Subsidy
row delays LIOC dividends
Lanka IOC, the subsidiary of the
Indian Oil Corporation, a Fortune 500 company, has locked horns
with the government over the fuel subsidy. Delays in getting the
subsidy has created a severe cash crunch at LIOC. In this interview
LIOC managing director M. Nageswaran describes the current state
of play.
Question
- Your first quarter profits came down quite substantially. Is it
possible to describe the reasons for this downturn and explain how
you hope to turn it around?
Answer - The first quarter profits have come down substantially
because the international oil prices have been increasing and we
have been allowed to increase domestic prices only by two rupees
per litre per month or to claim a subsidy. So the gap between the
actual price and the subsidised price – the chargeable price
– is increasing to a very high extent because of increasing
oil prices and the wide gap between the price that is being charged
and the price that is chargeable under the pricing formula. Our
present selling price of petrol is Rs 80 per litre while we should
be charging Rs 84. Diesel we’re selling at Rs 50 per litre
but we should be charging Rs 56.50 and kerosene we’re charging
Rs 30 per litre whereas the actual price should be Rs 52.
Q
- How much does the government owe LIOC as the fuel subsidy? And
what is the status of the talks to recover this money?
A - As of today the government owes us $61 million. We
have always been talking to the government of Sri Lanka. The Indian
High Commission is taking a keen and predominant role and talking
to the government. And the Indian government is also talking to
the Sri Lankan government on this issue. And we have been assured
informally that definitely the government will pay the subsidy and
the Sri Lankan government will honour its commitments. It has never
gone back on any of its sovereign guarantees.
Q
- Has the government said when it would pay the subsidy?
A - No, the government is trying its best and says the
subsidy would be paid as soon as possible. We hope it will be tomorrow
but it can be any day.
Q
- But how long can LIOC afford to wait?
A - We cannot wait for long. Actually, already our finances
are getting choked. We have told this position to the Sri Lankan
government. They say they are finding ways and means to give the
subsidy at the earliest. We hope that it would be done. We’re
taking up the case with PERC, the Treasury, concerned ministries
and ministers and Indian High Commission has taken up the case with
President Chandrika Kumaratunga. We’re hopeful of a very early
and positive settlement.
Q
- How is the delay in receiving the subsidy affecting your operations?
A - It is choking our operations. My bank loans - borrowings
from local banks – are already $70 million as of August 31
and we will not be able to sustain our operations. We have to borrow
so much because my subsidy itself is $61 million and I have to sustain
operations. We have to borrow $16-18 million for every parcel of
around 40,000 MT petroleum products delivered almost every month.
Each parcel costs around $25 million.
Q
- How is your cash crunch affecting dividend payments?
A - We’re very happy with the resounding success
of our public share issue and the confidence placed in us by investors.
Because of the delay in the subsidy we’re not able to declare
a good dividend. Had the subsidy been paid, we would have rewarded
our shareholders with a very handsome dividend. We can do so once
the subsidy comes.
Q
- At the time LIOC entered the market it said that one of its advantages
was its ability to source product from the parent company, IOC’s
refineries at competitive rates.
A - We never said anything like that. We always said we
will source products at the most competitive price from any source.
We never wanted to be linked with our parent company because it
should not be misunderstood that our transactions are only with
the parent company and the parent company is making a profit or
something. Another thing – our parent company itself is importing
from the international markets so how can they give us such assistance?
We’re also net oil importers in India.
Our relationship with our parent company stops with the contribution
of capital. We’re not attached to our parent company commercially
or in any other way. We always go to where we get the better rate.
Suppose tomorrow, we get a better rate from Ceylon Petroleum Corporation,
we’ll buy it from CPC.
Q
- But is it not cheaper for LIOC to buy from LOIC’s south
Indian refineries. Wouldn’t the freight cost be lower?
A - The oil rates are not geographical. They are government
by the Platt’s rate (Platt is an energy news service). The
south Indian refineries too quote the Platt’s rate plus a
premium. The freight may be cheaper but first of all Indian refineries
must have surplus product, and they have to cater to the huge Indian
market. Also, there’s a fixed freight price allowed in the
pricing formula so it would be immaterial whether the freight is
cheaper or not.
Q
- The government has said it wants to re-negotiate the privatisation
agreement with LIOC. What is the status of these talks?
A - The government has never told us anything like that.
We’re not aware of any such moves by the government. The government
has never approached us on this matter. No government agency has
approached us with regard to renegotiation of the privatisation
agreement.
Q
- Or is the government holding talks on this with your parent company,
IOC, or the Indian government?
A - No. As far as the Sri Lankan government is concerned,
the face is only Lanka IOC. Indian Oil is only one of the subscribers
to our capital. And we’re not aware of any such talks between
the Sri Lankan government and the Indian government.
Q
- On the question of the fuel subsidy and pricing formula, the government
has taken up the position that if the company is making profits
then it does not deserve a subsidy. LIOC has been making quite good
profits. Therefore, from a moral point of view, why would you want
a subsidy?
A - First of all we not aware whether the government has
taken such a stand because the government has been saying that it
will honour the subsidy commitment. Actually Lanka IOC’s profit
is only after taking the subsidy to account. The profit comprises
of the subsidy plus whatever we have earned. If we knock off the
subsidy element, LIOC will make an annual loss of nearly Rs 26 billion
as of March 31, 2005. So there is no profit without the subsidy.
And there are no moral or ethical grounds in any commercial organisation.
