“CPC is a highly politicised place”

Jaliya Medagama was the former Chairman and Managing Director of the Ceylon Petroleum Corporation (CPC). He performed his duties as the Chairman of the CPC from April 2004 until he resigned from the post in September 2006. He worked in the CPC during his retirement period in the Public Service. Before he retired from Public Service in December 2001, he held many important and key posts in Sri Lanka Administrative Service.

Medagama once served as the Commissioner of Agrarian Services and was later appointed as the Secretary of the Irrigation, Power and Energy Ministry, which also covered the Mahaweli Ministry at that time. During his tenure as the Irrigation Ministry Secretary, he also served as a member of the Board of Governors of the International Irrigation Management Institute as the Sri Lankan representative. After serving as a Secretary for more than seven years in many Ministries, he went on to retirement in the latter part of 2001.

In 2004, he was appointed as the Chairman and Managing Director of CPC and while he was serving as the CPC Chairman, he was appointed as the Secretary of the newly established Petroleum and Petroleum Resources Development Ministry in the latter part of 2005 but could not perform his duties in that capacity after December 2005, as he was not reappointed. However, he continued as Chairman and Managing Director of CPC until he tendered his resignation in September 2006. Altogether, he has a record of 40 years of service in the Public Service.

In a wide-ranging interview with The Bottom Line, Medagama spoke about the challenges he faced as CPC Chairman, how he overcame those challenges, resolving the fuel crisis, CPC privatisation, and resolving the outstanding debt owed to CPC.

Q: What are the main problems that you faced during your tenure as Chairman of the Ceylon Petroleum Corporation?

A: My telephone at Kandy residence started ringing at about 4:30 p.m. on April 7, 2004, and it was President Chandrika Bandaranaike Kumaratunga. It was a surprise to me to receive a telephone call from her, mainly because at that time it was just after 2004 April elections and her new cabinet was not appointed yet.

She said, ‘Jaliya, I am telephoning you for an urgent matter. There are problems at the Petroleum Corporation. Karu Jayasuriya, former Minister of Power and Energy telephoned me several times to say the boys at the CPC are going to riot, and there is no one to look after the interests of the CPC. It has become difficult to put the place in order. I am going to appoint you as the Chairman according to the power vested on me, and please do not refuse to accept it.’ My immediate response was, ‘Madam, how can I refuse and deny the trust that you have in me?’

The President requested me to come down to Colombo forthwith and assume duties in order to resolve the problems that had occurred in the CPC. I started off on the same day, and reached Colombo by about 10 a.m. The following day, April 8, 2004, I went to CPC and assumed duties without any formal ceremonies.

I had to summon all the trade union leaders and explain to them that I had assumed duties as the Chairman and Managing Director of CPC as appointed by the President, and that I didn’t want to see a status of anarchy any more. I also should mention here, that due to the good understanding with the CPC employees, they gave me the assurance that there would not be any kind of political harassment and everything would take the normal course.

The reason that I wanted to relate this story was to show that this has been a common problem soon after each general election. CPC is a highly politicised place where the trade unions are concerned. It is very unfortunate for me to note that the worst situation occurred soon after the 2001 November elections, and the employees who were harassed by their political rivals wanted to take revenge. This time, the issue was repeated in the same manner.

After assuming duties as Chairman CPC, the next thing that I saw was shocking to me. I realised the problems in the CPC were enormous. There was a letter on my table addressed to the former CPC Chairman by the Ministry of Power and Energy Secretary. It was marked important and confidential. When I read the letter, I saw stars.

That letter said that state banks were not in a position to extend any more credit facilities to CPC, because of its weak financial situations and that the Treasury was withdrawing its guarantees on behalf of the CPC. Therefore, CPC should negotiate with state banks to mortgage its assets in order to obtain credit facilities for the import of crude oil and finished petroleum products. As I explained earlier, naturally, as a new comer to CPC as the Chairman, it was shocking news to me.

I had lengthy discussions with my senior management staff and briefed them regarding the contents of the above mentioned letter. They assured their fullest cooperation in resolving the financial problems in the CPC. The main financial problem that I have realised in the CPC is that there isn’t a strong balance sheet whereby you could access financial institutions to obtain credit facilities, mainly due to non-adjustment of the pricing system in accordance with the pricing formula that the Treasury had agreed upon.

