Corporate sector offers policymakers a blueprint for CPC reform

by Sanath Nanayakkare

A blueprint of opportunities, challenges and the road ahead for the loss-making Ceylon Petroleum Corporation (CPC) was unveiled by JAAR Corporate Solutions at Taj Samudra Colombo last week.

Furthermore, JAAR offered potential public-private partnership (PPP) models for the financially-battered CPC to make a turnaround.

The participating policymakers, professionals, investors, economists and other individuals well-aware of the key reforms necessary for the debt-laden CPC discussed the reasons why Lanka Indian Oil Company (LIOC), which is the only competitor in the fuel retail market in Sri Lanka, has almost continuously made profit since its incorporation in Sri Lanka while the financial position of CPC has been a grave concern for its stakeholders.

The blueprint heralded by Dr. Janaka Fernando and Andreas Hergenröther was presented to Power and Energy Minister Kanchana Wijesekera, SJB MP Dr. Harsha de Silva and a number of high-profile individuals, for open discussion at the forum.

Both politicians made comments in favour of privatizing the CPC while ensuring quality of service, pricing accountability and distribution of fuel without disruption.

The discussion mainly centred on financials of CPC for the last 10 years, its products and services portfolio, the market structure, employment, social benefits, key performance indicators (KPIs), a comparison of Lanka Indian Oil Company (LIOC) and CPC using general figures, main contributors of losses, proposals for a suitable PPP models for potential investors and policy recommendations for the government of Sri Lanka.

A few observations made by Dr. Janaka Fernando and Andreas are as follows:

“The CPC provides a substantial source of income and expenses for the government being one of the largest SOEs. However, the CPC has become a heavy burden for the government and the Sri Lankan economy due to its poor performance. The total debt of CPC has been increasing at an alarming rate over the last few years.”

“The CPC’s debt amount, which was Rs. 529 billion at the end of 2020, increased to Rs. 561.3 billion by the end of 2021, and the amount has further increased to Rs. 700 billion by July 2022, which is the highest level of debt for an SOE in Sri Lanka. Meanwhile, the CPC accounted for 37.3% of public guaranteed debt stock of SOEs in Sri Lanka. In addition, the cumulative net loss of the CPC at the end of 2019 was Rs. 337 billion. This will further increase with the Rs.82.2 billion net loss incurred in 2021 and likely to increase further in 2022, according to CBSL 2021.”

“In contrast, LIOC, which is the only competitor in the fuel retail market in Sri Lanka, has continuously made profit since its incorporation in Sri Lanka, except for a few years. LIOC recorded Rs. 998 million profit-before-tax for the year ended by March 2021 together with positive retail earnings of Rs. 12.3 billion as of the end of March 2021.”

“Many countries around the world are increasingly relying on the private sector to invest in infrastructure services. PPP is not an unfamiliar concept in the petroleum industry in Sri Lanka. The petroleum market, which was nationalized in 1961, has experienced seven successful PPPs since early 1990s. However, before identifying potential PPP models for CPC, it is necessary to understand the scope of CPC in Sri Lanka’s petroleum distribution process. There are various forms of PPP models available, and the selection of a suitable method depends on the nature of the particular SOE and the project under consideration.”

JAAR Corporate Solutions made following policy recommendations to the government, for CPC to achieve and maintain a robust performance:

a. Discuss openly with all stakeholders such as government, trade unions and potential investors about sector-related PPP models and privatization.

b. Evaluate and reduce subsidies

c. Minimize currency risk

d. Increase liquidity

e. Introduce a transparent pricing mechanism that covers all costs

f. Breaking the monopoly of aviation fuel

g. Allow fare and free competition for fuel suppliers while enforcing transparent anti-trust legislation

h. Increase transparency and good governance

i. Minimize production risk

j. Increase storage capacities

k. Increase efficiency of human resources

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