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COVER STORY |
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COVER STORY |
PETRO
PRICE HIKE When the student unions and
opposition parties took to the streets last week burning tyres, vandalizing vehicles and
blocking traffic, it was not an entirely unexpected reaction given the long tradition of
protesting any and every rise in the price of petroleum products. Even as officials cried
hoarse that they had no option because the NOC was bleeding profusely due to mounting
losses, the incident was used to fan the fire of public criticism. Amid the chaos, debates
over the ways to improve the whole petro sector be it through privatization, revamping of
NOC, controlling irregularities or price deregulation were missing in action. Last
week’s events should serve as a wake-up call to the politicians and policy-makers to
give a face-lift to the sector once and for all so that future price shocks will not
translate into nationwide agitation especially when only 9 percent of the population are
actually dependent on the POL products for their energy consumption. And, it is high time
for the politicians to convince the people that bad economics is always bad politics
particularly when maintaining status quo would have meant creating a big hole in the state
coffer running into losses worth billions of rupees – the scarce resource, which
surely is needed more in providing health and education to poor millions than in
subsidizing the urban consumers By SANJAYA DHAKAL There is no such thing as free lunch. This
is the first lesson any economist would tell his students. The second thing he will tell
is that nobody can survive for long by selling products or services at a price lower than
its cost. Not any corporation. Not even the governments. So when the government decided to hike the
price of POL products last week, it was a decision that was overdue. No government –
particularly not a government of a poor country like Nepal – could have put off the
decision any longer given the mounting losses its indecision was causing.
As they say that
‘procrastination is the thief of time’, the dilly-dallying resulted in soaring
losses that were slowly but steadily eating up the country’s vitals. Paradoxically,
the government was pumping in billions to help the urban consumers – who are
relatively better off – at the cost of rural poor. Between May 2003 and November 2004, the
prices of petrol, diesel and kerosene rose by 88.47%, 94.93% and 106.2% respectively in
the international market. In that period, Nepal, however, made only minor increments of
3.7, 12.9 and16.67% respectively leading the state-owned monopoly Nepal Oil Corporation
(NOC) to bear heavy losses. In the last one and a half year, the international prices of
POL products has increased from US$ 27 per barrel (on average) to US$ 60 and then again
decrease to current price of around US$ 44 per barrel (one barrel is equal to 159 liters). For the first time in its history, NOC was
unable to pay its dues (of around Rs 1.5 billion) to Indian Oil Corporation (IOC) on time
in September, 2004 – which is its sole supplier. The monthly losses of NOC rose to
record Rs 700 million on November, 2004 – which later declined to around Rs 300
million because of gradual reduction in international market price. At present, the loan taken by NOC has
crossed Rs 2 billion and its accumulated losses have touched Rs 5.25 billion – nearly
5% percent of the total annual budget of the country.
The losses continued because the
successive governments were afraid of public backlash against price rise. In the last
fifteen months (May 2003-November 2004), India adjusted the prices of POL products 11
times and increased the per liter prices of petrol and diesel by Rs 11 on average. But
Nepal only increased Rs 2 in petrol, Rs 4 in diesel and Rs 4 in kerosene towards the end
of the period. Hence, there were big differences in prices
of these fuel in Nepalese and Indian markets – an ‘opportunity’ that was
roundly exploited by unwanted elements and smugglers. According to a recent report
prepared by the committee led by Dr. Shankar Sharma, vice chairman of National Planning
Commission (NPC), in the last one year alone over 60 million liters of POL products were
smuggled into India forcing the over-stretched Nepal government to subsidize Rs 300-400
million in favor of Indian consumers living across the border. The report suggested
substantial rise in the prices of POL products to tide over the current difficulties,
which the government agreed with. Price Hike Unable to bear the rocketing losses, the
cabinet decided to increase the price of petrol from Rs 56 per liter to Rs 62 (an increase
of 10.71 percent); diesel from Rs 35 to Rs 41 (up 17.14 percent); kerosene (at open
market) from Rs 28 to Rs 36 and kerosene (on subsidy) from Rs 24 to Rs 30 (up 25 percent).
