stranglehold of Lanka's economy
destabilised Sri Lanka in the early 1980's using the
Tamil ethnic issue and training Tamil militants, India
is now trying to systematically strangle Sri Lanka on an
economic level. In a stealthy, but focused plan the
Indian government is steadily taking control of Sri
Lanka's oil and gas industry which will in the long term
create turmoil and havoc for the Ceylon Petroleum
Corporation (CPC) and may even result in the closure of
monopoly of the oil, petroleum and gas industry in Sri Lanka has
already been agreed to by Treasury Secretary Dr. P. B Jayasundera at
a high level discussion he had on July 5 this year with India's
Finance Secretary, Shri D. C. Gupta.
issues discussed between Dr. Jayasundera and Gupta at this meeting
in New Delhi and agreed upon by Dr. Jayasundera includes a pact that
India would offer a new line of credit of US$ 150 million for the
purchase of petroleum products from Indian public sector oil
marketing companies on term contracts. This would be in the form of
an Exim Bank Line of Credit. It entails a fast disbursing loan, with
the first installment to be made available in about two months from
the time of release. The total repayment period would be seven
years, including a moratorium of one year. Dr. Jayasundera has
agreed that the government of Sri Lanka would consider creating an
escrow account to take care of repayments.
the long term, the result of this agreement would mean that this new
Indian Line of Credit would ensure that the decision making process
in Sri Lanka's petroleum sector - like pricing and supplies - will
be made not in Colombo but in New Delhi!
sources further revealed that Dr. Jayasundera also agreed the
government of Sri Lanka will begin settlement of a subsidy claim
submitted by Indian Oil Company (IOC) to the tune of about US$ 14.1
million (approximately Rs. 1.4 billion), while it makes no pledge to
honour subsidies due to the CPC to the tune of Rs. 10 billion.
Jayasundera has additionally agreed that the government of Sri Lanka
"will consider favourably" India's Oil Natural Gas
Company's (ONGC) request for allocation of blocks for oil and gas
exploration in Sri Lanka.
also promised that the government of Sri Lanka will take an early
decision on the bids invited for retail marketing of Indian oil
products in Sri Lanka. This means Dr. Jayasundera has pledged to
speedily push for a conclusion in negotiations with another Indian
oil firm which has made a bid to be the third player in Sri Lanka's
this discussion, Gupta had brought to the notice of the Sri Lankan
side the abnormal increase in the export of pepper and copper rods
often exceeding the production capacity of Sri Lanka. D. C. Gupta
informed Dr. Jayasundera that India anticipated similar problems
regarding the export of vegetable oils and vanasapti from Sri Lanka.
Dr. Jayasundera offered full cooperation in curbing third country
exports through Sri Lanka particularly in the agriculture sector and
verification of rules of origin in other sectors.
was agreed that the customs authorities of both sides would meet in
the near future to work out how this cooperation can be given a
Jayasundera also promised the government of Sri Lanka will reiterate
its instructions to the CPC to undertake oil purchases through term
contracts, in view of the significantly lower cost of a term
contract as against a spot purchase. To purchase through term
contracts certainly makes better economic sense. But there is a
catch here. This clause means that the CPC would have to buy oil
only from a state oil company in India which is the Indian Oil
Company and would not be able to purchase on a tender basis from
other Indian suppliers on a long term contract that would be more
cost effective and cheaper in price.
CPC, Jaliya Medagama said he knew nothing of this discussion and
agreement with India. Medagama
expressed deep misgivings, asserting that if indeed this be the
case, then Dr. Jayasundera's agreement with India will bear very
serious consequences for the existence of the CPC.
haven't seen this agreement so it is premature for me to
comment," he said, asserting however that if it is so,
"then it is a matter bearing very negative connotations to the
CPC and one to worry about."
agreed that the entry of Lanka Indian Oil Company (LIOC) into Sri
Lanka has caused concern to the extent that unions within the CPC
are charging that LIOC has become a serious threat to the existence
of the CPC. "I think these unions are somewhat justified in
their concerns," Medagama said, adding union heads have already
detailed the crisis issues and concerns to President Chandrika
consequences of the present privatisation plan of the CPC as it is
will result finally in the CPC being left with a market share of
only 17%. Medagama too conceded this fact. At present, CPC owns 300
filling stations which entails 50% of the retail market. Separately,
600 dealer filling stations dominate the balance 50% of the retail
market. The retail petroleum market share is directly related to the
number of filling stations.
all probability, under the present terms and conditions being
negotiated by the government with the third player and the entry of
a third player will result in a breakdown of market share. Out of
the 300 filling stations owned by the CPC - which is 50% of the
retail market - 100 have already been given to LIOC. Another 107
have been earmarked for release to the third player. This means both
LIOC and the third player will possess one third each or 17% of the
market share. Collectively they would control 35% of the retail
market while CPC would be left with only 17%. The balance 50% of the
retail market is controlled by dealer owned filling stations.
