OIL PSUs' to get compensation for selling fuel at government-controlled prices

RS 15K-CRORE CAP ON OIL PSUs' COMPENSATION
Public sector oil companies IOC, HPCL and BPCL may end up getting a maximum cash compensation of Rs 15,000 crore in fiscal 2009-10 from the government for the losses incurred by them for selling fuel at government-controlled prices, even as the compensation formula may be re-examined, a senior government official said. "We can revisit the compensation formula though the finance ministry would prefer to bear only up to one-third of the total burden," a finance ministry official said. The finance and oil ministries are yet to come to a consensus over the actual amount of compensation due to the oil companies as there are differences over on the total losses incurred by them.

The pricing of petro products includes notional costs like freight charges or insurance that should not be included as far as loss calculations are concerned, another senior government official said. Prime minister Manmohan Singh is expected to discuss this issue at a meeting next week with both finance and oil minister. The finance ministry has been pushing for reforming the pricing of fuel products in the country but nothing has moved forward on this count despite reports from several expert committees. The latest Kirit Parikh committee is expected to give in its report by the end of this month.

"We would like to limit the compensation to Rs 12,000 to 15,000 crore which we could provide in cash. We would prefer not to issue oil bonds," finance secretary Ashok Chawla said. The view now is that the government should compensate OMCs for the losses they have incurred on selling cooking fuel LPG and kerosene. The remaining compensation on autofuel - petrol and diesel - will have to be met by ONGC and OIL who have to take a hit on their bottomlines as they sell crude to the domestic government refineries at discounted prices.

This a clear departure from the past practice where the government doled out oil bonds instead of cash compensation to the oil companies in lieu of their losses. Oil bonds are a way of deferred payments where the government puts off its cash outgo for the current year for a later year. Oil companies trade these bonds in secondary markets to raise capital and ease their liquidity problems. Since, these bonds were deferred payment they did not show up in government accounts and thereby helped it in showing lower fiscal deficit in keeping with the targets set in the Fiscal Responsibility and Budget Management Act. 

Deepshikha Sikarwar, New Delhi....The Economic Times