Financial Times

The birth of another oil cartel?
Further liberalisation of the petroleum retail trade and entry of a third player could take Sri Lanka back to the pre-nationalisation days when the sector was controlled by three oil multinationals who fleeced consumers and drained foreign exchange out of the country by the use of irregular pricing mechanisms. This article by S. Talpahewa, a former chairman of the Ceylon Petroleum Corporation, spells out the dangers of such a move.

The Sunday Times article "Oil shocker from minister" appearing in your issue of April 3, headlined "700 more sheds badly maintained" based on Finance Minister Sarath Amunugama's comments indicates that either he was not aware of what he was talking about or attempting deliberately to mislead the general public, especially the business community, with a view to justifying his pet proposal to sell approximately one-third of the Ceylon Petroleum Corporation assets to the Indian government-controlled Bharat Petroleum Corporation Ltd., irrespective of what the future repercussions would be.

I give below the actual position, based on CPC data, of filling stations (petrol sheds) in the country as at the time the proposal to select a third player was initiated by the government in September 2003. The retail network of the CPC comprised a mixture of CPC owned and dealer owned filling stations. The CPC owned 359 outlets and the private dealers owned 679 outlets. The maintenance, refurbishing and/or modernization of privately owned filling stations was the responsibility of the private dealers themselves and the responsibility of the CPC, so far as the dealer-owned outlets were concerned, was to ensure that the private dealers maintained their outlets conforming to certain requirements and their requirements of petroleum fuel supplied to them at appropriate times. The concept of private ownership of filling stations was initiated in 1989/1990. Therefore it will be abundantly clear that CPC never owns "700 more CPC sheds" to be badly maintained by the CPC as asserted by Mr Amunugama.

After the entry of the IOC, CPC/Ceypetco owns approximately 252 filling stations, inclusive of those earmarked for the third player.

In the same breath Minister Amunugama has stated that on CPC reforms, the plan "is to sell a stake to Bharath Petroleum for $88 million . . . ". The "stake" is about 100 filling stations and one-third of the Ceylon Petroleum Storage Terminals Ltd., (CPSTL) or the Common User Facility, the storage and distribution arm of the local petroleum industry. The best maintained and high throughput 107 filling stations in the country, together with one-third of the CPSTL, were purchased by the Indian Oil Corporation for $75 million. To such a scenario if Bharath Petroleum is prepared to pay $88 million for 100 badly maintained filling stations, which are "no more than public toilets" (according to Minister Amunugama) and the one-third stake in the CPSTL, Bharath Petroleum management team should be considered as a bunch of mentally imbalanced people, who cannot distinguish between a public toilet and a filling station!

Annihilation of CPC
Prior to the establishment of the CPC in June, 1961, three oil majors, Shell, Caltex and Esso, who had virtually formed themselves into an "oil cartel" enjoyed the petroleum business monopoly in the country. They were obtaining large scale discounts from oil refineries on the 'bench mark' prices, which were the prices the foreign oil companies showed as purchase prices. The then government's request to the oil companies to import petroleum products at discounted 'bench mark" prices was rejected by the three oil majors without offering any valid and/or justifiable reasons.

The government had no alternative but to establish the Ceylon Petroleum Corporation to minimize the outflow of foreign exchange and also to pass on the discounted price benefits to consumers. CPC was able to import petroleum products at cheaper C.I.F. prices than the three oil majors and pass on such benefits to the consumers. With the increase in the volume of CPC business the then government requested the three oil majors as well to import their requirements of petroleum products at the c.i.f. prices enjoyed by the CPC and/ or for certain facilities from the three oil majors. The resultant threat to the then government by the oil majors of a possible interruption to the supply of petroleum products in the country and their refusal to accede to the request of the government paved the way for the petroleum business in Sri Lanka to be nationalized in 1964.