Thirdly, I recognise that some of the problems and challenges have mainly occurred due to not addressing some of the residual issues that have cropped up with the privatisation of the petroleum sector. It is also pertinent to remind the readers the previous government took a policy decision by cabinet memoranda dated November 30, 2002 and May 21, 2002, submitted by then Power and Energy Minister to select Lanka Indian Oil Company (LIOC) as a strategic partner to own 100% of the second retail company and 33 1/3% of the newly formed Common User Facility (CUF) and those terms to be negotiated.

As a result of the above cabinet memoranda and the cabinet memo dated August 8, 2003 submitted by the then Economic Reforms, Science and Technology Minister, cabinet granted approval for acceptance of LIOC negotiated settlement of US$ 75 million for 100% ownership of the second retail company (101 outlets) and 33 1/3% share of the CUF.

At the same time, with these cabinet memoranda, the petroleum retail sector was to be owned by three players – One third share by the CPC, another third to be owned by the LIOC and the remaining third to be retained by the Treasury until a third party was selected in the near future. There had been many agreements signed with Treasury and LIOC in this process and the privatisation process came into operation in February 2004. As I mentioned earlier, there have been many issues, problems and challenges mainly due to the above privatisation process, and the trade unions were always restless over the non-resolution of issues emanating out of the privatisation process. In this sphere, I recognise the third player issue has been a recurrent problem for the management.

Amongst the other issues and problems pertaining to the privatisation process is for the CPC to retain as a viable retail marketing company in the country. During my tenure, one of the major problems regarding retention of dealer-owned outlets was mainly due to some weak provisions in the Share Sales Agreement. Provisions in these agreements encouraged private dealers to join with LIOC. Under Section 2.3.1 (b) of the Share Sales and Purchase Agreement for 100 filling stations signed between the Government of Sri Lanka and LIOC, the provision is there for any franchise dealer to join LIOC and if a request is made by such a franchise dealer, he has to be released within three days of receipt of such intimation.

LIOC, being a flagship company, assuring lot of incentives to franchise dealers and operating under a flexible administrative system, was in a more advantageous position to attract CPC franchise dealers. One of the issues or problems that we have realised was to come out with new and innovative thinking and adopt a market-oriented approach to address these issues to retain them with the CPC.

CPC was established in 1964. Since then, it has been working under monopolistic condition in its activities such as import, export, refining, storage, distribution and retailing petroleum products. When the privatisation process was launched, the employers were retrenched under the new restructuring programme and the employees who opted to stay with the CPC and CPSTL did not have an opportunity to get themselves adjusted to re-orientation programmes to face the new challenges that was envisaged under competitive marketing atmosphere. Therefore, bringing the employees of the CPC into the corporate culture, to work under competitive marketing conditions, was identified as an immediate challenge during my tenure as CPC Chairman.

Q: How did you face those challenges?

A: As we discussed earlier, the problems, issues and challenges identified during my tenure at the CPC were in the nature of short-term and long-term basis and when seeking solutions to those issues, problems and challenges also should be perceived in the same manner. I had to work very closely with the senior management in resolving the financial issues. In this sphere, it was my primary duty to brief the highest political structure of the country as well as the highest decision-making bodies like the Treasury, the Power and Energy Ministry, institutions like Strategic Enterprise Management Authority (SEMA) and the Central Bank.

The financial viability of the CPC has a very close linkage with the macro-economic condition of the whole country. With non-availability of fossil fuels in the country, Sri Lanka has to depend mainly on imports and crude oil and petroleum products from other countries, and petroleum imports account for 20% of overall imports.

The amounts that we had to spend on importation of crude and other petroleum products were in the region of Rs. 212 billion. This was equivalent to our annual Middle East labour earnings. The colossal amount of money spent on petroleum also had a direct impact on one trade deficit. That deficit widened in 2006. The trade deficit widened to US$ 3,370 million; that is about 25% of the GDP, compared to US$ 2516 million in 2005, one of the reasons being high oil prices in that year.

In order to settle bills related to petroleum for about US$ 2 billion, the CPC mechanism was to negotiate with state banks and to settle these foreign bills on letter of credit basis. In 2006, CPC needed nearly US$ 160 million a month. The country was in short of foreign exchange. If CPC tried to buy foreign exchange to settle oil bills, it would have had a direct impact on the economy. The parity rate would go up. Therefore, it was a very prudent decision to have an informal meeting at the Central Bank, with the Governor, Secretary to the Treasury and CPC Chairman once a week to discuss the outstanding bills to be settled in oil imports, and how much of foreign exchange would be required for that particular week or month.

