- Govt to continue with it: Treasury Secretary
- Energy Minister backtracking from earlier claims
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The Government is set to continue with the fuel price formula despite earlier claims to the contrary, made both prior to and following the Presidential Election in November, The Sunday Morning Business learns.
This was revealed to The Sunday Morning Business by the Secretary to the Treasury S. R. Attygalle, on 1 January.
“We have to have a formula anyway to calculate fuel price, so there will be no change in the formula we have now. We will continue with this,” Attygalle noted, in response to our query as to the future of the formula.
This contradicts statements made by the Minister of Transportation, Power, and Energy Mahinda Amaraweera in late November and early December, stating that the fuel price formula would be abolished.
Addressing a press conference on 26 November, Amaraweera noted that the new Government hopes to revoke the fuel price formula introduced by the former Government and added that President Gotabaya Rajapaksa had also expressed concerns over the price formula.
In another media briefing on 3 December, the Minister reiterated that the formula will be abolished in the upcoming weeks and the relevant Cabinet paper would be submitted soon. He added that he would keep the fuel prices under control and not pass the burden on to the public.
As all the attempts to reach Amaraweera for further clarification on this matter proved futile, The Sunday Morning Business spoke to the Ministry Spokesman Dharma Wanninayake. He stated that Amaraweera had not discussed the fuel price formula after the aforementioned press conferences.
“The Minister has not paid any special attention towards the formula as of yet and nothing has been discussed recently, but there will be a discussion this week,” Wanninayake noted.
Meanwhile, Treasury Secretary Attygalle noted that the fuel price formula which was famously introduced by the previous Government was nothing new at all.
“The formula the former Government put out has been with the Treasury for the past 20 years. Otherwise, how did we manage to revise the prices all these years? The formula is the same up to date. Only the tax components were changed in the formula whenever there was a tax revision. They just made it public and revise it monthly,” Attygalle stated.
Even though fuel price is a subject that should come under the Ministry of Transportation, Power, and Energy, the fact that the formula was revealed to the public by the former Government’s Minister of Finance, has created a conflict over this issue between the two ministries.
The election manifesto of President Gotabaya Rajapaksa promised to eliminate the fuel price formula currently in operation. However, the President has not made any statement regarding this after assuming duties.
The formula
The fuel price formula is a requirement laid off by the International Monetary Fund’s (IMF) Extended Fund Facility (EFF) for Sri Lanka. In May 2018, the then Government brought in a fuel price formula that would be revised on the 10th of each month, reflecting fluctuations in the global oil market.
The purpose of the formula was to eliminate ad hoc price revisions driven by political needs as opposed to economic needs, to establish cost-based pricing to reduce losses suffered by the State due to low fuel prices, and also to protect the loss incurring state-owned Ceylon Petroleum Corporation (CPC).
Even though the formula was brought in May 2018, the components of the formula were revealed to the public only in October, of the same year. The pricing formula was reportedly said to be constructed by a technical committee based on landed cost, processing cost, administrative cost, and taxation. The formula read as “maximum retail price (MRP) = V1+V2+V3+V4”.
Accordingly, V1, the landed cost, includes Singapore Platts price per barrel, weighted average premium per barrel, losses due to the evaporation, and losses due to the exchange rate. V2, the processing cost, includes local port charges, transport cost, dealers’ margin including losses due to evaporation, and stockholding cost.
V3, the administrative cost, includes administrative expenses including personnel cost, depreciation, and other cost elements, if there are any. The last component, V4, refers to taxation. It includes customs import duty, excise duty, ports and airports development levy, and nation building tax.
Deviations
Despite its purpose to reflect global oil price fluctuation in the local oil prices, there were several times where the revision was done in contrary to the initial purpose, as oil prices in the local market were reduced despite higher global oil prices.
Further, there are months where the revision was either skipped or delayed. This includes April during which month the Budget 2019 was passed in the Parliament and October and November, during which months, the Presidential candidates were announced and the Presidential Election 2019 was held, respectively.
During the 51-day political crisis that began on 26 October 2018, the then Prime Minister Mahinda Rajapaksa abandoned the formula and reduced the prices, three times in a row. The formula was brought back in after the end of the crisis.
