Tuesday, December 23, 2008

Some thoughts on the "pricing mechanism" of petrol

The highest courtyard has made an order on 17 December 2008 that the price of petrol be attuned on the foundation of the method as set out in take possession of A, and that the advertising price of petrol be abridged to Rs 100/= per litre with effect from midnight of 17 December 2008.
In this link, the following points are of significance:
1. Impact on income
1.1 The above gauge is predictable to reduce Government profits by Rs. 14 billion during the year 2009, which is senior than the whole cost of the Samurdhi reimbursement
1.2 For the past more than a few decades, the Sri Lankan Government income has been insufficient to meet its spending. so, the Government has had to option to borrowing to meet its total spending. Accordingly, if the taxes on the fuel crop are to be abridged or revised with a view to plummeting the home retail prices, this would decrease government income.
1.3 The above affirmed a reduction in income will then have to be compensated by :-
1.3.1 A corresponding decrease in recurrent or assets expenditure
1.3.2 The burden of additional taxes on sure other items. The burden of taxes on other items to get well the income loss would of course result in increases in the prices of those items, as the income will have to be generated through not direct taxes, in which event the final burden will also have to be approved on to the People; or
1.3.3 The reduction of the subsidies provided to the most susceptible segments of our People; or
1.3.4 The matching increase in borrowing which would both add to price rises, and the debt load of the country, thereby having an unfavorable impact on the on top of two key macro-economic variables of the financial system.
1.4 Needless to say, none of these alternative would help the People of this country.
2. Possible Impact on Powers of Parliament
2.1 The imposition, taking away or change of exercise duty, civilization duty or any other duty which has been accepted by assembly via the financial plan on proposals by the Minister in accuse of the subject of Finance (who is responsible to Parliament for the finances of the country), would be a exit from recognized norms + conventions. The government, which is the Supreme power in the control of Finances cannot, and should not, abrogate such authority.
2.2 Any alter in that state of affairs as a result of a Court Order could chauvinism the power that Parliament exerts over the money.
3. The Court ordered Pricing Scheme being highly Arbitrary
3.1 The essence of the appeal has been that the price of petrol has been fixed by the Government in an random manner. However, Annex A also refers to a change in civilization duty based on a new randomly fixed selling price of Rs 100/=. If so, the new pricing scheme ordered by Court could attract the same fault.
3.2 Further, the items of costs as cautious in the compilation of the new pricing arrangement, appears not to have been factored in.
3.3.1 In fact, the item "Overheads counting profit margin" has been unspecified be a constant figure of Rs. 9/71 per litre. However, LC charges, attention costs, bank charges, etc. could vary materially, based upon the price of the manufactured goods. Hence, such an supposition is not tenable.
3.3.2 In this computation, CPC's "profit margin" has also been randomly limited to a particular figure. However, every business needs incessant new asset. In the same way, CPC needs to :
(a) Maintain its plant and equipment at a high level of competence,
(b) Make considerable new investments in order to get better its service delivery,
(c) Increase its plant capacity at a variety of times,
(d) Improve its sharing network,
(e) Upgrade its security standards,
(f) Strengthen its financing capabilities, etc.
If, so CPC is forced by a exact low profit fixed by an exterior force, it is probable that the CPC will fall short of the severe international principles that it must uphold, and that may quite with no trouble lead to, at some prospect date, for the CPC to face a likely privatization, on the basis that its financial power has dwindled or, that it is cash short of money, or that it is cover behind in growth. Therefore, the burden of a limited random profit edge could significantly affect the survival, continuance and enlargement of the CPC in the medium to longer term.
3.3.3 In the Court heading for computation, the swap rate has also been in use as a constant figure at Rs 110.73 to a US$1.00. Even as of 19/12/08, the exchange rate was approximately Rs 113.50 to a US$1.00. On that basis, a sum of nearly Rs. 3/- more than the figure used in the computation, has been recorded. Using a fixed swap rate is clearly may not be wise in today's worldwide volatile circumstances and needs to be revisited.
4. Basis for Reduction misguided
4.1 The main proposal upon which the petrol price decrease has been based upon is contained in the judgement of 15 December 2008. In such judgement, the Supreme Court has stated as follows: "if the 'Hedging agreements' had been in force, the cost per tub of petrol would have been about US$89. In the situation, there is a considerable reduction in the cost per barrel of petrol which resulted from the temporary order made by thus Court pursuant to the supposed infringement rights of the petitioners. Court is of the view that it would be arbitrary and unreasonable to impose heavy Government and fiscal levies in effect absorbing the gain made from the order complete by this Court in staying the operation of the 'Hedging agreements'"
4.2 This statement suggests that the Court assumes that the sum that was the subject matter of the petition is a "gain" for the CPC, and that therefore it could be passed through by the CPC to the People. However, such a dependent payment from the CPC to five banks was a matter in argument. Further, based upon the facts currently being revealed, there is sufficient reason for the CPC to dispute and repudiate such a payment, on the basis that the banks were amiss in "selling" them the copied products in question.
If so, the CPC would not be grateful to create any expenditure on the supposed oil hedging dealings. Hence, there would have been little danger of the amounts claimed by the banks from the CPC being, in fact, paid without demur. In such circumstances, the supposition that the price per barrel of oil would be US$89, and that due to the Court Order, it would now not be payable and hence, a "distribution" of such a apparent benefit to the populace is in not of necessity a valid proposal.
Further, the hedging agreements that are in argument are based on basic oil, diesel and petrol. By attempting to assign a apparent gain as a result of the suspension of these agreements to reduce to price of petrol is may not be a viable proposal.
5. Impact on Foreign Exchange
5.1 On a simple financial analysis, the decrease in taxes on petrol will add to the insist for petrol as well as the demand for motor vehicles. All these, in turn will considerably increase the outflow of foreign exchange from the country, which is toddy gathered at great give up and effort. The current international Credit crisis and the worldwide economic down twist have also substantially abridged the foreign money liquidity in the worldwide market.
5.2 In such a state of affairs, the reduction of the petrol price will inflict a huge burden on the country which is opposite the confront of using its limited foreign treasury in a cautious manner to balance the many macro-economic factors of the economy.
5.3 The mathematical computation which has been relied upon by Court to create this Order does not come into view to factor in this very significant feature and that fact undermines the foundation of this "Price formula".
6. Principle of Taxation of Petroleum Products
6.1 The fundamental principle in the present tax structure on petroleum crop is that there is a higher tax on petrol, since petrol is used mostly for private transportation. In difference, diesel and kerosene are used mostly for public and goods transportation, industries and for illumination and cooking. Therefore, moderately lower taxes are levied on diesel and kerosene so that such benefit would be to the general public, particularly the low profits groups, and those who are using diesel and kerosene for financial action.

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