Financial Times

Govt to subsidise CPC, LIOC losses
The government will continue to subsidise losses incurred by the two retail players in the petroleum product market, CPC and LIOC, as they have been asked not to raise prices in accordance with rising international oil prices.

Ceylon Petroleum Corporation (CPC-Ceypetco) estimates it will incur a total loss of around Rs 1.3 billion in February because it is unable to raise prices to fully cover rising costs, Ceypetco officials said. Lanka IOC, a unit of Indian Oil Corporation, also said the government will partly subsidise its losses as it had not implemented the full price hikes allowed under the pricing formula.

Under the pricing formula, the retail companies can raise prices by a maximum of two rupees per litre each month. In February, the government allowed Ceypetco and LIOC to increase prices of only petrol and furnace oil but asked them to hold diesel and kerosene prices which it will continue to subsidise in order to cushion the impact of rising oil prices on consumers.

"According to international price increases in February, we have to increase our prices by nine rupees per litre for all products but under the formula we can raise or lower prices only by two rupee per month," a Ceypetco official said.

"This month we increased only petrol and furnace oil prices as the government decided not to increase but subsidise diesel and kerosene," he said. "The Treasury will have to reimburse the CPC and LIOC."

LIOC managing director M. Nageswaran said the firm's total loss in February incurred by not raising prices in accordance with rising international prices was estimated to be Rs 200 million out of which the loss for not increasing prices of diesel and kerosene by the Rs 2 slab rate was Rs 70 million.

According to the government's privatisation agreement with LIOC, which now has an 18 percent market share, the Treasury has to compensate the company for the loss caused by asking it to not raise prices.

The government has to reimburse the loss within three months. The retail firms will be allowed to catch up on the loss in subsequent months when international prices do come down. "The government told us not to increase prices and that it will make good the losses. We agreed as a gesture of goodwill. We have a sense of social responsibility.

We can make profits later. We're waiting for international prices to come down." Had the pricing formula been strictly implemented diesel and kerosene prices would have gone up by Rs 5-6 per litre. "The government is partly subsidising our losses. They pay Rs 2 but we're losing more. Our total loss on diesel is around Rs 5 per litre."

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