantifies long term benefits of the gas price increase for Bangladesh. It also shows that negative impacts on the economy are temporary and not significant. The social benefits however rely on investing the augmented revenues on infrastructure development. Convincing the public about the potential benefits and government’s willingness to improve governance on gas revenue management and transparency will eventually determine implementability of the gas price increase.
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Evaluation Study Bangladesh: Energy Sector Assistance Program Evaluation September 2009
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11. RECOMMENDATIONS
311. Main recommendation of this report is gradual increase of gas prices to until the prices comparable international market prices.
312. The report shows that gas price increase does not affect macroeconomic performance in Bangladesh if the augmented revenue is invested in infrastructure development. However, the report does not provide a short, medium and long term pricing regimes which can be readily implementable. Therefore it recommends preparation of gas and power sector tariff reform master plan including short, medium and long term pricing targets.
313. As demonstrated very clearly, energy pricing reforms and associated infrastructure development benefits all the segments of the society in the long run. However in the transitional periods there will be some negative impacts. Supplementary policies and programs should be accompanied energy pricing reforms to alleviate negative transitional impacts.
314. Currently there is no well planned gas revenue management regime in Bangladesh. It is recommended to prepare a gas revenue management plan as a part of energy tariff reform master plan. Revenue management regime should ensure transparency and good governance to ensure public support for the energy pricing reforms.
315. Success of the energy tariff reforms heavily depends on public support for them. Public awareness campaign, particularly focusing on economic benefits of pricing reforms, should be undertaken as a part of the reform process.
316. Fertilizer sector deserve special treatment, in deciding gas price reforms, because subsidies gone to that sector bring social benefits through productivity improvements.
317. Energy efficiency improvements and energy sector diversification, policies should be implemented together with energy price reforms to ensure better outcomes.
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12. References
“Corruption Perceptions Index, 2011”, Transparency International, 2011 Transparency International. All rights reserved. http://www.transparency.org “Global oil and gas tax newsletter, views from around the World”, Deloitte, January 2012 “Oil: A Big Investment With Big Tax Breaks”, 19 February 2011, http://www.investopedia.com/articles/07/oil-tax-break.asp#axzz1nS1KNheK “Taxation along the Oil and Gas Supply Chain – International Pricing Mechanisms for Oil and Gas”, Energy Charter Secretariat, 2008 Abbink, G.A, Braber, M.C., and Cohen, S.I. (1995), "A SAM-CGE demonstration model for Indonesia: A Static and Dynamic specifications and experiments". International Economic Journal, 9 (3): 15-33.
Ahmed, A. I. Mahbub Uddin. Global Forest Coalition, "Underlying Causes of Deforestation and Forest Degradation in Bangladesh." Last modified August 2008. Accessed April 12, 2012. Ahsan, Manjurul, “Generation Costs Double.” New Age Newspaper, 2 October 2012, Ahsan, Monjurul, “Projects Taken to add 1650 MW of Power,” New Age, 25 March, 2012 Alarcon, J.V. (2002), "Social Accounting Matrix-Based Modelling: Extension to Wellbeing and Environment and Computable General Equilibrium Models: Applications using the 1975 and 1980 Ecuador and Bolivian 1989 and 1997 SAMs", Institute of Social Studies, The Hague, The Netherlands, pp. 13-15. Asian Development Bank, "Natural Gas Pricing in Bangladesh: A Preliminary Assessment." Last modified November 25, 2010. Accessed April 12, 2012. Bangladesh Economic Update, The World Bank, September 2011 Beiolp franlab; Gas System Development Plan and Strengthening of the Organization and Regulatory Framework for the Oil and Gas Sector in Bangladesh, July 1996 Bergman, David. Asia Calling, "Bangladesh opens its gas fields to US company." Last modified December 31, 2011. Accessed April 12, 2012. Bourguignon, F., Branson, W.H. and de Melo, J. (1989), "Macroeconomic Adjustment and Income Distribution: A Macro-Micro Simulation Model". OECD, Technical Paper No.1. BP (2010). “Statistical Review of Global Energy,” http://www.bp.com/assets/bp_internet/globalbp/globalbp_uk_english/reports_and_publications/statistical_energy_review_2011/STAGING/local_assets/pdf/statistical_review_of_world_energy_full_report_2011.pdf Buckle, Bob Pro Vice-Chancellor and Dean of Commerce, “A Tax System for New Zealand’s Future”, VUW Butcher, D. (2012), "Review of gas sector taxes and revenue management to develop a better, transparent revenue management scheme for the gas sector revenues, to ensure maximum benefits to the society in Bangladesh". Consultant Report for Asian Development Bank, Manila Caragata, P, “Resource Pricing, Rent Recovery Options for New Zealand’s Energy and Mineral Industries”; 22 December 1989 Chakma, Jagaran, Sixth Plan eyes Bangladesh a middle-income country by 2021, The Independent, 3 September 2010: http://the independentbd.com Chandra, Varigonda Kesava, “The Pipeline That Wasn't: Myanmar-Bangladesh-India Natural Gas Pipeline,” Journal of Energy Security 19 April 2012; Chowdhury, Syed Tashfin (2011). “Bangladesh gas find boosts supply hopes,” Asia Times, 10/4/2011. Chowdhury, Tanzir, and Mohammad Imran. Morbidity cost of vehicular airpollution: Dhaka city in Bangladesh.
Kathmandu, Nepal: South Asian Network for Development and Environmental Economics, 2010.
CIA World Factbook, "Bangladesh." Last modified 2009. Accessed April 12, 2012. Claus, Iris, “Government fiscal policies and redistribution in Asian countries, Treasury Guest Lecture, Wellington NZ, 28 February 2012 Dasgupta, Susmita, Mainul Huq, M Khaliquzzaman, Kiran Pandey, and David Wheeler. Indoor Air Quality for Poor Families: New Evidence from Bangladesh. Working Paper, World Bank, 2004. Finance Division, Ministry of Finance, “Power and Energy Sector Road Map: Second Update”, June 2012, http://www.mof.gov.bd Gillies, Alexandra, “Reforming corruption out of Nigerian oil?”, U4Brief, CMI Chr. Michelsen Institute, Feb. 2009 Giraud, Kelly, Branka Turcin, Jonh Loomis, and Joseph Cooper. "Economic benefit of the protection program for the Steller sea lion." Marine Policy 26, no. 6 (November 2002): 451-58. Guntilake, H., S. Riahan, and D. Roland-Holst (2012) “A Dynamic CGE Model for Bangladesh: Technical Documentation,” Working Paper, Department of Agricultural and Resource Economics, University of California, Berkeley. Guntilake, Herath and Roland-holst, David TARIFF REFORMS AND INTERSECTORAL ALLOCATION NATURAL GAS: Evidence from Bangladesh, ADB Project Report. October 2012 Guntilake, Herath, Natural Gas Pricing in Bangladesh: A preliminary Assessment, Draft Report by the Asian Development Bank, 25 November 2010 Hanemann, W Michael. "Discrete/Continuous Models of Consumer Demand." Econometrica 52, no. 3 (May 1984):
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541-561. Hanemman, W Michael. "Welfare evaluations in contingent valuation experiments with discrete responses." Amerian Journal of Agricultural Economics 71, no. 4 (1989): 1057-1061. Haque, A. K. (2012). "Tariff reform and intersectoral allocation of natural gas – draft final report. " Accessed April. Hossain, Kazi Nazir, “Present Condition and Outlook of Energy Resource Industry in Bangladesh, Presentation, May 2011 Imam, Badrul. Banglapedia, "Gas, Natural." Last modified 2002. Accessed April 12, 2012. http://www.banglapedia.org/httpdocs/HT/G_0045.HTM. IndexMundi. Index Mundi. 2012. http://www.indexmundi.com/commodities/?commodity=natural-gas (accessed April 26, 2012). Islam, Ifty. Asian Tigers Capital Partners, "Can Bangladesh be the Next Asian Tiger?", Powerpoint Presentation in Dhaka. Last modified November 1, 2008. Accessed April 12, 2012. Islam, Ifty. The Federation of Bangladesh Chambers of Commerce and Industry, "Maximizing Growth for Bangladesh: A Private Sector Vision." Last modified December 6, 2008. Accessed April 12, 2012. Islam, Salekul, “An Introduction to the Gas Sector & Production Sharing Contracts” 30 April 2008, Presentation by Petrobangla, Bangladesh Oil, Gas & Mineral Corporation Jaccard, Mark, Mujibur Khan, and John Richards. "Natural Gas Options for Bangladesh." IUBAT-CPR Commentary 1. (2000). Accessed April 12, 2012. Jung, H.S. and Thorbecke, E. (2003), "The Impact of Public Education Expenditure on Human Capital, Growth, and Poverty in Tanzania and Zambia: A General Equilibrium Approach", Journal of Policy Modeling. 25: 701–725. Karim, Naium-UI. Xinhua News Agency, "Bangladeshis boil over power, water, gas shortage amid rising temperature." Last modified April 5, 2012. Accessed April 12, 2012. Kondrashov, Alexey, “Ernst & Young, Global Oil and Gas Tax Guide” Global Oil & Gas Tax Leader, Ernst & Young, Moscow, June 2011 Loomis, John, Paula Kent, Liz Strange, Kurt Fausch, and Alan Covich. "Measuring the total economic value of restoring ecosystem services in an impaired river basin: results from a contingent valuation survey." Ecological Economics 33 (2000): 103-117. Loomis, John, Paula Kent, Liz Strange, Kurt Fausch, and Alan Covich. "Measuring the total economic value of restoring ecosystem services in an impaired river basin: results from a contingent valuation survey." Ecological Economics 33 (2000): 103-117. OECD, Articles on the OECD Model Tax Convention on Income and Capital, 22 July 2010 P Robson, R Weenink, I Wright, and N Wyatt (1987), “The Role of Government in the Management of Mineral and Energy Resources” Ministry of Energy, New Zealand Petrobangla, "Annual Report 2010." Accessed April 12, 2012. Petrobangla, “Annual Reports 2009 and 2010”, Petrobangla, 2010 and 2011 Pokharel, Bipin. McGill University, "Power Shortage, its impacts and the Hydropower Sustainability Assessment Protocol: in the context of South Asia." Last modified December 8, 2010. Accessed April 12, 2012. Quadir, Serajul. Reuters, "Total abandons Bangladesh oil exploration rights." Last modified March 17, 2009. Accessed April 12, 2012. Rahman, Azizur. The Financial Express, "Offshore gas-blocks to be re-demarcated." Last modified March 24, 2012. Accessed April 12, 2012. Rashid, M. M. (2007). "The exploration of natural gas and its export potential in Bangladesh. " Science Technology Society, 12. (245). Accessed April 12, 2012. Sarwar, M. (2008, February 27). Petrobangla, "Gas Infrastructure in Bangladesh", Powerpoint Presentation in Delhi. Last modified February 27, 2008. Accessed April 12, 2012. Selim Raihan and Herath Gunatilake, “Opportunity Cost of Gas Subsidy in Bangladesh”, ADB Project Report. October 2012 Staff Correspondent, Chevron to invest $500m at Bibiyana, Daily Star Newspaper, Tuesday, July 31, 2012 http://www.thedailystar.net/newDesign/news-details.php?nid=244233, Accessed 20 November 2012 Sunley, Emil, Baunsgaard Thomas, Simard, Dominique Revenue from the Oil and Gas Sector: Issues and Country Experience, IMF Conference on Fiscal policy formulation; 8 June 2002 Technoconsult International Limited Dhaka, “Bangladesh ADB Project Number: 38164, Consultant’s Report”, People's Republic of Bangladesh: Preparing the Gas, Sector Development Program. April 2009 The Daily Star, "Muhith rubbishes talk of gas export." Last modified June 19, 2011. Accessed April 12, 2012. Transparency International, "Corruption Perceptions Index 2011." Accessed April 12, 2012. http://cpi.transparency.org/cpi2011/results/ Treasury, The, “Consultative Document on Petroleum Mining Taxation”, The Treasury, January 1987 U.S. Energy Information Administration, (2011). Accessed April 12, 2012. Wabnitz, Guenter, Bangladesh Gas Pricing Framework 2012, AECOM for the World Bank, February 2012 (early draft) World Bank, Bangladesh Economic Update, September 2011, pages 1 and 3
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13. Annexes
Annex 1: Bangladesh gas sector exploration history and gas discovery
Onshore Exploration
Exploration for oil in eastern part of India (which now constitutes Bangladesh) started in early 1908, when surface mapping was conducted by the India Petroleum Prospecting Company, and based on this early understanding of the sub-surface and on oil and gas seeps, four wildcat wells were drilled up to 1914. In the period from 1923 to 1933 the Burma Oil Company conducted their exploration for oil and gas in the country, and two exploration wells were drilled. All six wells were drilled in eastern Bangladesh, but no commercial discovery was made. Due to Second World War there was a moratorium on exploration activity.
