• Can taxes be blamed for CPC losses?
• Overstaffing, weak procurement process causing CPC losses
• Politics of using CPC as job bank for supporters must stop

By Tanya Shan The local fuel market is a duopoly market; there are two players, selling fuel at the same prices. Yet, one’s business has been prospering throughout the years, while the other one is heavily bleeding money.  The loss-making business is the State-owned Ceylon Petroleum Corporation (CPC), while Lanka IOC (LIOC), a long-standing Indian investment, is the one that is prospering.  Taxes have been blamed for the losses incurred by the CPC, but is it the real reason? According to economists, taxes are not a problem and they in fact believe that fuel should be taxed more. According to LIRNEasia Founding Chair Prof. Rohan Samarajiva, when LIOC came to Sri Lanka, several conditions were imposed, which included that the prices of the products would be determined by the CPC and the Government and that LIOC would get only about 200 fuel stations compared to 800 CPC stations. “The whole idea at that point was to divide up the distribution points into three, so LIOC was supposed to get one-third and another entity was supposed to get one-third. The transaction was done and a Chinese company was declared the winner of that competition, but it pulled out after the 2004 election. This is how the CPC continued to hold 800 stations while LIOC was given 200 stations,” Samarajiva explained. An integrated monopoly Prof. Samarajiva stated that this was an integrated monopoly. Explaining further, he noted that the CPC had a monopoly in importing crude and refined petrol and it controlled the refinery, which was from the 1970s and small in capacity.  CPC imports the oil and runs it through the pipelines it controls in Kolonnawa. It also has the Sapugaskanda Refinery, which refines crude petroleum. The refined petroleum is put into bowsers and gets distributed. “This is an integrated operation. LIOC, even when it buys from conventional sources, gets oil at a cheaper price. Nowadays it is buying Russian crude, which means it is at an even further discount. Russian crude oil supply is very cheap. The Indian Oil Corporation (IOC) has long-term contracts and is a well-run, State-owned company. Its refineries in India are extraordinarily efficient and operate on a large scale, which means per unit costs are very low. LIOC procures from those refineries,” Samarajiva said, explaining the difference between LIOC and CPC. According to him, CPC was a company that had a small number of employees when it was formed, and was quite efficient and well-run and was not making losses. “It started making losses once employee numbers went up. It also has issues with procurement as at the moment it is buying above market prices because we are not doing long-term contracts, we are not hedging, and we are not taking any long-term measures. We are just buying and paying demurrage and other costs. All the losses are because of issues like overstaffing and lack of long-term procurement,” he explained. Prof. Samarajiva opined that fuel should be taxed even more, adding that an alternative was to introduce a toll for the use of roads. No market mechanism Meanwhile, University of Colombo Department of Economics Senior Professor Sirimal Abeyratne told The Sunday Morning that CPC made losses because it was a State monopoly without a principal or an agent. “The principal is an owner and the agents are politicians, the director board, employees, and trade unions. There is a chain of agents but no principal, hence these issues,” he pointed out. According to him, ministers use the CPC to provide jobs for people from their electorates and the management uses the CPC to achieve their own objectives. “There is no market mechanism. Losses are transferred to the public. The CPC is free from stakeholders and bankruptcy because it has been guaranteed by legislation. When it is free from these two, it has no fear, unlike other private businesses,” he added. In terms of losses due to taxes, Abeyratne stated that in fact petroleum prices should reflect global prices and components had to be increased accordingly.   Debt and taxes Meanwhile, former Central Banker Dr. Roshan Perera stated that CPC losses were partly due to its debt. “Deficits balloon when there is a debt to pay. Inefficiency is not the only reason for the losses. It is also because of colossal sums of debt,” she stated. Meanwhile, University of Colombo Department of Economics Senior Lecturer and Attorney-at-Law Dr. Shanuka Senarath told The Sunday Morning that the huge tax component that had been imposed on fuel prices should be taken off. He made this comment not in the context of CPC losses but in terms of easing the burden on the public.  He stated that fuel shipments that arrived in Sri Lanka were taxed and the collected tax went directly to the Treasury, with the CPC’s losses/profits being calculated only after this. “The Government should remove the huge tax component. The rupee is depreciating, so prices should be decided based on global prices and exchange rates, which will reduce the pressure on inflation as well,” he added.  Minister’s stance Attempts to reach Minister of Power and Energy Kanchana Wijesekera proved futile. However, a spokesperson from the Ministry told The Sunday Morning that the Minister was willing to speak on the tax components of the fuel price formula before the Committee on Public Enterprises (COPE) if called for a meeting. The Minister had also tweeted the same via his official Twitter account after allegations were levelled against him by the Public Utilities Commission of Sri Lanka (PUCSL) on fuel pricing and procurement.  Colossal CPC losses CPC has recorded an operating loss of Rs. 64.9 billion in the first four months of 2022 despite price increases due to import costs and exchange rate losses, a Finance Ministry report stated. In its mid-year report, the Ministry said the CPC had incurred Rs. 549 billion in exchange rate losses between January and April 2022, mainly due to the depreciation of the rupee. “Whilst the recent adoption of cost-reflective pricing in the fuel sector is a positive step towards the CPC’s operational sustainability, there remain a multitude of issues that require resolution. The primary concern is the legacy debt of CPC that is predominantly in foreign currency, resulting in frequent foreign exchange losses for the entity, which in turn results in additional fiscal stress for the Government and financial stress for State-owned banks. As a result, the CPC had negative equity of Rs. 986 billion as of the end of April 2022,” the Finance Ministry report noted. Lanka IOC recorded a net profit of Rs. 3.37 billion in the March 2022 quarter, 248% up from Rs. 968 million in the same quarter a year earlier. Tax component of fuel prices According to information received from the Ministry of Power and Energy, the current retail price per litre of 92 octane petrol is Rs. 470 and out of this Rs. 59.26 is the overall tax component imposed by the Government. Similarly, the current retail price of a litre of 95 octane petrol is Rs. 550, out of which Rs. 80.54 is charged in taxes.   Lanka auto diesel is priced at Rs. 460 per litre while Lanka super diesel is priced at Rs. 520 per litre and out of these two, Rs. 36.27 and Rs. 58.62 are the respective taxes imposed on these products. The price per litre of kerosene right now is Rs. 87 and there is no taxation component involved in kerosene prices.