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Was the fuel price revision necessary?

19 Jun 2021

 
  • ‘Yahapalana’ fuel formula is with Treasury for 20 years: Attygalle 

 
  •  Fuel fund initially set up to settle CEB’s debt to CPC 

  •  Energy Min. wanted a separate fuel fund by end 2020

  •  Less fuel pumping in first 3 quarters of 2019 made CPC profiteer

      By Madhusha Thavapalakumar  [caption id="attachment_144260" align="alignright" width="207"] Minister of Finance Mangala Samaraweera[/caption] Remember, not too long ago, there was a time when motorists would rush to the nearby fuel station before the 10th of every month to pump their gasoline tanks full, in anticipation of a fuel price hike on the 10th of that month under the ‘fuel price formula’ brought about by the Yahapalana Government? And remember then came the current Government and they swiftly said “No, we aren’t going ahead with this formula” and maintained fuel prices for good twenty or so months not taking into account fluctuating fuel prices because they made a public promise not to increase fuel prices for three years? But they did so even before they made it to two complete years. But do you remember fuel-related incidents that unfolded in between? You may not, and Market Mine covers this topic in this week’s edition of The Sunday Morning Business Beginning of the ‘fuel price formula’  Fuel price has been a sensitive topic for Sri Lankans both due to its complexity and being closely linked to the cost of living. Up until May 2018, local fuel prices were revised once, twice or maximum thrice a year and most were reduced before any upcoming elections. After maintaining fuel prices for almost 30 months under their regime, the Yahapalana Government announced a fuel price formula in May 2018 and the formula was MRP (Maximum Retail Price) = V1 (landing cost) +V2 (processing cost) +V3 (administrative cost) +V4 (taxation). The formula was mocked heavily by the public and the then Opposition Party which is the current ruling party. Even though the formula was announced in May, components of the formula were revealed to the public only in October the same year.  Under the formula, fuel prices were set to be revised every 10th of the month to reflect fluctuating global oil prices and most importantly, introduction of a fuel price formula is a requirement which the International Monetary Fund (IMF) put forth for Sri Lanka if they are to provide the country with financial assistance under the Extended Fund Facility (EFF). The purpose of the formula was to ‘eliminate ad hoc price revisions driven by political needs as opposed to economic needs’. Contradictorily, during several occasions, revisions under this were done in contrary to the initial purpose, as oil prices in the local market were reduced despite higher global oil prices. Not only this, but during some months, the revision was either skipped or delayed which includes April 2019 during when Budget 2019 was passed in the Parliament and in October and November of the same year in view of the upcoming Presidential Election.  Prior to this, during the infamous 51-day political coup of Sri Lanka which began on 26 October 2018 with the announcement of Mahinda Rajapaksa as the new Prime Minister of the Yahapalana Government, replacing Ranil Wickremesinghe, the formula was temporarily abandoned and the prices were reduced three times in a row within a span of two months. Then Minister of Finance Mangala Samaraweera brought back the formula after the end of the crisis.  End of the ‘fuel price formula’  Along with the Yahapalana Government, the fuel price formula they introduced went home by November 2019 as the current Government was firm in not implementing the price formula. Since then up until the recent revision, fuel prices were maintained by the current Government for about 20 months, leaving no issues whether to go ahead with the former Government’s formula or not.  Even though the current Government publicly announced that they have abandoned the formula of the former Government, based on the recent revision, the components taken into consideration are more or less the same as that of the formula Sri Lanka had earlier. At this point, it is ideal to recall Treasury Secretary S. R. Attygalle’s statement last year. On 1 January 2020, he told The Sunday Morning Business, “We have to have a formula anyway, so there will be no change in the formula we have now. We will continue with this.”  [caption id="attachment_144261" align="alignright" width="176"] Treasury Secretary S. R. Attygalle[/caption] At this point, Attygalle also 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 revised it monthly,” Attygalle stated.  Reduced global oil prices and maintained local oil prices  The prevailing Covid-19 pandemic which was confined within Hubei Province of China up until February-March last year began slowly spreading to the rest of the world and as a result, a large number of countries swiftly shifted into prolonged lockdowns. Needless to say that the global economy in its entirety was and still disrupted significantly due to not being able to operate as normal. By this time, the global oil prices hit its lowest level in 18 years as a barrel was quoted less than $ 20. But the Sri Lankan Government decided to maintain the local fuel prices.  