After partition of India in 1947, a new phase of exploration for hydrocarbons commenced in the then East Pakistan in 1951, when Standard Vacuum Oil (Stanvac), Pakistan Petroleum Ltd. (PPL) and Pakistan Shell Oil Company Ltd. (PSOC) drilled a total of 20 exploration wells up until 1971, including one offshore. During this stage of exploration major progress was made, resulting in 7 discoveries: Sylhet (1955), Chatak (1959), Rashidpur (1960), Kailashtilla (1962), Titas (1962), Habiganj (1963) and Bakhrabad (1969). Except Sylhet and Chatak, discovered by PPL, all the other fields were discovered by PSOC. PSOC was undoubtedly the most successful company, making five discoveries of large gas fields from only six exploration wells. Oil and Gas Development Corporation (OGDCL), a government organization established in 1963, discovered Semutang gas field in the Chittagong area. During this stage, however, the exploration companies had better surface map available and they could also use gravimetric and single fold seismic data in their search for hydrocarbons. The third phase of petroleum exploration commenced after Bangladesh became an independent republic in 1971, and it is still ongoing. Bangladesh received support from other countries and foreign institutions during the period. Soviet technical assistance, which started in early 60’s during Pakistan era, resumed in Bangladesh in 1973. The Federal Repub lic of Germany provided both technical and financial assistance, starting from 1977 and continued till 1987. During this period more sophisticated exploration methods were introduced, and analogue seismic was replaced by digital seismic acquisition. With assistance from the World Bank a hydrocarbon habitat study was conducted from 1984 to 1986. This study included the first comprehensive hydrocarbon resource evaluation for the first time in Bangladesh, and both onshore and offshore areas were included. The project was implemented by Bangladesh Oil, Gas and Mineral Corporation (Petrobangla) and helped in the identification of number of new prospects and leads both in eastern and as well as in western Bangladesh. It also resulted in block system of the country (23 Blocks), and promotion data packages were prepared to create interest and attract the international oil companies (IOC). During this phase, a total of 27 exploration wells have been drilled onshore. IOCs drilled 21 of these wells, and making 5 discoveries. Petrobangla and Bangladesh Petroleum Exploration Company Limited (BAPEX) drilled the remaining 6 wells, resulting in 3 discoveries. The oil companies are still focusing on eastern Bangladesh. A total of 8 discoveries were made during the phase, of which 2 are most significant, namely the Jalalabad and Bibiyana gas fields. Offshore
The first offshore well was drilled by PSOC off the coast of Cox’s Bazar in 1969, but no discovery was made. First round of bidding for offshore exploration began in 1974 when six IOCs were awarded blocks under production sharing contracts (PSCs). These companies’ drilled seven wells with only one gas discovery by Union Oil (Unocal) named Kutubdia. Second round of bidding for offshore exploration started in 1994 when a bidding round was organized to attract IOCs for exploration in onshore and offshore areas. Cairn/Holland Sea Search was awarded two blocks (15 and 16) and Sangu gas field was discovered in 1996 in Block 16. Production from Sangu commenced in1998. Cairn drilled three more exploratory wells at South Sangu, Magnama and Hatia having gas shows. Cairn plans to revisit Magnama and Hatia after three dimensional (3D) seismic planned for conducting in winter 2008. Rexwood/Oakland was awarded another two blocks (17 and 18), and their only drilled well was dry. Ownership of blocks 17 and 18 is now with Tullow/TOTAL and they had conducted extensive 3D seismic survey in first half of 2008. Petrobangla has recently divided the country into 54 smaller blocks and gone for a fresh bidding round for 28 offshore blocks. Eleven IOCs participated and proposals are under evaluation. Apparently lack of seismic data and stricter terms and conditions of PSC failed to attract major IOCs.
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Gas Reserve and Production
So far, 24 gas fields have been discovered having GIIP and recoverable reserves, based on proved and probable (2P) reserve categories,
62 of 37.33 trillion cubic feet TCF and 26.73 TCF, respectively. Cumulative production up to 31 December
2011 was 10.1 TCF. Production from 2 gas fields (Chatak and Kamta) suspended. At present, 17 gas fields with 80 producing wells are in production. Number of wells of these fields ceased production for many reasons. Current production capacity is about 2,250 million cubic feet per day (MMCFD), and production level is around 2,190 MMCFD. It is estimated that on completion of ongoing field development and transmission projects, gas demand will reach a level of about 2,500 MMCFD to take care of the committed unmet demand. Field wise gas reserves, production up to December 2011, and remaining reserves are given in Annex 3.
Remaining recoverable reserve of 16.63 TCF as of December 2011, if fully exploited, can meet gas demand at best up to 2026, with a modest demand growth rate of 5 % per year. As such, large scale exploration in onshore and offshore areas for further discovery, and systematic appraisal and development of discovered and producing gas fields to prove additional gas have to be done to sustain gas demand beyond 2026.
Gas Infrastructure
To facilitate gas supply to the under construction fertilizer plant at Fenchuganj an 8-inch diameter transmission line was built by the fertilizer plant owner from Sylhet gas field to the plant and was commissioned in 1960. At the same time, Sylhet gas field was also developed by installing gas processing plant to ensure supply of required gas to the fertilizer plant. This was followed by construction of another 4-inch diameter transmission line from Chatak gas field to an existing cement plant. Both lines are still in operation. However, following suspension of gas production from Chatak gas field and drastic reduction of production from Sylhet gas field, alternative 6 and 10 inch diameter transmission lines were constructed in 80s and 90s for supplying gas from Kailashtilla gas field to the fertilizer and the cement plants. PPL was the owner of the gas fields and the first transmission line from Chatak gas field to the cement plant was also owned by them. A 100 Megawatt (MW) power plant was built and commissioned at Shahjibazar in 1968, to utilize gas from Habiganj gas field discovered by PSOC in 1963. Following discovery of Titas gas field by PSOC, the then Pakistan Government allowed East Pakistan Industrial Development Corporation to incorporate Titas Gas Transmission and Distribution Company Limited (TGTDCL) in 1964 to start commercial use of natural gas in Dhaka by constructing a 51-mile 14-inch diameter transmission line. PSOC owned 10% share of TGTDCL while the rest shares were owned by the Government. PSOC extended foreign currency loan to the Government for construction of the pipeline. At the same time the Government decided to develop power generation facilities at Ashuganj and Ghorasal and a fertilizer plant at Ghorasal. Indo-Pak war in 1965 caused serious setback in construction of the pipeline. It was commissioned in April 1968 and gas supply commenced to a small power plant at Siddhirganj. Distribution facilities were also developed to ensure gas supply to industrial belts in and around Dhaka City and posh residential areas only. TGTDCL franchise covered greater Dhaka, Mymensingh and Comilla districts. Following independence of Bangladesh in 1971, Petrobangla was established; and TGTDCL, PSOC and PPL were nationalized and placed under Petrobangla. OGDCL was renamed as Tailo Sandhani and continued exploration activities as an arm of Petrobangla. In 1975, Shell Oil sold its shares in PSOC and TGTDCL. PSOC and PPL were reincorporated on 12 September 1975 and 8 May 1982, and renamed Bangladesh Gas Fields Company Limited (BGFCL) and Sylhet Gas Fields Limited (SGFL), respectively, with exclusive responsibility for gas production. In 1987, Tailo Sandhani was incorporated as Bangladesh Petroleum Exploration Company (BAPEX) with exclusive responsibility for exploration activities. BAPEX, however, is now operating as an exploration and production company that allowed revenue stream from production to sustain its day to day operation.
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Society of Petroleum Engineers (SPE) Inc. and World Petroleum Council (WPC) define petroleum reserve categories as follows: “Proved reserves are those quantities of petroleum which, by analysis of geological and engineering data, can be estimated with reasonable certainty to be commercially recoverable, from a given date forward, from known reservoirs and under current economic conditions, operating methods, and government regulations. Proved reserves can be categorized as developed or undeveloped. If deterministic methods are used, the term reasonable certainty is intended to express a high degree of confidence that the quantities will be recovered. If probabilistic methods are used, there should be at least a 90% probability that the quantities actually recovered will equal or exceed the estimate. Probable reserves are those unproved reserves which analysis of geological and engineering data suggests are more likely than not to be recoverable. In this context, when probabilistic methods are used, there should be at least a 50% probability that the quantities actually recovered will equal or exceed the sum of estimated proved plus probable reserves.
