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Hope
for a short war in Iraq However, there
are many factors beyond our control. Fears of war had already brought
the stock market down and, although it picked up a little towards
the end of last week as the war got underway, largely because the
uncertainty was over, in the long term the impact is likely to be
very negative. War in the
Gulf could result in the downward revision of corporate earnings,
which have seen healthy growth in the last few quarters although
the figures have not translated into buying interest on the Colombo
bourse. Stock prices, which have been going down despite good corporate
earnings, are likely to go down further if the Gulf war is prolonged. Asia Securities,
for instance, has forecast that an outbreak of war in the Gulf lasting
3-6 months would lead to the inevitable downward revision of corporate
earnings. They said it would be reasonable to expect earnings to
be cut by about 25 percent for FY 2004 thereby more than wiping
out the 18 percent forecast profit growth, given the resulting weaker
domestic and export markets and higher manufacturing costs. Fears of war
and the uncertainty generated by preparations for war have already
had an impact on the tea industry. Although the market recovered
after the initial downturn in early January it is likely to nose
dive again as the industry has warned, with reduced demand resulting
in lower orders since the Middle East is the biggest market for
Ceylon tea outside the former Soviet Union. Worst affected would
be the market for low grown teas, which are much in demand in the
Gulf and are produced mainly by small holders. Remittances
from migrant workers will be reduced if many workers return home
in fear. The government has said it is prepared to arrange for an
emergency airlift in much the same way India is doing. Garments
exports could be hit if the US and EU economies - our main markets
- slow down as a result of the burden of war and lower consumer
spending which means lower orders. There appear
to be mixed views of the impact on the tourism industry, which was
recovering nicely amid predictions of a record year. The increase
in the pace of bookings reportedly has slowed in the build up to
the Gulf war and arrivals could dip as Europeans shy away from travel
given fears of terrorist attacks such as the Bali bombings. However,
some travel trade officials believe war might not have a negative
impact since Indians are now the main source of visitors and the
possibility that travellers to the Middle East might be diverted
to other destinations. We can only
hope that the war would be short as a prolonged conflict could mean
further increases in petroleum prices, which could send the economy
into a tailspin. The government
is trying to cushion the impact of rising oil prices and stopped
the CPC from raising prices again, based on its new formula, possibly
with the exception of petrol prices. But the question is for how
long can the government subsidise the CPC, which incurs a Rs. 1
billion a month loss at current oil prices? Higher fuel prices could fuel inflation, which in turn could hamper government efforts to bring down interest rates. Lower borrowing costs are vital for economic recovery as companies need access to funds at reasonable prices to make the investments required to revive the economy and compete effectively in export markets. Anarchy
in Lanka's LPG industry Are the public
and the media becoming indifferent to such irregularities that reek
of malpractice and corruption? Is this yet another nail driven into
the coffin of law and order and proper governance in our country?
Or, are we naively hoping that ignoring such serious malpractices
is the price we will have to pay to get LPG at a lower cost? Even the claim
'The first shipment has just arrived' made in the above advertisement
placed by the Ministry is completely false, since the Mundo Gas
storage barge 'Formentera' that was towed into Galle Port on February
13 was empty! That's why Mundo Gas hasn't delivered any LPG even
one month after the advertisement placed by the Ministry on their
behalf. According to informed sources, Mundo Gas doesn't have the
necessary insurance cover to carry LPG in its storage barge at the
Galle harbour. Liberalisation
and privatisation will lead to anarchy and chaos if the government
starts openly supporting favoured competitors, instead of providing
a level playing field and implementing proper regulatory procedures.
