The management of gasoline prices in Cambodia could serve as a good case study to replicate in the price management of other utility items, argues Sim Vireak.
Gasoline is among the most basic utilities that affect the daily livelihood of people. While the price of gasoline in Cambodia is similar to other countries, the impact is different considering the income gap in the country.
The common complaint is that when the international price of oil increases, gasoline price in Cambodia also increases in tandem. However, when the price of oil falls in global markets, the gasoline price in Cambodia remains unchanged. So the gasoline price in Cambodia seems to be on an upward bias.
Efforts to manage the gasoline price in the country is not new and it should be understood that such an effort is not confined within the dynamism of populism or electoral campaigns.
Rather it is a question of how the government could make the public perceive economic development, which is not simply about growth but more about how people feel that there is an improvement in their livelihoods. If income increases and the price of utilities also increases, the people’s burden would remain the same.
When adopting a market economy, the government cannot fix prices. The retail price of petrol relies on price fluctuations in the global market, as Cambodia depends mainly on petroleum imports. Cambodia currently purchases petroleum from Vietnam, Singapore and Thailand.
In managing prices, cooperation from the private sector is a must.
Despite many efforts, and it was not until March 2016 that a proper formula was created through a joint prakas or directive by the Ministry of Commerce, Ministry of Economy and Finance, and Ministry of Energy and Mines.
The formula in the joint prakas sets out to calculate the retail prices of gasoline with the consent of all major petroleum distributors. The new price ceilings are calculated according to a formula based on the average Means of Platts Singapore (MOPS) plus taxes, net profit, VAT and operating costs.
The Ministry of Commerce provides price updates every 10 days and gasoline stations will be fined $1,000 if they charge more than the set price.
The reality on the ground, however, was not favorable despite efforts due to the fluctuation of global oil prices. The price of gasoline kept increasing and in the first five months of 2018, the government had to spend $83 million to help stabilise the price.
Additional measures were also taken to further reduce the price. The combination of government tax subsidy and cooperation from major gas companies has resulted in a 4-cent price reduction starting July 1, 2018.
From the government side, the tax rate for regular gasoline has been reduced from 35 to 15 percent, diesel from 15 to 5.5 percent, and kerosene from 15 to 10 percent, which has cost the government $30 million in tax revenue annually.
From the private sector, the nation’s biggest gas companies, including PTT, Tela, Sokimex, Total, Caltex and Papa Petroleum, agreed to reduce prices at their gas stations by 2 cents a litre.
Innovative price setting from the private sector also deserves attention. By reviewing the price setting of Tela Company – from January 2018 to January 2019 – which is normally almost the same with major companies, it was interesting to note that before mid-December 2018 there were price differences between normal gasoline, premium gasoline and diesel.
However, after mid-December, the price of normal gasoline and diesel per litre has been set at the same price, while the price of premium gasoline has been kept at 400 riels (10 cents) higher. This was a creative idea to charge extra for those who could afford higher quality gasoline while endeavouring to keep the price low for the masses.
This comment intends to capture the real effort on the ground when putting policy into practice. Such commendable effort could serve as a good case study to replicate in the price management of other utility items. In every modern society, the price of utilities, including food, are kept very low to ensure that people from all walks of life can enjoy the fruits of economic development.
Sim Vireak is strategic advisor to the Phnom Penh-based Asian Vision Institute (AVI).