The triple effect of increasing oil prices, appreciating dollar and steeply rising demand are placing severe strains on the Government's subsidy burden and on the balance sheets of the oil and fertilizer companies. The problem is compounded by the inability (or unwillingness) of the Government to pass on the increase in market price to the consumers.
The subsidy component in the sales of petroleum products sold under the Administered Price Mechanism (APM) in July were Rs 5.90 per litre on petrol, Rs4.80 per litre on diesel, Rs 14.65 a litre on kerosene and Rs 189.15 per cylinder of LPG. These products account for around 50% of the oil companies’ sales, while the other 50% comprises products that do not come under the APM.
It is in this context that the Government of India have decided to issue bonds to petroleum and fertilizer companies for securitizing the subsidy dues owed to them. Such bonds are interest-bearing IOU receipts issued in tranches by the Finance Ministry, that can be included in the balance sheet of oil companies. The bonds will be issued to these firms, and the finance ministry will organise payment of interest from the general budget and the principal on maturity. The PSUs can in turn sell them in the market at a discount to meet their cashflow requirements. The amount of bonds that these oil companies can sell in a quarter is also capped at 25 per cent of the total bonds in their portfolio. The main purchasers will again be other government insitutions, mainly the Life Insurance Corporation.
The investment of banks in these bonds will not be reckoned as an eligible investment in Government securities by banks and insurance companies for their statutory requirements. While the bonds will be transferable and eligible for market ready forward transaction (Repo), they will not be an eligible underlying security for ready forward transactions (Repo/Reverse Repo) with the Reserve Bank of India.
The Government of India have decided to issue fertilizer bonds of upto Rs 7500 to the fertilizer PSUs to compensate them for selling fertilizers at subsidized rates. In December 2007, the Government issued the first tranche of "8.30% Fertilizer Companies Government of India Special Bonds, 2023" for Rs 38.90 billion to 22 fertilizer companies. The fertilizer subsidy is expected to increase from Rs 11,835 crore in 2003-04 to an estimated Rs 47,979 Cr in 2007-08, including an Rs 8788 Cr carryover from last year.
The total petroleum subsidy in 2006-07 amounted to Rs 49,387 Cr (about $12.43 per barrel), or a cost recovery per barrel was $49.93 against an average cost for the year of $62.36. The subsidies are estimated to be Rs 54,935 Cr for 2007-08 and increase by Rs 2,200 crore for every one dollar increase in crude oil price. The Government is considering issuing petroleum bonds worth Rs 23,457 Cr in 2007-08, to partially compensate oil companies for their subsidy related losses. The Government has previously issued 7-year oil bonds amounting to Rs 9,000 crore on March 30, 2002, and 10 year Oil Bonds for Rs 24,000 Cr with a coupon rate of 7% in 2006-07.
The government does not account for these bonds in the fiscal deficit, or the gross borrowings target for the year, despite the bonds being a direct liability of the Government of India. This liability is also not covered under the Fiscal Responsibility and Budget Maintenance (FRBM) Act. This is virtually an off-balance sheet liability, and we have seen numerous examples in the private sector of how such financing could unravel.
There are many dangers associated with such financing. This could open up the floodgates for similar financing of other Government expenditures, involving food and other subsidies. The Prime Minister’s Economic Advisory Council, in its Economic Outlook for 2007-08, has highlighted such off-budget contingent laibilities, "Realistically, another 2% of GDP should be added to the reported revenue and fiscal deficits in order to get a more accurate picture of the state of government finances."
With the oil bonds a reality, the Government ought to atleast now put in place effective mechanisms to repay the same. The major share of oil is imported and is therefore paid for in dollars. It therefore makes sense to issue these bonds in dollars, so as to reduce the exchange rate risks and also make it more attractive for external investors. These bonds could be then sold externally by the Petroleum companies to even foreign investors and raise foreign exchange capital requirements for funding their purchases. This would also rule out any inflationary impact, which is likely to be generated by domestic transactions between the oil companies and the local FIs, and further on. With comfortable forex reserves, the RBI could afford to sell similar dollar-denominated bonds. This would also nicely set up the market for the inevitable future disinvestment of these oil companies. There is a precedent here.
The Venezuelan state-owned oil company, Petróleos de Venezuela, or PDVSA, sold $7.9 billion of dollar-denominated bonds in Latin America's biggest corporate bond sale ever. The sale was also partly designed to force down inflation and a falling currency. The PDVSA bonds were sold only to local investors, who could purchase them with bolivars and resell them to overseas investors for dollars.
1 comment:
Rising Crude prices and Govt.’s quandary
By Bharat Pitti
bharatpitti@hotmail.com
Under the scenario of burgeoning prices of crude, there are three options with the Govt., either to increase prices of perto products in tandem, or to cut down the taxes, or to make good losses of OMCS by giving them assistance. Of the above options, what option the govt. should follow depends upon the merits and demerits of the options. It can rely entirely on one option or may choose a bit of one and a bit of the other.
For last some years the Govt. has been resorting chiefly to off balance sheet financing in the shape of oil bonds to cope with the burgeoning crude prices. Oil bonds are issued to OMCS and expenditure of the union govt., which will be accounted for by it at the time of their maturity. For OMCS they form part of their current revenues.
For the Govt. the oil industry as a whole is one unit, which comprises all govt. owned companies viz., upstream companies and downstream companies i.e. ONGC, OIL, GAIL, IOC, BPCL, and HPCL
In the year 06-07 the govt. issued oil bonds of about Rs 24000 crores, which is roughly about ½ percent of GDP. Oil industry has always been a rich cash cow for the govt. as every year it milks huge revenues from it in the form of indirect tax, direct tax, and dividends. A revenue of about Rs 140000 crores accrues to the governments, 95000 crores to the central and 45000 crores to the states.
In the year 06-07 the average price of basket of crude imported by India was about $ 63 per barrel. Even at such a high price of the crude, the union govt. was not only able to do away with any price increase in petro products(whatever price was increased was rolled back), but able to keep intact its oil revenues both central and state Govts.)
The amount of oil bonds of Rs 24000 crores given by it in 06-07 was about equal to its revenue of direct tax and dividends only from the six oil companies. Last year it got about Rs 22000 crores in the form of income tax, dividend, and dividend tax from IOC, ONCG, HPCL, BPCL AND GAIL. And about 2000 crores it must have got from OIL.
The peculiar features of these bonds is that this outgo does not form part of the govt.’s expenditure in the current year, but due to the bonds issuance it earns income in the current year by way of Dividends and Income tax from the oil companies to the extent that is attributable to it.
In the current year 07-08 the amount of the bonds is likely to total about Rs 30000 crores plus.
In first 9 months of 07-08 of 83 MMT petro products sold by the three OMCs the domestic sales of the four controlled products was about 55 MMT translating into about 60 MMT or 438 Million barrels of crude oil consumption. The under recovery for this period was Rs 47765 Crores or 12.1 Billion dollars. This all translates into under recovery of about $28 per barrel and average price of the crude of the Indian basket was about $75 per barrel meaning for nil under recovery the crude of the Indian basket need to rule around $47 per barrel.
There is need of about 1.63 Million Barrel crude daily to produce the required four controlled products. For rise in each dollar of crude price their combined under recovery goes up $1.63 million or Rs 6.4 crores daily.
Post a Comment