Likewise, the price of cooking gas per cylinder has been increased from Rs 750 to Rs 850
while the aviation fuel has been hiked from Rs 46 per liter to Rs 48. “The government had two alternatives
– either commit suicide or raise the price. We chose the latter,” said Ishwore
Pokharel, Minister for Industry, Commerce and Supplies. According to Dr. Upendra Koirala, executive
director of the NOC, with the revised rates the corporation would make a net profit of Rs
50 million a month. “Even with the new increased price, it would take us 30 months to
just survive. Here we are not talking about recovering the accumulated losses,” said
Dr. Koirala. He added that even now the price of petrol in Nepal is lesser by Rs 1.58 per
liter compared to India. Likewise, he added, the price of diesel is less by Rs 4.05 and
kerosene (open market) by Rs 2 compared to the same in India. Who Uses POL Products? Even though their price fluctuation draws
strong public reaction, the use of POL products in Nepal is very low. Even now,
overwhelming mass of Nepalese population depends on traditional sources for energy.
According to the Economic Survey
(2003/04), out of the total of 8477 thousand tons of oil equivalent (TOE) of energy
consumption, only 769 thousand TOE is derived from the POL products – which is a mere
9%. Fuel wood comprises the single biggest source of energy at 6590 thousand TOE. At present, 87% of the total energy
consumption is fulfilled by the traditional sources like fuel wood, animal dung and
agriculture wastes. Commercial sources include POL products, coal (2%) and electricity
(1.6%). As such, it is obvious that POL products
are used by a limited number of people residing in urban centers. “This means that the majority of the
poor people in Nepal are not really benefiting from low petroleum prices. It will be wiser
for the government to support the promotion of energy technologies, such as improved
cooking stoves, biogas and “Tukimara” lamps, which directly benefit the
poor,” said Bhushan Tuladhar, an environmentalist and executive director of Clean
Energy Nepal (CEN). “The current agitation by the
political parties is a slap in the face of those millions of poor who will be ripped off
if the government is to continue sell the POL products in subsidized rates,” said an
economist, adding, “Everyone needs to ponder how justified it is for the government
to continue subsidizing the fuel, which is clearly not being used by the poor.”
Tuladhar adds that the government
should start considering promoting clean and available energy sources like electricity
instead of depending on ‘dirty fuels’ like POL. “Nepal does not produce petroleum and
it is a dirty fuel. In fact, diesel exhaust is a known carcinogen. Yet we continue
to spend our precious foreign reserves in importing increasing amounts of dirty fuel while
our own energy resources, which are also clean and renewable, remain underutilized. The
increase in petroleum prices will level the playing field to a certain extent and increase
demand for clean domestic fuel. For example, people in Bhattedanda, Lalitpur have decided
to use electricity to power their ropeway instead of diesel. Similarly, this will
also help increase the demand for electric vehicles in Kathmandu, which will result in
cleaner air and better health for us all. In fact, because of the high environmental and
social cost of fossil fuel vehicles, there should be an additional environmental tax on
fossil fuel in Kathmandu,” states a press release from the CEN. “Clean Energy Nepal supports the
government’s decisions to raise petroleum prices; provide transportation subsidy to
22 remote districts so that poor people there can have access to kerosene at the same
price as consumers in Kathmandu; allow NOC’s Board to adjust petroleum prices
according to fluctuations in the international market, and reduce NOC’s overhead
costs by Rs. 200 million,” it further stated. Even though most political parties and
their student wings – including, strangely, the ruling Unified Marxist Leninist (UML)
– have termed the decision to hike the price as anti-people, logic shows that it is
not true. “The bottom 40 percent of Nepalese
households use kerosene primarily for lighting (which consumes little kerosene) and not
for cooking. Furthermore, the percentage of households who rely on kerosene for lighting
is falling with time. The percentage fell from 80 percent in 1995/96 to 58 percent in
2003/04, and even in rural areas this percentage declined from 84 to 67 percent between
the two periods on account of increasing electrification. The estimated direct impact of
raising the price of kerosene to the cost-recovery level—an incremental cost of
approximately Rs 20 per month per household for the poor—seems too modest to justify
a price subsidy scheme with evidence of leakage and a significant cost to the
country,” states a report titled “Socio Economic Impact of Fuel Price Increases
in Nepal” prepared by the World Bank in October, 2004.
