A week of blunders as fuel prices rise

Former CBSL top official stopped investigations, details were in file number 312–2015 CB, but is the file intact now?

Sri Lankans were this week treated to a huge dose of bad governance as the feud between the ruling coalition partners – the Sri Lanka Freedom Party (SLFP) and the United National Party (UNP) – hit a new low.

The latest episode is over the fuel price increase. According to an official announcement at midnight previous Thursday, publicised by the media on Friday July 6, Petrol (Octane 92) was increased by eight rupees to Rs 145, Petrol (Octane 95) by seven rupees to Rs 155, Auto Diesel by nine rupees to Rs 118 and Super Diesel by ten rupees to Rs 129 per litre.

On that Friday morning, motorists who queued up outside fuel stations were in for shock therapy. They were told that prices had gone up. Like most Sri Lankans, as revealed in these columns last week, President Maithripala Sirisena, also learnt of the increased rates only on Friday (July 6) morning, or so he said. He ordered an immediate halt to the increase.

That Presidential order, pathetic enough, had to be carried out through Area Managers of the state-owned Ceylon Petroleum Corporation (CPC). They were hurriedly telephoning fuel outlets to put on hold the new prices. Most agreed, some asked for written instructions and others put up shutters for a day due to the confusion. Sadly there was no official announcement leaving the public in the dark over what was going on.

By hindsight it became clear that the writ of the presidency albeit the coalition government ran so tardily over an issue that affected every Sri Lankan. It was unprecedented. If President Sirisena has called a halt to the price increase, his Secretariat failed to tell the country why it has been done. Nor did the controversy ridden Petroleum Resources Development Ministry do so. For five long days since July 6, fuel was sold at old prices. Then, as if nothing had gone wrong, the previously announced new price increases became effective from midnight Tuesday (July 10). It was the second wave of government shock therapy on the people and caused a new wave of resentment against the coalition. Ironically, that was created by its own inaction.

Dispute over percentage increase

The latest imbroglio over governance and the initial price increase that was suspended featured at this Tuesday’s weekly cabinet meeting. President Sirisena noted that earlier on Tuesday (July 5) he had met Treasury Secretary R.H.S. Samaratunga. He had told him that fuel prices were being increased by “three to four rupees.” It was much later the same night that Petroleum Resources Development Minister Arjuna Ranatunga telephoned him to say fuel prices were being raised by “nine to ten rupees.” Ranatunga told a ministerial colleague that he had to wake up the President, who was asleep, to inform him about the price revision. If Ranatunga hoped there would be action that night to suspend the increase that was not to be.

Sirisena told the cabinet, during the lengthy discussion, that the way the increases were being made lacked proper co-ordination. Though he did not tell his ministers, the President had, since the suspension of the price revision, been making inquiries. He had been told that a senior Treasury official had determined the final increase, working on the Fuel Pricing Committee’s calculations. He had allegedly based his initiates on revisions that have been sought by Lanka-India Oil Company. However, a Treasury source insisted that the Committee’s recommendations formed the basis. Sirisena has also been told that suggestions made by the CPC’s representative to the Committee on pricing formula had not been taken into account.

Sirisena left yesterday on a visit to Italy and Georgia. He is to attend the 24th sessions of the Food and Agriculture Organisation (FAO) Commission on Forestry at its headquarters in Rome which begins on July 16. The meeting brings together heads of forest services and other senior government officials to identify emerging policy and technical issues, to seek solutions and to advise FAO and others on appropriate action. It also covers environmental issues. In Georgia, he will be the first speaker at the plenary of the US backed Global Summit on Open Government Partnership in the capital city of Tbilisi from July 17 to 19.

An official committee has been tasked with formulating the pricing formula based on the prevailing crude oil prices. This is to revise prices every two months. Such revision takes place in the first week of the third month. Finance Minister Mangala Samaraweera acknowledged at the cabinet that there has been a lack of coordination. Those remarks were clearly an understatement and downplayed the significance of the issue. It was his own Ministry officials who made the decisions on the new prices. Thus, it was their unquestionable responsibility to keep the President informed, either through their Minister or directly. Not surprisingly, Sirisena declared that coordination was most essential since he “did not want to look a fool.” On the other hand, Sirisena had the opportunity to act, if he wanted to. Minister Ranatunga had woken him up to inform him of the increase. He retired to bed and became concerned only after the media reports on Friday morning (July 6). Then he cried halt.

He told his ministers that the proposed price revision would be discussed further at a meeting he would chair that Tuesday (July 10) at 4 p.m. at the Presidential Secretariat. At this meeting, Lalith Samarakoon, who heads the National Economic Council (NEC), made a presentation on the fuel pricing formula. Taking part were ministers Mangala Samaraweera, Daya Gamage, Rajitha Senaratne and Arjuna Ranatunga. Officials included Treasury Secretary R.H.S. Samaratunga, his deputy S.R. Attygalle and Petroleum Resources Development Ministry Secretary Upali Marasinghe. It is noteworthy that none of the SLFP ministers was present at this meeting.