President Gotabaya Rajapaksa at this point said that the benefits of reduced global oil prices would be passed down onto the public in the form of reduced grocery prices to benefit every single one of the citizens instead of reducing fuel prices, benefits of which will not reach every person. Subsequently, the Government reduced a couple of essential groceries and also issued gazette notifications imposing maximum prices for these products. About a few weeks later, maximum prices were revoked and prices of these groceries returned to their previous (normal) levels. The general public could not enjoy the benefit of reduced global fuel prices either in the form of reduced local fuel prices or reduced grocery prices.  Fuel price stabilisation fund: a conundrum?  In order to make sure that Lanka Indian Oil Corporation (LIOC) does not benefit immensely from reduced global oil prices amidst maintenance of local oil prices, the Government established a fuel price stabilisation fund. By taxing the excess profits made by Lanka IOC and Ceylon Petroleum Corporation (CPC). The Government said that this fund would be utilised to settle the Ceylon Electricity Board’s (CEB) outstanding payments to the CPC. The plan was to collect Rs. 200 billion under this fund within six months. About three months later, Minister of Trade and then Co-Cabinet Spokesman Dr. Bandula Gunawardana stated that the fund has not grown as expected due to a drop in consumption during the peak of the first wave, locally.  On the other hand, the seven-week islandwide lockdown necessitated by the first wave of the outbreak transformed the CPC into a profit-making, state-owned enterprise for the first time in years. CPC managed to record a net profit of Rs. 830 million in the first three quarters of 2019, following a loss of Rs. 9 billion in the same period previous year. This was mainly due to less fuel pumping during the corresponding period last year coupled with a tax on fuel prices. Restricted travel during the lockdown period and less movement around the country, even after the removal of the lockdown, made CPC cater to a reduced demand at its current price point, the profit component of which was a question.  Coming back to the fund, as of August last year, about half of the CEB’s outstanding payments to CPC were settled using the Government’s Fuel Price Stabilisation Fund, then Ministry Spokesman Dharma Wanninayake told The Sunday Morning Business. The Ministry has made the settlement utilising Rs. 48 billion from the Fund. Wanninayake stated that the Ministry had to take this decision as the CEB’s debt to the CPC is a long-standing issue that was impeding the growth of two state institutions.  “The CEB’s outstanding debt to the CPC is Rs. 93 billion. We have paid Rs. 48 billion out of it and the balance outstanding payment at the moment is Rs. 45 billion. This is a major relief to the CPC to utilise that money and settle their pending payments and undertake development activities,” he added at that point.  As of August last year, the Government owed a whopping Rs. 135 billion to CPC for various services including fuel subsidies and the CEB’s pending payments, according to the CPC. Out of this, Rs. 93 billion of the outstanding payments of the CEB to the CPC is since February 2019. The CPC provides fuel for the CEB under a credit limit of Rs. 80 billion per month. There were occasions where the CPC discontinued fuel supply to the CEB when they exceeded the credit limit, which resulted in the CEB opting for power cuts around the island. Poor decisions made on cancelling electricity power plant projects and emergency power purchases at expensive prices are alleged to be the reasons behind the CEB’s losses over the years.  So, now, the money raised under this particular fund was utilised to settle CEB’s debt to CPC, which is its original purpose. By December 2020, Minister of Energy Udaya Gammanpila wanted to set up a whole new fuel price stabilisation fund. According to him, if the reference price of a litre of petrol is Rs. 100 and if it comes down to Rs. 80, the Ministry will equally divide the balance between the fund and the consumer. Later, the Ministry will divide one third of the balance to the fund and the rest to the consumer. So, when there is a price increase, the Ministry would check whether they can manage the hike utilising the fund without increasing the local oil prices and if they do, they will pay from the fund without burdening the consumers.  Now that Gammanpila wanted to establish a separate fund purely focusing on fuel prices, he wanted the Treasury to give him that Rs. 48 billion raised under the previous fund while the Treasury has already lended that money to CEB to settle its debt to CPC who in turn utilised it to settle a couple of loans it taken from state-banks.  Speaking to us in January this year, Gammanpila stated that the Cabinet of Ministers has already allocated Rs. 48 billion for the implementation of the price stabilisation fund and added that the Treasury will give that amount to the Ministry; after that, they will start the fuel stabilisation fund.  However, when contacted, Treasury Secretary Attygalle stated Rs. 48 billion was given to the CEB, and added that stabilisation has to be done in another manner, as these are all state-owned enterprises. “In fact, it is not Rs. 48 billion. It is Rs. 50 billion, and that money has been given out already. We will see whether we can adjust any taxes,” he added.  [caption id="attachment_144262" align="alignright" width="177"] Minister of Energy Udaya Gammanpila[/caption] Attygalle told The Sunday Morning Business in December that this additional duty was temporarily removed when global oil prices were returning to their previous levels. According to him, the fund has only raised about Rs. 50-60 billion, which is significantly less than the Government’s initial intention to collect Rs. 200 billion under the fund within a period of six months.  