Possible reserves are those unproved reserves which analysis of geological and engineering data suggests are less likely to be recoverable than probable reserves. In this context, when probabilistic methods are used, there should be at least a 10% probability that the quantities actually recovered will equal or exceed the sum of estimated proved plus probable plus possible reserves.”
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Gas distribution to greater Sylhet district commenced through supply of gas to 13 tea gardens located near the Habiganj gas field in 1977 that was followed by supply of gas from Sylhet gas field to Sylhet town in 1978. Subsequently major tea belts and most townships were brought under gas distribution system in phases. Jalalabad Gas Transmission and Distribution System Limited (JGTDSL) was incorporated on 1 December 1986. JGTDSL franchise covers entire greater Sylhet district.
Bakhrabad Gas Systems Limited (BGSL) was incorporated in 1984 for development of Bakhrabad gas field, construction of a 108 mile, 24-inch diameter transmission line from Bakhrabad gas field to Chittagong, and construction of distribution networks in its franchise area. BGSL franchise area covers Comilla and Chandpur districts of greater Comilla, and all the districts of greater Noakhali, Chittagong and Chittagong Hill Tract. Most townships and industrial belts in eastern region of the country already have gas facilities. Gas Transmission Company Limited (GTCL) was incorporated on 13 December 1993 to consolidate gas transmission activities by creating a national gas grid. GTCL commenced operation by taking over 24-inch gas transmission pipeline from Kailashtilla to Ashuganj by Petrobangla. Construction of a 30-inch diameter gas transmission pipeline along Jamuna Multipurpose Bridge (JMB) across Jamuna River by GTCL, allowed extension of gas transmission and distribution networks in the western region. The bridge was completed and commissioned in 1998. Gas supply commenced in Sirajganj town in December 1999. Subsequently gas transmission and distribution facilities were extended up to Baghabari (to supply gas to existing oil based power plants), Pabna, Ishurdi and Bogra. Paschimanchal Gas Company Limited (PGCL) was incorporated in 29 November 1999. PGCL’s franchise area covers entire Rajshahi Division (north-western region). A project is under implementation to cover south-western region of the country. Sundarban Gas Company Limited (SGCL), a new gas distribution company, has been incorporated for distribution of gas in Khulna and Barisal Divisions (south western region). In the year 1982-85, a pilot project was undertaken by Petrobangla to ascertain the feasibility of using compressed natural gas (CNG) in vehicles. The project was successful in establishing CNG as environment friendly cheaper fuel supplement for vehicles. Rupantorito Prakritik Gas Company Limited (RPGCL) was incorporated in 1987 to promote and market CNG for vehicular use, and processing of natural gas liquids for production and marketing of liquefied petroleum gas (LPG), gasoline and diesel. CNG use got boost following financing of a project by ADB (footnote 1) in 2002 and the Government’s decision to exempt/reduce taxes on CNG equipment and CNG operated vehicles, and leasing out of government owned land, particularly in and around Dhaka City, to the private sector entrepreneurs for establishing CNG refueling stations. Present gas transmission and distribution systems comprise of 1,996 kilometer (km) 4-inch thru 30-inch diameter transmission lines, 2,110 km 6-inch thru 20-inch diameter distribution mains, and about 16,420 km 1-inch thru 12-inch diameter feeder and service mains. Gas production, transmission and distribution infrastructures support gas supply to over 1.92 million consumers of which 1.90 million are domestic consumers. Over 120 CNG conversion workshops and 240 CNG refueling stations (about 70% in and around the Dhaka City) are in operation across part of the country already covered by gas distribution system. Over 140,000 vehicles, including trucks and buses, are operating with CNG.
Gas industry has also gone through a series of structural changes. The industry is currently under the Energy and Mineral Resources Division of the Ministry of Power, Energy and Mineral Resources (MPEMR). At present, one gas exploration and production company, two national gas production companies (NOC), four international oil companies (IOC), one gas transmission company, one LPG processing and marketing, and six gas marketing companies are in operation with Bangladesh Oil, Gas and Mineral Corporation (Petrobangla) as coordinating corporation under MPEMR. Hydrocarbon Unit (HCU) is the technical arm of the ministry.
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Annex 2: Consumer Category Gas Consumption Pattern 2000-01 and 2010-11
FY 2000-01 FY 2010-11
Consumer Category Consumption MMCF % Consumption MMCF %
Power 175,167 46 27,3809 38.2
Fertilizer 88,464 23.2 62,764 8.8
Industry 69,910 18.3 121,484 16.9
Commercial 5,235 1.4 8,464 1.2
Domestic 41,005 10.8 87,355 12.2
Tea Industry 860 0.2 777 0.1
Seasonal Brick 566 0.1 0 0
Captive Power 0 0 121,217 16.9
CNG for Vehicles 0 0 41,427 5.8
Total 373,206 717,116 100
Average Daily Consumption
1,044 1,965
Source: Petrobangla 2012, (Ahmed 2012 Table 2)
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Annex 3: Losses of SOEs
Source New Age Newspaper: 25 March 2012
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Annex 4: Costs are Rising
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Annex 5: Bangladesh Model PSC
Model
The Bangladesh model Production Sharing Contract (200863
) shows how the concept works. Article 14 of the model contract sets out the rules for allocation of production, recovery of costs, expenses and production sharing. The Contractor has the right to use petroleum produced from the Contract Area to the extent reasonably required for its operations under the contract. All remaining oil, natural gas, condensate and natural gas liquids (NGL) produced and saved from the Contract Area is measured at the applicable Measurement Point and allocated as described in the Model Contact.
The contractor recovers all costs and expenses out of a maximum of fifty-five % per year of all available oil, natural gas and other valuable resources from the assigned Contract Area, referred to as "Cost Recovery Petroleum (i.e. Gas)". Expenses incurred in commercial production, planned capital expenditure costs, exploration costs, exploration and appraisal program costs before commercial production as well as all other expenses related to operations, are recovered at the agreed rate on a straight-line basis from the time commercial production commences.
Production Sharing begins when the Contractor is recovering costs and expenses under Article 14 the balance of petroleum or gas remaining after cost recovery, is referred to as "Profit Petroleum") and allocated between Petrobangla and the contractor in proportions based on total average daily production over the Month.
Profit Gas Share Schedule
Natural Gas produced and saved from the Contract Area and not used in Petroleum operations
PROFIT ALLOCATION
Production tranches Petrobangla Share (%) Contractor Share (%) Up to 75 mmcf per day ♦ ♦ Portion in excess of 75 mmcf per day and up to 150 mmcf per day.
♦ ♦
Portion in excess of 150 mmcf per day and up to 250 mmcf per day.
♦ ♦
Portion in excess of 250 mmcf per day and up to 400 mmcf per day.
♦ ♦
Portion in excess of 400mmcf per day and up to 600 mmcf per day.
♦ ♦
Portion in excess of 600 mmcf per day. ♦ ♦
Source: Model Production Sharing Contract 2008, table 14.6B, page 37
The proportions denoted by the ♦ are bid by the contractors during the selection process. This means that proportions vary from one contract to another. Contractors may separately dispose of their individual shares of the Cost Recovery Petroleum and of Profit Petroleum. Title and risk of loss passes to each contractor at the outset of the measurement point. This freedom extends also to the right to export freely petroleum received. Petrobangla may receive its shares in kind or in cash, as mutually agreed between the Parties.
First Refusal
Under the PSC, Petrobangla has first refusal on the purchase of any gas produced by the IOC over and above its contractual entitlement. The purchase price equals the price that Petrobangla pays for gas under the PSC. Despite the relatively low prices paid to them, IOCs are among the largest taxpayers in Bangladesh, beating the mobile telephone companies, for example.
The first refusal system has the benefit of providing the IOCs with a guaranteed market for their gas. However, the price they receive is significantly lower than the price they would receive if they were to market the gas in competition with, say LNG imports similar to those currently entering India. The arrangement gives Petrobangla a captive, low cost gas supplier.
