Blueprint for reform

  • While preparing for privatisation, NOC should look into measures that reduce our petroleum dependency
Blueprint for reform

Jul 27, 2014-

The supply of petroleum products to the country has remained a critical issue for very long. A number of committees and taskforces have been formed to identify and recommend significant reforms. A 2002-03 (2059 BS) committee headed by former chief justice Top Bahadur Singh; another in 2004-05 (2061 BS) headed by Shanker Sharma, another in 2010-11 (2067 BS) headed by Bhanu Prasad Acharya; yet another committee headed by Member of Parliament Bhim Acharya; and a high-level 2012-13 (2069 BS) taskforce headed by Sushil Jung Bahadur Rana were major initiatives in this regard. However, none of the recommendations has been implemented so far.

A state-owned trading company that imports, transports, stores and distributes petroleum products in the country, the Nepal Oil Corporation (NOC) was established in 1970 under the Companies Act 1964 to replace the direct trading of Indian companies in Nepal. As per the latest yellow book published by the Ministry of Finance, the NOC imported 771,939 metric tonnes of petroleum in the first eight months of last year alone, an increment of 12.5 percent. However, the import of kerosene has decreased by 25 percent, as per the declining demand. Reciprocally, the import of Liquefied Petroleum Gas (LPG) was 151, 21-1 metric tonnes, an increase of 13.5 percent.

All petroleum products consumed in the country are procured and imported from the Government of India's Indian Oil Corporation (IOC) under a bilateral agreement, which is renewed every five years, the latest being signed in April 2012. NOC obtains petroleum products as per its requirement from IOC's different refineries, terminals and depots situated in eastern and northern part of India. NOC is the biggest corporation of the country in terms of annual turnover, with a recent annual turnover of about Rs 130 billion. However, its losses for the last year amounted Rs 10.16 billion; the accumulated loss until the previous year being Rs 24.54 billion. It has a negative net worth of Rs 24.25 billion.

Fixing transportation

No doubt, the NOC needs to implement serious changes, given its current state of affairs. Most of the myriad problems associated with the supply of petroleum products can be rectified by the government through progressive measures. For instance, petroleum has been categorised as an essential service. Therefore, the law prohibits any interference in its supply. However, tankers, pumps and drivers' associations frequently go on strikes. The presence of cartels and syndicates only makes such actions easier. Furthermore, most of these protesting organisations are registered under the NGO Registration Act, 2034, which allows neither collective bargaining nor protest programmes like strikes. Clearly, there has been a failure on the part of the government to enforce existing legislation.

It has been revealed that most irregularities occur during transportation. Adulteration, strikes and obstruction at custom points are some major problems. In order to counteract these, there are plans to construct a pipeline from Raxaul to Amlekhgunj in the first phase and later extend it to Kathmandu and other points. Discussions with NOC officials have indicated that the payback period of the pipeline project was affirmed to be within six years of operation. For this, the governments of both India and Nepal must work stringently.

However, it has been learnt that tanker drivers are underpaid (Rs 3,000-6,000 per month on average), far below the minimum wage fixed by the government. Despite this low pay, drivers have been serving long. This implies that are undue benefits to be had in fuel transportation. Therefore, it should be ensured that the employers pay minimum wages to their employees, along with social security contributions and insurance. This will go some ways towards preventing drivers from seeking to take advantage during transportation.

Gradual privatisation

The NOC was established under the utilitarian approach of an old government. However, times have changed and the private sector has grown substantially. Even now, transportation and dispensing of petroleum products are carried out by the private sector. Thus, the gradual privatisation of the supply of petroleum products is essential. However, before liberalising supply, there needs to be a strong regulatory body in place to control quality and pricing. The government is already in the process of setting up a regulatory agency, which will establish a cost-plus-pricing mechanism under an auto-pricing approach. This agency must be finalised and get to work as quickly as possible.

A cursory survey will reveal that the NOC is not too involved in LPG trading, except for issuing purchase delivery orders and dealing finances with the IOC. While the private sector handles distribution, the heavy overhead cost, resulting in a Rs 589.14 loss for each cylinder, is borne by the NOC. It seems the private sector is more competent at LPG trading. Thus, as the first phase of privatisation, it would make sense to hand over LPG trading to the private sector. The government recently introduced two types of cylinders (red for subsidised gas for household consumption and blue for commercial purposes). Handing LPG over to privatisation will also mean providing pricing authority, albeit with some strict criteria. The government should fix a quota for each family on the basis of family size and likewise, the pricing criteria can include compensation for the loss due to the subsidy. By separating gas trading, NOC can at least attempt to break even.

In the second phase, distribution of kerosene and other petroleum products, except for aviation fuel, petrol and diesel, can be given to the private sector so that the NOC can concentrate on supply. However, after gaining enough experience, trading opportunities for the private sector have to be gradually opened.

Stopgap measures

In the meantime, the government should think over revamping the NOC. The NOC was established as a public limited company under the Company Act. However, the government is the sole shareholder and the board of directors consists of bureaucrats. Thus, the company is more like a government department rather than a business entity. Forty percent of shares must be sold to stakeholders/public through an initial public offering. By doing so, the NOC will become a real public entity and there will be public participation in top-level management. Accordingly, the NOC needs a Maintenance & Operations survey along with downsizing compatible with a trading business. Reforms would also include the strict prohibition of any political interference in appointing executive heads.

Given the volatility of the international oil market, it would also be wise for the government to invest in projects that generate renewable energy. Sixty percent of current diesel consumption is used to generate captive electricity on account of loadshedding, particularly in the dry season. Hydropower would be the most feasible means of substitution. Likewise, biogas and solar power can be a great alternative to LPG use in the household. Introduction and subsidies on electric vehicles are also essential to taper the demand for fossil fuel. Trams, electric trains, ropeways and mass transportation would greatly reduce the demand of

petroleum products.

Likewise, exploration of fuel reserves would certainly reduce the import of petroleum products. It is gratifying to hear that a reserve project will soon be started at Emadol in Lalitpur. This project must be expanded. The storage capacity of the NOC too must be increased to cover at least three months' demand. Minimum stock levels must be maintained throughout the year. These measures, if implemented, could tide over petroleum woes and lead to a better functioning NOC in the long run.

BK holds a PhD in Economics and is currently Chief District Officer of Tanahu district

Published: 28-07-2014 09:15

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