Losses in the billions; battered and desperate: CPC’s Bad Management, Governing Policies Root Cause of Fuel Crisis
By Sulochana Ramiah Mohan
As the Ceylon Petroleum Corporation (CPC) is struggling to cope with sustaining fuel prices in the backdrop of a staggering Rs 70 billion loss as of August 2021, some of the proposals they tend to bring to curtail the price hike and ventures to sustain fuel supply are bleak and grey due to lack of strategic planning. The fuel crisis has been a part of a larger national issue and remains unresolved due to corrupt deals coupled with lack of vision and forward-thinking approach.
The fuel crisis is the latest issue next to the conundrum over fertiliser fiasco, while on Thursday (21), the Lanka IOC raised the price of octane 92 petrol and auto diesel prices by Rs 5. Last week, Energy Minister Udaya Gammanpila said the CPC had suffered a loss of Rs 1 billion in October and the Government could not continuously take this burden forward and the CPC does not have the funds to purchase fuel.
Working for the CPC is a lavish job where even newly appointed labourers pocket a monthly pay of Rs 58,000 that even most teachers in this country don’t take home. However, there is also a staggering amount of debt the Ceylon Electricity Board (CEB) has to repay the CPC in billions of rupees. However, since the CEB is a Government entity, that has been ignored, said the former MD of CPC, Prof. Prasanna Perera.
CPC workers get three annual bonuses in April and December. Notwithstanding, around 30 to 35 senior officials serving at the CPC receive monthly pay of between Rs 300,000 and Rs 400,000, claimed a CPC union member. Also, when the oil is unloaded from the ships at Colombo Port, it is standard practice for the fuel price quoted to the dealer to be less.
For instance, a petrol bowser can fetch 4,600 litres of fuel and, based on some scientific measures, it is expected that 33 litres of petrol will evaporate. Hence, the dealer is given a low price deal (33 litres given free). The underground tank in fuelling stations has a proper pipeline that stops evaporation. However, the dealer gets a standard 33 litre cut from every bowser considering the fuel gets evaporated.
Meanwhile, two prospective oil wells in the Mannar Basin have been earmarked to be given to Oman for a song based on a loan facility the Omani Government is intending to offer. The discussion between the Sri Lankan Government and Oman was sealed on Friday (22) and Oman agreed to lend USD 3.6 billion fuel procurement said the Energy Minister. Also, Sri Lanka is seeking a USD 500 million credit line from India to pay for its crude oil purchases from India and the energy secretaries of both India and Sri Lanka are expected to sign an agreement for the loan soon, the report quoted the Finance Secretary as saying.
"The Cabinet was informed about this and if there is a measure of relief, they will inform us," he said, adding that if the response is negative, there will have to be a price hike. The CPC’s current situation is that fuel prices need to be increased as it has suffered a loss of Rs 70 billion as of 31 August 2021. CPC Chairman Sumith Wijesinghe told the Media that there was no other option but to increase fuel prices given the losses incurred. He said the subject minister has been informed of the situation.
The worse dilemma is the CPC submitting a memorandum separately seeking Cabinet approval for USD 1 billion to be obtained from several local agents when the Treasury had given it a sovereign guarantee to raise USD 1.8 billion from the two State banks while the CPC owed USD 3.3 billion to these banks.
Although the Treasury offering would circle the dollar flow within the country, the CPC has separately invited lenders for USD 1 billion. The shocking contents show the country would fall into a liquidity trap due to its pursuit of foreign funds from local agents of international private lenders to settle the CPC’s fuel bill. The CPC has separately obtained proposals from several local agents of private lenders for a USD 1 billion loan submitted by the Minister of Energy for Cabinet approval.
Ceylon Today obtained the memorandum that stated, “Minister Gammpanila obtaining loan term refinancing facility of USD 1 billion for CPC, as recommended by the Minister of Finance and the Cabinet of Ministers, has decided to get the already received proposal evaluated by the Cabinet Appointed Procurement Committee (CAPC) instead of calling for expression of interest internationally”. The CAPC consists of the Secretary, Ministry of Energy, a Deputy Secretary to the Treasury, and the Managing Director of the CPC, who evaluated the proposal received by the CPC.