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http://www.petrobangla.org.bd/MODEL%20PRODUCTION%20SHARING%20CONTRACT%202008-FEBRUARY.pdf accessed 11-04-2012
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Annex 6: Current Pricing Framework and Conversions
Source: Bangladesh Gas Pricing Framework 2012 AECOM (NZ)
Bangladesh Gas Pricing Framework
Current Pricing Structure
Year 2011
International Currency USD short: $ Power
Exchange Rate Tk/$ 78 (Nov.2011) Tk/scm
Calorific Value, nat gas BTU/scf 1043 End User Price 2.82
average, gross (HHV) Tax SD+VAT 1.551
GJ/MMBTU 1.055056 VAT 0.367826
scf/scm 35.32 SD 1.183174
Calorific Value, nat gas GJ/scm 0.03887 * PB Production & Marketing
average, gross (HHV)
provisionary
2011
End User Total Tax = 55% of end price PDF BAPEX DWMB Wellhead Transm. Dist Gas Dev. Totql End User Sales Sales
Tk/scm Price VAT SD Total Tax Margin Margin Margin Margin Margin Fund PB Margin Price MMSCM MM BDT
1 Power 2.8200 0.3678 1.1832 1.5510 0.3170 0.0480 0.0400 0.2250 0.3200 0.2250 0.0940 1.269 2.8200 7,751 21,859
2 Fertiliser 2.5800 0.3365 1.0825 1.4190 0.2680 0.0000 0.0400 0.2250 0.3200 0.1550 0.1530 1.161 2.5800 1,778 4,587
3 Feed Gas for CNG 23.0000 3.0000 9.6500 12.6500 6.1000 0.1100 0.2000 0.3000 0.3200 0.1560 3.1640 10.35 23.0000 1,090 25,069
4 Captive Power 4.1800 0.5452 1.7538 2.2990 0.4560 0.0480 0.0400 0.2250 0.3200 0.5910 0.2010 1.881 4.1800 3,431 14,342
5 Industry / Tea Estate 5.8600 0.7643 2.4587 3.2230 0.7660 0.0480 0.0400 0.2250 0.3200 0.9550 0.2830 2.637 5.8600 3,462 20,289
6 Commercial 9.4700 1.2352 3.9733 5.2085 1.3355 0.0480 0.0400 0.2250 0.3200 1.7350 0.5580 4.2615 9.4700 241 2,279
7 Domestic 5.1600 0.6730 2.1650 2.8380 0.7090 0.0480 0.0400 0.2250 0.3200 0.7250 0.2550 2.322 5.1600 2,474 12,767
weighted average 5.00 20,227 101,192
End User Total Tax = 55% PDF BAPEX DWMB Wellhead Transm. Dist Gas Dev. Totql End User Sales * Sales
Tk/1000SCF Price VAT SD Total Tax Margin Margin Margin Margin Margin Fund PB Margin Price BCF MM BDT
1 Power 79.8342 10.4124 33.4964 43.9088 8.9743 1.3589 1.1324 6.3698 9.0592 6.3698 2.6611 35.9254 79.8342 273.8000 21,859
2 Fertiliser 73.0398 9.5263 30.6456 40.1719 7.5871 0.0000 1.1324 6.3698 9.0592 4.3881 4.3314 32.8679 73.0398 62.8000 4,587
3 Feed Gas for CNG 651.1300 84.9300 273.1915 358.1215 172.6910 3.1141 5.6620 8.4930 9.0592 4.4164 89.5728 293.0085 651.1300 38.5000 25,069
4 Captive Power 118.3358 15.4346 49.6501 65.0847 12.9094 1.3589 1.1324 6.3698 9.0592 16.7312 5.6903 53.2511 118.3358 121.2000 14,342
5 Industry / Tea Estate 165.8966 21.6373 69.6058 91.2431 21.6855 1.3589 1.1324 6.3698 9.0592 27.0361 8.0117 74.6535 165.8966 122.3000 20,289
6 Commercial 268.0957 34.9685 112.4841 147.4526 37.8080 1.3589 1.1324 6.3698 9.0592 49.1179 15.7970 120.6431 268.0957 8.5000 2,279
7 Domestic 146.0796 19.0526 61.2912 80.3438 20.0718 1.3589 1.1324 6.3698 9.0592 20.5248 7.2191 65.7358 146.0796 87.4000 12,767
weighted average 141.63 714.5 101,192
End User PDF BAPEX DWMB Wellhead Transm. Dist Gas Dev. Totql End User Sales Sales
USD/scm Price VAT SD Total Tax Margin Margin Margin Margin Margin Fund PB Margin Price MMSCM MM USD
1 Power 0.0362 0.0047 0.0152 0.0199 0.0041 0.0006 0.0005 0.0029 0.0041 0.0029 0.0012 0.0163 0.0362 7,751 280
2 Fertiliser 0.0331 0.0043 0.0139 0.0182 0.0034 0.0000 0.0005 0.0029 0.0041 0.0020 0.0020 0.0149 0.0331 1,778 59
3 Feed Gas for CNG 0.2949 0.0385 0.1237 0.1622 0.0782 0.0014 0.0026 0.0038 0.0041 0.0020 0.0406 0.1327 0.2949 1,090 321
4 Captive Power 0.0536 0.0070 0.0225 0.0295 0.0058 0.0006 0.0005 0.0029 0.0041 0.0076 0.0026 0.0241 0.0536 3,431 184
5 Industry / Tea Estate 0.0751 0.0098 0.0315 0.0413 0.0098 0.0006 0.0005 0.0029 0.0041 0.0122 0.0036 0.0338 0.0751 3,462 260
6 Commercial 0.1214 0.0158 0.0509 0.0668 0.0171 0.0006 0.0005 0.0029 0.0041 0.0222 0.0072 0.0546 0.1214 241 29
7 Domestic 0.0662 0.0086 0.0278 0.0364 0.0091 0.0006 0.0005 0.0029 0.0041 0.0093 0.0033 0.0298 0.0662 2,474 164
weighted average 0.06 20,227 1,297
End User PDF BAPEX DWMB Wellhead Transm. Dist Gas Dev. Totql End User Sales Sales
USD/GJ Price VAT SD Total Tax Margin Margin Margin Margin Margin Fund PB Margin Price PJ MM USD
1 Power 0.9301 0.1213 0.3903 0.5116 0.1046 0.0158 0.0132 0.0742 0.1055 0.0742 0.0310 0.4185 0.9301 301 280
2 Fertiliser 0.8510 0.1110 0.3570 0.4680 0.0884 0.0000 0.0132 0.0742 0.1055 0.0511 0.0505 0.3829 0.8510 69 59
3 Feed Gas for CNG 7.5860 0.9895 3.1828 4.1723 2.0119 0.0363 0.0660 0.0989 0.1055 0.0515 1.0436 3.4137 7.5860 42 321
4 Captive Power 1.3787 0.1798 0.5784 0.7583 0.1504 0.0158 0.0132 0.0742 0.1055 0.1949 0.0663 0.6204 1.3787 133 184
5 Industry / Tea Estate 1.9328 0.2521 0.8109 1.0630 0.2526 0.0158 0.0132 0.0742 0.1055 0.3150 0.0933 0.8698 1.9328 135 260
6 Commercial 3.1235 0.4074 1.3105 1.7179 0.4405 0.0158 0.0132 0.0742 0.1055 0.5722 0.1840 1.4056 3.1235 9 29
7 Domestic 1.7019 0.2220 0.7141 0.9360 0.2338 0.0158 0.0132 0.0742 0.1055 0.2391 0.0841 0.7659 1.7019 96 164
weighted average 1.65 786 1,297
End User PDF BAPEX DWMB Wellhead Transm. Dist Gas Dev. Totql End User Sales Sales
USD/MMBTU Price VAT SD Total Tax Margin Margin Margin Margin Margin Fund PB Margin Price MM MMBTU MM USD
1 Power 0.8816 0.1150 0.3699 0.4849 0.0991 0.0150 0.0125 0.0703 0.1000 0.0703 0.0294 0.3967 0.8816 286 252
2 Fertiliser 0.8065 0.1052 0.3384 0.4436 0.0838 0.0000 0.0125 0.0703 0.1000 0.0485 0.0478 0.3629 0.8065 66 53
3 Feed Gas for CNG 7.1901 0.9378 3.0167 3.9546 1.9070 0.0344 0.0625 0.0938 0.1000 0.0488 0.9891 3.2356 7.1901 40 289
4 Captive Power 1.3067 0.1704 0.5483 0.7187 0.1426 0.0150 0.0125 0.0703 0.1000 0.1848 0.0628 0.5880 1.3067 126 165
5 Industry / Tea Estate 1.8319 0.2389 0.7686 1.0076 0.2395 0.0150 0.0125 0.0703 0.1000 0.2985 0.0885 0.8244 1.8319 128 234
6 Commercial 2.9605 0.3861 1.2421 1.6283 0.4175 0.0150 0.0125 0.0703 0.1000 0.5424 0.1744 1.3322 2.9605 9 26
7 Domestic 1.6131 0.2104 0.6768 0.8872 0.2216 0.0150 0.0125 0.0703 0.1000 0.2266 0.0797 0.7259 1.6131 91 147
weighted average 1.56 745 1,165
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Annex 7: Landed LNG Prices US$ MMBTU
Source: Fed Energy Regulatory Commission • Market Oversight • www.ferc.gov/oversight cited Waterborne Energy, Inc.
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Annex 8: Fluctuations in Gas Prices 2011 and 5 year history
Source: Waterborne Energy, Inc. Data in $US/MMBtu
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Annex 9: Combined Cycle Generation
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Annex 10: Summary of selected oil and gas taxation regimes
Country Royalties Production
sharing Income tax
rate Resource Rent Tax
D.W.T. (non-res)
Investment incentives
State equity
Africa:
Algeria 20% PSC or other 38% Windfall <50 Not in oil law Yes 51%
Angola 16-20% 50-90% (V) 30% 35% 15% Yes (E, I) 25%
Benin 12.5% 55% None None … Yes (E,U) 15% (C)
Cameroon Negotiable PSC 50.5% None 25% on interest
CF 4 years 50% (C)
C.A.R. 12.5% None 50% None 40% None None
Chad 12.5% None 50% None 20% CF losses 10%
Cote d’Ivoire None 60-90% (V) 25% None 7.5% on contract
CF (O) 10-20%
Ethiopia None 15-75% (V) 50% None 10% Yes (E) 10%
Equatorial Guinea
PSC 35% 13% 25% on dividend
CF 5 years CI 20%
Gabon 65-85% (V) 35% 12% 25% CG, 10% else
Yes (E) 15% (C)
Ghana 3% gas 10%
oil PSC 35% 10% 5% … 25%
Kenya PSC 30% 20%-on royalty
CF 5 years ?
Mozambique None 10-50% 32% 10% 20% WT Yes (E) carried during
exploration
Namibia 50% None 35% Formula None Yes (E,U,I) None
Niger 12.5% None 50% None 18% Yes (E) ...
Nigeria 0-20% 20-65% 85% None 10% Yes (E, Cr) Variable
Republic of Congo
? PSC 35% 15% 20% ? ?
Senegal 5-10% V 0-50% (ror) 25% Yes 10% NRWT … 5-20%
South Africa 2-5% None 28% 40% 12% NRWT Yes (O,U,I) 20% (C)
Sudan … 60-80% None None None … None
Tanzania 20% 45-72.5% 30% 35% 10% CF no limit 15% (C)
Uganda None None 30% 0-80% PSA 15% Yes (E,U) 25%
Zambia 10% 0-25% (ror) Contract Yes ? 15% Yes (E,I,U) 10%
Asia and Pacific:
Australia 40% 35% 31.5% on R CF losses None
Bangladesh None 60-70% (V) None None … Yes (I) None
Brunei … None 55% None None Yes (A) 50%
Cambodia 5-12.5% 40-65% (V) 30% None None Yes (E) None
China 12.5% PSC (V) 25% $40 bl (WT) 10% on R None ?
India ? ? 40% 12.5% 40% NRWT
Indonesia … 80-90% (V) 25% None 20% in PSC Yes(I, A,Cr) 10%
Malaysia 10% 5:7 Petronas 38% 70% Profit 15% WT Yes(A, E,U) 25%
Mongolia 12.5% 35-60% 40% None 20% Yes (I) None
New Zealand None 28% 20% 30% NRWT CF indefinite
P.N.G. 2% None 30% 25% 50% windfall tax
None Yes (I, Cr) 22.5 (C)
Pakistan None PSC, PSA 40% 12.5% None ? ?
Philippines None 60-40% gov 30% None 30% on R Yes (E) None
Singapore ? None 17% ? 17% NRWT
Thailand 12.5% 50-50% 50% 15% 15% Yes (E) None
Vietnam 6-29% on
Transfer 70% 65-70% (V) 50% Formula 10% Yes (H) 15%
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Country Royalties Production
sharing Income tax
rate Resource Rent Tax
D.W.T. (non-res)
Investment incentives
State equity
Europe:
Bulgaria 12.5-17.5%
50%
40% None
15%
Yes (H)
None
Denmark 70% (WT) None 25% 52% 28% dividend CF Losses ?
