By Madhusha Thavapalakumar As stipulated in the fuel pricing formula to revise fuel prices on the 10th day of every month, the Sri Lankan Government reduced fuel prices on Thursday, 10 January. However, this raised a few eyebrows as the reduction came amidst a rise in global oil prices. This would appear to run counter to the purpose of the formula, which was to eliminate ad hoc price revisions driven by political needs as opposed to economic needs, and to establish cost-based pricing to reduce losses suffered by the State due to low fuel prices. Fuel pricing has traditionally been a contentious subject in Sri Lanka, both due to its complexity and its undeniable role in shaping public opinion, particularly as it is so closely linked to the cost of living. The debate around this issue amplified since the introduction of the pricing formula in May, 2018, with a variety of opinions being put forth, both for and against it. The latest price revision came at a time the Government sought popular appeal as the election cycle looms, and may signal the end of cost-based pricing and relegate the formula to a nominal position. Against this backdrop, The Sunday Morning Business spoke to a few economy and energy experts to obtain their views on the pricing formula. Formula still mysterious? According to a senior analyst who wished to remain anonymous, implementing a fuel pricing formula is a commendable step towards stimulating a country’s growth, but deviating from its initial promise is a complete “mockery”. “Certainly, we must adopt pricing that moves with the world’s market price. In this instance, Sri Lanka cannot afford to subsidise fuel,” he said, speaking to The Sunday Morning Business. On the other hand, former Jet Fuel Advisor of SriLankan Airlines Ltd., Cyril Suduwella said that a fuel pricing formula was not essential for a country like Sri Lanka, while pointing out that the current formula was very unrealistic. “The pricing formula is not essential for a country like Sri Lanka, and it is unrealistic. I am sure that even while paying the same tax, at least a Rs. 10 difference can be made by adjusting variables in the formula,” he said. Meanwhile, Advocata Resident Fellow Ravi Ratnasabapathy stressed that the fuel pricing formula should be made transparent, reflecting accurate purchasing costs and landing costs for each consignment of fuel. “We must ask them to make the formula transparent and to publish the purchasing and landing costs,” Ratnasabapathy said. Verite Reaserch Executive Director Dr. Nishan De Mel too commended the formula which is based on Singapore Platts index prices and therefore reflects fluctuations in global oil prices in the local market. However, De Mel was unhappy with the formula deviating from its actual purpose and failing to deliver transparency in terms of costs, including landing cost and taxation. “We know that the Government did not make the formula public. Also, the formula that was famously held up and then described was a completely postulate formula; they spoke about landed costs being the first factor and taxes being the second factor.” De Mel said that he does not welcome the costs, which were incurred as a result of the Government’s inefficiency and corruption, being passed on to the consumers. “It is very important that the Government comes clean on the question of whether the formula is genuinely indexed to international prices or whether it allows inefficiency and corruption in the purchase of fuel to be passed on to the consumer.” CPC and its losses Backed by the International Monetary Fund (IMF), Minister of Finance and Mass Media Mangala Samaraweera brought in the fuel pricing formula in May, 2018 to minimise fiscal risks through mitigating losses that were incurred through the state-owned Ceylon Petroleum Corporation (CPC) and also to secure a tranche of the Extended Fund Facility (EFF) by implementing the formula. According to JB Securities (Pvt.) Ltd.’s estimates, despite the customs duty waivers given by the Government, the CPC has on average incurred a loss of Rs. 12.53 per litre on petrol and Rs. 16.91 per litre on diesel as at end-October, 2018. Annual reports from the Central Bank of Sri Lanka (CBSL), stated in 2017, that the CPC sold over one million metric tonnes of petrol, while kerosene, naphtha, diesel, jet fuel (avtur), and furnace oil sales were 0.15 million metric tonnes, 0.13 million metric tonnes, 1.9 million metric tonnes, 0.45 million metric tonnes, and 0.78 million metric tonnes, respectively. Cyril Suduwella attributed CPC’s losses to the inefficiency of the refinery. He said: “The losses were not due to pricing, they were due to the inefficient operation of the refinery. If the refinery runs effectively, the CPC will make profits.” The almost 50-year-old Sapugaskanda Oil Refinery processes over 50,000 barrels per day (bpd), at 50% efficiency. However, upon proper management and refurbishment, the refinery would cater to 40% of Sri Lanka’s fuel requirement, according to Suduwella. “The refinery can make about 35-40% of the country’s requirement with a huge profit,” he added. The Sapugaskanda Refinery’s current bpd processing addresses about 30% of the refined products requirements of the country. The complex has five oil tanks of 40,000 metric tonnes in a 165-acre land in Sapugaskanda. Meanwhile, the senior analyst who wished to remain anonymous said that Sri Lanka lacks sufficient refinery capacities and as a result the country has to purchase finished products. “We do not have adequate refinery capacities – they are very limited. I believe they make only 10% of what we require. Therefore, we do not buy crude, we buy finished products,” he said. He also stated that even though purchasing fuel and storing it when global prices are low is possible, Sri Lanka lacks adequate capacities to buffer stock, and therefore, the country only purchases fuel for its existing capacity. He stated that rather than sitting back and doing nothing, the Government should choose to either expand or rehabilitate the Trincomalee refinery and pass the benefits to the people. “In reference to the Trincomalee refinery, irrespective of whether we give it to Indians or the CPC, or even both, fact is that nothing has been done. The facility is still languishing. “As a government, a decision has to be made on whether to set it up and utilise that capacity; rehabilitate it and pass on the benefits to the people of this country; or wait and do nothing,” he lamented. According to him, these are pertinent concerns that require prompt attention as fuel pricing, storage capacities, and fuel sector policies are connected to the entire economy and