Financial Times

Fuel subsidy delay puts LIOC expansion on hold
Lanka IOC, the subsidiary of the Indian Oil Corporation, has put on hold all its expansion plans in the island until the government pays it the fuel subsidy which now has ballooned to $61 million, LIOC managing director M. Nageswaran said.

The government’s refusal to allow LIOC to raise retail prices in line with increases in international prices and the delay in paying the subsidy has resulted in a severe cash crunch at LIOC, he said.

“This cash crunch has virtually crippled all our development activity,” Nageswaran told The Sunday Times FT in an interview. “When we are finding it difficult to sustain ourselves in the trade itself how can we incur capital expenditure on modernisation?”

Nageswaran said LIOC has plans to enter the bunkering business to cater to the refuelling needs of merchant shipping, put up a lubricant blending plant in Trincomalee, modernise 50 new stations all over the island and to upgrade its existing network of retail outlets.

“All these plans have been put on hold because we don’t have money.”
However, Nageswaran maintained that LIOC is not disappointed about its investment in Sri Lanka because of the dispute over the subsidy payments and said the government had assured the firm informally that the subsidy would be paid.

“We’re a long term player. This subsidy issue is a very, very passing phase, where the government is facing difficulties in raising revenue,” he said. “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.” Nageswaran also said.

The delay in receiving the subsidy was “choking” LIOC’s operations and it has been forced to borrow heavily from local banks, running up a debt of $70 million as of August 31. The cash crunch also affects LIOC’s ability to pay dividends.“Had the subsidy been paid, we would have rewarded our shareholders with a very handsome dividend. We can do so once the subsidy comes.”

Further delays in getting the subsidy could result in LIOC making losses in the next few quarters. “If this position continues we will make losses in the next few quarters. The interest burden itself would eat into our profits.” The subsidy was required because LIOC held prices on behalf of the government without increasing them.

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