If the government has promised a subsidy they must honour it. Our
profits are made because of our efficiency. It has nothing to do
with the subsidy. The subsidy is a social commitment by the government
to keep the price line. We have co-operated with the government
and we hope that the government also will co-operate. If the subsidy
element is taken away we will make a huge loss. And nobody will
come into any country to make a loss. See, the subsidy is the government’s
social responsibility for holding the price line. The oil companies
have assisted the government in this social responsibility and we’re
sure the government will honour its commitment to the subsidy which
is in the pricing formula.
After
having entered into an agreement nobody can talk about morals or
ethics. Then all the companies which are making profits in this
country – government should not pay them their dues saying
that they are already making profits so the government need not
give them refunds.
Do not mix profits and commitments. There are no morals or ethics
in that. Commitments are different and profits are different. A
commitment has been made and it must be honoured whether we have
made profits or losses. The subsidy is required because we held
prices on behalf of the government without increasing them. We actually
imported at a higher cost and sold at a lower cost.
Q
- Has the government approached LIOC to re-negotiate the pricing
formula?
A - No, the government has approached neither us nor the
Indian government to renegotiate the pricing formula.
Q
- What is the contribution from LIOC’s shareholding in the
storage company, Ceylon Petroleum Storage Terminals Lanka Limited?
A - The contribution accounted by us, which is still to
come to us, from the common user facility was Rs 154 million for
the first quarter ending June, 2005, compared with Rs 223 million
for the first quarter of the 2004/05 financial year. The drop is
because of lower sales of petroleum products because of reduced
private thermal power generation owing to a good monsoon in this
period and also because of increased transportation rates from October
2004 for inter-depot movements.
Q
- How does LIOC hope to get over this period where the government
has promised a subsidy but has not given it yet?
A - We are borrowing in the market and we’ll continue
to borrow.
Q
- What impact will that have on your future profitability?
A - Definitely it will have a very undesirable impact on
our future profitability because the interest costs are very high
and the subsidy is not coming in time. We can’t put a figure
on it because we do not know when the government will give the subsidy.
Suppose, the government gives the subsidy tomorrow, my borrowings
will be wiped out.
Q
- If this situation continues do you anticipate making losses in
the next few quarters?
A - Definitely if this position continues we will make
losses in the next few quarters. The interest burden itself would
eat into our profits.
Q
- Can’t you seek help from your parent company?
A - We are only a Sri Lankan company. Indian Oil Corporation
is a major investor. So any company in another country has to be
its own profit centre. And even to this day this amount of credit
we’re able to get from the market only on the strength of
our parent company. Our share capital is only $53 million. Nobody
will give a loan of $70 million. They are all given on the strength
of our parent firm.
Q
- What is the status of your plans for expanding your operations
in Sri Lanka?
A - Our plans for expansion – we want to enter the
bunkering business, we want to put up a lube blending plant in Trincomalee,
modernise 50 new stations all over the island and to upgrade our
existing stations. All these plans have been put on hold because
we don’t have money. When we are finding it difficult to sustain
ourselves in the trade itself how can we incur capital expenditure
on modernisation? This cash crunch has virtually crippled all our
development activity.
Q
- Why not go ahead with your plans for bunkering which could become
a new source of revenue?
A - I have to have a refined product first. And each parcel
is around $25 million. From where can I get this? First of all I
must get a product and store it here. A lot of money is required
even as an initial investment. We also have to have bunkering barges.
Bunkering is a very capital intensive industry. When we’re
borrowing to sustain our day-to-day supplies to all of our 170 outlets,
going for a new activity will be totally counter-productive.
Q - Are you disappointed by your entry into Sri Lanka given
the problems with the subsidy payments?
A - Not at all. We are not disappointed. We’re totally
optimistic of the payment of the subsidy by the government. We are
thankful to the government and CPC for the way they responded in
handing over the outlets and when we were finalising the agreement.
I think this subsidy issue is a very, very passing phase, where
the government is facing difficulties in raising revenue. All the
good done by the government of Sri Lanka, PERC and other agencies
cannot be wished away by a small delay in the subsidy. We’re
not at all disappointed. We’re delighted. Once the subsidy
comes we’ll be able to invest further in the island. We want
the subsidy only for developmental activity. We will not take the
subsidy away but plough it back into Sri Lanka. We’re very
happy doing business here and we’ll continue to do so. We’re
a long term player.
Q
- The government has said it has decided to defer indefinitely the
entry of the third player into the petroleum retail sector. What
is your view on this?
A - Whether there are three players or a 100 players, we’ll
be market leaders. So we’re not worried about either the entry
or deferment of the third player. It is for the government to decide.
We are not worried about the entry of any player. We’re confident
of ourselves. Our market share is now 32 percent in diesel and petrol
and around 16 percent in lubes.
Q
- So how can you claim to be market leader?
A - We have got only 17 percent of the outlets and 32 percent
market share. We started full fledged commercial operations on 22
January 2004. If we have garnered a market share of 32 percent within
one year and three months, then definitely we’re the market
leader. A market leader is not on existing strength but also on
future potential. Our potential is unlimited.
Q - In the lube market your competition is mainly with Caltex.
How do you see the competition developing?
A - Caltex had a monopoly market. Our product, because
of its intrinsic quality, has come up. So we will be market leaders
in lubes also soon.
The moment our lube blending plant in Trincomalee comes on stream
we will also get the duty advantage that is now enjoyed by Caltex
and we’ll be able to position our products more competitively.
So combined with the quality, price and supply advantage, we’ll
be able to completely change the market landscape for lubricants
soon.
There
is a duty differential of nearly 14 percent between lubes that are
blended in this country and lubes that are imported. While Caltex
is blending the lubricant we’re importing it. So this 14 percent
will start coming to us also. We’ll be able to price our products
more competitively. We have started work on the blending plant and
tendering is over but because of the financial crunch we have put
it on hold. |