Ireland None 25% 15% 15% WT CF 5 years ?
Greenland PSC 30% 37% NRWT
Netherlands 50% None 25% 80% ?
Norway None 28% 50% 10% WT CF indefinite
Romania Excise None 16% 13% 16% ? ?
Russia Export tax
35% None None 15% WT
CF losses 10 years
?
Spain 5% None 30% 25% NRWT
Turkey 12.5% None 25% None 20% Yes (E) None
United Kingdom
None None 30% 32% 20% interest
& royalty ? None
Middle East:
Abu Dhabi
12.5-20%
None
55-85%
Product.
…
None
60% (C) Algeria
10-20%
50-85% (P)
None
None
20%
None 51%
Bahrain None
70%
46%
None
25% on Int
CF losses
None Dubai
12.5-20%
None
55-85%
None
…
None None Egypt
10%
70-87% (V)
40% or:
40%
20% WT
Yes (I)
None
Iraq None 15% 35% 15% CF 5 years ?
Kuwait None 15% 15% subcontractor
Libya
16.67%
Yes (P)
44%
Total 65%
…
…
…
Morocco …
None
39.6%
Yes (ror)
20%
Yes (A,I)
35% Oman
None
80%
55%
None
10% None
None
Qatar
…
80-10%
35%
None 7% WT
None
None
Saudi Arabia ? None 20% 85% ? CF Indefinite ?
Syria PSA 28% 70% 10% Capital
Tunisia
…
None
50%-75%
Yes (ror)
None
Yes (E,U,I)
Negotiable
United Arab Emirates
PSC PSC None PSC ? ? ?
Yemen 3-10% 70-80% None None None Yes (E,U) None
Latin America:
Antigua 5% 30-50% (T) None None … None None
Argentina 12% None 30% 35% (WT) 31.5% None None
Aruba (NEI) None 79-89.5% (V) 39%? None None Yes (E,U) None
Barbados 12.5% 50-70% (V) None None 15% Yes (E,U) None
Belize 7.5% 5-15% (V) 25% None 15% Yes (U) 5%
Bolivia 31% None 25% 25% 12.5% Yes (E,U) None
Brazil CG Income PSC (V) 34% 10% 15% (Int) CF Losses ?
Chile Formula None 15% None 35% Yes (A) 35%
Colombia 20% None 33% None 10% net, max None 50% (C)
Costa Rica 1-15% None 30% None 15% None None
Dominican Republic
17-30% None 25% None 25% Yes (I) None
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Country Royalties Production
sharing Income tax
rate Resource Rent Tax
D.W.T. (non-res)
Investment incentives
State equity
Ecuador 12.5-18.5% 88% 25% 18.5% 20% WT … None
Guatemala 20% 30-70% (V) 31% None None Yes (E,U,I) None
Guyana ? None 50-70% (V) 35% None 10% Yes (E) None
Honduras 1-15% None 25% None 10-15% None None
Mexico None None 17.5% None 10-40% Yes (E,I) None
Peru Negotiable 60-40% Gov 30% 20% 4.1% WT Yes (E,A,I) None
Trinidad & Tobago.
… Variable 50% 50% (PPT) 15% (PPT) CF PPT None
Venezuela 16.7% None 50% 30% 34%- royalty CF 3 years
(E, Cr) 0-100%
Central Asia.:
Azerbaijan None 45-65% (P) 14% 32% 8% Gross Yes (E,O,U) 7.5-20%
Kazakhstan ? None 20% 12% 20% CF 10 yr ?
Kyrgyz Republic
None 60-80% (V) None None 15% Yes (H) None
Turkmenistan 12% 40% 25% None 15% … None
Uzbekistan Excess Profit
Tax 50% Yes 9+8+3% 20% … 50% (C)
North America
Canada None 26.5% 45% 25% Interest Tax credits
United States of America
None 35% 30% 30% NRWT
Sources: The basic data for the above table is taken from “Revenue from the Oil and Gas Sector: Issues and Country Experience” by Emil M. Sunley, Thomas Baunsgaard and Dominique Simard, It is a background paper prepared for an IMF conference on fiscal policy formulation and implementation in oil producing countries, June 2002. It has been updated where possible from data obtained from the Ernst & Young “The Global oil and gas tax guide”, which summarizes the oil and gas corporate tax regimes in 61 countries, based on information current to 1 January 2011. It is meant to be indicative only and should not be regarded as an authoritative guide to the existing position in any particular country. Some relevant information is not available in many cases and (?) means no information is available. The notation included in the table refers as follows:
Production sharing links to: volume of production (V), years of production (T), or realized profitability (P); Investment incentives include: tax holidays (H), accelerated depreciation (A), tax credits (Cr), current expensing of
exploration and/or development cost (E), exemption of imports of equipment and capital goods (I),unlimited loss-carry forward (U) and other (O).
The maximum equity share that the state can select to take, often on a carried basis (C). Other abbreviations used are: CF: Carried Forward; CG: Cost gas; NRWT: Non-resident withholding tax; WT: Windfall
Tax; Items in italics are additions and modifications based on the E&Y study
It should be noted that in most countries VAT applies too, but this is not included in the analysis and in many countries capital gains taxes are applied. Also other places use windfall reveneue taxes and where this is similar to a royalty, but
no royality is included the windfall tax is included under the Royalties column. Many taxation rates vary, where this is the case, the highest is shown
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Annex 11: Process for Tax Law Reform
A process of taxation law reform that involves the business community, the professions and the general public is much more efficient and produces a better result than a process devised by the civil service alone. The first example of this process was in 1986, when the NZ government decided to introduce a Goods and Services Tax (GST). It was a new comprehensive Value Added Tax reform measure that, unusually, was popular with both the business community and the public, while still raising significant new revenues. When enacted, it brought more than 100,000 new businesses into the taxation system, many previously unknown to the taxation authorities. Contrary to most predictions, the government that introduced it was re-elected in 1987 with an increased majority and much of its success was attributed to the successful introduction of the new tax. The focus was on ensuring that the introduction of the new tax would be acceptable to the business community, who had to collect it, while taking into account the concerns of the wider community. The various steps used in this major change are illustrated below. The process used was so successful that it subsequently became the model for all major changes in taxation law. Substantial areas of law modified in this way include the regimes affecting oil and gas (exploration and development), insurance and superannuation, livestock taxation and the regimes for forestry and overseas business income. The success of the new tax and the political success of the government were in no small part due to the work of the Parliamentary Committees. Bangladesh has many World class taxation experts and its Parliamentary Committees are well capable of playing a constructive role in the process. There is no reason why the Bangladesh Parliament cannot play a similarly constructive role in assisting the government.
Introduction of the Goods and Services Tax
Approximate Date Action Rationale and comments
1984 November Budget Announcement of GST to be introduced on 1 April 1986
The need for a more broadly based tax system
1984 November Publication of a Introductory Paper as a Budget Document
Budget paper released with the budget and made widely available for public scrutiny
1985 March Release of “White Paper on Goods and Services Tax”
To explain government Policy and solicit public submissions
1985 March Advisory Panel set up to review public submissions
The head of the advisory panel was Dr Don Brash, widely respected banker, former opposition candidate for Parliament, subsequently Governor of the Central Bank
1985 June Opening of GST coordination office
The coordination office was to run a public information campaign to ensure that the public understood the benefits of the proposed tax and addressed their genuine concerns
1985 June Introduction of the GST postponed until 1 October 1986
The initial planning had underestimated the complexity of the tax and the consequential adjustments required. The announcedment was made between the closure of the polls and the announcedment of the result in a bye-e;ection
1985 July Publication of the First Report of the Advisory Panel Report
Alongside the
Decisions published with the report so that the public can understand the thinking behind the decisions. In fact the vast majority of
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recommendations were the Minister of Finance’s decisions
recommendations were accepted. The name of every person making a submission was included.
1985 August Administrative Details of the GST were announced along with proposed reductions in other taxes
Substantial reductions were to be made in direct and sales taxes to compensate for the introduction of a VAT
1985 August Release of Second Report of the Advisory Panel
The second report focused on implementation issues rather than matters of principle. Made further comment on rejected recommendations where necessary
1985 August Introduction of the GST Bill into Parliament and reference to the Finance Select Committee
The bill was large and merited further detailed consideration by Parliament. In accordance with normal practice, the tabling of the bill was advertised
1985 August Call for public submissions on the bill
Standard procedure for all bills referred to committees
1985 September Select Committee Hearings on the GST Bill Commence
More than 300 submissions received and public hearings held on submissions. Official Reports and Deliberations in Private
1985 December Passage of the GST Legislation
The Bill as reported back from the Committee passed substantially un-amended
1986 July Budget confirms the introduction of the GST on 1 October
The Budget Policy Statement reaffirmed the Government’s intention to proceed with the introduction of the new GST and reductions in sales and income taxes were announced
1986 October Introduction of the Tax The changeover occurred with a minimum of confusion and delay. Telephone enquiries to the Nationwide support centre were fewer than anticipated and rapidly reduced in volume
1986 November Public Information Office begins its wind down because of a lack of work
Calls fell away to virtually nothing after two weeks and within a month the office could wind down and closed five months earlier than anticipated
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Annex 12: BPDB signs deal with Santos for buying gas at high rate
The Financial Express, VOL 20 NO 253 REGD NO DA 1589, Dhaka, Thursday 14 June 2012
M Azizur Rahman State-owned BangladeshPower Development Board (BPDB) has inked a deal with Australian Santos Wednesday to purchase gas at US$ 4.50 (Tk 368) per unit (1,000 cubic feet), around four-times higher than its current rate. The BPDB is now paying $ 1.2 per unit to state-owned gas DCs to generate electricity in gas-fired power plants. Although the tariff to purchase natural gas from Santos is higher, it would be lower than the cost of generating electricity in oil-fired power plants, said a BPDB official. The daily contract quantity (DCQ) has been set at 20 million cubic feet per day (mmcfd), but BPDB will be able to purchase 120 per cent higher than the limit subject to availability of gas. BPDB will have to purchase at least 60 per cent of the DCQ, SantosBangladesh Vice President Siraj Uddowlah said elaborating the terms of the contract. The BPDB will be able to adjust the quantity of gas purchase in line with the DCQ within 30 days, the Santos official said. The BPDB will have to inform Santos by 2 pm every day for its daily gas requirement in the next day, he said Santos will supply natural gas for 24 hours a day, from 8 am to 8 am, unless a 'force majure' emerges, the contract spells out. The BPDB will purchase Sangu-11 gas to run a 150-MW power plant at Sikalbaha in port city Chittagong. The BPDB has agreed to purchase Sangu-11 gas at a rate set by Santos as the baseline price, up 55 per cent from a previous rate of $2.90 per unit from the older Sangu well. It has also agreed to pay for transport charges for the gas from the offshore field to BPDB power plants. It will have to clear monthly dues of gas purchase, within 55 days with a grace period of 10 days, the Santos official said. BPDB will make bank guarantee against its gas purchase, he added. If the BPDB fails to pay Santos within the given timeframe, Santos will be able to encash bank guarantee, which will be equivalent to 30 days of payment, the official added. It will be relieved of making payment if the power plant turns non-operational due to technical fault. For any planned shut-down of the power plant or the gas producing well both the parties will have to inform each other before, the agreement spells out. Separately Santos has inked a Gas Transportation Agreement (GTA) with state-owned Karnaphuli Gas Distribution Company Ltd (KGDCL) Wednesday evening. As per the GTA the KGDCL, a subsidiary of state-owned Petrobangla, is obliged to provide the BPDB with the same quantity of gas it will take from Chilimpur, the off-take point of Sangu-11 gas. Both the agreements are of two-year tenure subject to renewal on mutual agreements. Santos Bangladesh president John Chambers inked the deals with the BPDB and the KGDCL on behalf of Santos, while BPDB Secretary Md Azizul Islam inked the deal on behalf of the BPDB and KGDCL Secretary Chowdhury Ahsan Habib inked the deal on behalf of his company. These agreements would have to have seal of approval from the cabinet committee on government purchase for its formal going. But as per the negotiation, Santos will be able to supply gas immediately after signing the deal depending on the readiness of the BPDB to take gas for running the power plant. "We are pleased to be able to purchase offshore Sangu-11 gas at a fixed flat rate at $4.50/Mcf," BPDB Chairman ASM Alamgir Kabir said after signing the deal.
