NOC – a White Elephant of the Government of Nepal (GoN)

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blogHistorically, the term white elephant derives from the story that the kings of Siam (modern day Thailand) customarily presented white elephants to their courtiers who suffered from high maintenance cost of the animals. In modern norm, the term is seen as a business venture, scheme or facility which is of no value or use. In other words, a white elephant is a term for a possession that can neither be disposed-off nor preserved through maintenance as the cost of its maintenance exceeds the utility that the owner derives from it. This phrase fits the description of one of the many state-owned enterprises in Nepal- Nepal Oil Corporation (NOC).

Nepal Oil Corporation is the only distributor of petroleum products in Nepal. Its function consists of smoothly supplying petroleum products to the people. However, it has suffered financial losses of millions of rupees for nearly a decade. To run its operations, it has been taking loans from the GoN, Citizens Investment Trust, Employees Provident Fund and various commercial banks. Now, it is neither disposable as it is the only importer of fuel in the country, nor does it supply fuel efficiently or make profits doing that.

As petroleum products are essential consumer goods that everybody uses, the mismanagement of NOC directly affects people. This can be perceived when there are fuel shortages and people have to wait in long queues at the gas stations to fuel their vehicle and when you or your family member buys an extra cylinder of Liquefied Petroleum Gas (LPG) to prepare for the impending fuel shortage that you hear in the news. Therefore, it is imperative that we look at the problems of NOC.

The primary problems of NOC are corruption, mismanagement, and most importantly, ineffective cross-subsidization policy. Under this policy, the government procures petroleum products from India at a certain rate and then cross- subsidizes LPG by manipulating prices of other petro- products. The rationale behind the policy is that the economically weak sections of the populace receive LPG at an affordable rate. This price control therefore has been the main cause of its loss. NOC carried out this policy till mid-2071.
To counter the losses being suffered by NOC and to facilitate the smooth supply of petroleum products, GoN implemented an automatic pricing system at the end of Ashwin 2071. It has adopted an automatic pricing system for petrol, diesel and kerosene. However, the system has not yet been implemented for aviation fuel and LPG. In the automatic pricing system, domestic prices will be aligned with international fuel prices.

Even though GoN implemented an automatic pricing system to tackle the losses, it has not yet been implemented on LPGs. This doesn’t seem like a rational move. It introduced an automatic pricing system to tackle the loss created by subsidizing LPG. But the LPGs don’t fall under ‘automatic pricing’ mechanism. However, GoN plans to fix two prices of LPGs- for household and commercial uses, it plans to continue subsidizing LPGs for households while start selling LPGs for commercial uses at market rate. Why does it still want to subsidize LPG for households when cross-subsidization didn’t achieve its goal is something that will go beyond a layman’s comprehension. It still endures a loss of Rs 511.28 per cylinder due to subsidization. How can they ensure this will work? The better option would be to discontinue subsidizing LPGs at all and fully adopt an automatic pricing system for LPG.

Although this is a move in the right direction for long-term development, the GoN should enact the proposed Petroleum Act which will provide legal means regarding issues like leakages, oil theft and adulteration, and facilitate proper management and monitoring. It should transition from a state-owned monopoly and deregulate the sector so that the private sector can step in. Deregulation will facilitate competition in the market between public and private firms and the consumers will benefit from this in the form of appropriate prices for the products.

Arman Pandey

About Arman Pandey

Arman Raj Pandey, a student of Economics works with Research Department at Samriddhi, The Prosperity Foundation.