The CPC (the monster according to Minister Amunugama) commenced business with an initial capital contribution of Rs.10 million from the government. The total capital contribution from the government to CPC as at end-1980 was Rs.117.8 million. The largest beneficiary of the CPC was the state exchequer. During the period 1970 to 1991 the government had directly collected from the CPC over Rs.42,425 million by way of customs duty, turnover taxes, income tax, contributions to the consolidated fund, dividends and special levies. CPC was a well-run establishment until politics was introduced to its main stream of activities.

The gradual erosion of the CPC began during the latter part of the 1970s. With the entry of politicians into the management and CPC working according to a political agenda indiscipline was rampant at the CPC and unruly elements became the de facto rulers. Thugs rampaged through the CPC with impunity and the CPC management allowed innocent CPC employees to be assaulted by political goons resulting in the CPC being nick-named "the Thug Corporation".

CPC funds were spent according to the whims of powerful politicians. Certain purchases running into several million rupees in foreign exchange were done by CPC violating tender specifications in order to suit favoured parties thereby incurring huge losses. CPC employees dismissed from service for fraudulent and/or irregular activities were reinstated under questionable circumstances, sometimes with political interference and sometimes at the "discretion" of the chairman concerned, with payments of so-called "back wages" running into several million rupees.

Such events were common with whatever government that came into power barring certain periods. Privatization of national assets in the guise of restructuring has become the panacea of successive governments for such "apparently incurable ills".

Disguised privatisation
Privatization of the petroleum business in the country in the guise of restructuring began in late 1989/early 1990. Several activities of the CPC - nylon plant, lubricant business and the bunkering business - were dismantled and formed into Government Owned Companies and sold to the private sector. They are Lanka Synthetic Fibers Co. Ltd. (owned by a South Korean firm and now defunct), Lanka Lubricants Ltd. (now owned by Caltex) and Lanka Marine Services (Pvt) Ltd. The core business of the CPC was retained with the CPC.

CPC achieved a turnover of Rs 80 billion and a profit of Rs.9 billion in the year 2002 with the so called inefficiencies, corruption and excess staff as a monopoly and further paid Rs. 2.3 billion to the Treasury as deemed dividends.

Despite those achievements by the CPC, the government decided to "liberalize" the petroleum sector of the country, in the process offering on a platter the best 100 petrol filling stations in the country free of litigation and with large extents of land for development, selected obviously with the blessings of the chairman at the time and with the able assistance of two retired senior marketing executives of the CPC, together with one third ownership of the whole infrastructure for petroleum in Sri Lanka as a Common User Facility (CPSTL) owned by CPC to the Indian Oil Corporation (IOC) without even agreeing on a price. With the liberalization and the entry of LIOC into the market the monthly price adjustment formula, which earned Rs. 9 billion to CPC in 2002, was also revised to provide guaranteed profit margins to the CPSTL and the marketing companies, viz. CPC, LIOC and possibly Bharath Petroleum, which resulted in the increase in the retail prices (to the consumer) of every litre of petrol, diesel and kerosene by approximately Rs.4.0/litre on average, irrespective of a world price increase. This adds to a total additional profit of nearly Rs.13.0 billion a year as a ball park figure on an average sale of about 3.4 billion litres of retail petroleum products per year in Sri Lanka.

The CPC through this "liberalization" programme lost its valuable assets on the assurance that the debt of Rs.16.0 billion created by the Treasury in 2000 will be settled by selling 2/3rd of the CPC owned infrastructure facilities to the private sector. However the debt still remains with CPC, which consumes nearly 60% of the profit margin available to CPC through the pricing formula for debt servicing. The US$75 million paid by the IOC for 1/3rd of the assets plus the best 100 filling stations seems to be recoverable within 2-3 years with the revised price revision formula loaded with guaranteed profit margins at the request of Lanka IOC. The annual guaranteed profit in this whole business under the present circumstances seems to be around US$200 million as per the above figures, which is much more than the total earnings from the sale of 2/3rd of the whole infrastructure for petroleum in Sri Lanka to 10C and the third player, possibly Bharath Petroleum. Whether it is CPC, lOC or Bharath Petroleum, doing petroleum retailing in Sri Lanka needs about US$ 100 million every month to purchase oil at the current prices in order to maintain a one-month stock in the country.

