Nepal buying overpriced fuel from Indian Oil Corporation

A report by a high-level committee led by a parliamentarian (The Report of High-Level Committee on Nepal Oil Corporation Reform, 2011) has found that Nepal Oil Corporation can reduce its losses by as much as Rs 6.40 billion (annually) by reviewing the pricing arrangement with its sole supplier, Indian Oil Corporation (IOC) and by another Rs 3.44 billion through reforms in the NOC. That losses caused by NOC being overcharged by IOC are nearly double the losses due to internal factors is a crucial piece of information for the lay public. Unfortunately, this aspect was generally either blacked out or downplayed in domestic media coverage, instead focusing only on the gains to be had from NOC reforms, which, though important, was old hat and hence no "news" at all.  Perhaps highlighting the lesser known fact would have been considered "knee-jerk anti-Indianism" – whatever that means – by domestic fifth columnists and intellectitutes, including those in the civil society domain.

IOC sets prices for NOC at import parity price instead of export price, entailing the application of Price Adjustment Factor (including Notional Custom Duty) that inflates the actual price NOC pays IOC. The burden for Nepal is twofold: first, the higher price while purchasing fuel from IOC; and second, the additional tax burden to NOC and/or Nepali consumers as VAT at the border is imposed on a higher base (resulting from the higher price charged by IOC). The report finds that purchasing fuel from IOC at import parity price rather than export price raises cost by 6.73 percent for petrol, 6.71 percent for diesel, 8.88 percent for kerosene and 4.19 percent for LPG (all at 1 April 2011 prices). The border import price is thus inflated by Rs 4.18 per litre for petrol, 4.75 per litre for diesel, 6.33 percent per litre for kerosene and 48.92 per cylinder for LPG (all at 1 April 2011 prices). This jacks up Nepal's annual import bill with respect to India by Rs 5.64 billion, or 14 percent of Nepal's merchandise exports to India in 2009/10. Adding the increased VAT burden resulting from higher base in the form of higher border import price, the total extra cost becomes Rs 4.72/litre for petrol, 5.37/litre for diesel, 7.15/litre for kerosene and 55.28 per cylinder for LPG (all at 1 April 2011 prices).

The report reveals that IOC owes NOC a staggering Rs 14 billion for the extra charges it included in its selling price from 2002 to 2011. (During that period, IOC refunded Rs 3 billion to NOC – which indicates that IOC also accepts in principle that customs duty and/or other charges it extracts while selling to NOC are NOT legitimately applicable.)  This amount was about equal to NOC's then cumulative losses. Which means that even with the rampant corruption in NOC's operations (which no doubt has to be stamped out) and the subsidy enjoyed by Nepali consumers, poor and rich alike (and of course foreign embassies and missions that have no qualms about guzzling fuel subsidized by this poor least-developed country) all these years, NOC would nevertheless be at a break-even level if only it had not been overcharged by its monopolist supplier.

Granted, NOC and ultimately our political class that is directly or indirectly responsible for NOC should have negotiated better with IOC (and by extension the Indian government). But the facts cited above do rubbish claims made by the ignorant or, perniciously, fifth columnists and intellectitutes that it is due to the benevolence of the southern neighbor that Nepal is receiving oil at the best possible price, that Nepal is better off with the current arrangement than the previous one (until 2002) under which NOC imported crude oil from other countries and handed it over to IOC for refining, paying IOC only the refining charge, and that it is futile to look for any alternative sources of fuel supply. The report, however, recommends exploring the option of importing fuel from China taking advantage of the Chinese government's plan to construct an oil pipeline linking Shigatse, Tibet. The report recommends a study on the feasibility of extending the pipeline to Nepal's Trishuli. "But that would be unfeasible" – this is likely to be the typical reaction of the ignorant, or perniciously, the fifth columnists and intellectitutes. How can you say that without conducting a study? And especially when a committee dominated by parliamentarians of NEW NEPAL and a professor and coordinator at the Energy Study Centre, Institute of Engineering, Tribhuvan University, considers it an option worth exploring.

At a time when Nepal's political parties are hell-bent on allowing choice hydropower projects to be built exclusively for export purpose even as the country reels under load shedding, without any sign of it being over in the foreseeable future, the report, commendably, emphasizes the need to utilize water resources to generate electricity for internal consumption, as a powerful means to reduce dependence on fossil fuel for commercial energy consumption, and by extension also reduce trade deficit. 90 percent of energy consumption in Nepal is for domestic/household purpose. The report states that for an average family of five, electricity is the cheapest source of energy for cooking, given the current market price of fossil fuel. The cost per month for such family is Rs 790 if it uses electricity, as opposed to Rs 930 and Rs 1150 respectively if it uses LPG and kerosene. As both LPG and kerosene are subsidized, the cost advantage of using electricity when LPG and kerosene prices are allowed to adjust to international market prices may be even higher.