in the backdrop of the present financial crisis within the CPC - its
debt is estimated to be in the region of Rs. 25 billion or US$ 250
million - there is every possibility that all 600 dealer owned
filling stations which possess a total market share of 50% would be
finally owned by the two competitors. Dealers who spoke on
conditions of anonymity said this would be because LIOC is offering
better facilities than the CPC could offer. They claim that LIOC is
offering "under hand commissions to dealers" as well as
additional discounts on sales.
a result, dealers are now refusing to sign agreements with the state
corporation unless the CPC agrees to demands for free equipment,
interest free loans, grants, etc., all of which are now way beyond
the economically strangled corporation. In fact, dealers confessed
they are waiting for the third player to enter the scene so that
competition would be stiff and dealers would stand to gain
Medagama agreed the end result would be that finally the CPC could
be left with less than a 20% market share which will gradually
reduce even further due to the present internal weaknesses within
the CPC and its financial crisis.
is of significance here is the refinery which produces about 60% of
the market share. In the now realistic scenario whereby the CPC will
have less than a 20% market share with the entry of a third player,
the refinery would face possible closure. Medagama maintained that competitors are not bound to
purchase the local production even of better quality and cheaper
than the imported product. This would effectively give full control
of the petroleum industry to the two competitors.
unions have made a strong plea for expansion of the refinery which
has been running at 100% capacity. The refinery during its 40 years
and more of existence has been profitable every single year except
one. Union heads maintain that the CPC's losses and the country's
losses today are due to imports of diesel and kerosene to meet the
country's increasing demand.
we come to the real danger in this setup. And that is that both
competitors are going to be Indian companies. One is, Indian Oil
Company which is already in the country, while the other proposed
third player is Bharath Petroleum Limited in India. The Treasury is
already negotiating terms and conditions with Bharath. And this was
discussed at the meeting in New Delhi between Dr.
Jayasundera and D. C. Gupta where Dr. Jayasundera agreed the
government of Sri Lanka will take an early decision on the bids
invited for retail marketing of oil products in the island. He was
referring to ongoing talks with Bharath making a promise to reach an
the regime of the United National Front (UNF) government a tender
was called for a third player to offer for a one third market share
in the Ceylon Petroleum Storage Terminal Limited (CPSTL) which is
the infrastructure company of CPC where ownership is to be divided
between three players.
the UNF mooted a tender to this effect the best price on offer was
by the Chinese oil giant SINOPEC. They offered US$ 88 million for a
one third market share in CPSTL. The deal included ownership of 107
filling stations plus the right to entice or persuade dealer owned
outlets into their network.
cabinet paper was prepared to this effect, but never submitted as
political turmoil broke out and Sri Lanka faced yet another general
election. When the government changed in April this year, the new
United People's Freedom Alliance (UPFA) altered the goal posts and
refused the Chinese full ownership of the 107 filling station. The
UPFA insisted the government must retain a 51% ownership of the
stations. The Chinese were not interested and pulled out of the
deal. However, the Indian company Bharath expressed an interest and
the government is expected to soon conclude negotiations with this
company. This is what Dr. Jayasundera meant when he met with Gupta
and promised to take an early decision on bids invited for retail
marketing of oil products in Sri Lanka.
already fully owns China Bay for import and delivery of oil
products. This is where the future of the refinery and the CPC is
balanced on a tight rope and whether they will make it to the end of
the line already seems shaky.
is why the entry of LIOC has already become a serious threat to the
existence of the CPC. When questioned, Medagama admitted that it has
been rumoured that a long term plan of LIOC is to get control of all
CPC owned filling stations in lieu of government subsidies to be
paid to them. Medagama however maintained he had no evidence that
this is true, but speculation to this effect is rife.
meantime voiced concern that the refinery cannot operate with a 60%
production in the event CPC market share is reduced to less than
20%. "This will in all probability result in the closure of the
refinery," he said.
the market share of CPC has reduced drastically after the entry of
LIOC, its overhead costs have increased as a result of benefits
being given to dealers as CPC continues to strive to retain their
outlets with the corporation. Some of these benefits have included
filling stations being upgraded, CPC incurring high interest
payments for bank overdrafts given to dealers, unpaid subsidy claims
exceeding Rs. 6.3 billion owed by the Treasury, unpaid monies from
the state sector exceeding Rs. 4.8 billion and an exchange loss of
more than Rs. 1.2 billion when the rupee depreciated from 98 to 102
against the dollars.
from Sapugaskanda terminal have already been suspended wasting a
huge investment while CPC continues to pay back the loan. The
overhead costs of CPSTL has already gone up where the 'throughout'
charges have been increased beyond amounts allocated in the price
LIOC has already spoken with the government to obtain approval to
supply islandwide from China Bay at a cheaper cost. They are in a
position to do this by using excessive concessions given to them in
the agreement. Going by Dr. Jayasundera's discussions in New Delhi
it looks like LIOC will definitely secure the necessary green light.
