Deregulate the oil marketing industry: COO Hascol Petroleum Limited

BR Research: Tell us about the brief history of Hascol and its operations in Pakistan. Saleem Butt: In 2005 the government decided to introduce new companies to increase competition. It devised certain criteria for new entrants. Hascol is one of the seven companies which were granted the license.
We started developing our front end, which comprises of retail outlets and franchises. Concurrently, we started development work on facilities for supply chain management. Hascol presently has over 180 fully commissioned retail outlets, which is quite an achievement given the limited span that we have been in the business and the difficulties that we have coped with during the entire period. And, if the environment for oil marketing business in Pakistan is conducive, we can put another 400 retail outlets.
BRR: What problems does Hascol face in the current environment?
SB: Petroleum marketing is a capital intensive undertaking. Prices of petroleum products are at a historical high level which increases the working capital. Also cost of construction of storage facilities has gone very high. The business environment, therefore, has to be conducive and investor friendly for the oil marketing companies to stay viable and expand.
Unfortunately, there is not much support coming our way in terms of policies and facilities. I would like to cite continued reduction in the margins of OMCs as an example. On top of the reduction there is a price anomaly as smaller players have to follow PSO prices which put additional burden on us. The basic focus of the government should be to provide a platform where there are equal opportunities for everyone in the industry. Long-term policies should be formed with the help of OMCs to replace decision making on ad hoc basis. This requires capacity building within Government and private sector.
The government has imposed a turnover tax on us which is much higher than the corporate tax rates for other industries. BRR: Margins have been revised upwards of late. What does it mean to you?
SB: This is a much needed step but it still falls below the required level. The real benefit of this move is mostly available to big OMCs who are price makers. For a smaller company there are times when our margins are negative.
We are forced to keep a 20-day storage which increases our inventory and storage costs significantly. The margins have only improved marginally which is not enough to pay-off the huge investment that needs to be put in to build storage capacities and depots. Margins initially were three-and-a-half-percent that went down to two percent and below. This is a revival but it is far from satisfactory and far from making our businesses viable.
BRR: What exactly should the government do to address your concerns?
SB: For starters, there has to be a consistency in the government policies, because when an investor comes in, he puts the money at risk on certain assumptions. If those basic parameters are changed, the whole scenario changes and dents the investors' confidence.
The existing price formula needs to be changed. It may be workable for the bigger companies with lower depreciation and availability of unsecured supplier credit, but for a company like Hascol, who are in the process of incurring significant capital cost financial charges have skyrocketed because of this. We do not have the luxury to charge penal interest on our receivables, a luxury that the bigger companies enjoy and that somewhat offsets their financial costs.
Deregulation that has been reversed recently should be progressed as it will ensure competition and will result in providing more benefits to end-consumer. Government should study the strategic stocks model of different countries where the responsibility of such stocks is taken on by Government. The Petroleum Development Surcharge should be used for this purpose instead of being treated as tax revenue. We also support implementation of recommendations made in Bhagwandas report.
BRR: How is the lubricant business performing?
SB: Lubricant is a deregulated business. Hascol is in partnership with one of the world's leading brand Fuchs. The product range that we offer to the consumers allows them the chance to choose, which makes it beneficial for both parties. Same is the case with furnace oil, where deregulated business is resulting in more competition and benefits for both buyers and sellers.
BRR: The government says it is gradually moving towards deregulation!
SB: As I have said earlier that of late process of deregulation is reversed. For example, instead of abolishing the Inland Freight Equalisation Margin, it has been reversed. The IFEM is massively abused and its deregulation will benefit the end consumer and also new companies.
Price uniformity of petroleum products in my view is not a big item. Every day requirements are bought at different prices by people of Karachi and Swat. So consumers will not be making big waves if there is a price disparity to account for actual transportation costs.
BRR: How long can Hascol cope with the current environment? What is the tipping point for Hascol?
SB: What keeps us afloat is the deregulated business of lubricants and furnace oil where we give tough competition to all market payers and in the process enhance customer value. Hascol would like the government to deliver on its promise of level playing field and deregulation so that the same competition may happen in the retail network.
BRR: What is the way out?
SB: In my views the way out is
---- Deregulation of downstream petroleum marketing sector
---- Long-term policies with the consensus of all players
---- Transparency in decision making
---- Level playing field.
For Hascol we are also focussing in the area of providing LPG solution to our customers. We have a plan to develop around 300 LPG stations throughout the country. This will alleviate the suffering of consumers due to shortage of CNG.
COURTESY: Economics and Finance Department, Institute of Business Administration, Karachi, prepared this analytical report for Business Recorder.
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