State-owned Nepal Oil Corporation on Sunday decided to revive automatic fuel pricing, with effect from the start of the next fiscal year at midnight, Sunday. The mechanism had been defunct for nine years.
But the pricing formula, used to determine local prices in response to global price changes, will only apply to petrol, diesel, kerosene and liquefied petroleum gas (LPG), and not jet fuel, which has experts crying foul.
The government oil monopoly has not given any credible reason why aviation fuel has been left out.
“We have already cut the price of aviation fuel three times in recent months, and we don’t think there is a need for auto pricing,” said Umesh Prasad Thani, managing director of Nepal Oil.
Thani justified the policy saying that aviation fuel was cheaper in Nepal than in Kolkata, India. But aviation industry insiders say that is a lie.
As per the Indian Oil Corporation website, jet fuel sold to international airlines costs $866.05 per kiloliter in Kolkata, $827.19 in Delhi, $825.47 in Mumbai and $822.73 in Chennai.
In Nepal, the price is $1,035 per kilolitre, which is one of the steepest in the world, airline officials say.
The high cost of aviation fuel at Kathmandu airport is hurting Nepal’s tourism industry because foreign airlines don’t want to come here, according to a government committee report.
In 2019, an eight-member panel headed by former government secretary Suresh Man Shrestha issued a report which said that the steep cost of fuel was keeping international carriers away, and urged the government to cut prices to put them on a par with the global market to boost market confidence.
“We have the most expensive aviation fuel in the world, and our airport is also among the most expensive in the world. This is a result of the government’s mindset that everything needs to be taxed,” said an international airline official who asked not to be named.
Domestic carriers pay Rs136 per liter for aviation fuel, out of which Nepal Oil pockets Rs25 as its cut. Likewise, the oil company makes a profit of Rs42 on every liter of aviation fuel sold to foreign carriers.
Economist Govinda Nepal says this is unfair. “The auto pricing system needs to cover all petroleum products,” he said. “Now flying is no longer a luxury. It has become an essential mode of transport given the terrible state of the highways.”
He says that Nepal Oil’s announcement not to put aviation fuel under the auto pricing mechanism reflects its conflicting policy. “The government says it has accorded priority to the tourism industry but it has been charging hefty prices for jet fuel.”
The government panel has also reported that the state-owned oil monopoly should review its cross-subsidy mechanism and adopt an auto pricing system that will ensure that aviation fuel prices are on a par with other South Asian countries.
The auto fuel pricing system was implemented on September 29, 2014 but it was ineffective because the government started subsidizing fuel by launching a cross-subsidy mechanism.
“With cross-subsidy in place, there is no logic behind implementing the auto fuel pricing system,” said Nepal.
Experts say the cross-subsidy policy is like giving a blood transfusion from the right arm to the left arm. Under this system, customers in one sector benefit but customers in another sector are being made to pay more.
The adoption of the automatic pricing mechanism, according to experts, should also be viewed as the first stage in Nepal’s transition to a fully liberalized pricing and supply regime. But when aviation fuel is exempted, it does not make sense, they say.
In many countries, auto pricing has typically been effective in avoiding subsidies.
Consumer rights activists have been accusing the government of profiting at the expense of the Nepali people who are already struggling with near double-digit inflation.
In Nepal, every drop of fossil fuel is imported, and it is the key determinant of inflation. Food prices, transport fares, room rents and school fees have all soared to record highs as a result of high-priced fuel.
Constantly rising inflation has played havoc with household budgets and caused anguish to the provider of the family. And to add to the pain, Nepal Oil does not lower prices even when its import costs drop, said experts.
Consumer rights activists say good governance is sorely lacking at Nepal Oil and other public enterprises.
The government company says the public will hopefully stop criticizing it as the auto pricing mechanism is finally being implemented.
“We have been criticized for not implementing the automatic pricing mechanism and overcharging customers. Now onwards, we won’t be blamed for it,” said Manoj Kumar Thakur, deputy director of the corporation.
“Due to various factors and interventions, the company was not able to implement the system fully,” Thakur said.
Nepal Oil will still add Rs3.63 per liter to the price of petrol and Rs2.79 per liter to the price of diesel as its profit margin.
“There will be no mark-up in cooking gas,” Thani told a press meet held after the decision to implement the system.
After the adoption of the mechanism, domestic gasoline prices will rise and fall in line with international fuel prices. Domestic prices are changed at pre-specified regular intervals—weekly, bi-weekly or monthly—to fully reflect changes in international prices.
In Nepal, under the automatic fuel price mechanism, the corporation will set prices based on the tariff it receives from its sole supplier Indian Oil Corporation.
Indian Oil Corporation reviews export prices of petrol and diesel/kerosene every fortnight and of other products such as aviation fuel and LPG on a monthly basis.
According to the new tariff list sent by Indian Oil Corporation on Sunday, the price of petrol has declined by 34 paisa per liter while diesel has increased by Rs2.47 per litre.
With the new system in place, the cost of petrol has dropped by Rs6 per liter to Rs164. Diesel has become cheaper by Rs4 per liter and will now cost Rs146 per litre. The price of a cooking gas has come down by Rs10 per cylinder to Rs1,790.
The government has also published an automatic fuel pricing mechanism working procedure.
“It’s a welcome decision,” said Prem Lal Maharjan, president of the National Consumer Forum. “The system will enable consumers to buy petroleum products at fair prices according to the international market price.”
The budget statement has also announced plans to fully implement the automatic pricing mechanism.
“Let’s be hopeful that the corporation will implement the automatic pricing mechanism fully,” said Maharjan.
Nepal imported petroleum products worth Rs383.92 billion in the last fiscal year.