CPC conundrum

Following are excerpts of an interview with Daham Wimalasena, former Chairman of Ceylon Petroleum Corporation:

Q:  What are your views on the recent price increases? 

A: Price increases are inevitable as fuel prices must be increased with increased crude oil prices. Around 92% of the fuel prices are determined by crude oil prices. However, the fuel price increases within the last 10 years cannot be fully justified. The prices of crude oil cannot be controlled, but there are the other cost factors which could be controlled. This Government has failed to do so. In fact they have aggravated the problem.

Q:  Can you specify the factors which could be controlled? 

A: There are many, but I will touch on some of them. With the Government delaying or not approving the justifiable price increases at the time that crude oil prices have gone up, the CPC has to incur heavy losses at the retail level. Another reason is that the Government does not want to increases the prices for political reasons such as elections. These losses due to delayed price adjustments are met by borrowed funds from banks at very high interest rates. This also adds to the selling prices. The finance costs on the retail prices are now very significant. This is something that the Government has failed to realise or failed to control. This is a controllable cost and it is indeed unfortunate. Finance cost is Rs. 19 billion a year! You and I are bearing this burden.

Another reason for the high cost is the unlimited credit given to State institutions such as SriLankan Airlines, Mihin Airways, Sri Lanka Railways, the armed forces and the Police. These institutions settle their dues to the CPC only after settling their other dues to other customers and the CPC is the last in the queue in their list of priorities.

The granting of unlimited credit and the delay in the collection of debts is covered by borrowing more funds from banks at high interest rates. All these add to the consumer price. Again, we the consumers have to bear the burden. The CPC must take the full blame along with the Ministry for negligence and lack of determination to collect what is due to the CPC. Even during the height of the war, CPC did not have so much money uncollected from these State institutions and the forces.

Q:  Why haven’t you mentioned the CEB, which owes the bulk of the receivables to the CPC? 

A: This requires a separate interview and the CEB is the primary cause of the predicament that the CPC is in right now. The CEB has committed many mistakes and some of the mistakes can be attributed to the lack of a farsighted Government policy. The CEB’s inefficiency is not known to many. Losses in transmission, wrong technology used and failure to advice the Government on extraordinary costs of their new projects are some. Norochcholai and Kerawalapitiya will continue to be burdens on the consumer.

I am not aware of any coal importing country building new coal power plants other than in Sri Lanka. New coal power plants are now established in coal mines itself. The site is wrong, technology is poor and the cost is extraordinary. CEB has misled the Government. In Kerawalapitiya, the CEB misled the Government when it agreed with the developer that combined cycle power plants could be run on ordinary fuel oil. The result is continuing breakdowns despite the use of a better quality and higher priced fuel oil.

It is common for CEB to blame the CPC for high electricity prices on high prices the CPC charges on fuel supplied to them. While I agree that some CPC fuel prices are too high, the CEB has the opportunity to directly import their fuel requirements through the CPSTL and yet does not make use of this opportunity. Why? It will show everyone their own incompetence and corruption.

Q:  The CPC is now importing more than 60% of its requirement in the form of finished products as petrol and diesel. What is the impact of this in relation to consumer prices? 

A: This has become a very significant influence on the price. The CPC refinery at its present capacity, despite its age and poor maintenance, is still capable of producing diesel and petrol at a much cheaper price than imported fuel. The expansion of the refinery has been a long-felt need after 2000. In 2002, there was a proposal by an American company to set up a new refinery on a BOOT basis. This proposal was rejected by the minister in charge and he went around the world looking for investors. It was the same with the minister who followed. Both ministers did not want to admit that the Government had no funds to invest and that no investor would deal with the CPC, which was chronically ill financially. Financial loss by not refining all our fuel requirements locally has caused a huge loss to Sri Lanka and a big burden to the consumer.

Q:  Didn’t the Iranians give us a proposal to improve the refinery? There was also a foundation laid for a refinery in Sapugaskanda. Your comments? 

A: The Iranians are the least competent people to provide a proposal for the development and the expansion of a refinery here or elsewhere. Their own refineries have not been upgraded for well over 50 years and they have to import petrol and diesel despite being one of the biggest exporters of crude oil! We are very fortunate that the deal failed. It would have been another white elephant.

Q:  This Government has proceeded with gigantic development projects such as new roads, highways, port expansions, etc. Can all these be sustained if the petroleum prices continue to increase along with electricity prices? 

A: No airport or port could survive without cheap fuel and we don’t have it. In fact the original justification of the southern port was that it could serve hundreds of ships passing the southern coast in bunker fuel, as compared to the Middle East and Singapore. We cannot supply these without having an oil refinery. Even the Colombo Port and the Katunayake Airport have not realised their full potential as fuel prices have not been competitive. The tourism industry will also be facing severe challenges in the future as it will be cheaper to spend a holiday in Bangkok than in Nuwara Eliya. After the war development of infrastructure was the only option. But what we have is lopsided development. The power and energy sector should have received priority – especially a refinery.

Q:  If you were the CPC Chairman once again, what would you do to rectify the culture of unpredictable price increases decided by political considerations? 

A: No way. I have had enough of the CPC. I have resurrected it twice; once in 1979 and again in 2003. It is now difficult to come out of the mess. But to answer your question, I will introduce a price formula with a Government guarantee that the pricing formula will not be abandoned again. You will be surprised to see the effect it will have on the CPC. It will be creditworthy again. Between 2002 and 2004, CPC borrowings were on better terms than the Treasury could manage from the same banks. What is more, it will pave the way for investments in the sector as well.

Q:  A pricing formula will restrict the Government from using petroleum prices for political survival. Will it agree to such a proposal? 

A: By not having a pricing formula, the Government will be artificially suppressing the prices for political needs but will be short-sighted for short-lived gain, as we see the adverse effects of the short-sighted policy now, whereas a transparent pricing policy was in fact accepted by the consumer when it was in force. The pricing policy could also provide safeguards to the Government’s own reasonable interests.

Q:  If the pricing formula is a must, why do you think that the Government is not implementing it now? 

A: Short-term political gain is one reason and the second is, the higher the prices of the petroleum products, the higher the ‘take’ by the Treasury. In 2003, the Treasury ‘take’ from the CPC was Rs. 30 billion. Now it is Rs. 60 billion. If the cost of living is to be maintained at a reasonable level, petroleum should not be targeted as a prime source of Government revenue. Financial discipline and transparency in pricing policy, purchasing and operations are a must if the burden to the consumer is to be minimised.

Q:  Who in your opinion is to be blamed for the present mess in the CPC? 

A: Both the UNP and the SLFP Governments must take the blame. The SLFP Government left the CPC with excess staff and huge debts in 1977 and 2000. The UNP followed by selling profitable businesses of the CPC – the blending plant and bunker businesses – in 1995 and 2001 to balance the national budget.

Q:   You are also responsible for selling a part of CPC to LIOC. Your comments?

A: Ranil Wickremesinghe wanted to sell the CPC 100% to settle the huge national debt. It was my Minister Karu Jayasuriya and I who prevented it. The compromise was the selling of one-third of the retail network. The refinery was to remain with the CPC. If there is no political interference, CPC can and will be a viable venture that would benefit the consumer.

Q:     Recently there has been a spate of allegations of corrupt purchases of sub standard products at high prices. Your comments?

A: This happens when you move away from well-established and transparent purchasing scheme on an open tender system. CPC is now engaged in negotiated contracts with so-called State-owned entities at prices which are not market related. Since the price is negotiated and not generally market-related, corruption is possible and likely.