Financial Times

The Ceylon Petroleum Corporation (CPC), in a new turn of events in the crisis over delayed payment of a government subsidy to the Lanka India Oil Company (LIOC), will now find its own subsidy ending from July 1 paving the way for a possible free-market structure, officials said.

They said subsidies to both the CPC and the LIOC will end on this day to ensure a level playing field in price fixing for the only two players in the fuel import and distribution sector. A new tripartite agreement involving the government, CPC and LIOC will be entered into to create this new mechanism.

CPC and CPC Storage Terminals Limited (CPCSTL) unions are said to be urging higher authorities for them (unions) to be involved in the current negotiations that would pave the way for further liberalisation in this sector. “The government will amend the CPC-LIOC agreement and facilitate a common policy for the two entities in terms of pricing strategy and will sign a fresh tripartite agreement. They will revise the present agreement which has been effective from February 2004 and ends in December 2008,” a senior CPC official told The Sunday Times FT.

The new development comes on the back of earlier threats by the LIOC to put up its shutters as delays in the payment of the government subsidy saw debts piling up for the company. The Sunday Times last week quoted Treasury Secretary Dr. P. B. Jayasundera as saying that the government will allow LIOC to determine selling prices of fuel products including petrol and diesel with effect from July 1.

On the disputed subsidy arrears of Rs 7.4 billion, he said the Treasury and the LIOC have decided to wave off Rs 2.5 billion while from the remaining sum the government will pay Rs 1 billion in cash and the rest in bonds.

K. Ramakrishnan, Managing Director, LIOC, speaking to the newspaper from India, confirmed that the government will pay Rs.1 billion upfront and the balance through bonds.

He said the government informed them that no more subsidies will be given to both LIOC and CPC who would be allowed to fix fuel prices during joint consultations. The LIOC chief said the LIOC board is discussing this proposal and “we will be finalising everything by the first week of July.”

The senior CPC official said that the government is planning to terminate the present agreement (with both parties) and amend the effective date to a two-year period instead of five years. He said that he expected the CPC and the CPCSTL unions to push for a representation in the discussions for a fresh agreement because they seem to be agitated about any new deal. “We want the Treasury to involve CPC and CPCSTL unions and we want to make sure that the government will not create an Indian monopoly as they have done in the past,” he said.

“We are not against another agreement, but it should not have defects such as the present one. The LIOC got the best filling stations and the China Bay Terminal and even a BOI status. This was very one sided and all the sectors of the sector, be it gas or lubricants, have a monopoly. This is very unfair by the consumer and the country,” he said.

The government, he said, owes the CPC an Rs.9.3 billion subsidy for the period of January to April. “The government has said that they have not allocated this amount from the budget as yet, but they are liable,” he added.