Nepal Oil Corporation (NOC) is the sole distributer of petroleum products in Nepal. It has an inefficient management and institutional framework, there is immense leakage, corruption and private dealers’ cartels and it suffers huge losses by the day; but one of the major reasons behind its loss i.e. subsidy “meant for the poor”has not reached the targeted consumers and even if it did, the targeted consumer would be much better-off paying full price for electricity (for cooking and lighting), than using kerosene. This whole idea of selling LPGs at below-market price is a complete negative-sum game for the entire Nepalese economy.
Here is how!
Before 1970, there were multinational players like Shell, Esso and more, both in Nepal and India. Then during the 70s, India adopted oil nationalization policy. These multinationals sold off their equities and left India. It was no more feasible to operate in Nepal and thus they closed down their subsidiaries in Nepal as well. Then in 1974, the Government of Nepal (GoN) and Government of India (GoI) signed a Memorandum of Understanding (MoU) whereby, NOC would import petroleum products via Indian Oil Corporation Ltd. (IOC).
Established in 1970, NOC did good business until the year 2000 when it had Rs. 4.9 billion worth of cumulative profits. In recent years however, NOC has been a sorry State-Owned Enterprise (SOE) suffering net losses year after year and has a cumulative loss of over Rs. 24 billion as of 2012/13. Why the loss? One of the many reasons is subsidy mechanism.
NOC receives no direct subsidy from GoN. The government charges VAT on all petroleum products except kerosene and customs on all products. If we take the case of LPG alone, the government collects taxes worth Rs. 245.31 per cylinder and NOC sells a single cylinder for Rs. 1470 at a loss of Rs. 559.73 per cylinder. This loss amount is not reimbursed by GoN to NOC. There is however a mechanism of cross subsidizing LPG from profits made from other petroleum products. This still does not offset the losses made on the sale of LPG. Hence, the loss figures of NOC. (click here for more)
Now we all know why NOC has been selling LPG at subsidized rates. NOC, as a public enterprise has a duty of availing necessary goods to Nepalese citizens at affordable prices. But the people that fall below or just around the poverty line cannot afford to buy LPG at market prices. Therefore, GoN asks NOC to sell LPG at such low rates, ruining its own financial health. But the ineffectiveness of this policy begs that we delve a little deeper into the issue.
For every 10 cylinders that come into Nepal, 6 are consumed in Kathmandu valley alone. We consume 1.4 million tons of LPG every month. A substantial percentage of this ends up in hotels and restaurants that consume multiple cylinders a day. Majority of households also maintain a stock of upto 2-3 cylinders. While these hotels and restaurants and households that can afford to pay the market prices have been stocking and consuming a huge chunk of LPG supply, the poor within the valley and across all nooks and crannies of the country are relying on either kerosene or fuel wood. While this would have made perfect sense some 20 years ago, there is however, no economic logic behind this anymore.
And now is when Nepal’s own indigenous resource – hydroelectricity – comes into play. A research by Prof. Amrit Man Nakarmi (Center for Energy Studies) reflects the following:
Monthly life-cycle costs of cooking in urban households
|2012||1640||1030 (with subsidy)||
The table shows how kerosene, one of the major sources of fuel used by the poor, is the most expensive one in the market. Then comes LPG (do take a note that this is a two year old data and LPG costs much more than Rs.1030 as of June, 2014). The cheapest one seems to be, surprisingly, hydroelectricity – something that lies idle in our own backyard.
So the bottom-line is, yes, NOC has an inefficient management and institutional framework, there is immense leakage, corruption and private dealers’ cartels and it suffers huge losses by the day; but one of the major reasons behind its loss i.e. subsidy “meant for the poor”has not reached the targeted consumers and even if it did, the targeted consumer would be much better-off paying full price for electricity (for cooking and lighting), than using kerosene. This whole idea of selling LPGs at below-market price is a complete negative-sum game for the entire Nepalese economy.
For more on petroleum supply debate, watch https://www.youtube.com/watch?v=gsSsoXo-e3A