How you pay as much as the government wishes!

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petroleum cross-subsidyWe know that government cannot give something to us unless it takes that something from somebody else. Somebody always pays the price. Reflecting upon some of the decisions made by Nepal Oil Corporation (NOC) regarding prices of petroleum products, whose NOC is the sole importer and supplier in Nepal, shows how government can completely disregard law in order to make this happen. Let us look at the case of one of the latest price hikes in petroleum products in Nepal.

March 14, 2014, Nepal Oil Corporation hiked the price of petroleum products in Nepal (reducing it again by some portion after a couple of days that followed). We will not delve into the numbers thus reached, but rather restrain ourselves to the mechanism by which this decision was made.

There are a few procedures that a Public Enterprise (PE) or the government has to follow before making a decision. The authority of decision-making must be allowed by an Act (a parliamentary legislation, setting out legal principles.) To our dismay, there is no such thing as Nepal Oil Corporation Act till date. Yes, a PE that does over Rs. 100 billion worth of business a year i.e. a fifth of the fiscal budget, is not guided by any Act.
But this is only the tip of the ice-berg. In cases like these, whenever a decision has to be made by the government or a public institution, it is done by publishing a notification in Nepal Gazette. But as it later unfolded upon digging into the archive of Government Gazettes, no such notification was published before the price hike. After some more research, it was found that the Board of Directors, under the chairmanship of the Secretary of Ministry of Commerce and Supplies forwarded a proposal to the cabinet asking for a permission to hike the prices of petroleum products. Cabinet approved! Prices rose!

Now here is the problem with that – Can the government then arbitrarily set any price for any service it provides? Of course, there was a rationale behind the move. The prices of petroleum products surged in the international market and NOC had to make some kind of adjustment. NOC bears huge loss on sale of LPGs and makes up for a portion of that loss through profits made on sale of petrol and kerosene (and sometimes, diesel.) But when a government monopoly cross subsidizes its loss to cover up for its inefficiency and lack of financial planning, it is the people that actually pay. It makes no economic sense when a government corporation controls price to run on loss worth hundreds of millions to billions of Rupees per month (see the table below). Besides, who gives the government the authority to put a fine on a person who rides to his office on a motor-cycle and cooks his food on electric cookers to pay for a hotel/restaurant or some other household’s consumption of LPGs? A few more things – when one allows the government to give it something, it also allows government to take something from the itself; who decides what is best for all? And on what basis? Wherein lies the limit of government discretion? These are some questions for ideological debate. But while the debate is on, no one can undermine the need for some reform measures.

NOC needs to adopt sound financial planning. Stealing from one to give to the other has to end. NOC should therefore switch to Automatic Pricing Mechanism in the distribution of petroleum products. Once price control is removed, there will be prospects of profit-making for the private sector as well. This will bring in competition in the industry and market will drive the prices. Then, it will be those who use a service that pay for the service. Drafting an Act that gives room for market forces to act freely would be a positive first move.

NOC’S Estimated Profit/Loss Position based on IOC Price, Effective from 01 July, 2014

NOC's monthly profit and loss position*Source: Nepal Oil Corporation

 

Akash Shrestha

About Akash Shrestha

Akash Shrestha is Coordinator of the Research Department at Samriddhi, The Prosperity Foundation where his focus areas are petroleum trade and public enterprises. He also writes newspaper articles, blogs and radio capsules, based on the findings of the studies conducted by The Foundation.

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