SPOTLIGHT

Indian Oil on slippery slope with CPC

By Frederica Jansz 

A STRATEGIC partnership between the Ceylon Petroleum Corporation (CPC) and Indian Oil Company (IOC) entered into in September last year following Prime Minister Ranil Wickremesinghe's visit to India in January 2002, is already falling apart at the seams following accusations of unfair play being levelled by both partners at each other.

Kishan Gomes' letter charging the Indians with selling diesel oil using the Caltex brand names

The letter to the Treasury from Sri Lanka Customs stating the violation in excise duty committed by the Indians

Not only CPC but other business entities are also charging that the Indian company is playing dirty and attempting to steal not only the business of CPC but that of private entities as well by resorting to unethical business tactics. Charges are also being levelled that the Indian company is swindling even the government of Sri Lanka by trying to smuggle in oil products imported from India and avoid paying the required excise duty.

Customs are already in the midst of an investigation against IOC for bringing into Sri Lanka shipments of kerosene oil which the Indians have allegedly declared as jet aviation fuel in order to avoid paying excise duty. Kerosene for domestic use is subject to an excise duty of Rs. 1.25 per litre whereas jet aviation fuel is free of excise duty.

There are two grades of kerosene oil. One is the kerosene oil used for domestic purposes, which according to laws in India is banned from export. The second grade believed to be of a slightly superior quality is referred to as jet aviation kerosene and according to Indian law can be exported. Customs investigators are suspecting IOC of classifying the kerosene oil imported from India to Sri Lanka as jet aviation fuel in order to avoid paying customs duty.

On August 19, Director General, Customs, S.A.C.S.W. Jayatilake wrote to Treasury Secretary, Charitha Ratwatte stating that Lanka Indian Oil Company (Pvt) Limited (LIOC) have so far brought into Sri Lanka four consignments of oil classified as jet A-1 aviation fuel. The total quantity is 38,262,634 metric tonnes and the value declared is Rs. 925,212,211.95.

Loss to the government

Jayatilake asserts that except for the last consignment, IOC has paid no excise duty at the time of importation, resulting in a loss of revenue to the government of Sri Lanka of Rs. 37.8 million.

"So far we have not yet established whether LIOC has imported domestic kerosene oil or the second grade which is referred to as jet aviation kerosene or whether it is jet aviation fuel. This difference needs to be examined," Jayatilake asserted.

He maintained that Sri Lanka Customs is also trying to establish if LIOC has in fact imported jet aviation fuel and is selling it as such which he said "would be a serious revenue fraud committed by the Indian company."

If it is established that the product is indeed domestic kerosene oil, not only will IOC have committed an offence by attempting to deceive Sri Lanka Customs and avoid paying taxes but would also be in violation of Indian law which the Indian High Commission in Colombo confirmed prohibits the export of domestic kerosene oil.

IOC is a major government owned entity in India. It is also one of the Fortune 500 companies.

As an initial step to create competitive conditions in the petroleum sector, IOC was invited last year by the government to make use of the oil tank farm situated at Trincomalee. The invitation was extended in an attempt to promote a strategic partnership with CPC and thus prevent possible unfair market practices by other multinational oil companies.

But what indeed has now happened is a fallout whereby the CPC is accusing LIOC of resorting to unfair market practices, attempting to seriously marginalise the CPC as well as increase their profit margins thereby increasing petroleum prices for the consumer.

The Premier last year invited IOC to manage the oil tank farms situated at China Bay in Trincomalee as only a fraction of the tanks were being used while the bulk stood neglected and in need of huge investments for repair and rehabilitation.  The tanks were built during World War II by the British navy and taken over by the government in 1957.

Subsequently, CPC, which was set up as a state owned enterprise in 1961 took over the ownership of the oil tanks by settling the full value of the tanks estimated at that time. This oil tank farm in fact is considered to be one of Sri Lanka's most important strategic assets and is located within the defence force complex in China Bay.

When Economic Reforms Minister Milinda Moragoda presented a cabinet paper to promote the participation of IOC in Sri Lanka in May last year, he noted that because of its strategic value, the development of this oil tank complex was specifically included in the Indo-Lanka agreement.

In this context, he noted that this initiative would be important to Sri Lanka's national security and energy security interests. Moragoda sought cabinet approval to lease out the oil tanks in Trincomalee on a long-term lease to a local company to be incorporated by IOC.

The terms and conditions of the lease were later worked out by CPC and PERC and IOC was incorporated as Lanka Indian Oil Company (Pvt) Limited.

Power and Energy Minister, Karu Jayasuriya also presented a cabinet memorandum on this subject the same day as Moragoda did, reiterating that the government proposed to assign to LIOC 100 out of 300 filling stations belonging to the CPC.

