Archives

By D. Chandrasekera, Project Director CPC

Until early 2002 Ceylon Petroleum Corporation (CPC) adjusted the consumer prices of petroleum products on an ad hock basis and each time a revision of prices was required CPC and the Ministry of Power and Energy had to obtain the concurrence of the Ministry of Finance and the approval of the Cabinet of Ministers although the Ceylon Petroleum Corporation Act, No. 20 of 1961 entrusted this responsibility to the Minister in charge who had the power to revise prices with the concurrence of the Ministry of Finance only.

The international price of petroleum products varied widely as from mid nineteen eighties based on supply and demand in the world for petroleum products. As from mid nineteen eighties successive Governments depended on the Petroleum sector to provide substantial tax revenues to the State. By the year 2001 petroleum products have been subject to Customs duty, National Security Levy, Goods and Services Tax and Excise Duty.

In 2000 even with the customs duty waiver granted by the State, the Ceylon Petroleum Corporation was liable to total taxes amounting to Rs. 22.7 billion by way of different taxes and levies imposed on petroleum products while the carried forward loss from CPC operations for the previous two years was Rs. 16.6 billion. As ad valorem taxes were imposed the tax liability varied widely with the actual international price of petroleum products and hence the tax revenue was lower when international prices were low and vice versa.

Petroleum product prices

Petroleum product prices are quoted in the international market in United States dollar (US$) terms and hence the exchange rate of the Sri Lanka rupee to the US dollar also had a significant effect on the cost of supply of petroleum products, in rupee terms.

The available mechanism to get the necessary approvals for the revision of consumer product prices when international prices were increasing or when the rupee is depreciating against the US$ was cumbersome and time consuming with much delay experienced depending on the local situation.

This has resulted in the CPC incurring heavy losses when international price were increasing and any additional profits made when prices were decreasing finally ended up as additional levies imposed by the State to recoup the drop in forecasted tax revenue.

The above left CPC with large losses at times necessitating revision of consumer prices by large margins with public dissatisfaction and criticism, specially as CPC also failed to revise consumer prices downwards when the international prices were decreasing at times as stated above. To get over this problem the Asian Development Bank initiated a study of pricing Policy in the petroleum subsector and recommended the implementation of the Automatic Adjustment to Consumer Price of Petroleum Products in late 2001.

Consumer prices

It was proposed that consumer prices of petroleum products be based on a simple transparent Formula, which has the following features:-

It is to be based on the monthly average prices of petroleum products (petrol, kerosene, diesel and fuel oil) in the international cargo market in Singapore. Import parity price of all products would be the starting point in the adjustment mechanism. CPC purchases all petroleum products based on international prices posted at the Singapore market. To this FOB price the cost of Insurance and Freight and loss in handling right up to the distribution point are included, to arrive at the CIF price at Colombo.

To the above CIF price is added all costs incurred at the point of import such as bank charges, port development charges, pipeline charges paid to the Sri Lanka Ports Authority to arrive at the US $ based landed cost. This is considered to be the ex-refinery price or Surrogate Refinery Gate Price for petroleum products. This is converted to landed cost in terms of Rupees per litre by using the average exchange rate of Rupees per US dollar of the previous month. At present no customs duties are imposed on imports of petroleum products.

Excise duty

Excise duty has been set at fixed amounts rather than on an ad valorem basis. The excise duty on petrol at present is Rs. 22.00 per litre, Kerosene Rs. 1.25 per litre and diesel at Rs. 3.50 per litre. This will ensure a fixed tax revenue to the state irrespective of the international price fluctuations. Excise duty on petroleum products are revised from time to time depending on revenue requirements of the State by the General Treasury. Auto Diesel supplies to the Ceylon Electricity Board (CEB) would continue to be exempt of excise duty.

Actual operating cost of the bulk storage terminal and depots and the distribution and marketing costs are also recovered as a pass through from the consumer and built into the retial price.

At present total finance costs are built into the retail consumer price of petrol and diesel only (supplies to CEB also excluded) and is expected to be revised downwards and distributed on all products when the present debt of CPC amounting to US $ 130 million is retired from the sales proceeds of 65% of the retial market and two third of the Common User Facilities (CUF) owned by CPC.

The sum of all above costs considered to be the wholesale cost of individual petroleum products ex-terminal.

At present there is no profit margin built into the retial selling price anywhere in supply chain except in fuel oil. However when the market is liberalised profit margins will have to be built into the final retial consumer price at two stages namely at the Common User Facility (CUF) before computing wholesale price and at the retial selling point, to provide a return on the investments made at these two points separately.

