- 86 -

15. Existing price structure for natural gas bear little relationship to the structure of gas costs. None of the projects surveyed used peak pricing or time of day or seasonal differentials. Six of the cases reported price differentiation by consumer category, but there was no uniformity across countries.. For example, the power sector receives gas for less than its average price in four of the countries, and more than the average price in the other two. Feedstock uses are charged below average tariffs in two cases and above average tariffs in four. Residential gas distribution, which is the most costly, is charged above average prices in three countries and below average in two. More attention should be paid to price structure in the natural gas sector.

# B.3 Discussion of Adiustments to Efficiency Price&

16. SARS in the oil and gas sector contain adequate discussions of financial and distributional adjustments to efficiency prices, but generally pay insufficient attention to the fiscal dimension. Tax policies are usually noted, but little discussion or analysis of them is provided. The exception to this general statement is in the energy pricing studies that have been financed under several projects in the sector. Terms of reference for those studies invariably include an analysis of the fiscal impact of the se.tor, and several of the studies have produced useful recomendations in this area. An Energy Paper sumarizing the results of those studies is under production.

17. Another area that deserves more attention is the transfer price policy and tax treatment of publicly owned oil, gas and refinery companies. Significant anomalies exist in the way that domestic crude prices are set both for (government) prcducer companies and as an input into domestic refineries. Ex-refinery prices of ;etroleum products are seriously cut of line with efficiency prices in many iountries. While these "intermediate prices' will have little effect on final consumption patterns, they play a major role in promoting or hindering the internal efficiency and financial viability of public enterprises. A confusion between these objectives, on the one hand, and the government's legitimate desire to generate a fiscal surplus from the sector, on the other, can lead to a transfer pricing mechanism that frustrates all three objectives.

# B.4 Discussion of Cnt JRecovery Issues

18. Cost recovery is generally high in the oil and gas sector. It is sometimes difficult to apply the Bank's usual financial covenants to the enterprises because of the intricate tax and financing relationships some have with government. Of the 10 proects reviewed, only one specified a rate of return on revalued net fixed assets, while another asked for a "reasonable" return on capital employed. Internal cash generation covenants were used in four cases and ranged from 26% to 80% with one case unspecified. Debt service covenants were applied in two cases. One project imposed a 90% ceiling on the operating ratio, and one asked for a 15% discounted cash flow return after taxer. Two projects (China and Benin) did not contain financial covenants; in China's case because the company is not operated on a typical commercial basis so the normal financial covenants would be of limited real significance.