Financial Times

CPC faces loss of dealer network
Owners of private fuel retail outlets are refusing to enter into marketing arrangements with Ceylon Petroleum Corporation (CPC/ Ceypetco) and demanding generous concessions the former state monopoly is unable to offer, Ceypetco officials said.

They said private dealers have expressed reluctance to sign agreements with Ceypetco because they can get better terms from the Indian Oil Corporation (IOC) and anticipate a better deal with the entry of the third player.

Corporation labour unions opposed to the entry of a third player into the petroleum retail sector are expected to raise these matters in talks with the government as indications Ceypetco could fall into further financial difficulty if it was privatised further.

IOC is already offering better commissions and discounts on petroleum product sales to private dealers in an effort to entice them to join the IOC petroleum retail network.

Owners of private petrol sheds have also taken to demanding far better terms than the CPC is able to offer such as low cost loans and free equipment. Further privatisation of the Ceylon Petroleum Corporation even by selling only a minority stake to the third player could leave the former state monopoly with a much smaller market share and excess refinery capacity.

Ceypetco market share is expected to fall from 100 percent before privatisation to under 20 percent following the entry of the third player, labour unions and corporations officials warned. If this happens its revenue could also fall sharply.

Before the privatisation deal with IOC, Ceypetco had 300 retail outlets which had about half the market share while some 600 private dealers had the rest. Its Sapugaskanda refinery also supplied about 60 percent of the requirement for fuel products.

Of its 300 retail outlets, 100 were given to IOC and another 100 have been earmarked for the third player. This means that CPC will eventually be left with just 100 petrol sheds or a mere 17 percent market share.

Unions opposed to privatisation are to point out when they hold further talks with the government that there is a danger that many of the private petroleum retail outlets which account for half the market share could end up in the hands of the two private companies, IOC and the third player.

This combined with the fact that its refinery can supply 60 percent of the market requirements could create a situation where the refinery could have excess capacity being unable to sell its entire production. Private players could import their own products as they would not be compelled to buy from the Ceypetco refinery.

The unions have maintained that Ceypetco could be revived and made into a viable entity if political interference in its management and operations ceased and it was allowed to operate independently.

The new government has said strategic enterprises such as Ceypetco would not be privatised and instead would be re-organised by the Strategic Enterprises Management Agency.

Officials pointed out that Ceypetco made a Rs 9 billion profit in 2002 under the previous pricing formula when its workforce was about 7,000. Today the workforce was down to 5,000.

Ceypetco's financial burden has been mounting largely because of delays in raising domestic fuel prices in response to increases in world prices as successive governments sought to dampen the effect of price hikes owing to the series of elections in recent years.

"The government prevented us from raising prices as much as was required and forced us to subsidise," said a corporation official. Under the privatisation deal with IOC, the marketing companies have the authority to raise prices. But if the government wants the IOC and Ceypetco to hold prices it must subsidise the balance which must be paid within three months.

"We sell 120 million litres of diesel a month," said an official. "So the Treasury owes us Rs 1.5 billion a month as subsidy only for diesel." However, the Treasury has not been paying the fuel subsidy to Ceypetco and up to end-June owed the corporation Rs 6.3 billion. The corporation is also owed almost Rs 5 billion by state sector organisation to which Ceypetco has supplied fuel.

The new government's policy is to offer the third player a minority stake and management control in the retail company that would run one-third of the Ceypetco 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.

The other two among the three short-listed players were Bharat Petroleum Corporation Ltd. and Hindustan Petroleum Corporation Ltd., both from India. However, unions are opposing the move as they fear the government's decision to change the terms of entry of the third player into petroleum retailing could lead to of Indian domination of petroleum retailing.

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