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Huge losses for CPC: Cabinet approves new pricing formulaBy Namini Wijedasa
View(s):The Ceylon Petroleum Corporation (CPC) continues to be in the red with losses of around Rs. 6.9 billion up to May 2015, authoritative sources told the Sunday Times. The deficit is a result of selling fuel at prices below cost — up to 25 rupees for a litre of petrol, they revealed. Similar losses are being made on diesel and kerosene. The situation has worsened due to a slight pickup in the global oil market. The CPC also pays steep customs and excise duties on petrol and diesel.
“The Treasury is supposed to subsidise the CPC but it does not seem to have sufficient funds,” one of the sources said, requesting anonymity. “We are running on bank borrowings. Our losses have increased to Rs. 6.9 billion for the first five months of 2015 alone.”
The source, who has access to internal documents, said that, by last year, the CPC had recouped some of its losses due to a massive downturn in the global price of crude. But the balance sheet took a hit again due to three successive tariff reductions motivated by political compulsions.
“We lost everything,” he explained. “Don’t forget that we also had ten years’ of accumulated losses amounting to Rs. 238 billion up to last year. The Treasury owes us Rs. 309 billion in subsidies. Not a single cent was paid.”“On top of that, the Government took Rs. 10 billion as a ‘special levy’ towards the end of last year, saying it will be paid back or set off against taxes,” he continued. “That never happened.”
This week, Indian fuel retailers raised petrol and lowered diesel prices to align them with world market changes. Many other countries have adjusted tariffs on similar grounds. Sri Lanka, however, does not have a cost-reflective policy and often fiddles with prices for political reasons.
For instance, fuel prices were reduced in December 2009, a month before the presidential election in January. Prices were slashed in September and December 2014, also in preparation for a presidential election. When President Maithripala Sirisena assumed power in January 2015, the Government again lowered prices in keeping with an election promise. They are yet to be reviewed. “At least if they could reduce the duties that have been imposed, that would provide the CPC with some respite,” a source said.
Simultaneous with the price reduction of December 2014, the Government raised customs and excise duties on petrol and diesel. This was a double blow to the CPC, the officials said. The utility was expected to keep prices low for the public while, at the same time, paying much higher taxes.
The excise duty on petrol now stands at Rs. 27 a litre while the customs duty is Rs. 35 a litre. This adds up to a staggering Rs. 62 a litre in taxes alone. Meanwhile, the excise duty levied on diesel is Rs. 3 a litre and the customs duty is Rs. 15 a litre — a total of Rs. 18 a litre. An additional 5% “port and airport development levy” is applied to both products.
However, a draft cost-reflective tariff formula has now been approved by the Cabinet and forwarded to the Treasury for observations, internal CPC sources said. “It is similar to a formula we had earlier but its frequency would be quarterly, not monthly,” they explained.
Power and Energy Minister Champika Ranawaka recently announced that the Government would set up an independent regulatory body to monitor the energy sector. He said that, once the new pricing formula was implemented, the people would have a breakdown of costs including taxes, freight, insurance and profit margins.
Meanwhile, the CPC has cancelled all fuel import “term contracts” signed by the previous administration and called for fresh, open bids. “The earlier ones were not done in a proper manner,” an official said. “They were unsolicited bids and deviated from Cabinet approval. The CPC has now called for new term contracts.” The tenders are advertised on the Corporation’s website. A term contract explicitly describes a fixed duration that the agreement will be in effect. The signing parties are obligated to adhere to the terms and conditions within the contract until expiration, or end date, of the contract.
Industry experts said term contracts helped long-term planning by offering price stability. They also aid forecasting and budgeting. They are not encouraged in a “price declining market”, when spot buying is most beneficial.