Pre-empting the escalation of an oil crisis

Rushing to stock up fuel 

The petroleum industry has been one of the highlights in the recent past in the media with headings such as “CPC in a quandary after Lanka Indian Oil Company (LIOC) price increase” – (Daily News, 10th February 2022) and “Fuel price formula to be presented to the cabinet” (Daily Mirror, 14th February 2022).   

The first headline refers to a statement made by the Chairman of the Ceylon Petroleum Corporation (CPC) inter-alia that the CPC had frequently demanded price hikes but the Government had refused to increase fuel prices.   
In the said article the Chairman further states that he is in the hope that the Government will favourably consider the situation and affect a price increase, suggesting that government intervention in preventing a price hike will definitely affect the profitability of the CPC.   

The news item under the second headline stated that CPC had made a request to the Ministry of Finance/Government on many occasions for a fuel price increase and that a formula must be adopted immediately as the poor will have to bear the burden if fuel prices in Sri Lanka are not revised. The energy minister said that a fuel price formula has been drafted and will be presented to the cabinet.  

The use of a pricing formula no doubt is a very effective method of pricing which can prevent a sudden steep rise in fuel prices from being passed down to the consumer. This method of using the pricing formula is nothing new and was first adopted in the years 2002 and 2003 and thereafter for a short period after 2015.  
The present petroleum crisis looming in Sri Lanka has certainly not been caused by the CPC but is a direct result of the short-term ad hoc incorrect policies and directions of the policymakers in the Government.  

Privatisation of the Energy Sector in Sri Lanka was never a wise decision, as the Energy Sector which is the heart of the economy should at all times be well managed nationally to pre-empt or reduce any adverse effects thereto resulting from International Market Forces or Other Market Forces

To go back in history, State involvement and interference in the business of Public Enterprises is perhaps one of the main reasons that justified the recommendation by the International Monetary Fund (IMF) in privatising inter alia the Energy Sector and in furtherance of same the Public Enterprises Reform Commission was entrusted in the year 2002 to partially privatise the downstream distribution of petroleum in the country.   

This was effected on the basis that there will be healthy competition and efficiency in the distribution of petroleum products. In pursuance of the same, it must be noted that the Lanka Indian Oil Corporation (LIOC) came forward and entered the petroleum industry in Sri Lanka.   

Privatisation of the Energy Sector in Sri Lanka was never a wise decision, as the Energy Sector which is the heart of the economy should at all times be well managed nationally to pre-empt or reduce any adverse effects thereto resulting from International Market Forces or Other Market Forces.   

This was stated in my article ten years ago under the Heading ‘ Fuel Crisis in the Country ‘and published in the “Daily Mirror” of 17th March 2012.   

The Indian Oil Group entry into the domestic market to operate on an equal level playing field was formalized by agreements entered into by LIOC with the Government of Sri Lanka (GOSL), CPC and Board of Investment, Sri Lanka (BOI) on December 5, 2002, in terms of which agreements, the said company was granted tax holidays for ten years and thereafter taxed on a concessionary rate of 15 per cent of assessable income of the company.   
All these concessions were granted to the LIOC on the basis that they will market the much-needed commodity at competitive prices. However, we do not know whether the desired effects were achieved as the LIOC pricing of various grades of fuel certainly are not less than the prices of the CPC.  

In fact, increasing of prices of petroleum products last month by LIOC will no doubt compel CPC also to effect an increase.   

In such circumstances, was there a need for a song and dance over the transfer by LIOC of a mere parcel of 40,000 metric tons of diesel to Sri Lanka on February 15, 2022, when LIOC had supplied and traded petroleum products to Sri Lanka for the past 19 years?  

Due to the lack of Foreign Exchange, we have now been informed that petrol will have to be rationed for consumers. The public has also been requested to restrict the use of electricity inter alia between 6 p.m. and 10 p.m. by the Public Utilities Commission of Sri Lanka (PUSL). This again is due to the lack of fuel needed to generate electricity by thermal power. 

 
Thus, we are quite aware that fuel is a necessity and not a luxury anymore. According to the Ceylon Electricity Board (CEB) over 60 per cent of the much-needed electricity is generated by fuel. Further, the transport sector which is a necessity for the functioning of the country in all spheres is dependent on fuel.  
It was reported recently that dues by state agencies to the CPC on account of fuel purchasers were quite high, even astronomical. This no doubt can have a cascading effect on the balance sheet of the CPC.   
The said State institutions or agencies which owe money to the CPC have budgetary allocations given by the Treasury and it is the Treasury that can easily and effectively transfer some of these allocations to the CPC in settlement of such dues.   