The profits generated through this business remained in the country and were used for the well being of our people when it was a monopoly of CPC, but drains out now as profits and through the import of equipment for refurbishments of filling stations - perhaps to convert "public toilets" to presentable sheds - through the entry of the I0C and possibly Bharath Petroleum. The Treasury further loses a fair amount of its revenue which otherwise would have been paid as deemed dividends by the CPC, through the BOI status given to LIOC and to be given possibly to Bharath Petroleum, who are exempted from income tax and import duty.

These are some of the negative effects of the so-called "liberalization" of the petroleum sector, other than the loss of control of this vital national asset by the Sri Lankan government in the long run. The so-called "liberalization" has already burdened the power sector, aviation industry, bunkering business and virtually the whole country through the increase in prices merely through the revision of the price adjustment formula. Once the other 1/3rd share is sold possibly to Bharath Petroleum Corporation Ltd. (BPCL) of India, 2/3rd of the total infrastructure for petroleum in Sri Lanka will be owned by India. This will further weaken the position of CPC and accelerate its natural death and ultimately create a private sector Indian monopoly for petroleum in Sri Lanka once again. Remember that we are heading towards the pre-nationalized state of the petroleum sector for sure, where the bitter experiences have not been forgotten by us who were there in the business at that time.

Most of the filling stations retained by CPC do not have even litigation free ownership and sufficient land space for development. Subsequently the Indian Oil Corporation decided to pay US$75 million for the taken over CPC assets and the Sri Lankan government had no alternative but to accept that figure.

Undue advantage to LIOC
The failure of the government to appoint a Competent Regulatory Authority for the petroleum industry as envisaged is a blessing in disguise to the LIOC.

They make use of the situation to their maximum advantage by violating the relevant agreements, engaging themselves in unethical practices thereby earning profits over and above the due amounts and using such profits against CPC in order to grab the dealer owned category dealers and making huge investments in propaganda and the modernization of filling stations owned by them. LIOC were once accused of importing illuminating kerosene under the guise of Jet AI fuel thereby depriving the government of revenue.

LIOC get an undue advantage over other market players. Only the Regulatory Authority can intervene in a situation of this nature and the failure of the government so far to appoint a Regulatory Authority has added insult to injury. According to a recent newspaper article the Treasury owes CPC around Rs.19 billion in respect of the "fuel subsidy". However, it is understood that money due to LIOC on the "fuel subsidy" had already been paid to them by the Treasury.

It is said that the government had already entered into an MOU with Bharath Petroleum to sell them the one-third stake of CPC earmarked for the third-player for US$.88 million. Under the above provision containing in the base document agreement, the government, if it so desires, has the right to withdraw from any dealings with Bharath Petroleum on the subject of the selection of a third player.

IOC is now firmly rooted in the country as the second player, but not playing on that level playing field. No person with an iota of business knowledge will ever accept that two associated companies carrying on business in the same trade, especially on foreign soil, will compete with each other to the detriment of their common interest. On the contrary they will play hand in glove with each other to eliminate the other competitor, their "common enemy", the CPC.

In addition it is reliably understood that the Indian Government has already taken a decision to bring the government controlled petroleum sector institutions under two umbrellas, i.e., Indian Oil Corporation and Oil and Natural Gas Corporation Ltd. (ONGC) by the end of this year. In such a situation Bharath Petroleum will obviously come under the purview and control of LIOC.

Does not accepting Indian Government controlled Bharat Petroleum Corporation, in such a scenario, for the third player position in the local petroleum trade defeat the very purpose of privatization vis-a-vis competition?

The acceptance of Bharath Petroleum Corporation Ltd., for the third player's slot in the aforesaid circumstances will result in two Indian Government controlled institutions, functioning under one umbrella, owning the majority stake (two-third) of the CPSTL thereby pushing CPC/Ceypetco down to the minority position.

Acceptance of Bharath Petroleum Ltd. as the third player will be the birth of another oil cartel in the country and could spell the death knell of CPC.

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