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Local fuel prices: Controlling a flammable situation

07 Feb 2021

By Maheesha Mudugamuwa Despite the government tax on fuel being reduced last week, the Ceylon Petroleum Corporation (CPC) said the prices of fuel will remain unchanged. As learnt by The Sunday Morning, a decision had been taken to avoid possible losses the CPC would incur unless the prices are increased or the taxes are reduced. However, it is learnt that when the matter was discussed at the cabinet meeting recently, President Gotabaya Rajapaksa had given the green light to reduce taxes instead of increasing prices. According to the CPC, the fuel tax imposed by the Government has been reduced by around Rs. 12 last week. Welcoming the decision taken by President Rajapaksa, petroleum sector unions claimed that the CPC would be a profitable institution if the taxes had been reduced long ago or if the government allowed the corporation to enjoy the full profits rather than transferring them to the Treasury. As explained by Energy Trade Union (ETU) Convener and former Jathika Sevaka Sangamaya (JSS) CPSTL branch President Ananda Palitha, CPC could sell a litre of petrol at Rs. 72, inclusive of all expenses incurred by the corporation during storage, transportation, and distribution. “At present, the cost of an oil barrel is around $ 57 and when calculated, the CPC spends around Rs. 60 to import a litre of petrol. The transportation and distribution cost is around Rs. 12, which means, when calculated, a litre of petrol can be sold at around Rs. 72. But the local market price of Lanka Petrol 92 Octane is Rs. 137,” Palitha explained. Urging the Government to re-introduce the pricing formula on petroleum products, Palitha said the prices could be further reduced if the formula was in effect. As further explained, the fuel prices dropped drastically throughout the whole year in 2020 due to the Covid-19 pandemic, but the Government did not reduce the fuel prices according to the world market price. “In December 2019, the price of a barrel of crude oil was around $ 68 and now the price is around $ 57,” he added. The ETU Convener also alleged that the Minister had not yet taken any productive decision to review any of the losses incurred by the two institutions falling under his Ministry. As learnt by The Sunday Morning, there was no reason for the CPC to incur losses at present, as during this year, the corporation had not reduced the fuel prices. “Actually, the CPC is not incurring losses at present. The issue is that CPC revenue is not coming to the corporation; instead, it is going to the Government. If an end can be put into this corruption, the CPC would gain massive profits,” Palitha pointed out. According to Palitha, the total loan amount payable by the CPC was Rs. 618 billion, while it pays a total of Rs. 1.2 billion as interest on those loans. In addition, the CPC owed $ 425 million to Iran while the Treasury owed to CPC Rs. 640 billion for providing subsidised fuel. Furthermore, the Ceylon Electricity Board (CEB) owed Rs. 50 billion to the CPC for providing diesel for CEB’s power plants. The CPC’s situation before global prices plunged had not changed, even though the local prices had not been changed, Palitha stressed. With the pandemic, local consumption went down drastically, and despite the reduction of its sales, the CPC had earned quite a considerable amount of profits due to plummeting oil prices in the world market, the TU leader said, also pointing out that the Government had not yet declared the tax they apply to fuel at present. “The Government has neither increased taxes nor passed the benefit to the people,” Palitha stressed. According to the 2019 annual report of the Ministry of Finance, the total cost of the fuel-based imports of the CPC for 2019 stood at $ 3,359 million, accounting for about 17% of the total imports of the country. Since the cost of imports accounts for about 95% of CPC’s total expenditure, its financial performance is directly affected by the dynamics of global oil price movements and the exchange rate. While sales to the transport sector are around Rs. 430 billion, which accounts for 65% of total revenue of CPC, it recorded a loss of Rs. 26 billion in 2019. The balance 35% represents other sectors including aviation, domestic, industry, and power generation, recording a profit of Rs. 14 billion and leading to an overall loss of Rs. 12 billion, it stated. The continuous losses accumulated by the CPC over the years stood at Rs. 337 billion as at end-2019 and has had a significant impact on the operations, thereby weakening its balance sheet in the absence of equity infusion. Trade receivables stood at Rs. 95 billion at the end of 2018 and has increased to Rs. 164 billion by the end of 2019, resulting in CPC’s exposure to Bank of Ceylon (BOC) and People’s Bank (PB) to close at Rs. 566 billion. The CPC has been financing the operations of the electricity sector in particular, with about Rs. 102 billion remaining unpaid at the end of 2019. Moreover, Treasury guarantees amounting to $ 1.8 billion have been issued to cover the exposure to the above two banks, according to the report. The losses are mainly due to the lack of a proper mechanism and the corruption that occurred in the processes of purchasing, storing, and distributing petroleum products for many decades. This has been investigated by a number of state monitoring agencies, including the Auditor General’s Department and the Committee on Public Enterprises (COPE) – a matter that has been reported by many media institutions including The Sunday Morning. The CPC has about 80% of the market share of supply of fuel products to the transport sector while maintaining the almost total supply of all other fuel products including heavy fuel, kerosene, and naphtha. CPC’s refinery has a capacity to produce only around 30% of the total fuel requirement in the country, while the balance is imported as refined products. The Corporation supplies petroleum products islandwide through a distribution channel which consists of 1,302 filling stations located around the country. In the meantime, in the latest report published by the Auditor General’s Department, it is stated that a considerable financial loss is observed to have taken place during the preceding years due to wastage caused by breakdowns happening often in the pipeline and the continuous leakage of fuel. This situation has caused a detrimental impact on the natural environment and compensation has been paid on several instances. However, when contacted by The Sunday Morning, CPC Managing Director Buddhika Ruwan Madihahewa said that the CPC has not incurred losses during the year 2020. “It was a really good year for CPC, even though consumption dropped drastically due to Covid-19. We are providing a service to the country and it's not aiming at earning profits,” he said. When asked whether the prices would be changed in the near future, Madihahewa stressed that the prices would remain unchanged. “The government tax on fuel has been reduced by around Rs. 10-12. The decision was taken to avoid incurring any losses this year,” he said. When asked whether there had been any discussion regarding repaying the loans or collecting the money owed to the CPC, its Managing Director stressed that SriLankan Airlines has agreed to start repaying its debt to the CPC from April this year while the CEB is paying their monthly component at present. “We are working closely with the Treasury and planning to implement a special mechanism to repay the outstanding loans,” he added.


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