Critical questions

Though India refuses to end the monopoly of Indian Oil Corporation (IOC) in the Nepali market, the country’s petroleum sector witnessed two major developments over the week. First, Nepal Oil Corporation (NOC), with strong backing from the government, managed to wrangle out a waiver of the duty and refinery costs that the sole Indian supplier has been passing on to Nepali consumers. Perceived as okay when agreed to in 2002 at a time India was liberalizing its petroleum sector and investing heavily in refineries, the refinery cost has of late made the Indian supply dearer than international processed oil. Moreover, transfer of the duty cost was gross highhandedness on India’s part. Both these factors were compelling NOC, and ultimately Nepali consumers, to pay more for fuel. Waiver of those costs will make imports cheaper, cushioning NOC against undue losses.



Secondly, NOC, while raising the retail rates on Tuesday, committed itself to henceforth adjusting petroleum prices every month in line with import rates. We welcome this, for Nepal can neither afford to keep bearing the oil losses nor sustain the long-running practice of the state cross-subsidizing NOC to finance imports. Given that petroleum is consumed for the most by just one-fourth of the population, use of scarce state resources to cushion them over prices has been an injustice to the remaining 75 percent, particularly the poor and those living in the rural hinterland.



Waiver of undue costs by IOC and NOC commitment to monthly price adjustments have made it easier for the country to move toward much-needed reform in the sector. However, we would caution that reforms will not happen if they are introduced on ad hoc basis, as is being done now. How can we rest assured that NOC will stick to its word on monthly price review unless the government adopts an automatic pricing mechanism (APM)? There has to be a clear plan on to what extent prices will be adjusted and when losses will be plugged. And what will happen once losses are plugged? Will the government deregulate prices and open imports to the private sector? Unless these critical questions are answered in black and white, we doubt reforms will materialize.



A commission led by then member of the National Planning Commission, Dr Yuba Raj Khatiwada, had worked out an APM mechanism and pricing formula for a deregulation regime. The government drafted a Petroleum Act, envisaging formation of an independent and autonomous Petroleum Board to enforce the APM, open the sector to private players, regulate these players and ensure market competition. The government must now truly commit itself to a reform mode. Only then will it do any good to the economy and the people.

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