What would then happen to CPSTL and its staff is the multi million
dollar question which even CPC Chief, Jaliya Medagama has no answer
Petroleum Limited (BPL) will buy a one third share in CPSTL. Valued
at US$ 45 million this share allocation is presently owned by the
Treasury. The government has already agreed that BPL will have total
freedom to negotiate and own the 600 dealer owned filling stations
which possesses a 50% market share in the retail marketing sector.
BPL has purportedly agreed that the Treasury may retain 51%
ownership of the 107 filling stations to be allocated to them.
However, the Treasury will not have any control over the business or
be entitled for any profits other than 51% of the lease rental for
the 107 filling stations.
sources revealed the third player will function as a subsidiary of
BPL and probably be named 'Lanka BPL.' Lanka BPL, they said, will
own a one third share of CPSTL, and will buy or lease as many dealer
owner filling stations as possible. They will in addition own via a
lease agreement 107 filling stations at present owned by Modern
Petroleum Marketing Limited (an arm of the CPC) and partly owned by
pointed out by a financial analyst what is noteworthy here is the
value of the third player in the petroleum sector lies in the
petroleum business itself and not in the lands of the 107 filling
stations. The total investment by BPL of an estimated US$ 65 million
can easily be recovered within a year through the profits of this
for his views on the current controversy regarding entry of the
third player and future of the CPC, Daham Wimalasena, its former
chairman said, "five months ago entry of a third player was
which offered US$ 88 million to be the third player would have
helped wipe off an appreciable part of the debt incurred by the CPC
during the years 2000 and 2001. The debt position if CPC received
US$ 88 million would have been adequate and manageable in early
2004." Wimalasena however asserted that at present the
financial and competitive position of the CPC has deteriorated
drastically to, "A hopeless position. In this context the entry
of a third player must be reviewed," he asserted.
this backdrop, the tragedy for CPC is that it made a Rs. 9 billion
profit in the year 2002 with the old pricing formula. The current
revised formula has additional profit of about Rs. 4.6 billion per
year as guaranteed profits for the marketing companies through the
may well be in a position provided it holds a two third share to pay
back debts in two or three years if the government is able to
restructure its debts to a long term loan through the government.
major reason for CPC's growing debt has been the government's
refusal to adjust prices to be in line with international prices. So
far it is the CPC which has been subsidising the consumer. The
Treasury and state agencies owe CPC an estimated Rs. 10 billion
while the overall debt is in the region of Rs. 25 billion.
the CPC has paid the Treasury about Rs. 25 billion every single year
without default or delay as taxes and duties. In 2001, when the
Treasury did not approve a price increase, CPC losses amounted to Rs.
16 billion. Yet, the Treasury took its pound of flesh - as much as
Rs. 22.5 billion.
2004, the Treasury is expected to do even better. The "Treasury
Take" could be around Rs. 30 billion irrespective of whether
CPC has a profit or loss. The truth of the matter is that with every
price increase the consumer suffers, but the Treasury gains. Even
much of the sales proceeds of its assets were retained by the
Treasury when it should have been given to the CPC to offset its
pointed out CPC's financial, operational and administrative costs
are soaring with misuse of its resources and a breakdown in
discipline. "Conversion of the CPC to a fully government owned
company with professional management devoid of political tinkering
is the answer," he said, adding "CPC is a Rs. 100 billion
turnover organisation - the only one in Sri Lanka. CPC can be
resurrected within two years if there is no political interference
in pricing and administration. Also there should be no further
downsising or disintegration of its existing market share," he
in a third player at this juncture appears to be more damaging than
of any real benefit. The total revenue from the third player is to
be in the region of about US$ 65 million. This is while the monthly
fuel import bill at the CPC is about US $ 90 million. So is there
any value in this sale for Sri Lanka in the long term?
companies such as LIOC and BPL will earn back their investment in a
matter of two to three years and profits will be taken out of Sri
Lanka in US dollars from the island's own local market.
to cap it all is now Sri Lanka's blanket approval to India to
allocate blocks for the Indians to conduct oil and gas exploration
in the island. This is what Dr. Jayasundera has agreed to when he
met with Gupta in New Delhi this year. He has done so ignoring the
fact that bids should be called and ensuring Sri Lanka's natural
resources are protected and not exploited.
quote Medagama on this issue, he said, "This is a very serious
aspect if indeed the Treasury has already entered into some kind of
an agreement with India." Medagama reiterated that government
officials early this year were hosted in Houston where it was
explained in great detail that if oil and gas exploration is to
begin in Sri Lanka it must do so under a transparent bidding process
which will also ensure the sites are protected and not exploited by
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