Ceylon Petroleum Corporation: What is driving the losses? – Opinion


Ceylon Petroleum Corporation (CPC) is a fully state-owned company engaged in the sale and distribution of fuel in Sri Lanka.

The CPC controls 86 percent of the market share in the retail petroleum sector. At the end of 2020, CPC debts stood at Rs. 529 billion – among the highest debt levels for a state-owned enterprise in Sri Lanka.
Meanwhile, the company’s cumulative net loss was Rs. 326 billion at the end of 2018. This is expected to increase further in 2020 as there was an additional loss of Rs. 9 billion in 2019 and 2020. In contrast, Lanka IOC – which also sells and distributes fuel in the retail market in Sri Lanka – has made profits every year for the past 10 years except 2018.

IOC also had positive retained earnings of Rs. 11.8 billion at the end of March 2020. This raises an important question as to why the CPC was unable to make a profit, while its competitor who charged similar fuel prices , was profitable.

This Insight shows that CPC has been operationally profitable in the past. However, the accumulated losses recorded can be entirely attributed to poor cash and financial management, which is reflected in interest charges and significant foreign exchange losses.

Operationally profitable CPC
Data from the Ministry of Finance shows that the CPC has made gross profits every year since 2013. That is, revenues have exceeded cost of sales including taxes (see Exhibit 1). In the past 10 years, the CPC recorded gross profit of Rs. 281 billion. Therefore, CPC losses cannot be attributed to the sale of fuel at a price lower than its cost plus taxes.

Even including the operational costs of sales and distribution, administration and depreciation, CPC still made a profit in most years. Accumulated operating profit stood at Rs. 29 billion over the past 10 years (2011-2020). Therefore, the substantial accumulated losses cannot be explained by the addition of general operating expenses, nor by capital depreciation costs.

CPC net profit mainly hampered by foreign exchange loss and interest expense
CPC losses materialize when financial charges and exchange losses are included in the income statement. Costs resulting from finance charges and exchange losses amount to Rs. 335 billion over the past 10 years. The cumulative loss – estimated at Rs. 335 billion through 2020 – can be attributed to
these fees.

Foreign exchange loss details
CPC’s foreign exchange losses result from a currency mismatch in its balance sheet. The company has trade receivables primarily denominated in Sri Lankan rupees.

In 2018, 70 percent of Rs. 86 billion trade receivables were denominated in Sri Lankan rupees and 30 percent in foreign currency. Trade receivables in December 2018 are mainly from (i) Sri Lankan Airlines — Rs. 25.6 billion, (ii) Ceylon Electricity Board — Rs. 47.6 billion, (iii) Independent Power Producers (IPP) – Rs. 6.7 billion, and (iv) armed forces – Rs. 0.82 billion.

However, CPC’s current liabilities are mainly denominated in foreign currencies.
of Rs. 245 billion.

It also has short-term US dollar denominated bank loans from the People’s Bank and the Bank of Ceylon in the amount of Rs. 295 billion (backed by a Treasury guarantee of US $ 1,800 million). These loans are used to finance import invoices payable to suppliers.

Given the currency mismatch between current assets and liabilities, whenever the Sri Lankan rupee depreciates against the US dollar, there is a significant negative impact on CPC’s financial statements, which is reflected in the income statement as a loss to the company. For example, when the rupee depreciates by 1% in a year, the profit of the CPC decreases by Rs. 5,765 million considering the value of the liabilities at the end of 2018.

Conclusion
Reducing the financial losses of public enterprises (SOEs) is essential to improve the overall fiscal position of the country. In some cases, losses of SOEs have been justified as being necessary to provide goods and services to the public at preferential prices.

In the case of CPC, it is evident that the financial losses do not arise from the preferential prices granted to consumers. Instead, CPC’s weak cash flow and financial management resulted in a large loss without benefiting the public.

(Verité Research is an independent Colombo-based think tank that provides strategic analysis to high-level decision-makers in economics, law, politics and media. Comments are welcome. Send email to [email protected])

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