If these issues could not be resolved at our level, they were taken to the Energy Committee, which was held once a month, presided over by the President and attended by the Power and Energy Minister, Finance Minister, Science and Technology Minister and other key officials in the energy sector.

In order to overcome the foreign exchange problem in the country and to overcome CPC’s financial difficulties, the President arranged with the Indian Government for Ua S$ 150 million loan from Exim Bank on concession terms. The repayment period was eight years and the loan was to be repaid in 14 instalments. It was considered to be very favourable to the country. Likewise, with the blessings of the Energy Committee, it was possible for the CPC to negotiate successfully with the National Oil Company of Iran to obtain crude oil on extended credit terms.

It was also possible for me as the Chairman and the Managing Director of CPC to negotiate with Petronas, a government-owned oil company of Malaysia for another extended credit terms for crude oil imports from Malaysia.

All the negotiations helped to strengthen the financial situation of the CPC as well as to overcome some immediate foreign exchange problems of the country. What I want to emphasise here is that mainly because there was a structured mechanism to discuss at the national level with the topmost political hierarchy and the government officials regarding the CPC financial situation and its impact in overall economy, it was an easy decision-making process in resolving some of the early problems faced by the CPC. All these decisions were ratified by the CPC Board of Directors and Cabinet of Ministers.

In addition to obtaining short-term loans and credit facilities, the other strategy that I adopted was with the state banks, to impress upon them that I was trying my level best to implement the agreed pricing formula that that was agreed during the privatisation process, which has been spelt out in Annexure III of the Agreement signed with the Sri Lankan Treasury on behalf of the government and other marketing companies. It was also a good decision to appoint the general manager of the Bank of Ceylon as an ex-officio member of the Board of Directors of the CPC, so that he was in a better position to get an exposure of the financial situations of the CPC.

At the very early stages, it was agreed with the Treasury, Bank of Ceylon and CPC to raise the bank limits to Rs. 200 million per month and it was not difficult for the CPC to agree with some terms and conditions with regard to facilities given to CPC. This was mainly due to our ability to convince the Treasury to adhere to provisions in the agreements entered at the time of signing it. Provision was there allowing CPC and LIOC to revise petroleum prices in accordance with the formula agreed upon, failing which the Treasury had to pay the marketing companies the differences as a subsidy.

We were, as members of the Board of Directors and with the political patronage given by the then Minister of Power and Energy, able to convince the Energy Committee to revise the prices in accordance with the agreed pricing formula, and if not so, to obtain Treasury subsidy on account of it.

It is always a fact, as politicians, they do not like to pass the burden on consumers by increasing prices, but at the same time I was able to convince that the other alternative would be to pay the subsidy by the Treasury to CPC. It was my responsibility to see that due to non-adjustment of prices on a rational basis, the CPC should not face any financial disaster as it was happening at the CEB.

One good advantage that I had as the CPC Chairman and Managing Director was my capacity to convince the Energy Committee and the Treasury, most of the time mainly due to a broader outlook and professional approach in tackling issues and problems rather than looking it a parochial manner. With all the strategies I adopted, I am happy to mention that during my first year at the CPC, we were able to make a net profit of Rs. 3,907 million and in the second year (2005), CPC’s net profit was Rs. 7,710 million.

At the end of year 2003, there was an accumulated loss of Rs. 4,060 million and by the end of my first year in the CPC, we managed to bring down the accumulated loss to Rs. 432 million and by end of my second year, that is at the end of year 2005, accumulated profit was Rs. 6,172 million. I am also happy to say that according to norms set out by the Treasury guidelines, CPC was able to pay all its due taxes and deemed dividends during that period.

In short, by the end of year 2005, CPC was on a better financial footing, due to the various strategies mentioned above and mainly due to a better coordinated, concerted effort and the firm commitment of the employees and the support gained from political hierarchy.

The Central Bank Report (2005) reported that ‘the financial position of the CPC improved in 2005 due to progress made in financial management, internal control and external financial support,’ whereas in the previous year Central Bank Report said that ‘weakening financial conditions of both the CEB and the CPC could give them to virtual insolvency with the accumulation of debt obligation to the banking sectors.’

Q: What about CPC privatisation? What are your views?

A: As pointed out earlier, CPC was a state monopoly until end 2003. The privatisation process took place with the submission of two cabinet memoranda dated May 21, 2002 and November 30, 2002 respectively. It was envisaged in the cabinet memoranda to liberalise the petroleum sector, mainly the retail marketing sector. It was suggested to have three marketing companies and each marketing company to have 100 filling stations.

