Fuel a price change

Saturday, 30 June 2012 00:57 -     - {{hitsCtrl.values.hits}}

India on Friday slashed fuel prices in a bid to bring relief to consumers, putting the stagnant oil prices in Sri Lanka under stronger focus. As the rupee continues to dip, there is ever-increasing pressure on the Government to take action on keeping the cost of living bearable – a tough task at the best of times.  

Oil prices remain a hot topic. Even Parliament had a discussion over it, with the Opposition calling for a reduction in prices but the Government hedging against passing on the savings from a global cost decrease to cover at least part of the Rs. 60 billion losses incurred over successive years by the Ceylon Petroleum Corporation (CPC).

Policymakers have long called for a transparent system that would allow for price flexibility so that when prices increase in the global market, they are passed directly on to the consumers rather than allowed to bleed a public company dry. One can argue that even if the Treasury releases the funds to cover this colossal debt, people would still end up paying as the costs would come from their tax money. Conversely, if world prices decrease, the relief would be directly passed on to the public.

Historically, governments have sought to subsidise basic needs, such as fuel, energy, transport and water and sanitation. Generalised subsidies were more justifiable when Sri Lanka was a low-income country and a higher proportion of the population lived below the poverty line. It was also more affordable when Sri Lanka received large amounts of grants and concessional loans.

However, Sri Lanka is now a $ 2,800 per capita income country and the poverty level is 8.9%, according to the Government. The Pathfinder Foundation points out that as a lower-middle-income country, it is no longer eligible for concessional assistance. Furthermore, it has been argued that the underperformance of State-Owned Enterprises (SOEs) undermines the macroeconomic stability needed to access the financing required from international capital markets for the country’s development programmes. This new environment attaches even higher priority to addressing the underperformance of SOEs.

It must be conceded that the losses of SOEs are due to non-cost-reflective pricing policies, operational inefficiencies and poor governance and the recent move to more cost-reflective administered prices is a welcome development. However, it should be accompanied by a concerted and accelerated campaign to strengthen the ongoing efforts to improve the performance of SOEs.

The Committee on Public Enterprises (COPE) has repeatedly pointed out the massive financial and resource mismanagement taking place in SOEs, particularly in the CPC. Sub-standard fuel imports, sporadic price increases, financial scandals and strikes are among the many ways that the public has experienced the CPC’s inefficiency – many shortcomings that go routinely unpunished.

As pointed out by the Pathfinder Foundation, there are 81 SOEs and the Government is also a partial owner of several entities established under the Companies Act (2007). The total turnover of SOEs amounted to Rs. 954 billion in 2010. The five largest SOEs (CEB, CPC, Sri Lanka Ports Authority, Bank of Ceylon and People’s Bank) exceeded the turnover of all 245 companies listed in the Colombo Stock Exchange. In addition, SOEs accounted for 17.2% of GDP and employed 160,000 people (2010).  

Such massive statistics show that the ever-increasing losses of SOEs cannot be sustained by the Sri Lankan economy. The country can no longer afford to overlook the negative effects of underperforming SOEs. Failure to take effective action can have severe adverse consequences for ordinary people if markets lose confidence in Sri Lanka’s creditworthiness. In the short term, the cost of living will remain challenging due to the sustained prices of fuel. Surely, it is time to change.