Financial Times

Treasury to pay CPC subsidies
The Treasury intends to pay the subsidy that is owed to the Ceylon Petroleum Corporation (CPC/ Ceypetco) in the same way it will pay the subsidy owed to the Indian Oil Corporation, Treasury Secretary Dr P.B. Jayasundera said.

"We're going to settle the subsidy with the CPC. However, the budget can go up to only Rs 8 billion in subsidies for petroleum products. Anything beyond the budget will be unable to bear and the companies will have to increase prices. I have told the CPC to take it up with the government," he said in a recent interview.

Ceypetco officials and labour unions have expressed concern that the Treasury had not settled accumulated subsidy payments owed to the corporation which was acting as a drag on the organisation's operations and efficiency.

They had said they were also concerned that the government was planning to settle the subsidy owed to rival IOC without paying the subsidies owed to Ceypetco.

Ceypetco has run up large losses because successive governments have not allowed it to raise retail prices in tandem with rising crude oil prices and also not paid the government subsidy that should have been paid, they said.

Jayasundera said that during his recent visit to New Delhi to discuss arrangements for the Indian credit line, the Indian government had asked whether the Sri Lankan government intends to settle the subsidies due to IOC as per the pricing formula agreed upon during the privatisation of one-third of Ceypetco's retail business.

"I agreed the government will pay, subject to verification of the claim and approval of the Cabinet," Jayasundera told The Sunday Times FT. The $150 million credit line extended by India would be used to buy petroleum products from Indian state owned firms at the best price CPC can negotiate, Jayasundera also said.

"The credit line is not cash but if the price is right CPC will import oil. We didn't want CPC to buy on the spot market because of its risky nature. We don't know how the petroleum market will move. If we go for spot all the money might be used up quickly so we will negotiate for term contracts.

That's why we like contract pricing. If a private company like Reliance offers a lesser price we can negotiate that price with the Indian government. Reliance might be cheap today but more expensive tomorrow."

Jayasundera also said exploration licences for oil and gas would be given on international tender and be open to everybody and not restricted to Indian firms. India had asked Sri Lanka to consider its proposals when oil exploration is undertaken during his recent talks in India, Jayasundera said. "There's no tender yet. Oil exploration will be on a competitive bidding process open to everybody. We have made no commitment to the Indians." Jayasundera also said that state corporations must face up to the reality of competition in a liberalised economic environment.

Former state monopolies that are facing competition in a newly liberalised environment must be restructured to become more efficient in order to compete against other companies. Asked about fears that the Ceylon Petroleum Corporation could be placed at a disadvantage and could become uncompetitive if it is further privatised, Jayasundera said:

"That's a fear any enterprise will have in a liberalised environment - that other companies could be more efficient." He pointed to the fate of state banks which once dominated the banking industry but have seen their market share erode owing to competition from private commercial banks.

"Wasn't that the case with the Bank of Ceylon and People's Bank - Bank of Ceylon had 90 percent market share at the beginning but today its share has got eroded because of competition from private commercial banks. It is up to the organisation to improve its efficiency and be more competitive to retain its strategic position in a liberalised market."

Even in a two-player petroleum market, unless Ceypetco is restructured and made more efficient in marketing it will lose market share, Jayasundera said. "That's why the government agreed to look at the proposals by the CPC trade unions to restructure the corporation and make it more efficient and better able to compete." While this government has ruled out further privatisation of strategic enterprises, these organisations would be restructured and made more efficient in order to be able to generate more revenue.

"Under previous privatisation programmes the government would sell assets and get about Rs 10-12 billion each year," Jayasundera said. "Now that amount of money should come by improving the performance of state enterprises through dividends and other income that would match the amount that would otherwise have come from privatisation. Or they must reduce their dependence on the Treasury for funds. That's the challenge. It's not easy."

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