The memorandum states there were 23 proposals/expressions of interest received by the CPC for this purpose and they have reviewed the original proposals. The CAPC decided to request a comprehensive proposal to obtain further information based on a common term sheet decided by the Committee so that the proposal could be evaluated under a common platform. Out of the 23 parties, seven parties responded to the request made by the committee.
The committee has reviewed the offers received from five parties as two of them were from project financing and trade financing. Those five parties were: Skyline Profits (HK) Ltd, Hong Kong, Triple A Investments, UK; Concept Global, USA; Mataraxia Ltd, UK; and Uni Control, USA. In addition to obtaining the comprehensive proposal on the common format provided, the committee has taken action to obtain further clarification from the local representatives of the parties by inviting them to present at the meeting held at the Ministry of Energy, the memorandum stated.
At the meeting, the local representatives were requested to submit a firm proposal from their principle lending institution and the draft agreement. In response, the lending institution of the M/s Concept Global, i.e., PSL, America INC, has confirmed the funding terms and appointment of its local consultant for this process. Furthermore, they have informed us that the draft agreement will be formulated once the CPC officially accepts their funding proposal. The memorandum further justifies that the committee evaluated the proposals of five proponents, giving due consideration to all the terms, including the amount of the loan, grace period, re-payment period, interest rates, other fees, and especially the required collateral, as well as the affordability of facilitating the collateral by the CPC, which they deemed easily accessible.
The evaluation process by the CAPC has been concluded with the agreement that M/s Concept Global’s proposal is the most responsive and accessible proposal which requests a sovereign guarantee as collateral with terms such as: Interest Rate: three per cent per annum, Grace Period: two years; Repayment Period: 12 years; Loan Arrangement Fees and Other Charges: seven per cent on the loan (93 per cent will be released) and finally, seven per cent on the total amount.
The proposed amount of the loan: USD 2.5 billion. The memorandum of the Energy Minster further stated that the ability to fulfil the requested collaterals by other institutions are being reviewed at present given the current circumstances of the country and in order to line up consideration for future financing requirements.
Following the Energy Ministry disclosure that it has approved Global Concept’s offer, the signing of the final deal is underway. As there are several other proposals, with India offering a USD 500 million loan facility as well as Oman having come forward to offer its hand with USD 3.6 billion for fuel procurement, it is unclear what the Government would strike for at the end.
Former Managing Director of the CPC, Prof. Prasanna Perera, a versatile academic who holds a PhD in Economics from the University of London and the University of Peradeniya, raised concerns about the 23 parties who were mentioned in the cabinet proposal. "My concerns are about the unsolicited 23 proposals we were asked to evaluate and that none of the steps have been taken to check for due diligence while evaluating those proposals.
He further noted that no certified company profiles, authorisation, financial status has been checked and that the CPC’s finance function has only checked for USD 1 billion financial proposals. The fourth selected party has been proposed to Cabinet. It's a third selected party, and the Cabinet memorandum has been forwarded to enhance the loan limit to 2.5 billion. It has not been checked and followed financial regulations that are to be followed by Government institutions. The same evaluation criteria are adopted for 2.5 billion loan facility, he noted.
He further noted that no financial regulations at the CPC have been followed as the responsibility of mitigating risk is on its finance, legal, and management, adding that none of the risk mitigating factors has been checked or instruments decided to mitigate the risk. He said that no written confirmation from the Treasury has been given to the CPC confirming the Government's sovereign guarantee and that the possibility of CPC's repaying capacity has also not been indicated. Without checking all these letters of intent (LOI) that have been issued to an unknown party by CPC; no proper due diligence has been done," he told Ceylon Today.
"No guarantee has been given by the unsolicited selected party when issuing the LOI by CPC and none of the industry practices have been followed," he underscored. He added that the floating interest rate is problematic because it seems another issue like hedging 13.7 per cent handling charges are beyond the normal practices; normally it is less than one per cent giving a sovereign guarantee; and below the interest rate.
"No proper settlement plan has been forwarded to the board for 2.5 billion; the settlement plan is forwarded only for 1 billion," he pointed out. The CPC is just taking painkiller and not treating the wound. This dearth of oil and fuel can continue for centuries if such short term plans are executed, noted a member of the CPC trade union.