Financial Times

The petroleum sector is facing a major crisis with the other competitors to CPC and LIOC screaming foul play whilst consumers are thoroughly disenchanted with the retail distribution being irregular due to the administration bowing down to unions who without much provocation call wild cat strikes at their will.

Daham Wimalasena, a former chairman of the Ceylon Petroleum Corporation (CPC – he was Chairman from 1977 to 1988 during the J. R. Jayewardene administration and again in 2002 under the Ranil Wickremesinghe government) discusses here what has gone wrong since the UPFA government took over in April 2004:

Excerpts:
In recent times the CPC has moved from crises to crises – disrupting the day to day life and contributing to the high cost of living. Your thoughts:

This government has no policy for the petroleum sector. To win the last election they agreed to every demand made by the unions – whether or not it was in the interest of the consumer, the government or the country. Union demands are usually dictated by the needs of its leaders and not necessarily of their membership. This is pay back time and the Government of Sri Lanka (GOSL) is now faced with the choice – give in to the unions or think of the public at large and of good governance.

The unions are against the restructuring of the CPC initiated by the UNF government and implemented by you. What was the justification or the reason for the restructuring?

In 2002, when the UNF government took over, the CPC was in deep debt to the banks and to suppliers of crude oil and petroleum products. The state banks stopped credit and the Treasury which was also near bankruptcy refused to help the CPC financially or even guarantee payment. We had no option but to come up with a restructuring plan, which we did having the interests of the CPC workers and the consuming public in mind.

But the CPC was a monopoly and monopolies rarely get into debt or crisis situations. So, how did or why did the CPC get into a crisis situation by end of 2001?

A series of elections close to each other, delayed obvious price revisions and the CPC debt to the banks rose phenomenally. The CPC was also used for political purposes by the previous administration, by recruiting over 2,000 unwanted and unskilled staff, while funds and other resources were misused by the then management. The debt was over Rs 30 billion!!

Our restructuring plan had to address these two issues – pricing of fuel and political interference in management and the resulting issue of – how to pay back the debts.

Unions are saying that the restructuring plan is a failure and that the CPC is in deeper trouble. Your response:

Our restructuring plans were stopped midway when the UNF government was dissolved in early 2004. In fact, the present government is bent on dismantling the good work done by us. The government has no clear objective. If we had completed our reforms, there would have been a competitive environment where three companies – CPC, LIOC and another would have competed with each other on pricing and services and brought down prices whilst offering better services to the consumer. We would have reached that goal in early 2007. Unfortunately we are now on reverse gear – giving back to a state monopoly which caused all these problems to the people in the first place. Today CPC's operating costs, administrative costs and financial costs have gone up significantly. They cannot compete with LIOC.

If the UNF government was allowed to complete the reforms, the prices of all fuels will be less by at least Rs 10 per litre.

The restructuring plan is interpreted by the unions as another term for privatisation. Can you explain your restructuring plan?
I have stated earlier that we had to address three issues (a) Pricing (b) Political interference in management (c) Debt repayment.
On pricing – we introduced a "Pricing formula" adjustable every month depending on changing international fuel prices and exchange rates. The Pricing Formula also had certain fixed costs to help the CPC cover its inefficiencies and high overheads. By 2007/2008, the CPC should have overcome these deficiencies and be ready to compete freely with the LIOC and the third player.
There was also provision for the government to intervene and prevent price increases as per the formula whenever it was necessary in the interest of the consumer.
In that event, the Treasury would have to meet CPC losses by the payment of a subsidy. On this basis the CPC would not have huge debts as before, and would have become a commercially viable and independent organisation devoid of political interference.

On political interference
Our proposal was to form CPC into a fully government-owned company which would be professionally managed and be able to effectively compete with the other two players thereby bringing greater benefits to the consumer. To ensure competition, there were to be three players, CPC, LIOC and another in the retail sector and the three companies jointly owning the infrastructure (Tankage, Pipelines etc) company named CPSTL.

If this plan was concluded as planned, CPC's huge debt incurred prior to 2002 would have also been paid up fully by the sale of some assets to the other two companies. No doubt the CPC would have been smaller, but certainly better equipped to compete and to serve the consumer more efficiently. The consumer would have a choice like they have in the banking, insurance, telecom sectors. Today the question is, should the govt. satisfy the consumer or the trade union leaders?