Why haven't our media watchdogs made a fuss about a Ministry blatantly
misusing taxpayers' money to support a private company in a competitive
marketplace? Why haven't they asked why a Ministry is promoting
a new entrant that has lost all credibility through numerous false
promises made repeatedly over the past year? Are our media also
openly supporting their favoured suppliers by applying journalistic
double standards? For example, on February 17, 'Rs. 67 Shell shock'
screamed a headline on the front page of a leading newspaper, presumably
voicing the desperation felt by consumers about Shell Gas's skyrocketing
prices. But, strangely enough, when Laugfs Gas raised their price
by a whopping Rs. 85 one week earlier on February 10, the same newspaper
didn't even bother to report it! Is this simply biased journalism
and sensationalist headline writing, or is it a sinister attempt
to discredit one supplier in favour of another in an increasingly
competitive marketplace? Where's
Mundo? The government
has abandoned its principles of fair play, transparency and good
governance by choosing to spend public money to promote a private
supplier in a competitive marketplace. The fact that the supplier's
credentials are suspect, and the fact that false claims were made
on their behalf, add to the suspicion of a serious malpractice.
Was it perhaps a misguided attempt to bring in more suppliers in
the hope of reducing domestic LPG prices? Appointing an independent
and competent regulator is the only way to open up the LPG market
for free and fair price competition by attracting serious suppliers
with the necessary resources and commitment to develop our LPG industry.
Without such a regulator what we are currently seeing is a free-for-all,
instead of free-market forces that will provide price benefits to
consumers combined with acceptable safety standards achieved through
necessary infrastructure investment. For example,
the safety aspects of unloading LPG at the busy Galle port have
never been properly addressed. Any accident involving a ship carrying
LPG can have serious consequences, especially if it happens near
a large urban community such as in Galle. According to an Internet
report, an explosion aboard an LPG tanker M/T Mundogas Europe docked
at Subic Shipyard in the Philippines killed 5 people in December
1997. A shipyard statement had said that the vessel was being prepared
for undocking when an explosion occurred in a cargo tank. In any
such accident, the resulting harm to the population will often be
aggravated by the fact that very little compensatory money will
be available to repair or alleviate the damage, since the vessel
responsible for such an accident is very unlikely to have the necessary
insurance cover. Risks LPG is a hazardous
product that requires very strict procedures to ensure public safety
in every operational phase starting at discharging from a ship,
right through to final usage. One would expect
that all new entrants to the LPG market would also have to make
the necessary investment to implement such safety procedures related
to their operations. But, strangely enough, new entrants to the
LPG market have no obligation at all to invest in infrastructure
development needed to ensure public safety during their discharging,
storage, transport and delivery operations. Refilling Since Mundo
Gas has not made any significant investment in setting up the necessary
infrastructure and in purchasing their own gas cylinders to distribute
LPG to consumers, they would be able to sell LPG at a lower price.
What will prevent LPG dealers from fleecing customers by getting
empty Shell or Laugfs cylinders filled with Mundo Gas at a lower
price and then reselling them as Shell or Laugfs LPG at their higher
price? Who will protect the consumer when branded LPG cylinders
are filled by someone who has no responsibility over the cylinder
brand and therefore doesn't have to bother about safety and quality?
How will customers be able to identify such cylinders? In another
new development, the Minister for Commerce and Consumer Affairs
has said at a recent press conference that it was his job to bring
in competition in order to bring down prices, and that three new
players will enter the LPG market. He is reported to have said that
in order to stop arbitrary price hikes, the government will not
enter into any agreement with new gas suppliers. There are several
interesting issues that arise from the Minister's above strategy
to bring down LPG prices. First, without any pricing agreements
or mechanisms, how will the government be able to block price increases
in an open economy? How can the government ensure that any reductions
in international prices will be passed on to consumers and not pocketed
by the suppliers as increased margins? Second, according to newspaper
reports, the Minister signed an agreement with Shell Gas in March
2002, which links their domestic selling price to key variables
such as the international market price and the US$-Rupee exchange
rate in a transparent manner. If the recent price increases by Shell
Gas have violated this formal agreement, why isn't the government
taking necessary action? If the government couldn't influence price
increases by Shell Gas in spite of 49% ownership and in spite of
a formal pricing agreement, how on earth will it be able to control
the prices of private companies which will also have to import all
their LPG requirements at the same international market prices?