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This is first time in Bangladesh that an international oil company has been selling natural gas to end-user at market price after wrapping up months of negotiation. Usually they sell gas to state-owned Petrobangla at a rate fixed in the production-sharing contract (PSC), which then sells it to state-owned gas DCs. Under its PSC, Santos had to give Petrobangla first option to buy its gas at market prices. As Petrobangla declined, it offered the gas to the BPDB, as per the PSC. Santos found commercially viable gas reserves in the Sangu-11 well which was drilled in block 16 in the Bay of Bengal in mid-February last. "Santos has been ready to supply new gas from Sangu-11 since late March 2012 on completion of a three-well drilling programme in the Bay," Chambers said. Before initiating a $128 million three-well drilling programme in block 16 in October last year, Santos had received expressions of interest in July from over a dozen large privately owned companies in Chittagong that were willing to buy gas at market prices due to a growing gas shortage in the country. Santos will shut the depleted Sangu gas field with the start of gas supply from new Sangu-11. The field is currently producing around 8.3 mmcfd, just 4.0 per cent of its peak production capacity of 220 mmcfd, which it achieved in 2006. The Australian firm had been incurring losses in operating the Sangu field over the past year as gas output had fallen sharply, a company official said previously.
Annex 14 Effects of Infrastructure Investment – SAM Multiplier Results
318. This section uses a SAM multiplier model to understand the impacts of increase in infrastructural investment in Bangladesh economy. The advantage of using the SAM multiplier model is that it shows linkages among different sectors and actors in the economy. It is able to capture the economy-wide effects of any exogenous shock. Therefore, a prior assessment of various infrastructural investments can be conducted using this model to guide policy makers when faced with a range of options.
Bangladesh Social Accounting Matrix 2007
319. In a narrower sense, a SAM is a systematic database and an organized, consistent classification system. As a data framework, the SAM is a snapshot, which explicitly incorporates various crucial transaction links among variables. It allows, for example, the mapping of the income distribution among the factors of production from the structure of production and the mapping of the household income distribution from the factorial income distribution. In a broader sense, in addition to providing a consistent classification scheme, it can be thought of as an analytical framework, based on a set of modules. The modules represent a set of interconnected subsystems, which specify the major relationships among economic variables within and among these systems
64.
320. For the purpose of this exercise, a SAM for 2007 for Bangladesh was constructed. The 2007 SAM identifies the economic relations through four types of accounts:
Production activity and commodity accounts for 41 sectors;
4 factors of productions with 2 different types of labour and 2 types of capital;
Current account transactions between 4 main institutional agents; household-
64
See Pyatt and Thorbecke (1976).
100 | P a g e
members and unincorporated capital, corporation, government and the rest of the world; and
Two consolidated capital accounts distinguished by public and private origins.
321. The two consolidated capital accounts capture the flows of savings and investment. The disaggregation of activities, commodities, factors and institutions in the SAM is given in Table 40.
Table 40: Disaggregation and Description of Bangladesh SAM Accounts
Accounts Description of Elements
Activities (41)
Agriculture (12) Paddy Cultivation, Grains, Jute Cultivation, Sugarcane Cultivation, Vegetables, Commercial Crops, Other Crop Cultivation, Livestock Rearing, Poultry Rearing, Shrimp Farming, Fishing, and Forestry
Manufacturing (20) Rice Milling, Grain Milling, Fish Process, Oil Industry, Sweetener Industry, Food, Leather, Jute, Clothing, RMG, Tobacco, Wood, Chemical, Fertilizer, Petroleum, Clay Products, Cement, Steel, Machinery, and Miscellaneous
Construction (1) Construction Services (8) Utility, Trade, Transport, Social Services, Financial services, Public Administration and
Defense, Professional Services, and Other Services Commodities (41)
Agriculture (12) Paddy Cultivation, Grains, Jute Cultivation, Sugarcane Cultivation, Vegetables, Commercial Crops, Other Crop Cultivation, Livestock Rearing, Poultry Rearing, Shrimp Farming, Fishing, Forestry
Manufacturing (20) Rice Milling, Grain Milling, Fish Process, Oil Industry, Sweetener Industry, Food, Leather, Jute, Clothing, RMG, Tobacco, Wood, Chemical, Fertilizer, Petroleum, Clay Products, Cement, Steel, Machinery, and Miscellaneous
Construction (1) Construction Services (8) Utility, Trade, Transport, Social Services, Financial services, Public Administration and
Defense, Professional Services, and Other Services Factors of Production (4) Labour (2) Labour Unskilled, and Labour Skilled Capital (2) Capital and Land Current Institutions (11)
Households (8) Rural: landless, Agricultural marginal, Agricultural small, Agricultural large, Non-farm poor and Non-farm non poor Urban: Households with low educated heads, and households with high educated heads
Others (3) Government, Corporation and Rest of the World Capital Institutions (2)
Public Capital Public Capital Private Capital Private Capital
Source: SAM 2007 of Bangladesh
D. Derivation of the SAM Multiplier
322. The move from a SAM data framework to a SAM model or multiplier framework requires decomposing the SAM accounts into “exogenous” and “endogenous
65” as well as
introducing a set of assumptions regarding production in technologically pre-determined proportions with little or no substitutability between factors. Generally accounts intended to be used as policy instruments (e.g. government expenditure, investment, exports) are designated exogenous and accounts intended to be specified as objectives or targets must be made endogenous (e.g. activity, commodity demand, factor return and household income).
323. For any given policy based injection of resources into the exogenous accounts (i.e. policy instruments) of the SAM, influence is transmitted through the interdependent SAM
65
Endogenous economic activity is activity generated from within an economic system as a direct result of internal processes - having an internal cause or origin.
101 | P a g e
system among the endogenous accounts. The interwoven nature of the system implies that the incomes of factors, households and production are all derived from exogenous injections into the economy via a multiplier process. The multiplier process is developed here on the assumption that when an endogenous income account receives an exogenous expenditure injection, it spends the injection in the same proportion as it would from its Average Propensity to Spend (APS). The elements of the APS matrix is calculated by dividing each cell by its corresponding column sum totals.
324. The multiplier analysis using the SAM framework helps to understand the linkages between the different sectors and the institutional agents at work within the economy. Accounting multipliers have been calculated according to the standard formula for accounting (impact) multipliers, as follows:
Y = A Y + X = (I – A)
–1 X = Ma X
Where:
Y is a vector of incomes of endogenous variables X is a vector of expenditures of exogenous variables A is the matrix of average expenditure propensities for endogenous accounts Ma = (I – A)
–1 is a matrix of aggregate accounting multipliers (the inverse of a generalized
Leontief function) 66
. Variations in any one of the exogenous account (i.e. in this case ΔX) will produce total impacts (ΔY) of endogenous entries via the multipliers. More specifically they are expressed as:
ΔY = Ma x ΔX. The economy wide effect is thus equal to ΔY = Ma x ΔX (i.e. a change in national income is induced by a change in various expenditures each with different expenditure multipliers). Thus ΔY captures the economy wide impacts on the four endogenous accounts namely: (i) gross output; (ii) commodity demand; (iii) factor returns and (iv) household. Table 41 provides the description of the endogenous and exogenous accounts and their multiplier effects.
Table 41: Description of the Endogenous and Exogenous Accounts and Multiplier Affects
Endogenous (y) Exogenous (x) The activity (gross output multipliers), indicates the total effect on the sectoral gross output of a unit-income increase in a given account i in the SAM, and is obtained via the association with the commodity production activity account i.
The consumption commodity multipliers, which indicates the total effect on the sectoral commodity output of a unit-income increase in a given account i in the SAM, is obtained by adding the associated commodity elements in the matrix along the column for account i.
Intervention into through activities (x = i + g + e), where i= GFC + ST (GFCF) Exports (e) Government Expenditure (g) Investment Demand (i) Inventory Demand (i)
The value added or GDP multiplier, giving the total increase in GDP resulting from the same unit-income injection, is derived by summing up the factor-payment elements along account i’s column.
Household income multiplier shows the total effect on household and enterprise income, and is obtained by adding the elements for the household groups along the account i column.
Intervention via households (x = r + gt + ct), where Remittance ( r) Government Transfers (gt) Corporation Transfers (ct)
Source: Selim 2012
325. The economy-wide impacts of additional infrastructural investment are examined by
66
A Leontief production function is one in which factor proportions are fixed. It was named after Wassily Leontief, a famous economist and represents a limiting case of the constant elasticity of substitution production function. It is known as the Generalized Leontief Model (Alarcon, 2002) or the generalized Leontief function..