Further, it must be noted that when there is a price increase of fuel in the International Market, it is the Treasury that benefits by such rise unless the rate of tax due thereon is reduced. If the Treasury acts responsibly, it could easily cushion the consumer and the economy by reducing the rate of tax.   
The colossal sums collected by the Treasury by way of various taxes from the CPC in the import and sale of fuel confirm that it is the CPC that is subsidising the Treasury and not the other way around as frequently alleged.
The above facts found in the public domain relating to the enormous debts due to the CPC by the State Agencies clearly confirm that once again, it is the CPC that is subsidising such State Agencies.   

To say the least, it is total financial indiscipline on the part of the policymakers and the relevant authorities that have contributed to the crisis in the CPC. Thus you will no doubt agree that the CPC can never operate at a loss, if its Board of Directors is permitted to follow the pricing formula without selling its product below cost and permit the recovery of existing dues from state institutions, without permitting credit sales. In short, CPC should be permitted to operate its business independently in a business-like manner without interference by the Treasury and other State organizations.  

I believe what has been said above is known to many of us, and the question one may pose is “what is the solution”? If the government and policymakers have the will and desire to sincerely solve the crisis, they can easily do so by following the remedial action set out below. (a) Apply the pricing formula. (b) The Treasury to reimburse the CPC all the losses caused to it by not permitting the CPC to sell its fuel above the cost (leave alone any profit margin) on a priority basis. (c) Direct all State Agencies to settle all dues to CPC once again on a priority basis, by transferring budgetary allocations from the Treasury due to such State Agencies directly to CPC. (d) To effect sales as far as possible in foreign currency to entities (purchasers) whose earnings are in foreign currency including SriLankan Airlines, in order to cushion any adverse effects arising from exchange losses. (e) In the short term request LIOC to assist the Sri Lankan consumer at this point of time in reciprocation to the smooth entry it had into the closely protected energy sector in Sri Lanka which was the heart of the economy, and the benefits and concessions the company derived at the time of entry into the Sri Lankan market and thereafter.   

The present petroleum crisis looming in Sri Lanka has certainly not been caused by the CPC but is a direct result of the short-term ad-hoc incorrect policies and directions of the policymakers in the Government

In 1962, the assets of the oil companies were taken over and vested in the CPC consequent to the nationalisation of the petroleum industry. Importation, distribution and retailing of petroleum products were carried on under a State monopoly up until 2002. Whereupon after partial privatisation of the petroleum industry, the assets of the CPC should have been capitalised and credited to its account. Similarly, the China Bay Installation consisting of 99 storage tanks and other ancillary facilities including premises, pipelines, pumps, loading /discharging facilities for petroleum products situated on the land at China Bay should be capitalised and credited to the account of CPC.  
The question arises as to whether capitalisation of such assets was effectively performed to reflect the true value of the assets of the CPC. We have been informed that an agreement has been entered into between the CPC, LIOC and the GOSL to vest the land, building and equipment belonging to the CPC in a new company for the operation of the China Bay Installation. In formulating the said agreement, we assume that the policymakers have taken a proper valuation of the assets of the CPC and accordingly credited its account with the value thereof. This exercise could help the CPC to set off and settle its accumulated losses caused to it by government interference, and enter the path of recovery  

It must be noted that in 2002, the CPC ran at a profit of RS. 9,786 Million, after contributing about Rs.30 billion to the General Treasury   

Hence, in light of the above, it is of utmost priority and importance for the authorities to safeguard, protect and maintain the smooth functioning of the CPC and not trigger a situation by taking ad-hoc decisions which can force inevitable privatisation of the industry. Privatisation may be canvassed at this point of time by some interested business entities with political patronage only for their short term benefits. However, privatisation of the petroleum industry is certainly not the best solution as it will not benefit the Sri Lankan economy and the sustainability of its people. 

In conclusion, the decision-makers should take remedial action as mentioned above without delay in the interest of the country, the consumers and the CPC. Failure to do so will no doubt result in adverse effects on all of us in Sri Lanka in fulfilling our day to day work economically and otherwise.   

The writer is a Former Director of CPC and First Chairman of the CPSTL