In fact, way back in 1992, a report
on “Deregulation and Privatization of POL Products” prepared by Dr. Bishwambher
Pyakuryal, Prabin Das Shrestha and Narendra Bhattarai for the IRIS Center of the
University of Maryland and Economic Liberalization Project (ELP) of USAID had called for
doing away with the subsidies and cross-subsidies questioning its rationale.
“Subsidizing this small proportion of energy consumption means the benefit of subsidy
is enjoyed by small segment of the people. In other words people who use kerosene and buy
goods and services transported by vehicles using diesel are privileged and better off than
the majority of population who are not affected by any change in prices of kerosene and
diesel. So the subsidy on these products do not fulfill the achievement of equity
objective as it is not in the interest of the majority of population,” the report
states. Would the continuation of indecision, which
was causing losses worth billions of rupees, have been pro-people? Not many believe it
would have been so. Economists broadly agree that the decision
to hike the price of petroleum products was inevitable given their rise in international
market. “But the way they announced it so
abruptly was not called for. They prolonged and dilly dallied in taking the decision in
the past and now they have increased the price in retrospective manner,” said
Professor Dr. Bishwambher Pyakuryal, president of Nepal Economic Association. “It is
just like if the power utility decides not to give bills to its customers for, say six
months, and later charge them at one go. While this is not something that the customers
can deny, they will be hard pressed to pay so much of accumulated dues at once,” he
likened. NOC’s Irregularities Many people – rightly to a certain
extent – have also complained that irregularities and leakage committed by the NOC
are passed to innocent consumers in form of price hike. Even Dr. Sharma’s report
states that the NOC can reduce losses from administrative overhead cost (by 10%),
technical losses (by 50%) and shrinkage and, thereby, save around Rs 200 million a year.
According to Dr. Sharma, these sorts of losses and irregularities constitute less than 5%
of the total losses incurred by the NOC. The report suggests not allowing the price
difference in Nepal and India (border side) to exceed 10 percent at present. It has
recommended that this difference be brought down to 5% in next price adjustment. As a monopoly supplier/importer, NOC could
have lesser incentives to become as efficient as desired by the people. “I accept
there are many weaknesses in the NOC. It has not run on truly professional manner,”
said Dr. Koirala. “But I want to commit that (as recommended by the report), I will
bring down the cost by Rs 200 million this year.” Another factor that is contributing to the
NOC losses is the adulteration of the fuel – particularly the practice of mixing
diesel and petrol, which is triggered by the existing policy of maintaining large price
difference between kerosene and diesel. Even now the difference in price between
kerosene (subsidized rate) and petrol is Rs 32 per liter and between kerosene and diesel
is Rs 11. “With respect to the existing kerosene
subsidy, there is strong international evidence that suggests that the price difference
between kerosene and diesel should be kept as small as possible because kerosene is a
nearly perfect substitute for diesel. A large price difference in favor of kerosene often
leads to illegal diversion of kerosene to the automotive diesel sector, and in fact
large-scale diversion is common in the presence of a large price difference. Therefore,
the option of keeping the price of kerosene low to “help” poor households and
raising the price of diesel to the cost-recovery level is unlikely to help the poor much,
and certainly not cost-effectively, because the poor may have trouble finding low-priced
kerosene on account of illegal diversion,” states the World Bank report. POL: Source of Revenue At present, the government is earning
revenue worth Rs 480 million per month through taxes in POL products. Based on the report (prepared by Dr.