While one of the retail companies was to be owned and operated by CPC, the other two retail companies were intended to be 100% owned and operated by strategic foreign partners. Common User Facility, (CUF) later named as Ceylon Petroleum Storage Terminal Ltd. was to be equally owned i.e. 33 1/3% by the retail companies. In addition to the above process, the government GOSL had also leased out a tank farm consisting of 99 storage tanks and its other ancillary facilities at Trincomalee to LIOC on a long-term basis.

The whole liberalisation process took place according to a political agenda, at that time. There was a political philosophy prevailing at that time that the efficiency in management of public corporations could be enhanced by the privatisation process. However, during my tenure as the CPC Chairman and Managing Director, I realised these myths were created by a part of society that really encouraged the market economy as a solution to ailing economies in the developing countries.

Of course, I don’t deny the fact that there have been many issues and problems created under a monopolistic situation. One of the issues was overstaffing of the administrative structure under the monopolistic situation. That was mainly due to unwanted political intervention. If the Board of Directors had the authority to act without any political interventions, and if the Board of Directors consisted of appropriate professionals to run such institutions, such incidents could have been minimised.

In a monopolistic economy, it is always seen that customers are not well looked after, mainly due to the reason that the customers are helpless as there is no competition among the servicing utilities. With liberalisation of the petroleum sector, it is always argued that customers are in a more advantageous position to get a better service.

I really don’t think that there is any truth in this thinking too. All of this depends on the management and its attitudes towards the customer service. Most of the government institutions should be reoriented towards these concepts in order to solve the problem in an efficient manner. By the privatisation process, the government would have envisaged that the petroleum products could be made available to consumers at a competitive price. But this never happened after privatisation.

There was a period of about two months when LIOC did not have even sufficient stocks to cater to the needs of consumers. Supply of kerosene was totally stopped by LIOC during the period of March to June 2006, mainly because the prices were not adjusted by the government to meet its cost. It was CPC that had to go out of the way to areas where LIOC had not supplied kerosene.

In a developing economy like Sri Lanka, it would not be advisable to liberalise the energy sector without taking proper stock of the situation. In a war time situation, could the private sector meet its obligations on behalf of the government? The private sector does not have even a distribution network to sell fuel in the northern areas. When it comes to real business, the private sector is more concerned about making profits rather than servicing society.

One of the other arguments brought forward in the privatisation process in the developing countries was that it could supply its hard currency requirements to overcome its economic problems. There, what we see is that we have received only US$ 75 million on account of 101 fuel stations and for the one-third share of the Common User Facility! It was based on negotiated terms, and did not go for a competitive bidding. One could argue that if the government had decided to go for an open bidding process, it could have fetched a better price for its assets. The understanding was that the newly formed retail private company would invest Rs. 2 to 3 billion in upgrading its fuel stations.

There is a misconception that CPC had to be privatised mainly because it was a loss making venture at that time. The accumulated losses of the CPC were mainly due to the fact that it was not allowed to adjust its prices in accordance with international prices. But the fact remains that even during the loss period, CPC was paying its taxes and excise duties to the tune of Rs. 30 billion a year.

If CPC was given the authority and autonomy to run that institution as a profit-making venture, the Board of Directors at that time could definitely have done a better service. Every government tried to regulate petroleum prices without considering international price behaviour. Of course, at the same time, it is also a primary factor that CPC management should make every endeavour to restrict costs so that unnecessary burdens would not be passed on to the consumer.

It should be a primary responsibility of the government to extend its fullest support to safeguard the interests of CPC as a national asset. The government should do its best to obtain financial support to expand the existing refinery, which could save a sizable amount of foreign exchange that would drain out from the country in importing finished petroleum products.

Therefore, my thinking is that the retail outlets which have been earmarked for the third player and presently with the Treasury should be handed over to the CPC so that the CPC could refurbish them and bring them to a better condition and be in a stronger position to compete with LIOC. A firm decision was made during mid 2005 that the government would abandon its earlier decision to consider a foreign company to come as a third player in the retail market in the petroleum sector. However, this has not been resolved to the satisfaction of the employees of CPC yet.

When CPC and CPSTL employees went on strike on the same issue somewhere in July 2006, the government had given an assurance that no more liberalisation or privatisation would take place in the CPC. The present Petroleum Resources Development Minister submitted a cabinet memo in the latter half of July 2006 to this effect and cabinet agreed on principle that retail outlets earmarked for the third player and presently with the Treasury should be amalgamated with CPC, allowing CPC to refurbish them. I hope the present administration would take immediate action to resolve this issue to the satisfaction of the CPC employees and for the betterment of the country.

