Paying the price of the free market at the pump
The Government issued a decree in April giving petrol dealers autonomy to set the retail price of petrol. The move aims to free the government from the burden of subsidizing fuel costs and shift pricing from centralized management to market forces. However, analysts warn, market conditions and the financial capacity of domestic retailers may make enforcement of this decree premature.
The issuance of Government Decree No. 55 of
Government authorization of traders to fix the retail prices of petrol and oil based on market prices (after paying all required taxes and fees) will free the state budget from the price subsidy for this commodity whose daily sales hit around VND 80 billion (roughly USD 5 million) and ensure stable tax revenues from oil and petrol imports.
Article 25 of the Decree stipulates that the Finance Ministry shall, based on the National Assembly-set tax bracket, balance norms and world oil price forecasts, coordinate with the Trade Ministry in specifying the import tax rate applicable to each category of petrol and oil, ensuring stability and conformity with socio-economic conditions in each period. This provision introduces a sharp and flexible management tool to ensure stable import tax rates while giving room for necessary changes in accordance with socio-economic realities.
The new Decree also spares state management agencies of the complex task of pricing, enabling them to focus on their role of supervision and stopping violations, while still ensuring tight control over the market of this strategic product via Article 26 which requires petrol traders to pay all taxes and charges before they can fix retail prices.
On the other hand, the Decree facilitates oil and petrol traders in devising import plans and adopting price strategies in accordance with market changes. It also makes petrol traders more active in their business, especially in devising strategies on business development and price stabilization, said Mr. Bui Ngoc Bao, deputy general director of state-owned Petrolimex, the country’s largest petrol enterprise.
Yet, giving petrol traders the freedom to decide on retail prices also means consumers will have to pay more once world prices rise, given the unchanged import duty rate, some experts said, adding that the market mechanism will also put businesses under pressure to lower prices to lure buyers.
Despite the clear targets expected with the issuance of the new Decree, the achievement of these targets remains questionable due to a number of factors, analysts said.
First, precisely forecasting world oil prices remains a tough challenge and failure in doing this may lead to a number of consequences, including the impossibility of a stable import tax rate, analysts said, pointing out the fact that, in order to stabilize the import tax rates of oil and petrol within a year, not only world oil prices but also their fluctuation bands and cycles must be predicted.
According to statistics for the latest 39 months, the Government has had to adjust the domestic retail prices of oil and petrol 13 times. Before or after each price adjustment were numerous import tax rate adjustments. If the import tax rate cannot be stabilized, the domestic retail prices will certainly follow suit, placing the target of price stabilization out of reach.
Next, the possibility for domestic oil and petrol businesses to stabilize prices by making up for losses with profits is also unlikely due to their weak financial capacity. The Decree requires petrol traders to have a minimum reserve for circulation of a mere 20 days, to be increased to just 30 days by 2010. With such modest capital, domestic petrol traders are most likely to run out of capital in a three-week time when world prices experience sharp rises, the analysts estimated.
In reality, world oil prices often see constant fluctuations as a result of sharply increasing demand, putting supply under hard pressure and making oil prices vulnerable to global economic and political changes as well as weather conditions. Therefore, without the price subsidy buoy, domestic businesses will obviously choose the easiest tool of a price hike to prevent capital shortfall, the analysts pointed out.
Finally, even if management authorities are presumably able to control the market and prevent monopoly, there are grounds to believe that the market mechanism can hardly operate when there are only 11 oil and petrol businesses joining the market, with Petrolimex alone holding nearly 60% of the market stake and together with PetroVietnam, Petec and Saigonpetro, dominating some 90% of the market. The target of market prices most beneficial to consumers thus remains unmet.
Trade Minister Truong Dinh Tuyen, in an interview with the Saigon Giai Phong (Liberated Saigon) daily, said that it was agreed in a meeting this month between the Trade and Finance Ministries and petrol businesses that sale prices of oil and petrol will not be set according to temporary market fluctuations and petrol traders must use profits to cover up losses upon world price hikes.
Mr. Tuyen also stressed in an April online interview that petrol traders are now given the freedom to decide on their business and so must figure out business plans and pricing strategies to ensure overall profits for the year rather than chase after world market ups and downs.
He also cited the limit of price increase of VND 1,000 per liter for each occurrence to prevent market shocks. Petrol traders will also not be allowed to raise the retail price by VND 1,000 per liter two times within three months and must register their price increases in advance.
The Government will keep a close watch on petrol pricing, the Minister reiterated, adding that an inter-ministerial supervision group will be set up with specific powers and responsibilities to ensure state oversight of this sensitive business area.
The Government will promptly suspend any unreasonable price levels set as a result of collusion among retailers to increase prices, but, on the basis of various fixed factors such as world prices, VAT, special consumption tax and circulation charges, said Mr. Nguyen Tien Thoa, deputy director of the Finance Ministry’s Price Management Bureau. Violating businesses will be subject to sanctions of VND 10-20 million as well as business license withdrawal and penal liability, he added.-
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