Saturday, June 07, 2008

Sri Lanka's retarded Oil policy

Now maybe it's just me, but it seems to me that the Sri Lankan Government's oil policy is a bit retarded. Let's summarize,
  1. First, theres' a tax on Petrol (VAT, excise duties, so on)
    Some reports puts the proportion of the tax at about 37% of the total selling price which now stands at Rs.157 at state-owned CPC pumps.

  2. Then, the earnings from petrol, subsidize Diesel.
    There is no real reason why diesel should cost less, but it does here in Sri Lanka. In some countries in fact, diesel is more expensive. Ironically, the richer sections in Sri Lanka have the diesel vehicles (thanks to a higher import duty on diesel vehicles) while middle and lower income earners who use motorcycles, three-wheelers, small vehicles, etc. are using petrol therefore subsidizing the rich kids. Some pro-poor policy.

  3. Finally, the Ceylon Petroleum Corporation (CPC) makes a multi-billion rupee loss.
    The burden of which must be financed by the taxpayer -- which is basically everyone who buys anything. From January this year, the CPC has made a loss of about Rs.7 billion (700 Million US$)
So the policy is essentially this: you tax on one hand, and subsidize on the other. Taxpayer pays on both counts. That strikes to me as being rather retarded (or ingenious, depends on how you look at it).

Which other company you know does this kind of thing? I mean think, really. Can you even name a sillara mudalali (small shop owner) who'd practice this insane business model? If you could, then that person is probably out of business by now. That's a fundamental difference with governments and private initiatives.

In private enterprise, failure would mean closure. No more resources are spent on that failed project. In governments, failure usually means even more money and even more resources are spent on that project, compounding the problem.

This is especially apparent when CPC's only rival in the business, Lanka IOC managed to make a profit, without any freebies from the taxpayer. The reason for this has to do with incentives, while Lanka IOC faces market incentives, CPC doesn't. It faces political incentives, which are nearly always economically disastrous. LIOC's incentives tells them to diversify business, make productivity enhancing investments, etc. Whereas CPC's incentives instructs them to hold down prices, hire unnecessary labor, etc resulting massive losses.

To cut to the chase, yes, CPC should be privatized. There's no doubt about it. Why on earth would you, the beggars on the street, taxi drivers or anyone for that matter finance state blunders.

If you are waiting for the bright sunny day, where we'll have good governance and efficient state enterprises living the democratic socialist dream, sorry machang it ain't coming. It's time we realize that, dismantle the leftover socialism and take advantage of market efficiencies.


shehal said...

you might want to read the cpc annual report

sachithvida said...

me add somethings to this.. yes i agree that the fuel prices are way too high in Sri Lanka, but there are some more reasons..Let me start with your reasons:
1. Yes the tax is way too high...I didn't know that this is THAT high.
2. actually Deane, Diesel costs less to produce. The petrol is more refined than diesel. We get diesel, kerosene, jet fuel and heating oil from the same basic kind of oil: so when the demand for heating oil goes up in winter, diesel production goes down, but the demand remains the same. So in some countries, diesel is more expensive.
However, there is another aspect, in SL, we do not squeeze it enough to get the whole juice. Our refinery is way out dated. see, when you refine oil, you get liquids of different densities from gas to asphalt. Petrol is just one of them, but also get paraffin for which there is very little demand. What happens in much sophisticated refineries is that the fuels which have less demand are converted to petrol through different conversion methods. this doesn't happen SL

sachithvida said...

in SL. We just burn up the excess fuels which do not have any demand.

Also from what I heard at my Chemistry class, most of the byproducts of petroleum are not produced in SL. For example; Sulphuric Acid. You will be surprised to know that the sulphur is just burned up rather than using for Acid production. However, Sulphuric Acid production was once used as a yardstick of industrialization in a country, because Sulphuric Acid is SO very important.
So this is how we run at a loss. Also we don't have capacity (I guess we are short of 50%!!)to feed the whole country with fuel, we actually import petrol rather than crude oil, which is way more expensive..Asantha de mel raised concerned some time back, (
but in my opinion, it is way too late for that. Now we should allow a private company to do the refining..

Deane said...

Yeah Sure, there could be that and a whole lot more reasons why CPC makes a loss. The thing is they need to feel the need to do those investments, in better technology, better ways of doing things, etc. They don't face those incentives to profit maximization, which eventually benefits everybody.

It's the same story with CEB, if it was in private hands, investments like noracholai would have happened years ago.