102 | P a g e
changing the total exogenous injection vector, especially Government Expenditure (g) and Investment demand (investment in construction and infrastructure). The changes in the total exogenous account, estimate the effects of the changes on output (through an output multiplier), value-added or GDP (through the GDP multiplier), and household income (through household income multiplier) and commodity demand (via commodity multipliers).
E. Simulation and Results
326. For the SAM multiplier framework two scenarios were considered. In the first scenario it was assumed that $6.7 billion extra revenue from the gas sector (i.e. gas priced at the 2010 LNG landing price in India) is invested annually over a period between 2013 and 2030 (18 years) in such a way such that the investment demands in construction, utility, transportation, health and education services are increased annually by 13.4 %, 480 %, 17.5 %, 4.4 % and 2.2 % respectively. In the second scenario, the $2.9 billion extra revenue from the gas sector (if gas is priced at average gas price in India and Pakistan) is invested annually over the same period in such a way such that the investment demands in construction, utility, transportation, health and education services are increased annually by 5.8 %, 207.8 %, 7.5 %, 1.9 % and 1 % respectively.
327. Simulated outcomes of the two scenarios by four endogenous accounts are reported in Table 3. Under the first scenario, as a result of the rise in investment in the infrastructural sectors, the gross output of the economy would increase by 15.8 % annually compared to the base year value. The commodity demand would increase by 15.4 % annually. Value-added or gross domestic product of the economy is expected to increase by more than 17 % annually compared to the base case. Total household consumption would increase by 15.3 % annually compared to the base case.
328. Under the second scenario, even under a relatively lower annual investment demands than that under the first scenario, the gross output of the economy and the commodity demand would increase annually by 6.8 % and 6.7 % respectively compared to the base year values. Value-added or gross domestic product of the economy would increase annually by 7.5 % compared to the base case. Finally, total household consumption would increase by 6.6 % annually compared to the base case.
Table 42: Economy Wide Benefit of Infrastructural Investment
(annual % change from base value over 2013-2030)
Endogenous accounts Scenario 1: $6.7 billion annual investment
Scenario 2: $2.9 billion annual investment
Activity Cereal Crop sectors 15.01 6.50
Commercial crops 12.71 5.50
Livestock Rearing 15.24 6.60
Poultry Rearing 15.30 6.62
Fishing 12.69 5.49
Forestry 13.88 6.01 Agriculture 13.96 6.04
Rice Milling 15.12 6.54
Grain Milling 15.34 6.64
Food Process 15.13 6.55
Leather Industry 9.37 4.06
Yarn 4.06 1.76
Cloth milling 10.05 4.35
Woven RMG 0.98 0.43
Knitting 1.24 0.54
Toiletries 18.59 8.05
Cigarette Industry 14.80 6.40
Furniture Industry 9.77 4.23
103 | P a g e
Endogenous accounts Scenario 1: $6.7 billion annual investment
Scenario 2: $2.9 billion annual investment
Paper, printing and publishing Industry 21.32 9.23
Pharmaceuticals 17.72 7.67
Fertilizer Industry 12.72 5.51
Petroleum 16.36 7.08
Chemical Industry 12.77 5.53
Glass Industry 12.44 5.38
Earth-ware and clay industry 13.58 5.88
Cement 17.55 7.60
Metal 15.93 6.90
Miscellaneous Industry 8.41 3.64
Mining and Quarrying 13.61 5.89 Industry 10.92 4.73
Construction 13.47 5.83
Electricity and Water Generation 17.78 7.69
Gas Extraction and Distribution 18.16 7.86
Wholesale and retail trade 12.43 5.38
Transport 30.52 13.21
Health Service 65.53 28.36
Education Service 63.06 27.29
Public Administration and Defence 2.05 0.89
Bank Insurance and Real estate 16.54 7.16
Hotel and Restaurant 15.42 6.67
Communication 14.28 6.18
Information Technology and E-Commerce 9.63 4.17
Other Services 18.00 7.79 Services 20.26 8.77
TOTAL GROSS OUTPUT 15.81 6.84
Commodity
Cereal Crop sectors 15.01 6.50
Commercial crops 12.71 5.50
Livestock Rearing 15.24 6.60
Poultry Rearing 15.30 6.62
Fishing 12.69 5.49
Forestry 13.88 6.01 Agriculture 13.91 6.02
Rice Milling 15.12 6.54
Grain Milling 15.34 6.64
Food Process 15.13 6.55
Leather Industry 9.37 4.06
Jute and Yarn 4.06 1.76
Cloth milling 10.05 4.35
Woven RMG 0.98 0.43
Knitting 1.24 0.54
Toiletries 18.59 8.05
Cigarette Industry 14.80 6.40
Furniture Industry 9.77 4.23
Paper, printing and publishing Industry 21.32 9.23
Pharmaceuticals 17.72 7.67
Fertilizer Industry 12.72 5.51
Petroleum 16.36 7.08
Chemical Industry 12.77 5.53
Glass Industry 12.44 5.38
Earth-ware and clay industry 13.58 5.88
Cement 17.55 7.60
Metal 15.93 6.90
Miscellaneous Industry 8.41 3.64
Mining and Quarrying 13.61 5.89
104 | P a g e
Endogenous accounts Scenario 1: $6.7 billion annual investment
Scenario 2: $2.9 billion annual investment
Industry 11.03 4.78
Construction 13.47 5.83
Electricity and Water Generation 17.78 7.69
Gas Extraction and Distribution 18.16 7.86
Wholesale and retail trade 12.43 5.38
Transport 30.52 13.21
Health Service 65.53 28.36
Education Service 63.06 27.29
Public Administration and Defence 2.05 0.89
Bank Insurance and Real estate 16.54 7.16
Hotel and Restaurant 15.42 6.67
Communication 14.28 6.18
Information Technology and E-Commerce 9.63 4.17
Other Services 18.00 7.79 Services 20.35 8.81
TOTAL COMMODITY DEMAND 15.42 6.67
Value-Added
VA Labour Unskilled 15.86 6.86
VA Labour Skilled 19.30 8.35
VA Capital 17.52 7.58
VA Land 13.97 6.05 TOTAL VALUE-ADDED 17.33 7.50
Households Rural Landless 15.50 6.71 Rural Marginal Farmers 15.11 6.54 Rural Small Farmers 14.38 6.23 Rural Large Farmers 14.23 6.16 Rural Non Farm 15.41 6.67 Urban Low Education 14.09 6.10 Urban High Education 16.50 7.14 TOTAL HOUSEHOLD CONSUMPTION 15.33 6.64
Source: SAM Multiplier Simulation Results
Annex 15: Dynamic CGE Model Results: Scenario 2
329. The results of the second scenario are reported from Table 43 to Table 47. The directions of the impacts of the second scenario would be the same as in the first scenario, though the magnitudes of the impacts would be lower under the second. A smaller cash injection will produce smaller growth.
Table 43: Macroeconomic Impacts of Annual $ 2.9 billion Investment (% deviation from Business-as-usual scenario)
Year GDP Exports Imports Equivalent Variation
CPI
2013 4.00 4.14 1.05 3.13 -0.85
2014 4.02 4.22 1.06 3.19 -0.87
2015 4.03 4.38 1.08 3.26 -0.88 2016 4.05 4.49 1.09 3.32 -0.90
2017 4.07 4.61 1.10 3.39 -0.92
2018 4.09 4.73 1.12 3.46 -0.94
2019 4.10 4.85 1.13 3.53 -0.96 2020 4.12 4.97 1.14 3.59 -0.98
2021 4.14 5.09 1.16 3.66 -1.00
2022 4.16 5.22 1.17 3.73 -1.02
2023 4.19 5.34 1.19 3.80 -1.04 2024 4.21 5.46 1.20 3.86 -1.06
2025 4.23 5.58 1.22 3.93 -1.08
2026 4.26 5.70 1.23 4.00 -1.10
105 | P a g e
Year GDP Exports Imports Equivalent Variation
CPI
2027 4.29 5.82 1.25 4.06 -1.13
2028 4.32 5.94 1.26 4.13 -1.15 2029 4.35 6.06 1.28 4.20 -1.16
2030 4.38 6.19 1.30 4.26 -1.14
Source: Dynamic CGE Simulation Results
Table 44: Impact Annual $ 2.9 billion Investment on Sectoral Domestic Prices (% deviation Business-as-usual scenario)
CROP
COMC
LIVS
FORS
RATM
FOOD
LEAT
CLOT
GARM
CHEM
MACH
PETR
OIND
CNST
SERV
2013
-0.25 -0.23 -0.77
-1.03 -0.52 -0.49 -0.48
-0.34 -0.09 -0.08 -0.11 -0.04 -0.15