But once again, a word of caution is necessary here. Heavy responsibilities lie upon the government and CPC Board of Management and its employees. The government should intervene in its decision-making process at a minimal level and give more autonomy to the Chairman and Board of Directors of the CPC to strive to be the premier customer driven, environmental-friendly, enterprise in the petroleum and related industries in the region while contributing towards the prosperity of our country, as spelled out in its vision statement.

At the same time, the employees and all the trade unions, irrespective of their political differences, should extend their fullest cooperation to the management in a rigorous manner to achieve its mission. This is the only way out to make CPC a viable and vibrant institution in the energy sector in Sri Lanka.

Battling the fuel crisis

Q: There is a fuel crisis in the country, with fuel prices rising daily. How do you think the fuel crisis can be resolved?

A: The fuel crisis is not only limited to Sri Lanka. The impact of the fuel crisis is being felt by many countries, whether they are developing or developed countries. That is why even developed countries like USA, UK and others are taking remedial action to resolve issues related to their countries.

In responding to earlier questions, I have pointed out that Rs. 225 billion is spent on the import of fuel to the country. So far, we have not explored any fuel. As seen earlier, 20% of our total imports are crude oil and finished products and when imports surpass the exports earning, there is always a balance of trade problem which create serious problems in the economy, especially in foreign exchange reserves which would have a direct impact in the whole economy.

On March 10 this year, crude oil, mainly the American Sweet variety, went up to US$ 110 per barrel. Like, the other crude oil, such as Brent and Middle Eastern crude oils also went up in price. The high fuel prices in the world market were mainly due to the shortage in supply, due to increased demand in developing economies such as India and China. At the same time, other external factors such as geo-political reasons also have a direct bearing on fuel prices in the world market.

In the second half of year 2007, world demand for crude was 86.3 mm/ barrels per day. However, OPEC and non-OPEC countries were in a position to produce only 86 mm/ barrel/ day, where by OPEC countries produced 31.2 mm/bb/day and non-OPEC countries producing 54.5 mm/bb/day respectively. According to International Energy Agencies data, the forecast demand for year 2008 would be 87.15 mm/bb/day and the forecast production would be in the range of 85.44 mm/bb/day which makes deficit of 1.71 mm/bb/day.

In addition to the world shortage of production, political developments in the international arena had a direct impact on world oil prices too. Political upheavals in Basra area in Iraq could lead to disruption of supply to the world market. Venezuelan President Hugo Chavez predicted on August 18, 2007 that crude oil would rise up to US$ 100 per barrel and it really happened from the beginning of year 2008. The depreciation of the US dollar too has direct impact on international oil price hikes.

There has only been a marginal difference in oil consumption in Sri Lanka during the last couple of years. Import of crude oil is limited by the refinery capacity of Sapugaskanda refinery. In 2005, the import of crude oil to Sri Lanka was 2.008 m/m tonnes whereas in 2006, it increased up to 2.153 m/m/tonnes, which is very marginal. If you take the imports of finished products too, the difference in 2006 is very marginal, corresponding to 2005. In fact, import of finished products in 2006 has gone down by 0.59 m/m tonnes, mainly due to less consumption of oil by the Electricity Board and private power plants.

However, there is a significant change in the sum of money spent on crude and finished products between 2005 and 2006. In 2005, oil bills were about Rs. 156 billion whereas in year 2006, they had gone up to Rs. 212 billion, making a significant impact on the Sri Lanka economy.

As seen in the recent past, international oil prices are on the rise, and the Petroleum Minister has already made an announcement that oil prices would be increased soon after the Sinhala New Year, which would definitely create a very uncomfortable situation to the general public of the country.

Now, let us see what sort of action we could take in order to overcome this kind of fuel crisis. Most of the solutions are in the nature of the long-term. There could be few short-term solutions too. The Petroleum Ministry, which is in charge of petroleum activities, should be able to take policy initiatives to face this crisis situation, with a close dialogue with the Treasury and the Central Bank as many of the problems are directly related to the macro-economic condition of the country. The Government of Sri Lanka should be able to make a rational decision with regard to its import capacity. As we have seen earlier, what is the rationale in spending all that hard foreign exchange that we earned through Middle East labour on fuel?

As a small country, we may not be able to make any impact on international oil prices, but we should be able to have a ceiling on the amount of foreign exchange that we would be able to spend on our oil imports.