Samarakoon, who is playing a key role in President Sirisena’s economic development drive since the shutting down of the Cabinet Committee on Economic Management (CCEM), which was under Prime Minister Ranil Wickremesinghe, made some critical comments on the Fuel Pricing Formula. According to sources privy to the discussion, he said the methodology adopted was wrong and was not fair by the consumer.

This Fuel Pricing Formula is now based on three factors – (1) the landed cost of crude oil based on the Singapore price plus premium. (2) Transport, distribution costs and the margins of profit for retail outlets, and (3) the addition of all government taxes on fuel products. Samarakoon argued that the question was not about a pricing formula but the total operating cost. He noted that taxes were enormous.

According to the same sources, the National Economic Council (NEC) statistics show that the percentage of the recent fuel price increases was higher. They are: Petrol (Octane 92) is up by Rs 53 per litre (or 36 percent of formula price), Petrol (Octane 95) is up by Rs 60 per litre (or 39 percent of formula price), Auto Diesel is up by Rs. 21 (or 18 percent of formula price) and Super Diesel is up by Rs. 31 (or 24 percent of formula price). Samarakoon’s proposal was that an increase of a maximum of three per cent of the average price for two months would have to be considered. He said this way the government would not be accepting the “automatic” price increases.

A recent study by experts in the Fiscal Affairs Department of the International Monetary Fund (IMF), though not the Fund’s official view, reflects how an “automatic pricing” system works. It says “………… Motivated by a desire to protect fuel tax revenues, some countries have adopted automatic fuel pricing mechanisms. The adoption of such a mechanism is intended to ensure full pass through of changes, both increases and decreases, in international fuel prices to domestic fuel prices. (Note: Pass-through is defined as the ratio of the absolute change in retail prices divided by absolute change in world prices, both in local currency units). At the core of the mechanism is an explicit fuel pricing formula, which determines domestic prices as the sum of the import price of fuel products, domestic wholesale and retail distribution margins, and fuel taxes.

“Domestic fuel prices are then changed at pre-specified regular intervals (e.g., weekly, bi-weekly, or monthly) to fully reflect changes in international prices. In addition to protecting fuel tax revenues, this approach also protects the margins of distributors, thus avoiding the disruption of fuel markets that often results from distributors incurring subsidy arrears due to lack of full pass-through of international fuel price changes. The adoption of an automatic mechanism should also be viewed as the first stage of a transition to a fully liberalised pricing and supply regime, which has typically been a more effective approach to avoiding subsidies and protecting the budget…….”

At Tuesday evening’s discussion, Samarakoon also argued that the government taxation on fuel was high and a phased increase should be considered with little or no shocks to the consumer. He urged that the increase be confined to three percent. However, Finance Minister Samaraweera stood his ground. He insisted that no changes could be made in the increases already recommended. When he has held portfolios, it is a known fact that Samaraweera stood by decisions taken by his officials and strongly defended them. On the other hand, there are also other compelling reasons. The Treasury is cash strapped and needs to raise money to keep the wheels of government turning. So much so, any means of raising money receives serious consideration. One such case is a periodic tax on car owners whilst parliamentarians not only receive duty free permits but also the opportunity to sell their vehicles at highly inflated prices.

Lost on the coalition leaders is the solemn pledge they made to voters three and half years ago – to deal with those involved in high profile cases of bribery and corruption. To the contrary, these social ills have risen to such high if not higher levels under their rule too. And if those funds were saved after the law was applied on the present day crooks, some now billionaires or millionaires, the coalition would have saved billions of rupees. That alone would have obviated the need for burdening the public with more taxes and heaping more hardships. More on this aspect later.

There is an even more important aspect in this week’s developments. Sirisena abolished the Cabinet Committee on Economic Management (CCEM) early this year and took over the running of the country’s economy. This was through the setting up of the National Economic Council (NEC). Yet, the NEC has had little or no role to play on an important element of the country’s economy – the energy sector. Nor has the Petroleum Resources Development Minister, who by law is the authority to revise prices and not the Ministry of Finance. Recommending such revisions haa been placed in the hands of a committee of officials. It has now been decided that the fuel prices will be reviewed every month. In fact a suggestion to review it weekly had been made earlier by Central Bank Governor Indrajit Coomaraswamy. This was not considered useful.

That Sirisena, contrary to his own NEC head’s recommendations, eventually concurred for a higher fuel price increase is one thing. This was notwithstanding the views of the three UNP Cabinet ministers, who favoured a lesser hike. That way he has endorsed a virtual UNP fuel pricing policy perhaps influenced by the worsening financial situation in the country. This is whilst the head of the former CCEM, Premier Wickremesinghe who took many decisions related to the economy, some even outside CCEM’s scope, remains side lined only to prophesise on coming events. During the past days, headlines in the state run Daily News reveals many. Among them: “Lanka, a fully developed country by 2050 – PM,” “Galle to become South Asian hub of