A fare or fair deal?

The delay in implementing a transparent pricing formula for fuel has resulted in a standoff between private bus owners and the Government as the latter grapples to keep fares at a minimum. Failure to introduce a price formula in the first quarter of 2016, as initially planned by the Government, has left consumers unable to transparently calculate how much fares should be increased and whether they are given a fair deal.

Sri Lanka already has a pricing formula for LPG, which was approved by the Supreme Court. The two major gas companies have to appeal to the Consumer Affairs Authority (CAA) giving their reasons for a proposed hike and can only put it into action if the authority gives its regal nod. While posturing as a transparent pricing formula, it nonetheless faced significant impediments to being implemented because of political interference, especially during election time. A fuel pricing formula will hopefully come with a stronger backbone. Historic volatility in international fuel prices was highlighted the fiscal risk inherent in the current approach to fuel pricing. Domestic fuel prices are administratively determined and increases in international fuel prices are often not fully passed-through to domestic consumers. This has translated into increased volatility in fuel tax levels and revenues, and substantial fiscal costs over long periods, especially when there is more complete pass-through of international price decreases.

Motivated by a desire to protect fuel tax revenues, some countries have adopted automatic fuel pricing mechanisms. The adoption of such a mechanism is intended to ensure full pass-through of changes, both increases and decreases, in international fuel prices to domestic fuel prices. At the core of the mechanism is an explicit fuel pricing formula, which determines domestic prices as the sum of the import price of fuel products, domestic wholesale and retail distribution margins, and fuel taxes. Domestic fuel prices are then changed at pre-specified regular intervals (e.g. weekly, bi-weekly, or monthly) to fully reflect changes in international prices. In addition to protecting fuel tax revenues, this approach also protects the margins of distributors, thus avoiding the disruption of fuel markets that often results from distributors incurring subsidy arrears due to lack of full pass-through of international fuel price changes. The adoption of an automatic mechanism should also be viewed as the first stage of a transition to a fully-liberalised pricing and supply regime, which has typically been a more effective approach to avoiding subsidies and protecting the Budget.

However, in Sri Lanka the Government has sought to use fuel prices to party cover extensive losses of the Ceylon Petroleum Corporation (CPC), as well as hide inter-public enterprise costs where the CPC is owned huge amounts of money from SriLankan, the military and other entities.

Making the system transparent would require a huge overhaul of the CPC and its interlinked systems, which would be a giant undertaking. But it would deliver the much-needed public reform the Government says it is intent on. An additional beneficiary would be the public as they can demand transparency from other areas such as the private bus owners who calculate annual fare increases in opaque ways without independent oversight. So colluded has the system become that it has become an yearly exercise in posturing between the owners and the Government. Who is really telling the truth?