cannot be left in isolation. According to Suduwella, over the years, governments failed to consider the profits and the tax margin of the Sapugaskanda refinery when arriving at a pricing formula, even though it has the capacity to eliminate CPC losses. “Nobody took the refinery profit or refinery tax margin into the pricing formula in the past. Even the initial pricing formula by the Asian Development Bank (ADB) or the recent pricing formula by the previous Government did not give due consideration to the refinery’s profits,” he noted. Expressing their views on this subject, Prof. Ajith De Alwis from the University of Moratuwa and Eng V. De Silva from the University of Ruhuna, both with backgrounds in chemical engineering, also highlighted the limited capacity of the refinery and the failure of timely upgrades, stating that these were causes for flattened crude oil imports. “In relation to crude, Sapugaskanda cannot use whatever oil available as there are specific crude characteristics required for the refining process. Our refinery is in dire need of upgrading too as our refinery requirement picture has changed,” they stated. They also added that the CPC’s profits are highly dependent on Low Sulphur Fuel Oil (LSFO) and Heavy Fuel Oil (HFO) sales to thermal power plants in addition to Global Petroleum price fluctuations and variations in the exchange rate. However, Ratnasabapathy had a different view on the Sapugaskanda Oil Refinery. According to him, while over 60% of Sri Lanka’s fuel requirement is imported in the form of refined products, shutting down the operations of the refinery is the ideal solution for a country like Sri Lanka as the rest of the fuel requirement too can be imported. “The refinery should be closed because it will not work economically for a country like Sri Lanka. It is not worth running. It is better to purchase fuel entirely refined.” Commenting on this, De Mel underlined that oil purchasing should be done in an efficient manner and through standard procurement procedures by the Government in order to curb the losses of the CPC. He added: “Purchasing has to be done efficiently as well. To what extent are we making forward contracts and to what extent are we buying on the spot market? “Often, what happens in Sri Lanka is that the current procurement procedure results in less inventory and supply, and when in danger of a shortage, emergency purchases are made on the spot market with less competition at prices that are disadvantageous to the public and taxpayers. “This is routine in government procurement.” Meanwhile, Suduwella emphasised the importance of handling the petroleum sector of the country in a professional manner, and also on feasible management of the CPC. “The CPC’s excessive staff is not a problem as they constitute less than 3% of total turnover. The problem, however, are the employees at the top. If we could have 10 right people at the top, both parties will benefit. The Government can get their tax without any problems,” Suduwella added. Deviating from policies The senior analyst who wished to remain anonymous highlighted that a record number of vehicles were brought down to Sri Lanka in 2018, even though fuel was the highest import bill of the country. He added that amidst a depreciating currency and inadequate foreign reserves to settle the external debt pile, a country like Sri Lanka should focus on allowing the importation of fuel efficient vehicles and discourage the importation of small vehicles as the latter are fuel inefficient, contrary to the present motor vehicle policy. “The motor vehicle policy depends on the amount of fuel consumed. The duty structure of a vehicle is based on engine capacity, which means that it is directly connected to the capacity of fuel consumption. If you want to buy vehicles, buy more fuel efficient ones.” Further, he took on the ministers and the ministry officials who enjoyed fuel with taxpayers’ money and were never affected by fluctuating oil prices. He said: “Have you heard the Government stating that they want to reduce consumption? When these formulas are constantly changed, it is the consumers who suffer, and the consumer is not the Government.” Tax and duty JB Securities (Pvt.) Ltd. said that in Sri Lanka, market prices of fuel do not reflect negative externalities such as global warming, local air pollution, congestion, and road accidents. They are under-taxed in the country when compared to higher retail prices in other South Asian countries. “Most countries even in the South Asian region have higher retail prices of fuel in comparison to Sri Lanka. Fuel is under-taxed here,” JB Securities Managing Director Murtaza Jafferjee said. He further highlighted that according to the IMF the corrective tax on petrol when accounting for negative externalities should be $ 0.63 per litre, while for diesel it should be $ 0.42 per litre (as at February, 2014). According to JB Securities (Pvt.) Ltd., as at end-October, 2018 the Ceylon Petroleum Corporation (CPC) and Lanka Indian Oil Corporation (LIOC) were incurring losses owing to operating expenses such as freight charges, terminal charges, transport charges, storage costs, and dealer margins, in which the continued depreciation of the rupee also had a significant impact. As a measure towards addressing this issue, on 2 November, 2018, the Ministry of Finance and Mass Media increased the duty waiver of petrol and diesel while reducing the excise duty on them. Accordingly, the customs duty waiver on petrol increased to Rs. 13 while the excise duty on diesel reduced to Rs. 6 from Rs. 13. On 16 November, Ministry of Finance increased the customs duty for petrol from Rs. 25.42 to Rs. 35 and increased the duty waiver from Rs. 13 to Rs. 20 while the customs duty waiver for diesel increased from Rs. 2 to Rs. 5. Prof. De Alwis and Eng. De Silva called for alternate fuel utilisation, national energy resilience, and a national roadmap in this regard. “We await favourable price fluctuations and then we think that by adjusting prices we are extending a great service to the masses – no we are not. National energy resilience is non-existent, especially in the transport sector,” they said. Advocata Resident Fellow Ravi Ratnasabapathy said that revising fuel prices on a daily basis would not cause a considerable impact on consumers’ day-to-day fuel expenses as the changes based on fluctuations would be minor. “We don’t have problems with revising the prices daily, and if we do so, people will not feel it. They would not protest about political problems. We can avoid that if we have a fuel price formula on a daily basis. The people will not feel the changes to the prices.”