-0.19 -0.06
2014
-0.49 -0.39 -0.90
-1.06 -0.59 -0.54 -0.54
-0.37 -0.18 -0.10 -0.13 -0.06 -0.17
-0.21 -0.09
2015
-0.59 -0.45 -0.97
-1.03 -0.60 -0.58 -0.60
-0.41 -0.13 -0.11 -0.16 -0.07 -0.19
-0.24 -0.10
2016
-0.62 -0.47 -1.06
-1.10 -0.61 -0.62 -0.65
-0.44 -0.09 -0.13 -0.18 -0.09 -0.21
-0.27 -0.13
2017
-0.70 -0.52 -1.14
-1.10 -0.64 -0.66 -0.71
-0.47 -0.07 -0.15 -0.21 -0.10 -0.24
-0.30 -0.16
2018
-0.76 -0.57 -1.23
-1.12 -0.65 -0.70 -0.76
-0.50 -0.06 -0.17 -0.24 -0.13 -0.27
-0.33 -0.19
2019
-0.83 -0.61 -1.31
-1.14 -0.67 -0.75 -0.81
-0.54 -0.06 -0.20 -0.27 -0.15 -0.30
-0.37 -0.23
2020
-0.89 -0.65 -1.40
-1.16 -0.68 -0.79 -0.85
-0.57 -0.06 -0.23 -0.31 -0.18 -0.33
-0.40 -0.27
2021
-0.96 -0.70 -1.48
-1.18 -0.70 -0.84 -0.88
-0.60 -0.08 -0.26 -0.35 -0.22 -0.37
-0.44 -0.32
2022
-1.02 -0.74 -1.57
-1.19 -0.72 -0.88 -0.90
-0.63 -0.09 -0.30 -0.39 -0.22 -0.41
-0.47 -0.33
2023
-1.09 -0.78 -1.65
-1.21 -0.75 -0.92 -0.93
-0.67 -0.11 -0.35 0.06 -0.24 -0.45
-0.51 -0.36
2024
-1.15 -0.83 -1.74
-1.23 -0.77 -0.96 -0.95
-0.70 -0.13 -0.40 -0.48 -0.26 -0.50
-0.53 -0.39
2025
-1.22 -0.87 -1.82
-1.25 -0.79 -1.01 -0.97
-0.73 -0.15 -0.46 -0.53 -0.28 -0.55
-0.55 -0.42
2026
-1.28 -0.91 -1.90
-1.27 -0.82 -1.05 -1.00
-0.76 -0.16 -0.53 -0.56 -0.30 -0.59
-0.56 -0.45
2027
-1.35 -0.96 -1.99
-1.29 -0.84 -1.10 -1.02
-0.80 -0.19 -0.62 -0.57 -0.32 -0.63
-0.55 -0.48
2028
-1.41 -1.00 -2.07
-1.31 -0.86 -1.14 -1.05
-0.83 -0.20 -0.73 -0.61 -0.35 -0.64
-0.52 -0.52
2029
-1.48 -1.04 -2.16
-1.33 -0.89 -1.19 -1.07
-0.86 -0.22 -0.84 -0.64 -0.37 -0.66
-0.49 -0.55
2030
-1.54 -1.09 -2.24
-1.35 -0.91 -1.22 -1.10
-0.89 -0.24 -0.90 -0.67 -0.39 -0.67
-0.61 -0.58
Note: CROP = cereal crop, COMC = commercial crop, LIVS = livestock and poultry, FORS = forestry, RATM = rice and ata milling, FOOD = other food, LEAT = leather and leather goods, CLOT = mill clothing, GARM = readymade garments, CHEM = chemicals, MACH = machinery, PETR = petroleum products, OIND = other industries, CNST = construction, SERV = other services
Source: Dynamic CGE Simulation Results
106 | P a g e
Table 45: Impact of Annual $ 2.9 billion Investment on Sectoral Exports
(% deviation from the Business-as-usual scenario) CRO
P COM
C LIVS
FORS
RATM
FOOD
LEAT
CLOT
GARM
CHEM
MACH
PETR
OIND
CNST
SERV
2013
0 1.98 3.61
0 0 3.86 4.60 2.98 3.08 6.12 4.41 5.79 2.75 0 4.41
2014
0 3.24 4.51
0 0 4.45 5.54 3.84 3.26 6.17 4.45 5.90 2.87 0 4.57
2015
0 3.83 4.73
0 0 4.52 5.74 4.15 3.37 6.23 4.52 5.99 2.98 0 4.81
2016
0 4.03 4.95
0 0 4.58 5.95 4.17 3.53 6.28 4.57 6.10 3.09 0 5.00
2017
0 4.49 5.17
0 0 4.65 6.15 4.38 3.68 6.33 4.62 6.20 3.20 0 5.20
2018
0 4.88 5.39
0 0 4.71 6.35 4.55 3.83 6.38 4.67 6.30 3.32 0 5.40
2019
0 5.28 5.61
0 0 4.78 6.56 4.72 3.97 6.43 4.73 6.41 3.43 0 5.61
2020
0 5.67 5.83
0 0 4.84 6.76 4.89 4.12 6.48 4.78 6.51 3.54 0 5.80
2021
0 6.06 6.06
0 0 4.91 6.96 5.05 4.27 6.54 4.84 6.61 3.65 0 6.01
2022
0 6.46 6.28
0 0 4.97 7.17 5.22 4.41 6.59 4.89 6.71 3.77 0 6.21
2023
0 6.85 6.50
0 0 5.04 7.37 5.38 4.56 6.64 4.95 6.81 3.88 0 6.41
2024
0 7.25 6.72
0 0 5.10 7.57 5.55 4.71 6.69 5.00 6.91 3.99 0 6.61
2025
0 7.64 6.94
0 0 5.17 7.78 5.72 4.86 6.74 5.06 7.02 4.10 0 6.81
2026
0 8.03 7.16
0 0 5.23 7.98 5.89 5.00 6.80 5.11 7.12 4.22 0 7.01
2027
0 8.43 7.38
0 0 5.30 8.18 6.05 5.15 6.85 5.16 7.22 4.33 0 7.22
2028
0 8.82 7.60
0 0 5.36 8.39 6.22 5.30 6.90 5.22 7.32 4.44 0 7.41
2029
0 9.22 7.82
0 0 5.43 8.59 6.38 5.45 6.95 5.27 7.42 4.55 0 7.62
2030
0 9.61 8.04
0 0 5.49 8.80 6.55 5.59 7.00 5.32 7.52 4.67 0 7.82
Note: CROP = cereal crop, COMC = commercial crop, LIVS = livestock and poultry, FORS = forestry, RATM = rice and ata milling, FOOD = other food, LEAT = leather and leather goods, CLOT = mill clothing, GARM = readymade garments, CHEM = chemicals, MACH = machinery, PETR = petroleum products, OIND = other industries, CNST = construction, SERV = other services
Source: Dynamic CGE Simulation Results
Table 46: Impact of Annual $ 2.9 billion Investment on Sectoral Production
(% deviation from the Business-as-usual scenario) CRO
P COM
C LIVS
FORS
RATM
FOOD
LEAT
CLOT
GARM
CHEM
MACH
PETR
OIND
CNST
SERV
2013
2.78 2.65 3.00
1.82 3.45 4.14 4.86 3.02 3.17 5.23 4.58 5.57 4.48 2.72 3.99
2014
2.88 2.74 3.08
1.97 3.56 4.19 4.91 3.08 3.26 5.32 4.64 5.69 4.66 2.80 4.07
2015
2.98 2.80 3.13
2.04 3.60 4.22 4.97 3.16 3.37 5.38 4.71 5.92 4.73 2.83 4.20
2016
3.08 2.87 3.20
2.17 3.68 4.27 5.03 3.23 3.46 5.46 4.77 6.08 4.87 2.89 4.31
2017
3.18 2.94 3.27
2.28 3.75 4.32 5.09 3.31 3.56 5.53 4.84 6.25 4.99 2.94 4.41
2018
3.28 3.01 3.34
2.39 3.82 4.36 5.14 3.38 3.66 5.61 4.90 6.42 5.12 2.99 4.52
2019
3.38 3.09 3.40
2.50 3.90 4.40 5.20 3.45 3.75 5.68 4.97 6.60 5.25 3.04 4.64
2020
3.48 3.16 3.47
2.61 3.96 4.45 5.25 3.53 3.85 5.75 5.03 6.77 5.37 3.09 4.74
2021
3.58 3.23 3.54
2.72 4.04 4.49 5.31 3.60 3.95 5.83 5.10 6.94 5.50 3.15 4.85
2022
3.68 3.30 3.61
2.83 4.11 4.53 5.37 3.67 4.05 5.90 5.16 7.12 5.62 3.20 4.96
2023
3.78 3.37 3.67
2.94 4.18 4.58 5.42 3.75 4.14 5.97 5.23 7.29 5.75 3.25 5.07
2024
3.88 3.44 3.74
3.05 4.25 4.62 5.48 3.82 4.24 6.05 5.29 7.46 5.87 3.31 5.18
2025
3.98 3.51 3.80
3.16 4.32 4.66 5.54 3.90 4.34 6.12 5.36 7.64 6.00 3.36 5.29
107 | P a g e
2026
4.08 3.58 3.87
3.27 4.39 4.70 5.59 3.97 4.44 6.19 5.42 7.81 6.12 3.41 5.40
2027
4.18 3.66 3.94
3.38 4.47 4.75 5.65 4.04 4.53 6.27 5.49 7.98 6.25 3.46 5.51
2028
4.28 3.73 4.01
3.49 4.54 4.79 5.70 4.12 4.63 6.34 5.55 8.15 6.38 3.51 5.62
2029
4.38 3.80 4.07
3.60 4.61 4.83 5.76 4.19 4.73 6.41 5.62 8.33 6.50 3.57 5.73
2030
4.48 3.87 4.14
3.71 4.68 4.88 5.82 4.26 4.83 6.49 5.68 8.50 6.63 3.62 5.84
Note: CROP = cereal crop, COMC = commercial crop, LIVS = livestock and poultry, FORS = forestry, RATM = rice and ata milling, FOOD = other food, LEAT = leather and leather goods, CLOT = mill clothing, GARM = readymade garments, CHEM = chemicals, MACH = machinery, PETR = petroleum products, OIND = other industries, CNST = construction, SERV = other services
Source: Dynamic CGE Simulation Results
Table 47: Impact of Annual $ 2.9 billion Investment on Household Real Consumption
(% deviation from the Business-as-usual scenario)
H1 H2 H3 H4 H5 H6 H7 H8 H9
2013 3.72 3.57 3.77 3.84 3.51 3.78 3.82 3.87 3.94 2014 3.80 3.60 3.83 3.86 3.53 3.87 3.89 3.89 3.96
2015 3.87 3.61 3.87 3.87 3.58 3.94 3.89 3.92 3.98
2016 3.95 3.64 3.92 3.89 3.61 4.03 3.93 3.94 4.00
2017 4.03 3.66 3.96 3.90 3.64 4.11 3.96 3.96 4.01 2018 4.10 3.68 4.01 3.92 3.68 4.19 4.00 3.98 4.03
2019 4.18 3.70 4.05 3.93 3.71 4.27 4.03 4.00 4.05
2020 4.25 3.72 4.10 3.95 3.75 4.35 4.06 4.03 4.06 2021 4.33 3.74 4.14 3.96 3.78 4.44 4.09 4.05 4.08
2022 4.40 3.77 4.19 3.98 3.82 4.52 4.12 4.07 4.10
2023 4.48 3.79 4.23 4.00 3.85 4.60 4.16 4.09 4.12
2024 4.55 3.81 4.28 4.01 3.89 4.68 4.19 4.11 4.13 2025 4.63 3.83 4.32 4.03 3.92 4.77 4.22 4.13 4.15
2026 4.70 3.85 4.37 4.04 3.96 4.85 4.25 4.16 4.17
2027 4.78 3.87 4.41 4.06 3.99 4.93 4.29 4.18 4.19
2028 4.86 3.90 4.46 4.07 4.03 5.01 4.32 4.20 4.20 2029 4.93 3.92 4.51 4.09 4.06 5.09 4.35 4.22 4.22
2030 5.01 3.94 4.55 4.10 4.09 5.18 4.38 4.24 4.24
Note: H1 = Landless households, H2 = marginal farmers, H3 = small farmers, H4 = Large farmers, H5 = rural non-farm households, H6 = urban no-educated households, H7 = urban low educated households, H8 = urban medium educated households and H9 = urban high educated households. Source: Dynamic CGE Simulation Results