IHT, 30-Jun-08
By Nicholas Owen
Yogendra Raj Sharma, on a recent day, had been waiting in line for six hours at a service station in Katmandu to fill the motorcycle he uses to drive to work. "It's very bad," he said. "Without petrol I cannot get to work, so I have to spend my time here."
Ending the fuel shortages that have kept Sharma, a civil engineer, and thousands of other Katmandu residents waiting in line for hours is one of the main challenges facing the Maoist leader Prachanda, who is widely expected to head the next government following the resignation on June 26 of Girija Prasad Koirala as prime minister.
Nepal subsidizes the retail price of gasoline, diesel and other fuel products. But the state-owned Nepal Oil Corp., which has a monopoly over fuel procurement and distribution, cannot afford to keep selling at a loss.
As world oil prices rise, so do the company's financial losses. Officials have estimated these will reach a record 8.5 billion Nepalese rupees, or $131.8 million, by the end of the fiscal year on July 15, representing 10 percent of the government's budgeted tax revenue. In May, the company's monthly loss rose to 1.78 billion rupees, according to official estimates - equivalent on an annual basis to about 3 percent of Nepal's gross domestic product.
"Clearly it's not sustainable," said Alexander Pitt, the International Monetary Fund's representative here.
With official lending to Nepal Oil putting public finances under strain, Koirala's government raised fuel prices on June 9 for the first time since October. Retail prices for petrol, diesel, kerosene and liquefied petroleum gas were increased by 25 percent, 24 percent, 27 percent and 9 percent, respectively.
With that, and yet another loan to the company, the line at the filling station used by Sharma disappeared. Bus drivers, however, responded by blockading roads across Katmandu until the government agreed to raise regulated transport fares. Student groups protested against higher fares by burning tires and vandalizing vehicles.
Even after the price increases, the oil company will still be selling at a loss. Pitt, the IMF representative, said the price rise was a "positive step," but "it goes only some way towards resolving the crisis."
Because of its losses, the company cannot make regular payments to Indian Oil Corp., its sole supplier, which routinely suspends cross-border fuel shipments. As a result, Nepal Oil often imports less than half of the country's daily requirement of two million liters, or 530,000 gallons.
Pitt said the government's "ad hoc" subsidy policy was part of the problem. Instead of agreeing to regular payments to ensure regular supplies, it has waited until filling stations run out of fuel before stepping in with additional loans or price increases.
"If it was just fiscal losses that would be one problem, but it's not only that, it's the disruption that comes with it," Pitt said.
Fuel shortages are one of the three biggest constraints on business activity in Nepal, along with power cuts and labor disputes, said Rajendra Khetan, president of the Young Entrepreneurs' Council, a business lobby.
"It curtails the productivity of the industrial sector," Khetan said, and the higher prices for consumer goods that result from low productivity contribute to increasing wage demands by trade unions.
"There's a whole chain impact," Khetan said.
In the dry season, from October to April, when low water levels at hydroelectric plants often cause the state-owned Nepal Electricity Authority (NEA) to cut power supplies to factories, fuel shortages mean the lost power cannot be replaced by running diesel-powered back-up generators.
After recent consultations with Nepalese officials, the IMF's executive directors recommended that to end the shortages, the government should abolish fixed prices and "consider introducing an automatic pricing mechanism for petroleum products." But so far, the country's politicians have not proposed freeing prices to rise and fall with global trends.
Nepal's fuel subsidies are widely acknowledged to benefit mainly the relatively well-off, who can at least afford cars or motorcycles. Critics of the subsidies say that by canceling them, money could be used for improving basic services for the poor. According to budget figures, the oil company's expected annual loss represents 30 percent of the government's planned expenditure on education, and 70 percent of its planned spending on health care.
Communication is part of the problem, but implementation is a bigger problem, Pitt said. The company has failed to ensure that filling stations can buy fuel even after price increases.
"When there have been price increases in the past, they have not led to a visible improvement in the supply situation," Pitt said.
Fuel lines reappeared about a week after the latest price rise and fuel station owners went on strike, saying that the company was still not providing them with sufficient supplies.
Recently, Koirala's government tried a dual-pricing system, theoretically allowing some filling stations to distribute fuel at cost. It did not work - Nepal Oil was still unable to ensure supplies.
"You cannot have two prices," Khetan said. "The system has to be privatized."
The government took a cautious step toward doing that when it announced the price increases this month, saying that it would abolish the oil company's 30-year monopoly. But unless prices are liberalized and subsidies ended, private-sector participation in the fuel business is likely to be limited.
"If the price remains regulated at a low cost then there will be no incentive for the private sector to enter the market," Pitt said.
Deregulating prices is not something the country's politicians are prepared to consider. And in elections held on April 10, Prachanda's Maoists emerged as the largest party in the Constituent Assembly. The Maoists have not said how they will address fuel shortages but abolishing subsidies would likely be a step too far for a party that only signed a cease-fire ending its 10-year "people's war" in November 2006.
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