News - Deal delayed but IOC to pump petrol from next week

Following the government’s decision to stop paying the fuel subsidy to Lanka Indian Oil Company, it will be a month before a new agreement between LIOC and the Treasury is signed, LIOC Managing Director M. Ramakrishnan said.

LIOC Chairman, Sarthaha Behuria was in Colombo this week for talks with officials.

Mr. Ramakrishnan said though the signing of the agreement would be delayed, they hoped to restore the petrol supply in the IOC-managed fuel stations by next week. He said it was mainly the Colombo-based sheds that were affected.

Following are the key developments after the signing of the agreement with Lanka IOC:

* On January 28, 2004, the then UNP Government, in a bid to check rising debt at the Ceylon Petroleum Corporation (CPC), and provide fuel to consumers at a reasonable price, entered into two agreements offering the Indian Oil Corporation (IOC) 1/3rd of the Sri Lankan market.

* One agreement was called the Sale and Procedure Agreement to transfer shares from the CPC; which allocated 100 sheds island-wide to IOC; and the other was the Common User Facility (CUF) to give IOC 1/3rd of a new company called CPST Ltd., which owned the infrastructure facilities of CPC like the Sapugaskanda refinery.

* The CPC was to have 1/3rd of the number of filling stations and the Sapugaskanda refinery with another 1/3rd to be given later to a third player.

* The Treasury held the third player’s 1/3rd, so in effect, the Government owned 2/3rds of the market in Sri Lanka.

* The prices for these agreements were US $ 35 million and US $ 45 million respectively.

* A 'Pricing Formula' was introduced to Petrol and Diesel -- aligned to international market prices.

* Using this formula, a Maximum Retail Price (MRP) was to be fixed on a monthly basis and the three players were not allowed to sell fuel to the public higher than the MRP.

* A 5% profit margin was permitted and the three players were permitted to reduce their prices by a maximum 15 per cent of their profit margin.

* However, this was not permitted for the first five years, because the IOC was a Fortune 500 company and could easily undercut the CPC, which was struggling to clear its debts to the Government.

* Due to different interpretations to the term "Free Pricing", the issue of a "subsidy" became a dispute.

* While this remained a dispute, the amount owed by the Government to OIC ballooned to US $ 80 million.

* Now, the five-year moratorium on "Free Pricing" has been abandoned by the Government - with a new formula -- an issue the trade unions are resisting.