Fitch Ratings on Monday urged the Centre to act on its fuel pricing and subsidy policy. While the reluctance of the government to fully pass on the rise in crude oil prices?and the discretionary nature of subsidy sharing?was always a concern in the financial profile of downstream public sector companies(PSCs), the problem deepened in the financial year 2009 (FY09) due to a significant increase in crude oil prices during the first half of FY09. This led to unprecedented losses (under-recoveries) for these companies during this period. Under-recoveries significantly declined after the huge reduction in crude oil prices (of over 70% from the peak) in the second half of FY09.
?Even if the position appears more comfortable than a year ago?from the long-term perspective of liquidity and financial health of the public sector oil companies, the fiscal position of the government, energy efficiency and energy security ? it is imperative that the Centre takes this opportunity to introduce a transparent mechanism to tackle the issue of fuel pricing and subsidy to avoid a repeat of a 2008-like situation,? says Abhinav Goel, director with Fitch Ratings India.
The sheer size and timeliness for issue of oil bonds and their monetisation increased the borrowings of downstream public sector companies , and affected their liquidity. However, a reduction in under-recoveries from anticipated levels in the second half of FY09?as well as the issuance of oil bonds?eased the liquidity position of downstream PSCs.
?The government has also ensured that downstream public sector companies were fully compensated for under-recoveries in FY09, unlike in previous years when they had to bear a part of the subsidy burden. While this is comforting, concerns still remain on the lack of a well-defined fuel-pricing and subsidy-sharing mechanism,? notes Goel.
Even after the reduction in under-recoveries, the government ended up issuing a significant amount of oil bonds from a fiscal deficit perspective, assuming these as on-budget. Indian Oil Corporation Ltd (IOC) has accounted for Rs 40,383 crore of oil bonds in FY09 (FY08: Rs18,997 crore); for Hindustan Petroleum Corporation Ltd (HPCL), the figures stood at Rs 14,692 crore and Rs 7,703 crore, respectively; for Bharat Petroleum Corporation Ltd (BPCL), this was Rs 16,216 crore and Rs 8,589 crore, respectively. Upstream PSCs provided discounts of Rs16,902 crore in FY09 (FY08: Rs 14,322 crore) to IOC; to HPCL, the discount figures were Rs 7,176 crore and Rs 5,408 crore, respectively; to BPCL, Rs 7,556 crore and Rs 5,975 crore, respectively. While the actual oil bond issuance for FY09 was lower than envisaged in the first half of FY09, it was much higher than that in FY08. The scenario now is that the crude oil price has increased in the last three to four months, almost doubling from its lowest point in the second half of FY09. ?Though the price might decline again, this does not obviate the need for a clear fuel-pricing policy,? Goel adds.
The retail prices of controlled fuels has not changed during this time, which means that the downstream PSCs are again facing under-recoveries, though matters are much better than that of a year ago. In addition, the profitability of the downstream PSCs might be affected if gross refining margins remain subdued. Another difference from the previous year is that the elections for central government were due at that time; while a new government is now in place, apparently with a more comfortable majority. Given the local political and global oil market scenario, it appears to be an opportune time for a critical policy decision like this.