R.P Natekar GM (Treasury) BPCL SUBISDIES ON COOKING FUELS.

R.P NatekarGM (Treasury) BPCL

SUBISDIES ON COOKING FUELS

Presentation outline

Why

How

How Much

Since When

Impact

Road Ahead

1

2

3

4

5

6

Subsidies : Since When

• Consumer pricing for Cooking Fuels – Subsidized since APM

• Continued even when other products were “Marked to Market”

• ‘PDS kerosene and Domestic LPG Subsidy Scheme 2002’

• Introduced in 2002

• Flat Rate of Subsidy

• Reducing every year

• Differential supposed to be “Passed On”

Subsidies : Why

• Socio Economic Purposes

• Used as fuel

• Kerosene for lighting purpose in Rural Area

• Cooking purpose in Urban Area

• LPG – fuel for most of the Urban Population

• Poor Masses

• Alternates could harm environment

Subsidies : How

• Subsidies made available through “Low Price Supplies”

• Kerosene

• Distributed through the Public Distribution System (PDS)

• Oil Companies – Wholesaler – Retailer – Customer

• Available only to “Card” holders

• Quantity constraint

• LPG

• Oil Companies – Distributor – Customer

• Available only to Registered Customers

• No Quality Constraints

SUBSIDIES : HOW MUCH

SUBSIDIES : HOW MUCH

Subsidies quantum

Government pays about Rs. 25 billion to oil companies towards subsides

Rest is borne by Upstream Companies, Government Bonds and Marketing Companies

2004-05

2005-06

2006-07 2007-08 2008-09 (Estd)

SKO 94.80 143.84 178.83 191.02 350.00

LPG 83.62 102.46 107.01 155.23 240.00

Year by year increasing in under recovery is effecting financial health of OMCs badly

Subsidies : iMPACT

• Heavy subsidy has resulted in

• Increase in adulteration along with Diesel

• Diversion for Commercial use

• Waste, leakage, inefficiency etc.

• National Council of Applied Economic Research (NCEAR) Study :

• 38.6% of Kerosene is diverted

• Non-household use at 18.1%

• Black market at 17.9%

• Non card holders at 2.6%

Measures to check

• IT solutions like monitoring movement of tank through Global Positioning System (GPS) to check adulterations

• Supplying the product directly to wholesalers/sub wholesalers

• Distribution is monitored under the supervision of Panchayati Raj Institutions (PRI)

• Marker system to detect adulteration of kerosene in Diesel

• Monitoring of LPG cylinder usage - RFID tags for LPG Cylinders

In spite of these : benefits of the subsidy not reaching targeted section

Subsidies : solutions ahead

• Targeted Subsidies – rather than General Ones

• Restrict only to BPL families

• Mark to Market at the point of retail sale for all consumers

• Subsidy can be passed through alternate mechanisms such as :

• Introduction of Coupons

• Smart Debit Cards

• Based on Quantity RestrictionsRestricting Subsidy to BPL families will bring down the Subsidy burden by 40%

SKO Pricing – Calculation of Cost PricePrice is calculated based on Import Parity Price

methodology which works as follows:S. No Cost Component

Unit Basis of Computation

1 FOB Value S/bbl Monthly Average quotes of Platts Asia Specific Arab Gulf and Petroleum Argus including Premium/Discount

2 Ocean Freight S/bbl World Scale freight from Sitra to the respective ports adjusted for prevailing AFRA for MR size vessel

3 C&F Price $/KL Total of 1+2 and apply exchange rate

4 Other Charges Rs/KL Insurance, ocean loss, LC charges, wharfage

5 Refinery Transfer Price

Rs/KL Total Above represents RTP

6 Ex-Storage Price

Rs/KL For the above price add Storage, Distribution, Return on investment, Inland Freight, Stock loss and Working Capital to arrive Ex-Storage Price at Depot

7 Under Recovery

Rs/KL Wt Average Ex-storage price for all refineries calculated as per above formula – Ex-storage price at which OMCs are allowed to sell SKO to end consumers

Calculation of Retail Selling Price

Ex-Storage Point Price Common at all Refineries

Freight Notional Rail Freight at APM Period

State Specific Cost At rates applicable for respective states

Sales tax/VAT At rates applicable States

Dealer commission Retail and wholesale as decided by state governments

Selling Price at Location Total of Above

Computation of Retail Selling Price is given below: