Fuel supply and oil policy | Print edition
A few days ago we were told that Cabinet approval had been granted to open up Sri Lanka’s domestic fuel market to more players – companies that want to import fuel and make sales in the domestic market . In principle, the entry of several players into the domestic fuel trade would improve market competition in terms of price, quality and efficiency. However, the outcome of Cabinet’s decision would be shaped by the future regulatory mechanism under which the fuel market would operate.
For the past 20 years, Sri Lanka’s fuel supply has been a “duopoly market” in which there are two major players – the state-owned Ceylon Petroleum Corporation (CPC) and the subsidiary of the Indian Oil Corporation ( IOC), Lanka IOC. Previously, for about 40 years, it was a “monopoly market” held exclusively by the state-owned CPC.
Whether the “duopoly market” with CPC and LIOC makes it better than the previous “monopoly market” remains a question to ponder! As the fuel crisis hits the domestic market, CPC and LIOC are equally helpless to seize the opportunity (of growing demand).
By the time a share of the domestic fuel market was ceded to LIOC in 2002, there was another international company to enter the Sri Lankan fuel market; it is Sinopec Company established as a subsidiary of China Petroleum and Chemical Corporation.
The political authorities of the time could better explain why the Sinopec company was denied a market share of Sri Lanka’s fuel trade. If he had been granted a stake, we would have three suppliers today. So even if CPC failed to meet fuel demand, the other two players would have been competitive. Needless to say, a three-player market structure, known as an “oligopoly,” would have been more competitive than a duopoly.
What was before the establishment of the CCP by an act of parliament in 1961? It was a competitive private enterprise operated by a few international oil companies. The CPC began operations in 1962, competing with these international oil companies.
The nationalization of the oil trade and its handing over to the CCP made it a state monopoly. With this, all international oil companies had to leave the country. The CPC took over all fuel import, sale and distribution activities. Additionally, the Kolonnawa oil facility, regional bulk depots and retail outlets that operated under three different oil companies were also unified into a single entity under the CPC, further strengthening its monopoly market powers.
With the start of the oil refinery in 1969, bunkering operations in 1971, and entry into the production of other petroleum products, the CPC grew in strength and capacity as a state monopoly. Even after the LIOC entered in 2003, its monopoly status changed only marginally due to its overwhelming market share and the regulatory mechanism which was not challenged by the duopoly status.
Incidentally, Royal Dutch Shell Company – known as “Shell” – was one of the multinational oil companies operating in Sri Lanka since colonial times; she too had to leave the company after the nationalization of the oil companies. However, as the government offered a 51% stake in Colombo Gas Company in 1996, Shell re-entered the Sri Lankan market by buying it for $37 million.
This time, Shell did not stay longer than 10 years. As part of Sri Lanka’s “renationalisation policy” after 2005, Shell Company ceased operations and returned its stake to the government for $63 million; with this renationalisation activity, the government created its own company Litro Gas, which has also today failed to maintain its commercial gas supply mandate.
The state monopoly model in Sri Lanka has failed today, so much so that state monopolies such as the CPC have collapsed in supplying the domestic market. This failure is critical, as it would obviously push Sri Lanka’s crippled economy from the pot to the fire, as we discussed last week.
But why did they fail? Someone can make an argument that they don’t fail everywhere; I agree, because SOEs have grown globally and become multinational corporations that compete well with private multinational corporations. A 2013 OECD research publication on state-owned enterprises identified that of the world’s 2000 largest listed companies, 204 were state-owned enterprises from 37 countries, mostly in Asia.
Then I have to refine my question to ask why at least state-owned companies in many countries have failed; apparently, there is no doubt that Sri Lanka is one of them.
The political slogan that SOEs are “people’s property” makes little sense in the political and economic environment in which they operate in Sri Lanka. As we debate the “principal-agent problem” in economics and management studies, the “ownership” of a firm matters; identifying the true owner of a state enterprise is complicated; therefore who holds responsibility and accountability for their performance is unclear. Agents are those who run the business, while principals are the owners.
Who owns it?
There are multiple oversight bodies for SOEs, such as the general public, elected politicians, unelected bureaucracy, and management, but ultimately the questions come down to who is responsible for what. The environment in which a SOE operates, the public interest objective could also be displaced by the interests of influential stakeholders, whose vested interests can guide decision-making.
In general, SOEs face distinct corporate governance challenges, as evidenced by evidence from around the world:
- They suffer from undue and politically motivated ownership interference
- They are protected against two major business threats: takeovers and bankruptcies.
- There is a complex chain of agents – management, board, ownership entities, ministries and government – without clearly identifiable principals.
Therefore, business losses do not matter, as the losses are transferred to taxpayers through the state budget. There is no incentive for efficiency in the absence of competition in a monopolistic market. They can borrow money because the government provides bank guarantees. On top of all this, the board, management and employees have all got their hands on the “spoon” with which they can “help themselves” without liability.
Obstacles to reform
Overall, at some point, they were doomed. Leaders, who understand this in advance, must take corrective measures to reform state enterprises, a process that includes liberalization and privatization, opening up to competition and introducing responsible management systems.
There could be obstacles to reform from various parties: (a) politicians who seek popular gains, (b) employee unions who enjoy the benefits status quo with the “spoon” in hand, (c ) public pressure groups who have been led astray by others with vested interests and, (d) finally the corruption of politicians, bureaucrats and negotiators who seek bribes, commissions and other benefits indus from agreements.
Incredibly, Sri Lanka still has about 400 state-owned enterprises, while their exact number is not known to anyone. I had a hard time even understanding why some of them exist, draining the budget. The largest SOEs by turnover as well as annual losses are the CPC, Ceylon Electricity Board, SriLankan Airlines, Water Board, Sri Lanka Transport Board and the Railway.
Reform is not a choice but a mandate regardless of ownership; nor is it inconclusive, but continuous. If taken seriously, the economic crisis also provides an unprecedented opportunity to reform not only the CCP, but also to review and reform all state-owned enterprises; this would contribute to economic recovery as well as macroeconomic stability and growth momentum.
(The author is Professor of Economics at the University of Colombo and can be contacted at [email protected]
and follow on Twitter @SirimalAshoka).
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