Impact
Since the day of the introduction of the fuel prices formula up to the latest fuel price revision in September last year, the price of a litre of 95 Octane petrol increased to Rs. 161 from Rs. 148. It reached a peak of Rs. 169 in October and November 2018.
The current price of 92 Octane petrol matches that of May 2018 which is Rs. 137, with fluctuations during the period in between. It reached a peak of Rs. 155 in October 2018.
Price of a litre of Lanka Auto Diesel decreased to Rs. 104 from Rs. 109 while it reached a peak of Rs. 123 in September and October 2018. Lanka Super Diesel increased to Rs. 132 from Rs. 119 with fluctuations in between. It reached its peak price of Rs. 141 in October and November 2018.
Despite the formula, CPC incurred losses in 2018 compared to profits a year ago. Its net loss widened to Rs. 104 billion compared to a profit of Rs. 3.5 billion in the previous year, despite 0.6% year-on-year (YoY) growth in litres of fuel sold in 2018. Poor financial performance resulted in over 50% YoY increase in CPC’s bank borrowing during the year. CPC borrowed Rs. 562 billion compared to Rs. 224 billion in 2017.
Out of the Rs. 104 billion loss reported in 2018, a report by the Ministry of Finance attributed the amount of Rs. 82.7 billion to the depreciation of the rupee against the US dollar, which depreciated by over 19%. The rest of the loss was attributed to the on-and-off implementation of the formula.
The report also read: “The formula has not covered the full cost of the CPC, and this has adversely affected its financial position.”
Interestingly, despite the Sri Lankan rupee being the worst performing currency in the Asian region and the political disruption over the continued implementation of the formula in the fourth quarter of 2018, Lanka IOC improved its gross margins to 4.9% from 2% a year ago.
Lanka IOC attributed the improvement to the price formula introduced in 2018, in contrast to the CPC. Lanka IOC cut down its loss by nearly 50% in the calendar year 2018, with its losses coming down to Rs. 625 million from Rs. 1.3 billion a year ago.
The Government is set to continue with the fuel price formula despite earlier claims to the contrary, made both prior to and following the Presidential Election in November, The Sunday Morning Business learns.
This was revealed to The Sunday Morning Business by the Secretary to the Treasury S. R. Attygalle, on 1 January.
“We have to have a formula anyway to calculate fuel price, so there will be no change in the formula we have now. We will continue with this,” Attygalle noted, in response to our query as to the future of the formula.
This contradicts statements made by the Minister of Transportation, Power, and Energy Mahinda Amaraweera in late November and early December, stating that the fuel price formula would be abolished.
Addressing a press conference on 26 November, Amaraweera noted that the new Government hopes to revoke the fuel price formula introduced by the former Government and added that President Gotabaya Rajapaksa had also expressed concerns over the price formula.
In another media briefing on 3 December, the Minister reiterated that the formula will be abolished in the upcoming weeks and the relevant Cabinet paper would be submitted soon. He added that he would keep the fuel prices under control and not pass the burden on to the public.
As all the attempts to reach Amaraweera for further clarification on this matter proved futile, The Sunday Morning Business spoke to the Ministry Spokesman Dharma Wanninayake. He stated that Amaraweera had not discussed the fuel price formula after the aforementioned press conferences.
“The Minister has not paid any special attention towards the formula as of yet and nothing has been discussed recently, but there will be a discussion this week,” Wanninayake noted.
Meanwhile, Treasury Secretary Attygalle noted that the fuel price formula which was famously introduced by the previous Government was nothing new at all.
“The formula the former Government put out has been with the Treasury for the past 20 years. Otherwise, how did we manage to revise the prices all these years? The formula is the same up to date. Only the tax components were changed in the formula whenever there was a tax revision. They just made it public and revise it monthly,” Attygalle stated.
Even though fuel price is a subject that should come under the Ministry of Transportation, Power, and Energy, the fact that the formula was revealed to the public by the former Government’s Minister of Finance, has created a conflict over this issue between the two ministries.
