charindra chandrasena  00:03
Over the past 30 odd days, Sri Lanka has seen several fuel price hikes, followed inevitably by complaints from consumers. But what if I told you that certain countries are actually revising their full prices far more frequently than Sri Lanka is. Sometimes, as often as once a day. India is one such example, and today we are going to look at their model, why Sri Lanka should eventually move towards that, and why now is the time to prepare for it, even though it's not the time to implement it, and the benefits Sri Lanka can get out of that model. Sri Lanka's fuel is priced according to the fuel price formula, but have you ever noticed that when global oil prices spike, our prices at the pump go up soon after, but when global prices drop, they drift down slowly like a feather, or don't move at all. This is a built-in feature of how the state-owned Ceylon Petroleum Corporation operates. They use two different sets of logic depending on whether they are gaining or losing money. When global prices rise, the CPC uses replacement cost. They say they need to raise your price today so that they have enough cash to buy the next shipment, which is going to be more expensive. They are looking at the future to justify raising your price now. But when global prices drop, they suddenly stop looking at the future. They switch to historical costs. They argue that they can't drop your price yet because they bought this current stock 30 days ago when it was very expensive. Essentially, they use the future to raise your price and the past to keep it high. This lag time means you're always paying for the market conditions of a month ago. In a daily pricing model, this lag is gone. You pay for what oil is worth today, and that is the model that's used in India. To better understand this, let's talk about why you see different prices at different stations? For 20 years, every station in Sri Lanka charged approximately the same price. We've now entered an era of decoupling. The main worry of the government is a total collapse of public transport amid the crisis. If diesel prices for buses and lorries go too high, the price of every loaf of bread and every bus ticket in the country explodes. This is called cost-push inflation. So the government has decided that common man's fault, which is the 92 octane petrol and auto diesel, must remain subsidised. The CPC is currently losing a staggering 20 billion rupees for every single month that they keep these specific prices artificially low for the public. But private companies like Sinopec and LIOC don't get that 20 billion from the government. If they sell at cost, they are not subsidised because they are private businesses. Which means, if they do that, they will eventually run out of money and stop importing. This could lead to a nationwide crisis. And to prevent this, the government pulled an emergency brake and allowed a decoupling of the premium fuels, they effectively deregulated 95 octane petrol and super diesel. They informed the private companies that they must match the CPC's low subsidised price for 92 octane and auto diesel, so that the buses and the three wheelers can run. But in exchange, they can charge whatever they want for premium fuels. That is why 95 octane and super diesel prices have gone pretty high at private stations. The person driving a luxury SUV is now paying a convenience premium. They are paying the true market price plus a bit more, and those high profits allow the private company to stay in the country and keep selling the basic 92 petrol at the lower subsidised rate. It's a system where the wealthy SUV owner is effectively subsidising the three wheeler and the bus. It's a bandaid that keeps the country running during this crisis, but it's not a permanent solution for a healthy economy. So, what is the alternative? Let's look at the Indian model of dynamic fuel pricing. Every morning at 6 a.m. the price at every Indian petrol station updates automatically. But they don't just track the. Daily global price because that would be like a roller coaster. Instead, they use a 15-day rolling average. Imagine global oil prices are stable at 100 rupees.

charindra chandrasena  05:12
Suddenly, a war breaks out and the price jumps to 130 rupees in one day. In Sri Lanka, we would wait two weeks, let the pressure build, and then hit everyone with a massive 30 rupee hike at midnight. In India, they take that 130 rupee spike and average it with the previous 14 days of stable prices. The result is that the price at the pump only goes up by a few cents the next morning, it's a tiny, manageable adjustment. Over the next two weeks, the price slowly climbs bit by bit until it reaches the new level. The consumer doesn't feel a shock; it's an incremental, gradual increase. So, how did India implement this model? It was completed in 2017, and while India's size looks like their biggest challenge, they actually turned it into a strength by using a pilot project. In May 2017, they didn't just flip the switch for the whole country at once. They picked five specific cities and ran a 40-day test. They wanted to see if the technology worked and if the public panicked. It worked so well that they went national just one month later. India had to coordinate over 60,000 fire stations across a country the size of a continent, Sri Lanka has roughly 1300 stations in total. We are effectively the size of one small Indian state. If India could connect 60,000 pumps to a central digital system using the Internet of Things technology, Sri Lanka can do it in a fraction of the time. We are small and centralised, and our stations are already using digital QR systems. The plumbing for a daily system is halfway built. However, now is not the ideal time to implement this system, but it is the ideal time to start planning for that implementation because the world is in crisis, oil prices are volatile, and they keep skyrocketing. However, if we lay the groundwork now, by the time the crisis is over, and it will eventually end, we will be ready to move into a daily pricing model. To begin planning for the implementation, we need to establish three main parts. First, we need digital transparency. Right now, the government doesn't actually know exactly how much fuel is in every private tank at any given second. To have daily pricing, every fuel pump needs to be connected to a central dashboard to be able to track their inventory levels and prevent hoarding. If a dealer knows the price is going up by, say, three rupees tomorrow, they might try to close the station today to save stock. A digital system would flag that instantly. Second, we need storage independence. Currently, all our fuel is stored at the CPSTL tanks at Kolonawa. So, if one company wants to lower its price to compete, but its fuel is physically mixed in a tank with the CPC's fuel, it creates a massive accounting mess. We need to let companies manage their own storage so that they can actually compete on price. Third, we need targeted support. This is the most important part. Instead of the government losing 20 billion rupees a month subsidising foal for everyone, including the wealthy who don't really need it, we should move to a daily market price and take that 20 billion and send it as a direct cash transfer straight to the bank accounts or the digital wallets of whole consumers who actually need help. Moving to a daily pricing model is an investment for the future. It is about replacing political drama and uncertainty with technical precision. India showed that even a country the size of a subcontinent could move to daily pricing in a matter of months by starting small and utilising technology. Sri Lanka, being much smaller and more connected, has no excuse. The Iran crisis will eventually end, but if we start planning now, by the time things normalise. Our full industry and consumers will be in much better shape.


Transcribed by https://otter.ai