The finance ministry, struggling to meet its difficult fiscal deficit target of 4.8% of the GDP for the current fiscal, has been slapped with a hefty bill it wasn?t accounting for. In a joint letter shot off to the ministry, the finance heads of the three public sector oil marketing companies (OMCs) ? Indian Oil Corporation (IOC), Bharat Petroleum Corporation (BPCL) and Hindustan Petroleum Corporation (HPCL) ? have asked for an additional R20,000 crore compensation this fiscal for certain costs they accumulated over the last seven years, consequent to the policy of subsidised sale of petroleum products.
This bill includes the interest costs on borrowings that resulted from delayed release of subsidy amounts, the losses on the now-discontinued oil bonds for which there?s only limited appetite in the market and the extra costs for transportation of LPG to far-flung areas which the current under-recovery estimates don?t factor in.
OMCs sell their products below cost and the under-recoveries are compensated through cash payment by the government (budgeted subsidy) and discounts offered by upstream oil companies ONGC, OIL and GAIL India in a 1:2 ratio. The under-recoveries estimated for first half of this fiscal is R60,907 crore, while it was R1.61 lakh crore in FY13.
In fact, immediately after the Budget for FY14 was presented by the finance minister with an oil subsidy estimate of R65,000 crore, petroleum minister Veerappa Moily had talked about a pending bill of R32,000 crore to OMCs.
It is unlikely that the finance ministry would provide for the entire R20,000 crore arrears in compensation this fiscal.
In any case, the additional burden is not only for the government but also for the upstream companies that have of late been vocal against the increasing share of the subsidy burden on them. ONGC chairman Sudhir Vasudeva recently said that the company could be constrained to dip into its cash reserves to meet even operational expenses in a couple of years if the subsidy yoke on it isn?t removed.
In their eight-page letter, the OMCs? finance heads pointed out eight areas of operations that are draining the companies of valuable cash due to selling fuel at below market rates. OMCs have pegged the additional interest burden on them due to delayed release of subsidies at Rs 12,286 crore for the last two fiscals, Rs 6,494 crore for FY13 and Rs 5,792 crore for FY12.
The companies borrow money from the market for running their daily operations as the subsidy released by the government comes after a lag of a quarter, usually. ??delayed and ad hoc release of compensation by the government is resulting in substantial borrowings by OMCs, with consequential additional interest burden? Since financial condition of OMCs is under considerable stress, OMCs are not in a position to bear such a high interest burden. It is also being viewed negatively by the lenders as well as rating agencies,? said the letter.
The second major point highlighted is the loss on oil bonds which were earlier issued by the government to compensate the OMCs for losses. This practise was discontinued from 2009-10 and the government shifted to a cash disbursal mechanism for paying subsidy thereafter.
?Appetite for these bonds in the secondary market is very limited, leading to considerable discount on their liquidation,? the letter noted. OMCs realised a loss of Rs 5,722 crore towards lower returns on these bonds since 2005-06. Out of this, IOC?s loss was the highest at Rs 2,600 crore, it said.
Other areas pointed out by the companies were mainly with regards to LPG whereby the companies faced losses on additional freight cost borne by them for transporting LPG to far-flung areas which increased the cost per cylinder by about Rs 1.50 per cylinder, loss on import of LPG due to handling at the ports, disallowance of import freight differential for import of LPG, terminal charges at ports which offer handling services for LPG imports and delay in compensation due to recently introduced direct benefit transfer for LPG consumers (DBTL).
Another area of operation that led to losses for the companies is the dilution of diesel and petrol due to a shift to a Bharat Stage III fuel grade from 2009-10.
?All the points highlighted above have resulted in additional under-recoveries of around Rs 20,000 crore for the downstream PSU (public sector units) oil companies, including the under-recoveries accrued on this account during the earlier fiscals. It is requested that the compensation of the above mentioned additional under-recoveries in the Loss Sharing Mechanism for 2013-14 may please be considered,? the OMCs said.
The amount sought by the OMCs is just 2.24% of their total revenues for the year FY13 against a total under-recovery for the last year which stood at 18% of their total revenues last fiscal.