Sharma-led team) recommendations, the government has decided to slash the import duty on
cooking gas by 50 percent (from the existing 13.5 to 6.75 percent). As per the new price
structure, the government extracts revenue of Rs 7.5 per liter in diesel, Rs 18 per liter
in petrol and Rs 1.75 per liter in kerosene. For instance, before the January 10 hike,
the price of diesel per liter could be broken up thus: IOC Raxaul price Rs 33.08; customs,
local development tax and road toll Rs 7.81; transportation Rs 1.21; administrative cost
Rs 0.34; storage loss, shrinkage and interest Rs 0.43; dealers’ expenses and
commission Rs 1.27 – that is the total cost price of Rs 44.14 even as its selling
price then was Rs 35 per liter. The government annually raises around Rs 6
billion as revenue from POL sector – which is around 10 percent of the total revenue
it generates. “This is the amount that is used to meet our regular expenditure and
service delivery,” said an official. In accordance with the 1974 agreement
between Nepal and India – which is renewed every five years -, the NOC purchases
crude oil from the third country and delivers it to the IOC. The IOC then provides refined
POL products – in quantities determined by the NOC and equal to the cost of the total
crude oil purchased – at international market price rate. The IOC sends the revised price of the POL
products in the international market on 1st and 16th day of every month. And NOC makes the
payment to IOC on every 15th day of the month. Back in Nepal, the NOC then adds up the
various government taxes, customs, dealers’ commission etc to fix retail price of the
products. Is Privatization An Answer? The debates over privatization of NOC or
deregulation in the import of petroleum products are not new. Various reports in the past
have pointed to the need. But the government has chosen to tread
carefully in this area. “Given the sensitive nature of the energy sector, it is not
strange to see the government feeling uncomfortable with the total privatization of this
sector,” said Dr. Pyakuryal. The Action Plan on POL Deregulation he
prepared in 1994 states “After the announcement of government’s policy to allow
free imports of all kinds of commodities including POL products, there are private
importers who are willing to import POL products from India, So the private sector should
be allowed to import petrol, diesel and kerosene from India in the proportion as set by
the government.” Dr. Pyakuryal remembers how the Nepal
Rastra Bank (NRB) did not provide forex to the aspiring private sector importers in
mid-1990s. “Therefore, we need to have a short, medium and long-term strategy to
involve the private sector in the supply and distribution of POL products.” He believes that involving private sector
would definitely result in efficient pricing provided they maintain buffer stock to tide
over temporary supply side constraint. After the incident of last week, even the
government ministers have voiced opinions in favor of gradual privatization of this
sector. But for the time being, it is important to
give full autonomy to the NOC, at least, in pricing, say many economists. In fact, based
on Dr. Sharma’s report, the government has decided to allow the NOC Board of
Directors to adjust the prices of petroleum products every two months based on its
international price swing. Whether the periodic price adjustment is implemented properly
remains to be seen. The Road Ahead All said and done, it is obvious that the
prices of POL products, which have to be fully imported from overseas, are not under our
control. Unless Cairns Energy - the British exploration company, which is conducting
survey in Nepal - finds substantial petroleum reserves, Nepal will have to suffer from
fluctuations in international price. The NOC has said that it needs to enhance
its storage capacities to be able to absorb short-term price shocks. The present storage
capacity of 70,309 kiloliters is, however, just enough for 30 days of national sales.
“The NOC management is giving adequate attention to the expansion of storage
facilities. Currently, it is working towards developing storage facilities for petroleum
products to meet the demand of at least 45 days,” the NOC press release. That apart, NOC has also inked an agreement
with the IOC for laying a pipeline to supply petroleum products through the 35-km pipeline
from Raxaul in Bihar on the Indian side to Amlekhganj. The proposed 35-km product pipeline
will be designed for a capacity of 1.1 million metric tons per annum (MMTPA) to meet
current and future needs and will be constructed at a cost of nearly Rs 500 million within
24 months. In these backdrops, it is obvious that the
policymakers are in a race against time to not only improve the health of NOC but also to
deregulate and open up the petroleum sector. There is neither a political nor an economic
logic in continuing to sustain losses from this sector, particularly when the country is
in dire need of the resources to carry out basic service delivery and development works to
benefit the millions of people languishing in extreme poverty. |
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