Due payment

As a result, 100 of CPC's best filling stations were handed over to IOC after LIOC paid a down payment of US$ 2 million on the condition that the Indian firm would pay the balance due once a value assessment of the 100 filling stations was complete. This balance payment would be mutually agreed upon by both parties to the MoU, namely CPC and LOIC.

A valuation was subsequently conducted by Ernst & Young who placed the value of the 100 filling stations at approximately Rs. 9.8 billion or US$ 100 million. What has now shocked government officials is that LIOC has offered a pittance, which is less than half the value placed on the 100 filling stations.

LIOC in addition is required to pay an equity of one third for common storage facilities shared with CPC at the Ceylon Petroleum Storage Company.  LIOC operates 15 oil tanks at Trincomalee, which were handed over by the government to the Indian firm for a nominal yearly lease of Rs. 100,000 and involved no other commercial transaction.

On February 7, Minister Karu Jayasu-riya issued a license to LIOC to import, sell, supply or distribute petroleum products for sale in the 100 outlets purchased from CPC for a period of six months. This licence expired on August 6.

On June 17, LIOC requested the energy supply committee to grant a licence without restrictions to import, procure, store, sell, supply and distribute petroleum and petroleum products in terms of the agreement signed with the government and CPC.

The CPC however strongly objected. In a letter to Charitha Ratwatte on July 11, CPC Chairman, Daham Wimalasena voiced serious concern. Wimalasena maintained that granting an unrestricted licence to LIOC prior to reaching an agreement on the price for 100 filling stations and for the purchase of one third equity in a proposed common facility terminal company would effectively create an uneven playing field as far as Sri Lanka's petroleum market is concerned.

He stated that if LIOC is allowed to acquire franchise dealers at this stage, while CPC continues to deliver products incurring all costs, it will affect the strategic value placed as this value is based on the increase in the profitability in acquiring a bigger share of the remaining market in addition to what is given to them via the 100 stations.

LIOC at present have got a 15.4% share of the market through the 100 stations and the assumption is that they will eventually acquire at least one third of the market if not more in the present context. 

Furthermore, Wimalasena points out that the value realised from the third player will reduce substantially as the valuer will take into account the market share of the remaining franchise stations.

The offer at present made by LIOC for the 100 stations is way below the values given by Ernst & Young. Wimalasena has in his letter to Ratwatte pointed out that if LIOC were to engage in protracted negotiations, CPC will not be able to continue to service bank debts and could even get into a default situation as the state company would lose a sizeable portion of its present sales.

Serious problems

Wimalasena further charges that CPC is already experiencing serious problems where recoveries from LIOC is concerned and that LIOC withholds payments for long periods quoting nebulous reasons. LIOC at present owes the CPC an estimated Rs. 200 million in unpaid dues. It is believed that LIOC at present makes a monthly profit of Rs. 1000 million from the 100 filling stations as most of their costs including the finance costs are borne by the CPC.

Wimalasena charges that this has enabled LIOC to offer various incentives to private dealers to lure them away from the CPC and the CPC is finding it extremely difficult to match these incentives, as the state company is not allowed to keep a margin. Wimalasena in effect maintains that LIOC is not abiding by the rules of market competitiveness in a level playing field but resorting to unethical methods in order to achieve greater profitability and thus harm the business of CPC.

In addition to Wimalasena's concerns, on July 15, Managing Director, Chevron Texaco and Caltex Lubricants Lanka Limited, Kishu Gomes wrote to Chairman, IOC, M.S. Ramachandran stating that LIOC is guilty of committing a serious violation of business ethics.

In this letter Gomes states that LIOC is using similar brand names such as Super DS 30, Super DS 40, and Super DS 50 and in some instances DS 40 to mislead customers into believing they are purchasing the well renowned Caltex lubricant. IOC in fact has different product names for these diesel engine oils such as Servo Super 10 and Servo Super 20-50. However the use of 'DS 40' and 'Super DS 30-50' by LIOC, Gomes maintains is something new and very recent.

He had told Ramachandran that he views this new development as an act to deceive customers in Sri Lanka who are not used to referring to Caltex products by these names.

"As you would know this is not an accepted business tactic under any circumstances or by any standard and we expect a much higher standard of ethical business conduct from your esteemed company," Gomes states in his letter.

Complaints against CPC

Meantime, Managing Director, LIOC in Sri Lanka, M. Nageswaran has also in a letter to Charitha Ratwatte on July 4, complained against CPC stating that CPC has not facilitated or assisted LIOC to enter into arrangements with dealers who own retail outlets even in instances where such dealers have indicated a desire to terminate their current arrangements with the CPC. On the contrary he charges CPC with trying to dissuade the dealers "though subtle coercion."

