Financial Times

Row over LIOC $57m fuel subsidy claim
The government is disputing Lanka IOC’s claim for $57 million as fuel subsidy which the subsidiary of Indian Oil Corp is demanding as compensation for what it says are losses incurred by agreeing not to raise prices to the extent it desired.

The two sides are holding talks over the claim to arrive at a mutually acceptable settlement. The Public Enterprises Reform Commission (PERC) has written to LIOC saying that the government is not liable to pay LIOC the fuel subsidy unless it makes actual losses by not applying the pricing formula in the privatisation agreement.

The Sunday Times FT reliably learns that the payment dispute was discussed at a July 5 meeting chaired by the Attorney General K.C. Kamalasabaysan where PERC chairman, Nihal Sri Ameresekere, LIOC managing director M. Nageswaran, First Secretary (Economic and Commerce) of the Indian High Commission Sunjay Sudhir, and a Finance Ministry official were present.
The Indian government is backing LIOC’s claim. Sudhir told a seminar at the Ceylon Chamber of Commerce recently that Lanka IOC was “cash strapped” because of delays in getting the fuel subsidy and that this was in violation of the privatisation deal between the Indian company and Sri Lankan government.

Nageswaran and Indian High Commission officials maintain they are sticking by the subsidy claim. The dispute has arisen over interpretation of the term “loss” in clause 6(2) of the Share Sales and Purchase Agreement under which IOC acquired part of the Ceylon Petroleum Corporation retail outlets and the Trincomalee oil tank farm in the privatisation deal. Under the agreement, LIOC has to get government permission to raise retail fuel prices and is entitled to a government subsidy to make up for any loss it suffers by not being allowed to raise prices by the desired amount.

The government has not been raising local retail fuel prices to reflect actual market prices in order to reduce the burden on consumers of soaring crude oil prices. Attorney General K.C. Kamalasabaysan has advised PERC that the government is not liable to pay LIOC a subsidy unless it incurs an actual loss on fuel sales, and not a loss of profits.

“I am of the view that term ‘the loss arising from the price differential incurred by that player shall be compensated by the GOSL (Government of Sri Lanka) through a payment of a subsidy’ contemplates a situation where the government would only become liable for an actual loss incurred by the player for a given accounting period computed in terms of accepted accounting standards arising from the non-application of the pricing formula,” the AG has told PERC.

“In a situation where a player has incurred an actual loss for an accounting period computed in the above manner, GOSL becomes liable to compensate such a loss in accordance with clause 6(2) of the Share Sales and Purchase Agreement.

“Therefore, I am further of the view that the GOSL will not be liable if any determination or order by the government authority or any change in the law does not cause any loss to a player, in this instance Lanka IOC,” the AG has said in a letter to PERC.

This followed an independent opinion on the validity of LIOC’s claim for a subsidy, sought by the government from President’s Counsel K. Kanag-Isvaran and Attorney-at-Law Dr Harsha Cabral. In their opinion, they have pointed out that clause 6(2) of the privatisation deal “unequivocally reveals that the words used are ‘loss arising from the price differential incurred’.”

They have opined that unless a player incurs a loss because of a request by the government or a change in law, a subsidy is not payable. Kanag-Isvaran and Cabral also pointed out that it has to be an actual loss and not a loss of or difference in profits that could have been earned for LIOC to be entitled to a subsidy.

Government has already paid about Rs 250 million on the basis of loss of profits. Asked for his comments on the dispute, PERC chairman Nihal Sri Ameresekere said he was surprised by the comments from the Indian High Commission First Secretary Sunjay Sudhir on what he said was a commercial matter.

"This is a commercial matter and I don't think diplomats should get involved," he said. He declined to comment on other issues saying the matter was before the Attorney General. However, Indian High Commission officials maintained that the embassy “is here to promote commercial relations between the two countries and also to protect the commercial interests of our companies whether public sector or private sector.”

A High Commission official said: “The LIOC claim is correct. This is the amount due from the government in accordance with the pricing formula which is sacrosanct in the three-player model the government has for the petroleum sector. “There is nothing like a purely commercial matter because LIOC is an Indian company.

“The Indian High Commission is doing commercial work also. We are concerned about the commercial interests of Indian business.” Nageswaran said the government has not rejected the claim. “There is a dialogue between the Sri Lankan government and LIOC on the computation of the fuel subsidy,” he said.
Asked why LIOC was claiming the subsidy when it has declared a big profit, Nageswaran said the profit and subsidy were separate issues.

“The subsidy is a legitimate claim for charging a lesser price for fuel,” he said.
“Our total subsidy claim is Rs 4.6 billion while our profit is only Rs 2.1 billion. If there is no subsidy my loss for the financial year ending Match 31, 2005 would be Rs 2.5 billion.”

Kanag-Isvaran and Cabral, in their opinion, noted that LIOC has made ”substantial profits” over the past three years. LIOC has so far made “enormous claims” for loss of profits from the government, when prices were regulated due to consumer sensitivity, they said.

“LIOC has made enormous profits during the period the subsidy is claimed and cannot in our view be taken to have incurred losses during the same period.” They also opined that no subsidy is payable or ought to be paid unless the player is able to show that it has incurred an actual loss during the accounting period without making any profit whatsoever.

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