One way would be for us to have an overall development strategy, whereby we should be able to restrict our import budget in order to meet oil demand. For this purpose, right thinking in correct perspective has to be reflected in long-term development policies. Very recently, the Agriculture Minister emphasised that 75% of our food items are imported despite there being every possibility of growing most of the items in Sri Lanka.

As a matter of policy, the Ministry should be able to come out with a comprehensive policy package addressing the issues and give its recommendations in resolving them. The Petroleum Ministry should take a very aggressive role in guiding the Minister, so that he would be able to address the issues and implement its recommendations through a powerful cabinet sub committee. As Sri Lankans, we always think in terms of crisis situations, rather than try to initiate long-term policy initiatives.

One of the common factors is that we should be able to restrict our import of finished products, which amounts to roughly 50% of our total oil imports.

In this sphere, every effort should be made to enhance our refinery capacity at Sapugaskanda, which has only 50,000 capacity barrel at present. It is learnt that negotiations are taking place with the Iranian Government to expand its capacity to refine 100,000 barrels per day at a cost of US$ 01 billion. I can still remember when I was the Power and Energy Ministry Secretary, we initiated negotiations with the Chinese Government and it was negotiated at a very favourable interest rate with Chinese Exim Bank and the total investment was US$ 389 million in 2000. However, due to bad decision making process of the External Resources Division of the Treasury, it did not materialise, mainly due to debt servicing problems in the country.

Later in 2005, and 2006, the Petroleum Ministry had initial discussions with ARAMCO through the Saudi Arabian Government and also with the Egyptian Government. Some pre-feasibility reports too had been prepared, but due to unknown reasons, at least to me, it never saw the light of the day.

The expansion of the refinery project at that time was in the range of US$ 600 million. As of now, with the limited refinery capacity at Sapugaskanda, CPC is in a position to save US$ 75 million (Rs. 7,500 million) of foreign exchange a year. This could be doubled with the enhanced capacity in addition to other benefits of having our own refinery.

One word of caution is necessary here. I think the Ministry and the government should solicit the best technical proposals and suggestions in this venture. It should not be a mere political decision. It could be either foreign experts or our local experts who should get involved from the initial project concept level.

One could argue that some of the taxes and duties that are embedded in the fuel pricing structure could be withdrawn in order to cut down the prices and to give some concession to the consumer in a crisis situation. It has its pros and cons. The government is getting roughly about Rs. 30 billion in fuel taxes and these taxes and excise duties are invested in development activities, according to Treasury authorities.

The tax structure imposed on fuel is a common phenomenon in most countries. If you take today’s petrol prices, the CIF price would be in the range of Rs. 70 per litre, but there are many taxes, duties and levies that are added to it. Excise Duty alone comes to Rs. 20 per litre; port development charges would be about Rs. 2.35 per litre. In addition, to these taxes and duties, a Provincial Council tax of 1% on imported products is also levied, which comes to about 0.95 cents per litre. Earlier 15% VAT was also charged against petrol, which came to about Rs. 14 per litre. Now the VAT has been reduced to 5% and the component would be in the range of Rs. 5 per litre on petrol. If you add all the taxes and duties, it would be roughly Rs. 30 per litre on petrol. In other words, there would be about 42% added to CIF on petrol as government revenue.

Similarly, in India too, there is a tax component in petrol sales. In Delhi, the tax would be around 52% and in Chennai it is about 58% and in Bombay, it would be about 59%, according to statistics supplied by the Sixth Report of the Standing Committee on Petroleum and Natural Gas, published in latter part of August 2005.

As taxation on petroleum products forms an important source of revenue for any government, it is always difficult for respective governments to cut down on taxes, excise duties and custom duties. It is going to be a trade off between government ability and capacity to invert on its development programme without such revenues coming into government coffers. In such a situation, the marketing companies such as CPC should explore other alternative avenues in order to reduce the cost to consumers. CPC could concentrate on cost cutting methods in their marketing programmes.

One of the strategies would be for the CPC to have a strong professional marketing unit which should be very sensitive to international price behaviour. Efficient management of fuel inventories would pave the way for efficient management of stocks. If CPC stocks high inventories during the periods of international price hikes, the loss has to either be borne by the CPC or passed on to the consumer. I observed in 2005, the stock value of crude oil and finished products was in the range of Rs. 17 billion, where as at the end of 2006, the value of stocks had gone up to Rs. 27 billion.

