Unleashing the Market: How Deregulation in the Petroleum Industry Benefits Consumers

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The petroleum sector in Nepal has long operated under the government’s monopoly. Nepal Oil Corporation exercises absolute control over the import and distribution of petroleum products.

In 1974, Nepal signed a memorandum of understanding with India to source fuel exclusively from the Indian Oil Corporation, with the supply agreement renewed every five years. On the domestic front, the state-owned corporation remains the statutory fuel import monopolist.

The government has occasionally announced its plans to open the petroleum trade to the private sector. But the plan never became a reality and anti-competitive practices in the petroleum business remain.

Nepal’s annual petroleum imports are now billed at Rs300 billion.

There are voices to make the business transparent amid questions about pricing, quality and safety.

Here is what you need to know about the petroleum deregulation plan and why it is the need of the hour.

Why has the government failed to deregulate the petroleum business?

There have been several (unsuccessful) attempts to enact a new petroleum law to deregulate the oil market.

Former officials at Nepal Oil Corporation said the government’s subsidy policy has made the petroleum sector a lucrative business for private traders in Nepal. Some lobby groups don’t want a new player in the market.

The existing guidelines of the Nepal Oil Corporation on petroleum transactions have failed to benefit consumers in terms of costs, quality and quantity, experts said.

Even if the oil entity incurs losses, private traders enjoy a sales commission. In every business, there is profit and loss, but in the petroleum business, there are no losses for the private parties that distribute fuel.

Instead, they demand more in commissions every year by threatening to stop selling oil.

For example, Nepal Oil Corporation gives a sales commission of Rs4.21 on a litre of petrol and Rs322.67 on a cylinder of cooking gas to sellers and bottlers.

Experts say that deregulating the oil market will end the provision of sales commissions for traders and subsidies to consumers.

In January 2020, then-minister for industry, commerce and supplies Lekhraj Bhatta had said that the government would not open oil trade up to the private sector.

“In view of national security, petroleum is sensitive,” he had said. “Therefore, we should not bring the private sector into the oil business.”

What were the efforts made earlier?

In 2010, the commerce ministry had even tabled a new petroleum bill in Parliament, but it was sent back for further homework and consultations. And with the frequent changes in government, the bill was never a priority.

The government’s reluctance to loosen its grip on the oil trade may have been prompted not only by massive revenues but also because domestic sellers fear profits may go down, say industry watchers.

In the past years, several Indian companies have shown interest in selling petroleum in Nepal.

In January 2013, India’s private petroleum giant Essar Oil, which is now Russian oil company Rosneft-owned Nayara Energy Limited, approached the Nepal government to supply petroleum products.

Why deregulate or break the monopoly?

Experts said that a business monopoly is not good for any country. At a time when the government has been announcing a public-private partnership in every venture, it should not hold all key businesses.

“Deregulating the petroleum sector and giving it to the private sector will make the business competitive, ultimately benefiting consumers. The rise in competition will mean lower prices and higher quality,” said Purushottam Ojha, a former commerce secretary. “The prices might not drop substantially due to high taxes, but it will definitely make the business transparent.”

It is vital to deregulate the petroleum business now, Ojha said.

For instance, when Nepal Telecom was the only telecommunications service provider, the cost of mobile SIM cards, including other services, was high. Soon after Mero Mobile, which is now Ncell, entered the market, the hassle of taking SIM cards ended and the price came down sharply. When telecom was a monopoly business, customers were paying even for incoming calls.

When the private sector enters the petroleum business, there will be an end to the subsidy, Ojha said.

What has been done to date?

It has been a long time since the government started preparing to deregulate the petroleum monopoly. But progress is zero.

The draft of the petroleum bill to deregulate the petroleum monopoly was prepared in 2005-6 and tabled in Parliament, but it was returned, said Ojha. The lawmakers believed that the private sector should not be involved in the petroleum business as it is a political commodity.

At least a dozen reports containing recommendations for improving the corporation are gathering dust on government shelves. All recommendations have a common suggestion—deregulate Nepal’s petroleum business.

Several high-level petroleum sector reform task forces have recommended ending the monopoly of Nepal Oil Corporation.

In March 2013, the government introduced the Petroleum and Gas Transaction (Regulatory) Orders 2013, which envisaged the opening up of the petroleum business to private investment, but it drew flak from gasoline dealers and experts over its effective implementation without related legislation.

Experts doubt regulatory orders, instead of the Petroleum Act, will attract massive private investments and address potential risks. They argue that the orders are too weak to govern the petroleum business, which has a high investment risk and is volatile in nature.

The order had set up the minimum paid-up capital for refining companies, petroleum trading firms, liquefied petroleum gas import firms and bottling plants at Rs20 billion, Rs10 billion, Rs5 billion and Rs50 million, respectively.

Private companies dealing in petrol, diesel and kerosene were required to install a depot with a capacity of 20,000 kilolitres while liquefied petroleum gas bottling plants needed to have a stock capacity of 500 tonnes.

The “regulatory orders” would not guarantee investment of the private sector as the Nepal government can suspend their licence at any time.

The orders were subsequently suspended.

What needs to be done?

A separate petroleum authority needs to be created to regulate and monitor the market, Ojha said. The authority will check quality and ensure safety and security.

Currently, the corporation has its own policies to regulate the oil business.

The regulatory authority needs to be effective and must include a professional with the experience and expertise in the oil business other than cadres of political parties, Ojha said.

The Petroleum Act will provide the legal basis for the private sector to import and supply petroleum products, he said.

Source: The Kathmandu Post (Krishana Prasain)