Q: Why a new pricing mechanism?
Since 2004, the committee of the Automatic Pricing Mechanism (APM) used to meet every 3 months to certify the retail price of petroleum products. As from November 2008, this exercise was carried out every month following the exceptional price rise and fall that started in May that year.
Various weaknesses have been observed in the system and the public simply could not reconcile price movements on the world market with the domestic APM price changes. Price decrease alternated with price increase month after month. The increases in price were almost always perceived as exaggerated and unnecessary, especially when announced at times when world prices were going down. The decreases for their part were always perceived as insufficient and slower to come.
Moreover, the elements comprising the price structure were not well understood. Hence, the need for a more transparent and stable system.
Q: What will the new system bring?
Prices will not be changed every month, but only when rendered absolutely necessary as a result of significant changes in price trends on the world market. One of the key objectives of the new mechanism is to mitigate, if not nullify, the effects of world price fluctuations on retail prices at the filling stations.
The selling prices will be fixed for a time frame based on an estimated average Platts price for the whole year. The CIF price is the price at which gasoline and gasoil lands at Port Louis and comprises the Platts price and the premium paid to the refinery (FOB) , the price paid for a tanker to carry them (Freight), and the price paid to insure the products (Insurance).
The estimated retail price will be based on the Platts price paid for the previous six months and the future prices for the following six months provided again by Platts.
Q: How can selling price be stabilized when oil prices change for each consignment purchased?
STC imports all of our requirements and hands them over to Oil companies, namely, Shell, Total, Chevron and Indian Oil, for storage and distribution. STC pays for the imports and gets paid when it sells the products to the Oil companies.
STC shall operate a Price Stabilization Account for each product in order to shield the market from price fluctuations.
Q: Why is it necessary to stabilize oil prices?
Monthly price shocks on commodities crucial to the conduct of economic and social activities ought to be avoided if at all possible. They come in the way of longer-term planning of all economic activities as well as the family budget and therefore affect the country and all its citizens directly.
Q: What is the minimum/maximum decrease?
(a) below 7%, there will be no change in the retail price. The difference will be credited to the Price Stabilization Account;
(b) between 7% to 10%, there will be a decrease in the retail price;
(c) more than 10%, the retail price change will be restricted to 10% only.
Q: What is the minimum/maximum increase?
If the percentage increase between the calculated price and the current retail price is:-
(a) below 5%, there will be no change in the retail price. Funds from the Price Stabilization Account will be used to offset the loss incurred by STC;
(b) in the range 5% to 15%, the increase will be passed on to the consumer;
(c) more than 15%, the retail price change will be restricted to 15% only.
Q: How often will prices change?
As from January 2011, the Petroleum Pricing Committee will meet as often as necessary, but at least once every 4 months to monitor the oil purchase and sale data, the price trends on the world market or any pertinent situation and decide whether there is a need to review prices.
Any price revision for gasoline and gasoil will be carried out separately depending on the evolution of world prices and the balance in the Price Stabilization Account.
Q: What are the factors that influence price?
Oil prices are primarily determined by the rules of supply and demand on the oil markets of the world.
If supply exceeds demand, prices go down. When demand is shorter than supply, prices go up. Supply can be affected by such factors as war and extreme weather conditions in oil producing areas. Demand goes up with increased economic activities in large markets such as China, India and goes down when industrial production slows down.
The global economic crisis has resulted in declining demand since end 2008. It has begun to rise with the economic and financial recovery observed since 2010.
Is that all?
No. Oil products, when bought from a Refinery or a trader, need to be transported by tankers to Mauritius. They must then be unloaded, carried by pipelines to storage tanks, then distributed by special trucks to filling stations as and when required.
All those operations cost money. As they are carried out by private companies which have invested in infrastructure and logistics to provide the services to the whole country, they must recoup their investments and make a little profit so that they may renew their equipment etc.
In addition, Governments all over the world apply excise duties and taxes on oil products to raise money to finance various services provided to the whole population. Those excise duties etc apply per litre, not on the value; so the amount is fixed and does not change with the changing price of oil at source.
The whole world pays for oil in US Dollars. So the rate of exchange of each currency to the dollar does affect price. When the dollar appreciates against the Euro, Europeans pay more for their oil products. Similarly, we pay more when our rupee depreciates against the dollar.
Oil prices are also subjected to VAT. This 15% tax is based on value, not volume. So when price at source goes up, the VAT due is correspondingly higher.
Q: Are we taxed more in Mauritius than in other countries?
According to information that anyone can quickly browse, Mauritius is amongst the countries applying lower excise duties and taxes. The USA which produces and imports oil products has only 25% fuel tax, this varying from State to State. The largest European countries have taxes in excess of 60%.
In Mauritius, all taxes, levies and contributions to various public services such as subsidies on staple food and LPG represent 40 to 55% of the retail price at which the consumer buys gasoline or gasoil at the filling stations.
Q: How is the price at the Filling Station determined?
The prices at which gasoline and gasoil are sold by STC to the oil companies, by the latter to the filling stations, and by filling stations to the consumers, are fixed by Law.
The STC presents all documents pertaining to each shipment of oil products it purchases, the amounts paid as duties, levies and taxes, to a body called the Petroleum Pricing Committee (PPC).The PPC consists of independent parties to STC but with special knowledge of business, oil industry, finance, statistics, and pricing.
The PPC scrutinizes all the figures presented by STC and may either approve or reject its proposals for pricing. The PPC recommends to Government who then fixes the prices.
Q: How does the STC formulate its proposals?
The price structure is based on a model provided for by law in the form of a Government Regulations published in the Government Gazette from time to time and also published in the Press.