Better financial management is a key factor for sustainability in any organisation. The CPC should make every endeavour to negotiate better terms with banks on credit facilities. I also wish to state that financial cost should be brought down to a minimal amount. However, it is observed that the financial cost of CPC in 2005 was Rs. 1,260 million. It has gone up to Rs. 2,463 million in the financial year of 2006.

In financial transactions, CPC should always strive to have a strong balance sheet, so that its negotiating capacity would automatically improve and whatever financial benefits that CPC gets could be passed on to the consumer to regulate fuel prices.

What is more important for the petroleum sector is to come out with some policy framework in order to meet the challenges in facing the problems in the sector. For that purpose, I strongly believe the Petroleum Ministry should be restructured with competent people who could really understand and appreciate its problems and issues.

The Ministry is more concerned about its regulatory role than coordinating with the CPC. There should be attitudinal and mindset change among the officers working in the Ministry. The officials of the Ministry should be able to guide their own minister for a broader dialogue with regard to its role and should be able to guide the other policy makers to agree upon a broader policy framework with regard to various issues in the sector.

A separate Petroleum Resources Ministry was formed mainly to develop a policy framework for downstream and upstream activities in the sector. However, whether this task has been fulfilled is another issue. That is why there has been much criticism with regard to its role as the “blind leading the blind.”

One of the key future policies should be to develop and expand the power sector without depending too much on oil consumption. As it is, CEB roughly consumes 25-30% of the total diesel consumption of the country in its power generation. The cost to CEB would be in the range of Rs. 45-50 billion. The drain of foreign exchange could be minimised if CEB concentrated more on hydro and coal power and other alternative energy as being planned now.

The subsidy issue is also another policy matter where CPC and the Ministry have to take the initiative. One could argue the subsidies and other cross subsidies should be rationalised by addressing the real targeted group. Being a marketing company, CPC should not market its products below the cost. As a co-partner, is LIOC ready to market its products below the cost? No marketing company would do business on that basis.

If CPC is asked to market below the cost, the difference has to be paid to CPC by the Treasury as a subsidy, and if not, there would be heavy losses which would lead to its insolvency. If a section of the society is unable to meet the international prices, it is the government’s duty to give a rationale subsidy only to that identified/ targeted group? I am still not aware whether the Ministry has come out with a concrete policy on this subsidy issue.

At the same time, one could argue the rationale of selling petrol and diesel below the cost to consumers who are economically better off. A person who owns a Mercedes, BMW, Prado or other luxury cars or jeeps which has an engine capacity of over 2000 cc should not be given the fuel below cost. Most of these vehicles are over and above Rs. 10 million, and a person who could afford to pay for a vehicle of that amount should be able purchase the fuel requirement at real cost rather than below cost. This policy could encourage more people to go for smaller engine capacity vehicles, and conserve fuel-consumption. The government should also offer more incentives to people who are ready to go for smaller capacity engines.

If you take the recently constructed fly-over at Kelaniya, I am sure that would enable to control unnecessary traffic congestions on the road, which lead to an unnecessary fuel wastage. If the government makes a concerted effort to reduce traffic congestion, mainly due to bad roads and non availability of fly-overs at the appropriate places, I am sure that would have a very positive impact in terms of saving foreign exchange on fuel.

As mentioned in earlier discussions, there are many ways and means of handling this fuel crisis situation, but what is needed is a concerted effort among various agencies to come out with a policy document and its efficient implementation. This is a global scenario, and every country has to develop its own strategies according to its requirements

Blazing away from the debt trap

Q: How can the outstanding debt be resolved? Institutions such as the Electricity Board (CEB) owe a lot to CPC. Can the debt be recovered?

A: Being a marketing company, CPC sells its petroleum products to customers on credit basis. The main customers could be categorised into two broad sectors. One is government institutions; the other is the private sector. Institutions like Ceylon Electricity Board (CEB), Sri Lanka Railway, Ceylon Transport Board, the Police and armed forces (Army, Navy and Air Force) and SriLankan Airlines are the major public sector fuel consumers of the CPC, while CPC and LIOC dealers, and other petroleum dealers could be classified as the private sector customers. As a general policy, CPC has not secured any guarantees with regard to government institutions, while most of the private sector dealers establish cash or property guarantees against their required quotas.

Now let’s look at these major customers’ debt position with CPC with regard to 2005, 2006 and 2007 financial years.

Major debts are as follows:

CEB: As at December 31, 1005 – Rs. 7.2 billion; As at December 31, 2006 – Rs. 12.4 billion; As at December 31, 2007 – Rs. 25.8 billion.

