Audit watchdog wants government to rework rates at which oil is bought from private firms
The Comptroller & Auditor General (CAG) of India claims oil marketing companies (OMCs) have made gains worth Rs 50,000 crore between 2007 and 2012, which were never passed on to the end-consumer.
This is contrary to the popular belief that OMCs make huge losses on sale of petroleum products that are subsidised by the government.
The audit watchdog also flayed the government's fuel pricing policy in its report that was submitted to Parliament on Friday, saying it gave "undue benefits" to private refiners such as Essar Oil and Reliance Industries. The report called for renegotiating the rates at which diesel is bought from them.
State-owned oil retailers buy diesel from private refiners as their own production is insufficient to meet domestic demand. This purchase is done at a trade parity price (TPP), which is 80:20 of the actual import cost and export parity price (actual price realised on exports).
The CAG said private refiners export the remaining petroleum products they produce at a price lower than the price at which the OMCs buy from them.
The government auditor has pointed out that notional elements in the price build-up of the petroleum products, which are actually not incurred during production, jacks up the retail price and also affects the determination of under recoveries.
The OMCs have been reporting under-recoveries of over Rs 1.10 lakh crore every year. The CAG said all these projected losses are notional due to flawed petroleum pricing.
"Elements of costs, namely freight, insurance and customs are not actually incurred in the production of the refined products in OMC refineries. However, being included in the pricing methodology, or price build-up, they form part of the refinery gate price, which refineries are compensated," said the CAG report.
"Addition of these notional elements had the effect of increasing the refinery gate prices for refined- regulated products processed in OMC refineries by Rs 50,513 crore," said the CAG. These notional charges are insurance charges, letter of credit charges, ocean loss, wharfage charges, and basic custom duty, among others.
Out of the Rs 50,513 crore, the custom duty itself accounts for more than half of notional elements in the build up to the prices at about Rs 28,544 crore.
The ministry of petroleum and natural gas, however, pointed to the CAG that the actual cost of production in Indian refineries is identical to the refinery gate price and the pricing methodology is not a source of benefit to the OMC refineries. The CAG, meanwhile, observed, "The actual cost of production referred to by ministry, is as per cost audit reports and as per the studies by Cost Accounts Branch, ministry of finance, an allocation of costs incurred by the refinery to the products on the basis of their sales realisation, in view of the composite nature of the refining process. In fact the composite nature of the refining process has been cited as one of the reasons for refineries being unable to arrive at the actual cost of production."
The auditor said continuance of protection in the pricing mechanism was intended to improve efficiencies and encourage investments in technology upgradation in PSU refineries which has not been fully achieved.
"There is a strong case for review of this mechanism in view of the limited progress in improvement of the efficiencies of refineries and consider an alternate transparent, target oriented mechanism in the case of poorly performing refineries," said CAG.
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