The Prime Minister has agreed to give the China Bay Installation to the CPC as demanded by the trade unions. Is that possible?

If this is true, then it must be a policy of the current government. The then UNP government leased it to the Indian government/IOC for a period of 30 years. This was done for strategic reasons, to ensure that the Trincomalee area does not become a major battleground between the LTTE and government forces.

That strategy is more valid now than before. It is a significant fact that the vast area of 1,000 acres comprising the China Bay installation has remained untouched despite the violence in the immediate surroundings.
In any case the CPC has no ownership rights to the installation. It has no documents whatsoever to prove ownership. It is a property owned by the government and that was why the agreement to lease was signed by the government of Sri Lanka and the IOC and a nominal lease rent is also to be paid to the government. I only hope that the government is aware of the obligations it has under the Indo-Lanka accord with regard to the Trincomalee oil tanks.

The Prime Minister has also agreed to the union demand to abolish the CPSTL and absorb its staff to the CPC. Any comment?

The LIOC may well like this decision if they are paid back the $45million which they paid for 1/3rd share of the CPSTL. They may also like to wash their hands over joint responsibilities of managing a troublesome organisation.

The question is will this decision help the CPC? The answer is no.

The $45million if paid back will help LIOC to further improve its retail network, while the CPC will be burdened with an additional staff of over 3,000 which added to their already excess staff, bring down CPC in double quick time.

The government has to decide whether to continue to restructure the petroleum sector or get back to an inefficient monopoly, as before.

The LIOC has not been paid their subsidy dues and the amount has ballooned to nearly $80 million whereas they paid only $75 million for the 100 retails outlets which they took over from the CPC and the 1/3rd share of the CPSTL. How did this happen?

The present government has to take the total blame for this. For political reasons and due to the promises given at the December 2003 general elections, they subsidised the price of petrol and diesel endlessly. In the meantime the world oil prices were rising. If the pricing formula was adhered to, only an increase of Rs 2 per litre per month for petrol and diesel would have been permitted and the impact to the consumer would have been progressive. Because of the inaction of the Treasury and to pander to populism, the PA government's philosophy was to absorb the subsidy for which they did not have funds to pay. As a result the amount blew out of proportion in a short space of two years. Had the Treasury advised the policy makers of the consequences of not adhering to the Pricing Formula, the present situation would not have arisen. They were asleep or under pressure, to comply.

Was the Pricing Formula flawed?

Yes, this might be so. Especially because of the rapid increase of international prices certain windfall profits accrued to both LIOC and CPC. This was because some elements of the Pricing Formula were in "percentages". At $30 per barrel (at the time the "pricing formula" was introduced) to $75 per barrel now, there was a windfall profit. But you can't blame either the LIOC or CPC for that. The Treasury could have intervened and got both parties to agree to "cap" these percentages to an acceptable maximum.

What is your opinion on permitting "free pricing" which has now been granted to LIOC?

In my opinion, this was a ploy of the government to get out of the subsidy syndrome once and for all without upsetting the JVP and the unions.

Is it practical? The LIOC would be governed by costs of their imports of petrol and diesel. They cannot sell below imported prices as this would be contravening fair trading laws. On the other hand, they will not be given a subsidy whereas the government can give various direct and indirect hand-backs to CPC when they want to sell petrol and diesel at subsidised prices for political reasons. In either case, if CPC's price per litre is cheaper by say Rs 1 (or vice versa) no one will go to the other's shed for their petrol or diesel. Eventually, there would be a price war much to the detriment of CPC as the LIOC is backed by a giant who is financially sound and can weather losses for a longer period time than the CPC.

On the other hand, it could be a cartel where both parties agree to sell at one price much to the detriment of the consumer and will defeat the purpose of competition. This is why a three-player scenario was recommended in the restructuring plan.

Furthermore, the original Pricing Formula was for a period of five years giving adequate time for the CPC to put its "house in order". By advancing the date for "Free Pricing", the CPC will be unable to meet LIOC's price, as LIOC doesn't have an excessive bloated staff nor government departments owing them over Rs 10 billion. CPC's collapse will be imminent due to the vacillation of the administration. At the end of the day the government must decide as to whom they wish to satisfy – the consuming public of this country or the union leaders?