Independent power plants: As at December 31, 1005 – Rs. 1.8 billion; As at December 31, 2006 – Rs. 0.8 billion; As at December 31, 2007 – Rs. 3.1 billion.

Sri Lanka Railway: As at December 31, 1005 – Rs. 0.5 billion; As at December 31, 2006 – Rs. 1.1 billion; As at December 31, 2007 – Rs. 1.8 billion.

Armed forces: As at December 31, 1005 – Rs. 1.7 billion; As at December 31, 2006 – Rs. 2.8 billion; As at December 31, 2007 – Rs. 3.9 billion.

As of December 31, 2007, the accumulated amount that had to be settled by the above institutions to CPC was in the range of Rs. 34.6 billion. In addition, there could be other current debtors which I consider as minor debtors. It is seen that out of a total debt of Rs. 34.6 billion, CEB has to settle about Rs. 25.8 billion, which amounts to 70% of the total amount.

This situation badly affects CPC’s financial stability. There are many implications in financial management of CPC institution. This situation badly affects its cash flow situation and in order to over its cash flow situation, CPC has to go to banks to borrow money on over draft basis and on short-term and medium-term loan basis, which results in CPC having to pay additional financial charges and these financial charges have to be added in determination of fuel prices. Invariably, the cost component goes up in computing monthly prices structure.

Now, let us see how best that this outstanding debt could be resolved. With regard to the armed forces, it is the responsibility of the heads of the Army, Navy, Air Force and Police to take up this matter with the Treasury and seek supplementary Budgetary provision to settle these CPC bills.

Everybody knows that there is a confrontation going on in the north and east. In such situations, it would be their primary responsibility to request enhanced allocations from the Treasury in order to pay their fuel bills. If they are unable to make a correct judgment of their fuel requirement, the next option would for them to take up this matter with the Treasury before the end of the financial year and seek their advice on this matter. The Treasury would be glad enough to enhance their fuel allocations, as it has to be given top priority.

Non-settlement of fuel bills to CPC by CEB and its independent power suppliers is a matter for grave concern, which would have bad consequences on CPC, as pointed out earlier. Since 2004, CEB has not paid any serious consideration to address this issue of non-payment of fuel bills to CPC. Their excuse has always been that CEB is not recovering enough revenues from their consumers and hence there is no money to pay their fuel suppliers.

CEB authorities know it very well that it would be difficult to stop issuing their fuel requirements in the event they default their payment due to social pressure. This social pressure is taken by the politicians to demand fuel from CPC, as the country cannot be kept in darkness.

I remember a related incident in this aspect. When I was CPC Chairman and Managing Director, we were monitoring CEB’s reluctance and non-payment of fuel bills. This position was briefed to the Minister, and cabinet memo was submitted to that effect, spelling out dire consequences of non-payment of bills by the CEB and private power plant owners to CPC. At that time CEB had to settle Rs. 11 billion, while private power plants arrears were in the range of Rs. 3 billion. This request was overlooked and the observations of the Finance and Planning Ministry was to continue credit facilities to CEB by the CPC at least for a period of three months and the Chairman was directed to issue fuel on credit accordingly.

This happened somewhere in July 2006 and still the matter has not been amicably resolved. If CEB made a genuine effort by way of obtaining a long-term loan to settle on an instalment basis, this problem of defaulting would not be dragged on indefinitely. There could have been a win-win situation for both parties.

However, with the recent electricity tariff revision, settlement of CPC fuel bills has to be given priority. I would suggest that both parties should come to some sort of understanding and sign a MoU on the method of settlement and lay down specific covenants for CEB to adhere to. The Treasury also should be cited as a guarantor in this MoU. In case if CEB defaults, it should be made obligatory for the Treasury to take up that responsibility.

I am made to understand that with recent electricity tariff revisions, CEB would be in a position to recover additional Rs. 43 billion from the consumers for a year. It is also understood that there is a non-written understanding to settle Rs. 21 billion as CPC outstanding debts, leaving a balance of another Rs. 4 billion. My argument is that CPC should not incur any kind of losses at the expense of supplying fuel to CEB power plants.

At the same time, it is the primary responsibility of the CEB to explore the avenues to cut down fuel consumption in its power plants, which is going to be a costly item. CEB has to come up with the lowest cost power generation plan in order to address this issue and I sincerely hope that it would help them cut down oil consumption in their power plants, which would be advantageous to the whole nation.