Coal Power Royalties and Provincial Autonomy

Syed Akhtar Ali

0345-2447714

Federal government should sort out the royalty issue on the exploitation of natural resources,so that the lacunae in this respect are removed and the investors feel secure in making their investment decisions. Although the 1973 constitution lays down some guidelines with respect to royalty payments ,these are either vague or outdated
by the events that have subsequently taken place. Take the example of NWFP royalty in hydel power.The matter has been a subject of debate and contention for along time.there have been inputs from late Ghulam Ishaque Khan,AGN Kazi formula,Council of Common Interests’ determinations and tribunals. The constitution provides for the “net profits” from hydel sales to be given to the province where it is located ie., for the time being NWFP.Net profit is avague term.NAPDA is not making any profit It subsidizes
electricity.Government is paying as revealed by consent of minister for water and power,a subsidy of Rs.1.67 per unit.It does not mean that the NWFP should not get royalty.The intent of the law makers should be seen and decisions on specific rates should be left to the administration.There are several approaches which could be
adopted. and a rational and just one adopted through consensus.
Our orthodox bureaucracy may not be in a position to evolve
a suitable formula,neither do they have the ability or capacity.
We have seen foreign consultants coming for even drafting Terms and
References for studies which in a way seems to be a better solution
than beating about the bush and coming out with half baked solutions.
Energy content of the hydel power needs to be rewarded with
royalty.This is not the time and space to discuss technical
details.However,one would like to briefly mention some outlines,so as
to guide the discussion of the issue which has defied solution for
more than two decades.

The possible royalty approach may have the following components;
Firstly, the main premise that has to be accepted is that the energy
content of hydel power is to be rewarded to the producing province
and region(including districts) at par with other energy
resources.Although at par or more or less may be decided according
to relative economics,it has to have some relevance and comparison
with the competing resources.

Secondly,measurement of energy content of hydel power being easier
said than done.in one view the EPP charges of abasket of thermal
resources of thermal plants measures the corresponding energy
contribution of a hydel plant.12 % of the earlier mentioned ought
to be the hydel royalty. The same rate of royalty applies to oil and
gas.

Coming to the oil and gas sector,luckily the royalty rates well
defined.But then again there are the issues of well-head provinces.
For some historical reasons,the well-head prices of PPL-Baluchistan
gas are fixed at an incredibly low rate. Baluch leaders are very
angry over this as this does not result in a just and meaningful
revenue,the natural gas pices at well-head being much higher in other
provinces.The royalty could be and should be calculated at the
generally prevailing well-head prices in the country,even if the
fixed well-head prices are to be maintained for contractual reasons.

Similarly the royalty issue on coal and other natural resources is to
be sorted out. At least part of the tusle on Thar coal between the
provincial and the federal government comes out from the
uncertaineties in this respect.due to alack of the public
information system and transparency,we only hearof rumours in this
respect.Vague statements on sindh to get a big royalty or news of
cajoling on a paltry sum of Rs.60 per ton as royalty is heard.We
would recommend a royalty rate of 12% at coal minehead prices,as is
the case in oil and gas,although the general rates are between
5-8%.as in India and Australia.In Bangladesh ,it is variable
between6-16% depending on the coal prices.Indonesia being a more
relevant country ,charges 13.5%.of mine head prices. In Indonesia
also now there are issues related to mine-head prices,which they are
trying to tackle through developing a coal price index.

A framework of other provincial taxes on coal such as excise (in
American parlance severance tax),property and other local taxes
should be discussed..In Wyoming,USA in addition to
royalties,additional taxes almost equal to royalty or more are
levied.A total revenue of 850 million dollars,is revised in a
production of 350 million tons,such taxes should be fixed and
guaranteed for a period of ten years.