The election manifesto of President Gotabaya Rajapaksa promised to eliminate the fuel price formula currently in operation. However, the President has not made any statement regarding this after assuming duties.
The formula
The fuel price formula is a requirement laid off by the International Monetary Fund’s (IMF) Extended Fund Facility (EFF) for Sri Lanka. In May 2018, the then Government brought in a fuel price formula that would be revised on the 10th of each month, reflecting fluctuations in the global oil market.
The purpose of the formula was to eliminate ad hoc price revisions driven by political needs as opposed to economic needs, to establish cost-based pricing to reduce losses suffered by the State due to low fuel prices, and also to protect the loss incurring state-owned Ceylon Petroleum Corporation (CPC).
Even though the formula was brought in May 2018, the components of the formula were revealed to the public only in October, of the same year. The pricing formula was reportedly said to be constructed by a technical committee based on landed cost, processing cost, administrative cost, and taxation. The formula read as “maximum retail price (MRP) = V1+V2+V3+V4”.
Accordingly, V1, the landed cost, includes Singapore Platts price per barrel, weighted average premium per barrel, losses due to the evaporation, and losses due to the exchange rate. V2, the processing cost, includes local port charges, transport cost, dealers’ margin including losses due to evaporation, and stockholding cost.
V3, the administrative cost, includes administrative expenses including personnel cost, depreciation, and other cost elements, if there are any. The last component, V4, refers to taxation. It includes customs import duty, excise duty, ports and airports development levy, and nation building tax.
Deviations
Despite its purpose to reflect global oil price fluctuation in the local oil prices, there were several times where the revision was done in contrary to the initial purpose, as oil prices in the local market were reduced despite higher global oil prices.
Further, there are months where the revision was either skipped or delayed. This includes April during which month the Budget 2019 was passed in the Parliament and October and November, during which months, the Presidential candidates were announced and the Presidential Election 2019 was held, respectively.
During the 51-day political crisis that began on 26 October 2018, the then Prime Minister Mahinda Rajapaksa abandoned the formula and reduced the prices, three times in a row. The formula was brought back in after the end of the crisis.
Impact
Since the day of the introduction of the fuel prices formula up to the latest fuel price revision in September last year, the price of a litre of 95 Octane petrol increased to Rs. 161 from Rs. 148. It reached a peak of Rs. 169 in October and November 2018.
The current price of 92 Octane petrol matches that of May 2018 which is Rs. 137, with fluctuations during the period in between. It reached a peak of Rs. 155 in October 2018.
Price of a litre of Lanka Auto Diesel decreased to Rs. 104 from Rs. 109 while it reached a peak of Rs. 123 in September and October 2018. Lanka Super Diesel increased to Rs. 132 from Rs. 119 with fluctuations in between. It reached its peak price of Rs. 141 in October and November 2018.
Despite the formula, CPC incurred losses in 2018 compared to profits a year ago. Its net loss widened to Rs. 104 billion compared to a profit of Rs. 3.5 billion in the previous year, despite 0.6% year-on-year (YoY) growth in litres of fuel sold in 2018. Poor financial performance resulted in over 50% YoY increase in CPC’s bank borrowing during the year. CPC borrowed Rs. 562 billion compared to Rs. 224 billion in 2017.
Out of the Rs. 104 billion loss reported in 2018, a report by the Ministry of Finance attributed the amount of Rs. 82.7 billion to the depreciation of the rupee against the US dollar, which depreciated by over 19%. The rest of the loss was attributed to the on-and-off implementation of the formula.
The report also read: “The formula has not covered the full cost of the CPC, and this has adversely affected its financial position.”
Interestingly, despite the Sri Lankan rupee being the worst performing currency in the Asian region and the political disruption over the continued implementation of the formula in the fourth quarter of 2018, Lanka IOC improved its gross margins to 4.9% from 2% a year ago.
Lanka IOC attributed the improvement to the price formula introduced in 2018, in contrast to the CPC. Lanka IOC cut down its loss by nearly 50% in the calendar year 2018, with its losses coming down to Rs. 625 million from Rs. 1.3 billion a year ago.