Attempts to maintain fuel prices  As the global oil prices began recovering and hitting two year highs in the recent weeks, when we contacted Gammanpila, he said that the Government is trying and will try as much as they can to maintain fuel prices without burdening the consumers further. Even a week prior to the revision, Gammanpila told us that his Ministry is planning a new refinery and this would offset the financial impact caused from the maintenance of local fuel prices.  However, a week later, local fuel prices increased. The Government increased the price of a litre of Octane 92 petrol by Rs. 20 to Rs. 157, 95 Octane Euro by Rs. 23 to Rs. 184, Diesel by Rs. 12 to Rs. 111, Super Diesel by Rs. 12 to Rs. 144, and Kerosene by Rs. 7 to Rs. 77. The reason for the revision was cited as colossal sums of losses CPC made for some years now. According to opinions expressed publicly by local economists, while recent price revision might come as a fuel to the fire, the impact of not increasing the prices would have anyways indirectly burden the general public either through new tax policies, underperforming economy or even increased electricity prices (if CEB is to settle CPC’s bills).  Are CPC’s losses purely from selling subsidised fuel?  While subsidised fuel could be one of the reasons behind CPC’s non-profitability, it is apparent that it is not the only reason. Speaking to us a while ago, SriLankan Airlines Jet Fuel Advisor 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 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.  Earlier, 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 is 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.  In addition to this, CEB and SriLankan Airlines purchasing fuel from CPC by making little or no payments or on credit basis has resulted in CPC incurring colossal sums of losses, forcing us to count mismanagement of these state-institutions as a reason for CPC’s losses in addition to losses caused by annual depreciation of the rupee, selling subsidised fuel, lack of infrastructure facilities and inability to store large chunks of fuel when global fuel prices are low.  What should be done ideally?  Establishing a fuel price stabilisation fund with a pure focus on absorbing shocks from fluctuating global oil prices, as Gammanpila noted, might shield consumers from ad-hoc price revisions while also protecting the profitability of the CPC but again, proper implementation and utilisation of the fund is crucial. For example, the Vietnamese Government established a petroleum price stabilisation fund in 2009 which is a financial instrument that avoids local oil price fluctuations, and thereby controls inflation and stabilize the macroeconomy. According to Vietnam News in 2009, the petroleum companies were permitted to increase their retail price by only up to VND (Vietnamese dong) 500 per litre at a time, even if global prices rose above domestic retail prices. In turn, they received offsets from the stabilisation fund for any losses. Every litre of fuel sold contributes to the fund, with the contribution varying from time to time. The money from or to oil companies goes through the fund and nothing goes to the Government.  Meanwhile, Thailand too has established a similar fund. After 10 drones struck Saudi’s oil facilities in September 2019, the Thai Government used THB 1.5 billion from their oil fund to support local oil prices. In October last year, the Thai Government was planning to impose more levies on motorists when global oil prices were low, to strengthen the fund.  The second important thing would be the improvement or development of energy infrastructures. It is unfortunate that Sri Lanka could not stock up on fuel significantly when the global oil prices hit their lowest level in 18 years last year due to not having sufficient facilities to do so. The developments in discussions over reclaiming some fuel tanks in Trincomalee from LIOC to whom these tanks have been leased, are not-transparent and seem vague at the moment. Two weeks ago, Gammanpila told us that this progress has been very slow.   Even though consecutive governments have been talking about setting up new refineries, progress is yet to be witnessed. The present Government is set to build two new refineries, one in Hambantota and one in Sapugaskanda, in the same premises as the old one. The Ministry of Energy confirmed that necessary measures have been taken to proceed with these measures and as a part of these measures, the Ministry has begun formulating/amending necessary legal provisions to permit Build-Operate-Transfer (BOT) projects in this sector.  To drive a conclusion, based on the comments received for this article and for other articles on this matter that were run in the very same column, there are a number of key reasons why Sri Lanka’s energy sector has not been profitable for years while in fact, it has the potential to be otherwise. As promises made in this sector by politicians remain as just promises on many occasions, full-implementation of them following consultation with industry experts, proper management of other State-Owned Enterprises (SOEs) who do business with CPC itself would alleviate the financial burden on CPC and consumers.

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