To understand how the price one pays at the filling station is determined, it is necessary to know the elements of the price structure.
The price structure for Gasoline and Gasoil is made up of the following components:-
• CIF price (Cost, Insurance, Freight)
• Government taxes and levies
• Administrative costs for the STC
• Profit margin for distributors (Shell, Total, Chevron, Indian Oil)
• Price Stabilization Account
• Profit margin for filling stations
The Government taxes and levies are costs already explained above. The operational expenses and profit margins of oil companies and filling stations have already been fixed. The only variables are the CIF, the exchange rate and the VAT as already explained too.
Cost of gasoline and gasoil placed on board a tanker by the supplier is based on Platts, the international oil prices benchmark accepted by buyers and sellers on all oil markets as the price reference. To this, the supplier adds a premium which represents the cost of transport of crude oil to the refinery and the cost of refining the crude to obtain the desired products gasoline and gasoil in our case, but also fuel oils or bitumen or other petroleum products.
We also need to pay the freight charges for carriage of the products from Refinery to the Oil Jetty in Port Louis harbor. The products are then pumped out into pipelines which run from the Oil Jetty to the Storage Tanks owned by each Oil company operating in Mauritius. The CIF therefore includes all the cost of the oil products, insurance, freight and delivery to tanks.
Q: Following the first meeting of the Petrol Pricing Committee, what are the new retail prices of Gasoline and Gasoil and how do we arrive at those figures?
The Table 1 gives the breakdown of the price structure for Gasoline and Gasoil that lead to the new prices at the pump:
Q: On the sale of each litre of Gasoline and Gasoil, what is the share that goes to government?
As explained, Governments all over the world apply taxes on fuel products. In OECD countries, the average tax is 60%. In Britain, Netherlands, Turkey and South Korea, the taxes are even higher. In Mauritius, all taxes, duties and levies add up to 40 to 55% of the retail price.
Table 2 below shows the various taxes and levies on Gasoline and Gasoil.
Q: How are the taxes on gasoline and gasoil used?
Most taxes are used to maintain the cost of living in Mauritius at a reasonable level and particularly to ensure that a basic necessity such as LPG (gaz ménager), and staple foods such as rice and flour are within reach of the whole population particularly the less fortunate fellow citizens.
For example, subsidies on ration rice, wheat flour and LPG (cooking gas) cost more than Rs 1.2 billion to the STC. Without these taxes, the consumers would have paid world market prices currently very high for these products.
Breakdown of subsidies
For each litre of gasoline and gasoil we purchase, we bring our share of contribution to maintaining the social fabric of the country, to the Maurice Ile Durable project (so important for future generations), to the construction of new road infrastructure through the Road Development Authority and to ensure that Rodrigues gets a regular supply of petroleum products.
Q: Does the sale of petroleum products generate enough revenues to subsidize gas, rice and flour?
Yes. STC imports about 1.3 million tons of petroleum products annually out of which around 400,000 tons are destined for the airline and shipping industry. The proceeds generated should normally have been paid as dividends to Government but they are instead used to for the partial subsidization of rice, flour and gas.
Q: According to the price structure, only 37 cents go to STC. What is the objective behind this contribution?
STC obtains only 37 cents per litre to meet its administrative and financial costs for the purchasing, transport, transfer of petroleum products and also to finance exchange rate risks. This amount represents only about 25% of the profit margins for filling stations.
Q: Who fixes the price of gasoline and gasoil on the local market? Is it the STC or Government?
Market forces determine the price of petroleum products on the world market. The price at the pump is calculated by STC based on the purchase price, taxes and levies and the profit margins for distributors and retailers. The Petroleum Pricing Committee verifies and approves the processes in a very transparent manner and finally recommends to the Minister for the fixing of the new retail price.
Q: How does the Petroleum Pricing Committee function (PPC)?
The Committee is chaired by the Director of the Central Statistics Office and comprises professionals and experts of independent backgrounds. No representative of STC sits on the PPC. As from January 2011, the Petroleum Pricing Committee will meet at least once every 4 months and as often as possible in times of crisis to monitor the situation and decide whether there is a need to revise the price.
The PPC ensures that the calculation of the retail price for Gasoline and Gasoil is done in all fairness and transparency. All relevant information is available on STC’s website http://www.stcmu.com in order to enable the public to understand the price fixing mechanism.
It must also be noted that the PPC has access to all data and parameters used to fix the retail prices, including the contract with STC’s supplier of petroleum products.
Q: What are the factors that influence the import price of petroleum products?
Transactions in petroleum products are based on the Platts price reference. Platts publishes its prices on a daily basis. On top of this price, one has to add the premium agreed with the oil refinery, the insurance and the freight.
Q: Who is STC's supplier?
STC has a 3 year contract with Mangalore Refineries and Petrochemicals Ltd (MRPL) of India which has the advantage of being only 8 days sailing time from Mauritius. The contract specifies that the purchase price will be the price based on the Platts reference plus the premium which has been negotiated with the refinery.
Q: Is this mode of purchase a normal practice?
This is normal practice. All buyers or traders pay the same Platts price plus the negotiated premium.
Q: Why is the contract with MRPL not public?
It is a standard commercial contract which contains information pertaining to the quantity and specifications of the product and delivery terms. The only element which is commercially sensitive is the negotiated premium. Obviously, the leverage used to obtain a premium will not be the same for all buyers. It will be unethical to divulge information on a negotiated premium rate between a supplier and the STC to third parties. Such secrets are quite acceptable in commercial transactions.
Q: Is it fair to say there is no transparency?
Even if the secret is best kept for reasons mentioned above, our auditors are well aware of it as well as all the other conditions in the contract. This is important to ensure that STC has not caused prejudice to the use of public funds.