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The story behind the fuel crisis
By Rohan Gunasekera
The government was still holding talks with the three companies short listed to come in as the third player in the petroleum retail sector, Treasury Secretary Dr. P.B. Jayasundera told The Sunday Times. "No decision has yet been taken. All three parties are still conducting studies," he said.

Dr. Jayasundera said the government's policy was to offer the third player a minority stake and management control in the retail company that would run one-third of the Ceylon Petroleum Corporation (CPC) outlets instead of majority ownership. The government has decided not to go ahead with the former regime's decision to accept China's Sinopec's bid to retail fuel under the petroleum sector reforms and has changed the terms of the original bidding process.

It was offering one-third of the common-user facility, grouping all pipeline and storage facilities, as before. But the third player will only be allowed 49 per cent ownership of the retail outlets along with management control, and not full ownership as was in the original bids called for by the Public Enterprises Reform Commission (PERC).

The government will retain the majority 51 per cent stake. Sinopec (Hong Kong) Ltd. was selected on the basis of having made the highest bid. It was earlier reported to have rejected the new terms.

The other two among the three short-listed players were Bharat Petroleum Corporation Ltd. and Hindustan Petroleum Corporation Ltd., both from India. The government's decision to change the terms of entry of the third player into petroleum retailing has raised the prospect of Indian domination of this crucial sector. It is also likely to get a lower revenue from the deal under the new terms. Although the restructuring and privatisation of Ceypetco under the deal with Indian Oil Corporation (IOC) was supposed to ensure a level playing field, this does not seem to have happened.

"Ceypetco was forced to agree to unfavourable conditions in the privatisation process," a source said. Ceypetco trade unions staged a strike at the Kolonnawa depot on Friday in protest against alleged secret government efforts to sign a deal with Bharat Petroleum by selling another one-third share of its retail outlets.

President Chandrika Kumaratunga was expected to meet the unions on Tuesday when Power and Energy Minister Susil Premajayantha returns to the island. Finance Minister Sarath Amunugama, acting Power and Energy Minister Kumara Welgama and Ceypetco chairman Jaliya Medagama held emergency talks on Thursday to discuss the crisis.

The unions are against any further privatisation of Ceypetco and are worried that privatisation could further weaken the corporation's business and erode its market share. Ceypetco officials said if the government struck a deal with Bharat Petroleum, it raised the possibility of Indian firms dominating petroleum retailing, a key sector of the economy, given the presence of the IOC. The IOC came in as the second player and ended the Ceypetco monopoly by taking over 100 retail outlets.

They pointed out that the petroleum sector throughout the world was usually owned and controlled by the state because of its strategic and sensitive nature. The new policy also means that the government will earn much less from the deal because the bidders are likely to quote lower than before under the new terms since they would not have full ownership of the retail outlets.

The government would also be faced with the problem of raising funds to upgrade the outlets, officials said. Sinopec came first in the previous evaluation of bids under the former regime, offering a price higher than the two Indian firms. The final offers from the short-listed bidders were $88 million from China's Sinopec (Hong Kong) Ltd., $81 million from Bharat Petroleum Corporation Ltd., and $77 million from Hindustan Petroleum Corporation Ltd. Officials also said Sinopec's offer was much higher than what IOC paid on a negotiated basis - $75 million - for being given the choice to take the best retail outlets and the right to start operations pending valuation and final negotiations.

"IOC has an unfair advantage in the retail market as they got the best of the petrol stations," a source said. Officials said IOC had got tax and other concessions denied to Ceypetco. Under the privatisation agreement with IOC, restrictions had been imposed on their retail stations and opening of new ones. This placed Ceypetco at a disadvantage as the IOC does not need to relocate or open new stations, having been able to pick the best ones. Union officials said they were opposed to any further privatisation as they felt the IOC deal was unfavourable to Ceypetco and had placed it on an unequal footing with the Indian firm. The unions fear the third player would be given similar advantages.

With its lease of the China Bay oil tank farm in Trincomalee, the IOC can also import and distribute petroleum products cheaper than Ceypetco. This was because IOC could supply from China Bay at a lesser cost than from Kolonnawa thus making larger profits.

Ceypeco has to pay port charges and a three dollars per tonne charge for using the pipeline and jetty which costs have to be passed on to consumers. In contrast, IOC enjoyed lower overhead costs and charges at China Bay.

"The overhead costs in China Bay are very low compared to Kolonnawa. And there is no port charge. But the price adjustment formula for Kolonnawa and China Bay are the same, which should not have been the case. The cost structures are different in the different terminals. So IOC has an advantage", an official added.

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