According to their recent media statements, Shell Gas is following
the formally agreed pricing mechanism strictly, and even pricing
at levels below the formula price agreed with the Minister. If this
is not true, why isn't the government taking steps to enforce compliance
with the signed agreement, instead of criticising Shell Gas for
their recent price hikes? Finally, given the fact that about 90%
of our LPG requirements have to be imported, can we expect serious
new players to enter our LPG market without some assurance of a
mechanism that would allow them to recover possible increases in
import costs through corresponding price adjustments? New players The balance
90% has to be imported from the international market at current
$ prices. In September 2001, Laugfs Lanka Gas managed to enter into
a 3-year Agreement with CPC for obtaining all the LPG produced by
CPC at a highly subsidised price in rupees, without going through
the stipulated government tender procedure. In return, Laugfs contractually
agreed to supply domestic LPG at a price at least Rs. 100 below
the retail price of Shell Gas, and not to sell any of CPC's LPG
as auto gas (which had a very high profit margin). Laugfs broke
both these terms of the agreement, but continued to get CPC's LPG
at subsidised prices! Strangely enough, instead of terminating the
agreement for non-compliance (as stipulated in the Agreement), in
January 2002, CPC signed a supplementary Memorandum of Understanding
with Laugfs Gas which actually mentioned that it was being originated
due to the non-compliance and breach of certain conditions incorporated
in the earlier agreement by Laugfs! Stranger still,
CPC recently decided to give Laugfs a five-year monopoly to purchase
CPC's entire output of LPG, again without calling for tenders. CPC
would sell all its LPG to Laugfs at the rupee equivalent of the
Saudi Aramco FOB price, without charging anything extra for the
freight, insurance and handling payments needed to bring the LPG
to Colombo. Why is CPC,
in spite of its huge accumulated losses, giving this subsidy to
a private company which has broken former agreements made with CPC,
when other competitors would have to import all their requirements
from the international market and pay the additional cost of bringing
the LPG here? Today, Laugfs are selling domestic LPG at the same
price as Shell. Their price was even Rs. 67 higher than Shell for
a one week period at the beginning of February. Why is the Fair
Trading Commission (FTC) not investigating the latest price increase
by Laugfs considering that their investment has been minimal and
that they receive about 25-50% of their LPG requirements from the
CPC at a subsidised price? Why has the FTC ruled that Shell Gas
should refund to the consumer (depositor) the entirety of the cylinder
deposit at the time the cylinder is surrendered, while Laugfs are
following the same partial deposit refund policy as Shell Gas? Why
is Laugfs, a private company, continuing to receive preferential
treatment from the government at the expense of LPG consumers? CPC plan Anyone who
follows developments in our LPG industry will see that the bizarre
situations and grave procedural anomalies summarised above have
created anarchy in the industry. CPC supplying their LPG to a private
company at subsidised prices with total disregard for government
tender procedures, and the Ministry of Commerce and Consumer Affairs
spending taxpayers' money to promote a private company are two highly
suspicious situations that reek of malpractice and demand immediate
investigation. Such glaring
irregularities involving government ministries and organisations
show poor governance, raise suspicions of corruption and seriously
undermine our efforts to attract foreign and local investment. Besides, who
would want to invest in a country where the government itself is
encouraging the violation of trademarks and intellectual property
rights? Clearly, the LPG playing field is far from even and worse
than a jungle. It is hard
to understand why the Commerce and Consumer Affairs Ministry is
trying to bring in more players into the LPG market without appointing
a regulator. The controlled growth of our LPG industry requires
that all competitors operate under the watchful eye of a competent
regulator, play by the same rules, and make the infrastructure investments
needed to meet strict safety standards. Without such a competent Regulator, bringing LPG safely to more consumers all over Sri Lanka at a fair price will remain just a pipe dream. |
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