At present CPC has a small profit margin of 5% on landed cost of 180 cst fuel oil and 2.5% on landed cost of 380 cst residual fuel oil built on to the retail selling price. In the past CPC had not been required to obtain predetermined return on investment, only to ensure that the treasury was not called upon to subscribe to the losses incurred in the overall operations. The objective of the State often has been to maintain retial prices at levels acceptable specially those living below the poverty line even by cross subsidy with products like petrol.

As from July 2002 with the abolition of National Security Levy (NSL) and the Goods and Services Tax (GST), Value Added Taxes (VAT) on selling price at 10% on petrol, kerosene and diesel and at 20% on fuel oil were imposed to mitigate loss of revenue.

In addition the Provincial Council tax at 1% on selling price before VAT on imported products and the dealer turnover tax also at 1% on selling price before VAT are built into the price before VAT and included in the retail price.

The dealer margin is fixed at 1.75% on VAT inclusive selling price and is paid to dealers who operate CPC owned outlets. Margin paid to dealers who own their outlets is marginally higher.

It is also expected that the domestic price would not be changed if the required change as per the calculated price based on the formula is below 25 cents/litre while the maximum increase or decrease for any given month would not exceed Rs. 2.00 per litre. The detail structure of the Monthly Price Formula for Petroleum Products is given below. Detailed Structure of Monthly Price Formula for petroleum Products (Basis Import Parity)

Singapore FOB Price in US $/bbl
Freight/Insurance (in USS $/ton)/Los
CIF Price in US $/bbl
Currency Exchange Rate (Rupees per US $)/litres per barrel (158.9)
CIF price in Rupees per litre
Jetty Pipeline charge (US $ 3.21/ton)
Port Development Charge (1.2% of CIF incl. bank commission)
Landed cost (a surrogate ex refinery price) in Rs./litre
Customs Duty, if appropriate
Excise Duty (fixed amounts on petrol, diesel and kerosene)
Tax paid landed cost
Finance charges on working capital (-Rs. per litre)
Terminal operating costs including its interest cost (Rs/lit.)
Terminal Margin
Ex terminal cost (to be fixed by the regulator)
Retail profit margin
Wholesale selling price|
Marketing and distribution costs (1.75% on landed cost)
Provincial Council tax on imports (presently 1.% on price before VAT)
Dealer turnover tax (at present 1.00 on selling price)
Price before VAT
VAT (10% petrol and diesel and 20% on fuel oil)
Consumer retial price (Rs./litre)

The responsibility of supervision of price revision has been handed over to a committee comprising of representative of CPC, Ministry of Finance and Ministry of Power and Energy.

Consumer prices of all petroleum products are to be revised monthly on the basis of import parity prices based on the average Singapore postings of the previous month and the average exchange rate also of the previous month as reported by the Central Bank, while all other components like operating overheads are revised periodically and financial charges and taxes are to be revised as and when required.

Retail consumer prices have been adjusted based on the above formula as from February 2002. From February 2002 CPC retail prices had a built in margins on petrol and diesel which were utilised to retire a part of the carried forward debt of CPC.

However, with the intervention of the Government this margin was removed all together and CPC had to depend on the small marging built into the retail selling price of fuel oil, the total margin available from refining of 60% of the domestic demand and savings made on budgeted operating costs and finance cost savings by a very rigorous Treasury management in order to meet its targeted operating results. This combination enabled CPC to retire part of its carried forward loss and prepare CPC to face the oncoming competition.

The pricing formula at present in use will have to be modified to account for profit margin for the CUF and also to accommodate a retail margin on consumer prices as required to ensure viability of the investments being made by private parties in petroleum downstream marketing sector. A retail consumer price comparison in pre and post liberalised regimes is given below and is presented in the form of a bar charge.

With the onset of the Iraq war international prices of petroleum products were on the rise as from January 2003. Although as per the formula in place, the prices of all products should have been revised upwards due to government intervention price of kerosene and diesel remained same as that prevailed at the end of 2002 without revision throughout the year in 2003.

The expectation that the Government will subsidise the loss to the state monopoly CPC has not been realised and CPC has only been able to recoup part of the losses by not revising prices of kerosene and diesel in the last three months. This situation certainly cannot continue after liberalisation of the sector and entry of private sector players.

The Government at such times, if it intervenes to control retial selling prices will need to pay a direct subsidy to the marketing companies or adjust excise duty to keep retail price within the required retail price band. The Government need to address this issue as price of crude oil and petroleum products have been moving up with the onset of winter in the Western hemisphere and shortage of crude oil experienced by the market.

If the OPEC does not move to increase production, prices in the fourth-quarter will remain above the average price that prevailed in the third-quarter of this year.

www.crescat.com

News | Business | Features | Editorial | Security
Politics | World | Letters | Sports | Obituaries

Produced by Lake House
Copyright © 2003 The Associated Newspapers of Ceylon Ltd.
Comments and suggestions to :Web Manager