Daham Wimalasena has in a strongly worded reply to Nageswaran pointed out that he cannot understand how the CPC through coercion, subtle or otherwise, can influence independent businessmen from making commercial decisions of either joining LIOC or remaining with CPC or wait for the third player.

He asserts that in fact some of the 100 dealers who were assigned to LIOC strongly opposed the transfer and even went to the extent of seeking political support at the highest level opting to remain as CPC dealers.

Some of them Wimalasena reiterates even threatened legal action, which was avoided as a result of CPC prevailing on them not to do so.

Nageswaran meantime asserts that the licence issued to LIOC is very restrictive and permits LIOC only to import, sell, supply or distribute petroleum products required for sale in 100 outlets purchased from the CPC valid for a period of six months. He adds that as a result LIOC is unable to supply or distribute petroleum products to dealers who own retail outlets and wish to enter into dealership agreements with LIOC.

Wimalasena maintains that the agreement with LIOC clearly deals with the 100 stations released and does not cover supplies to additional stations. "The method of access to dealer owned stations and the supply thereto have been explained to you on far too many occasions to warrant further mention here," Wimalasena asserts.

Violation

The CPC Chairman adds that LIOC's current position of operating 100 best stations without having to make any worthwhile investment in itself a violation of the principle of a level playing field. He adds that CPC has extended to LIOC a considerable amount of interest free credit in order to ensure that the spirit of the agreement is upheld at all times.

Wimalasena charges that in fact what has now transpired is that as a result of an MoU between LIOC and the CPC sealed on September 5, 2002, has effectively killed the concept of a level playing field and sought to obtain for IOC a very dominant position in Sri Lanka's petroleum market.

Nowhere in the world the CPC Chief states is a ready-made business given free. In this context to further expect an unrestricted licence and supply franchise outlets without payment Wimalasena maintains is both unreasonable and unacceptable.

In view of the concerns raised by the CPC Chief, Ratwatte on July 8, noted that the request by LIOC to grant a license with no restrictions to import, procure, store, sell, supply and distribute petroleum and petroleum products in terms of the agreement signed with the government and CPC cannot be accommodated.

Instead the Treasury has decided to grant a temporary licence with effect from July 9 this year to LIOC until such time payment has been made by the Indian firm for the purchase of one third of the equity of the proposed common facility terminal company and for the 100 filling stations.   Negotiations in this regard are at present underway between LIOC, PERC, CPC and the government.

Wimalasena meantime in his letter to Nageswaran has urged LIOC to treat this business as a commercial venture particularly because the Trincomalee tank farm which IOC got on non commercial terms, has now vast commercial potential in a peaceful Sri Lanka and that continuous agitation for more concessions will only further deteriorate the present uneven playing field.

Terms and conditions to an agreement between IOC and CPC was initiated according to a cabinet paper presented by Minister Karu Jayasuriya last year where it was decided to divest and lease 100 CPC owned filling stations to IOC on terms to be negotiated.

BOI status

IOC in addition was granted BOI status, which means the company is in a position to import dispensing pumps at a much cheaper price than the CPC which does not have BOI status. The CPC is charging that LIOC is now offering these pumps free to private dealer owner outlets, which consist of another 400 filling stations around the country.

Technically, this offer should be made to only one third of the private dealer owners as due to the present restructuring of CPC, the government has called for bids for a third player to compete in a level playing field with a strong regulatory authority in place.

The government is attempting to bring in a third player for which another 100 filling stations belonging to the CPC will be allocated after the chosen company pays a satisfactory fee based on the valuation of the filling stations.  However, by LIOC now offering the pumps to any number of private dealers they would be in a position to secure some of the best filling stations around the country.

LIOC it is alleged is in fact importing the expensive US made Tokheim pump at a cost of over Rs. 400,000, which is being offered to private dealer owner outlets at no cost to the owners.  In contrast, the CPC is able to purchase the cheaper dispensing pumps L&T which are of Indian make or another dispensing pump made in China, which is less costly. The Indian pump is purchased on the Indian line of credit.

LIOC were granted BOI status after proving they would invest US$ 5 million to upgrade the 100 petrol stations assigned to their management. However, they are now being accused of using these monies to lobby private owner outlets as well.

The Sunday Leader in fact has photographic evidence of the IOC having already established one such pump at a private dealer owner outlet at Battaramulla called Nadeesha Travels and Tours (Pvt) Ltd.

LIOC is also offering private dealer outlets to maintain the pumps and tanks, to repaint buildings, supply generators, lend attractive credit facilities and even supply furniture and sign boards.

Our attempt to contact Nageswaran at LIOC failed as he is presently in India. LIOC said they did not have a phone number for him in India.

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