MoEA drafts RGOB-GoI MoU for lower fuel prices but issues still remain

The Ministry of Economic Affairs (MoEA) has drafted a Memorandum of Understanding (MoU) for the sale of fuel from India to Bhutan that primarily aims to change the current set up and reduce fuel prices in the process.

The aim is to get this MoU signed at the government to government level between the MoEA and the Petroleum Ministry in India instead of the current set up of an agreement between Oil Public Sector Undertaking (PSU) companies in India and oil dealers in Bhutan with an overall agreement with the Department of Trade.

A key point in the draft MoU is on pricing. The MoU asks for an ex-factory price which is the cost of the raw fuel plus refining costs, transport costs, administrative costs and margin rather than the current system of bulk pricing.

Bhutan is currently being charged bulk pricing on fuel which is the higher rate charged to commercial entities in India like railways, malls, big industries etc.

An official said that due to bulk pricing Bhutan is paying around Nu 12 more per liter than it should. He said Bhutan has sought the details of the price break up from the PSUs but they have not given it so far.

The MoU also mentions the requirement to give a break up of the prices.

The official said that Bhutan is not asking for any subsidy and is willing to pay all the refining and administrative costs, but wants a consistent and transparent system of pricing.

Officials suspect that bulk pricing is a recent phenomenon and may have been applied recently a few months ago.

The other aspect of the MoU is on the consistent supply of fuel so that one fine day the PSUs will not turn around and say they do not have fuel or cannot supply it.

Another key point is in identifying the points and routes through which fuel will enter Bhutan like Samtse, Phuentsholing, Gelephu, Samdrupjongkhar etc including the routes Bhutanese trucks will take to go to the nearest depots or refineries of the PSUs.

This is to ensure that in the future there are no regulatory or other barriers like the trucks being stopped or other security and commercial barriers coming up.

The MoU has been sent to the Office of the Attorney General for vetting to ensure it is in line with the legal processes to draft an MoU with a foreign country.

Once that is done, the MoEA will send the draft to the Ministry of Foreign Affairs with whom there will be discussions and then the MFA will convey this to the Indian side which in this case is the Petroleum Ministry.

This is expected to lead to talks and negotiations between the two countries with a working level technical group looking at the details where it is hoped India’s Petroleum Ministry can involve the so far evasive Oil PSU companies.

Issues in the MoU

While the MoU talks of the additional bulk pricing which is suspected by the MoEA to be imposed on Bhutan from March 2022 by Oil PSUs, the bulk pricing is only a recent addition, and the real nature of the problem is deeper and goes back decades.

Both Petrol and Diesel in India are cheaper than Bhutan or around the same price at times. This does not make sense as in India the fuel sold there includes the raw crude price, transport price, refining cost, administrative expenses, agent commissions and around 40% to 50% in central and state government taxes.

Since Bhutan should not be paying the Indian domestic taxes in theory we should be getting oil at around half the price we currently import at.

For example, a liter of diesel in Thimphu right now costs Nu 120.68 a liter and petrol costs Nu 100.52 a liter.

The Indian Oil Corporation which is the largest PSU supplier to Bhutan on its own website gives a price break up of both fuels in Delhi.

 As of 1st July 2022 it says the base price of diesel which covers the price of crude and refining cost is INR 57.92 per liter and freight or transportation cost till Delhi is INR 0.22 per liter bringing the total to INR 58.14.

Added to this is INR 15.80 per liter in central government taxes, INR 13.11 in state government taxes and dealer commission of INR 2.57.

The total overall is INR 89.62 per liter for diesel in Delhi.

Bhutan should not be paying the INR 31.48 in taxes and commission to the Indian dealer.

Ideally we should be getting the diesel at Nu 58.14 with Nu 1.86 per liter in transportation charge coming to Nu 60 and with our 15% Green Tax, Sales Tax, commission and other levies it should be around Nu 69 at Phuentsholing and around Nu 72 per liter in Thimphu.

However, what is happening now is double trouble for Bhutan especially in diesel which even with the inflated rates of above was marginally cheaper than in India until one to two years ago.

In addition to the already high rate being charged to Bhutan, Oil PSU companies seem to have quietly changed the already overcharged prices to Bhutan to an even higher bulk pricing model recently.

In the case of petrol, the same IOC website shows that as of 1st July 2022 the base price which is INR 57.13 and freight or transportation cost till Delhi is INR 0.20 per liter bringing the total to INR 57.33.

Added to this is INR 19.90 per liter in central government taxes, INR 15.71 in state government taxes and dealer commission of INR 3.78.

The grant total is INR 96.72 per liter for petrol in Delhi.

Like in the case of diesel Bhutan should be getting petrol inclusive of transportation cost at around Nu 60 at the border and after our 15% in taxes and commission should be around Nu 69 per liter in Phuentsholing and around Nu 72 per liter in Thimphu.

So while the MoU talk about doing away with bulk pricing, which is a recent phenomenon, will help reduce the prices,  but only to levels that was around a year or two ago which is still highly overcharged.

If the MoU can get prices at the actual cost plus or factory plus model, then fuel prices in Bhutan should come down by around Nu 30 per liter for petrol and Nu 50 per liter for diesel.

If this is not possible then Bhutan should at least aim to get fuel at the same price as Nepal from India which in April 2022 was Nu 12.23 cheaper per liter of petrol than Bhutan and Nu 11.48 cheaper per liter of diesel than Bhutan.

There is also the issue of Indian PSUs buying large quantities of discounted Russian Oil but somehow the benefits do not appear to be trickling to Bhutan.

In short, the fuel prices for Bhutan was already in a hot pan for a long time, but the recent addition of bulk pricing moved it into the fire.

The aim for Bhutan should be to get it out of both the fire and the hot pan and not just the fire. This would result in savings of billions in import bills as fuel is our biggest import at around Nu 8 bn a year, reduction of the trade deficit and reduction in the outflow of valuable INR from our limited reserves.

This paper in a series of stories has shown how Bhutan is being overcharged for fuel compared to pumps in India and also Nepal and also showed all informal arguments from Oil PSUs justifying a higher price of Bhutan not to be supported by facts on the ground.

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