Oil tariff cuts OK’d by gov’t

REPORT FROM BUSINESSWORLD MALACAÑANG announced Tuesday the reimposition of a scheme to lower tariffs on imported oil and petroleum products, seeking to contain the impact of skyrocketing world crude prices on Filipino consumers. Finance Secretary Margarito B. Teves, speaking at Palace briefing, detailed the "trigger prices" that would be used to reduce the existing 3% tariff in one-percentage point steps, providing oil firms some respite and allowing them to implement fuel price cuts. Oil companies would be asked to focus the price reduction on diesel to provide "more impact", Mr. Teves said. Current world prices already point to a two-percentage point tariff cut to 1% but the scheme as approved calls for a two-week average for the trigger mechanism to take effect. Officials said what could immediately be implemented is the tariff cut to 2%. Concerned government agencies such as the Bureau of Customs will also have to be formally informed, thus the scheme could take effect in two to three weeks, Mr. Teves said. President Gloria Macapagal-Arroyo told the briefing the tariff reduction scheme would be embodied in an Executive Order (EO) to be released Wednesday. "We will lower the tariffs for petroleum products and we will be asking the oil companies to use the tariff cuts to reduce the prices of diesel," she said, adding that more consumers would benefit if the price cut was limited to diesel. Mr. Teves said the 3% oil tariff would be reduced to 2% once Dubai crude prices breach $80.84/barrel. The tariffs would be further reduced to 1% if prices hit $92.41, and to zero if $106 is achieved. The trigger point for diesel prices, he said, is $110/barrel. Mr. Teves noted that Dubai crude is now hovering at $93 while diesel has reached $115. Economic managers, however, still have to look at how prices behave for another week. "We average the prices for 14 days. The Dubai crude price of $93.28 is the average for seven days so we have to add the prices for the next seven days. If that price level remains, we would implement the 1% tariff," Mr. Teves said. The Finance chief said every percentage point tariff cut implemented across the board would mean a P0.23-0.25/liter reduction in fuel prices. "If it is implemented across the board, it would mean a reduction of P0.23 to P0.25 per 1% reduction. You double that if you have 2% reduction. You have another option: you may want to focus on diesel, which would mean a larger reduction but not all oil products would be covered. The President suggested that we focus on diesel so there would be more impact," he said. The government said the oil tariff cut would be revenue neutral but added that it would have gained P11 billion if the adjustments were not made. "There is a windfall .. that could be rechanneled to other sectors. What we did is we used it to mitigate the impact of rising pump prices. At least our government earnings will not be hurt because this is revenue neutral," Mr. Teves said. In 2006, a similar tariff reduction to mitigate the impact of oil prices was made via Executive Order 527, which was implemented for six months. Asked to comment, University of Asia and the Pacific economist Peter Lee U said the government could have opted for the windfall and then channeled it to additional spending on social services. "It [the oil tariff cuts] will lower prices but it also means lesser tariffs collected by Customs. The question is are we happy that we have lower pump prices but the government collects lower taxes?," he told BusinessWorld. "The windfall could have been taken to fund, say more public school buildings, or food for the poor and homeless." The Energy department, meanwhile, said it was readying the implementing rules and regulations (IRR) of the oil tariff cut order, basing it on Department Circular 2006-05-0007, the IRR for the 2006 tariff reduction. The guidelines will be finalized in consultation with the Finance department, Bureau of Customs, Trade department, National Economic Development Authority, and oil companies. Energy Secretary Angelo T. Reyes, in a statement, said channeling the gains from the tariff cut to diesel meant the first one-percentage point reduction would translate to a P0.70/liter decrease in the pump price. Ramon F. Villavicencio, chairman of independent oil firm Flying V, said the diesel focus would have a trickle-down effect. Fellow independents Seaoil Philippines Inc. and Eastern Petroleum Corp. said they would follow the law. "We are just agents of the government in collecting tax," Seaoil President Francis Glenn L. Yu said. A spokesman from Petron Corp., the country’s largest oil company, said the firm welcomed the tariff cut move. The militant group Bagong Alyansang Makabayan, however, said "the proposal of reducing tariff rates will only protect the profits of the oil companies with negligible positive impact on pump prices." Meanwhile, Flying V’s Mr. Villavicencio said oil companies might have to recover some P3 per liter via price hikes after January 15, the point when oil companies will have exhausted inventories. Retailers, which import refined products, will likely stagger the increase at P0.50 per week. "That was the original scenario. But given the tariff cuts, we’ll have to see how they [interplay]," he said. — A. D. B. Romero with a report from M. K. C. Conti/BusinessWorld Calls to scrap deregulation, suspend EVAT nixed IN ANNOUNCING an oil tariff reduction scheme, President Gloria Macapagal Arroyo rejected proposals to suspend the expanded value-added tax (EVAT) on oil and scrap the Oil Deregulation Law. Mrs. Arroyo told a briefing that deferring the 12% VAT on oil would be "counterproductive" as this would mean lesser earnings for the government, reduced infrastructure spending and fewer investors. "If we will lessen the VAT ... It would lead to a larger budget deficit, we would spend less on infrastructure and then investors would not want to look into the country," she said. "We cannot spend for social programs, the interest rate will soar, the peso will weaken again and then prices of commodities will rise. Therefore it (the suspension of the VAT on oil) would not help and instead we chose the oil tariff cut which is revenue neutral." Finance Secretary Margarito B. Teves said suspending the VAT on oil would mean foregone revenues of as much as P54 billion. "The past year, our estimate was P40 billion. Since prices of oil increase, we would lose more," he said. Sen. Manuel "Mar" Roxas II, the main proponent of the VAT suspension proposal, on Tuesday said he was "absolutely dismayed" by the Palace decision. Mrs. Arroyo likewise expressed reservations over proposals to scrap the oil deregulation law, saying it encouraged competition in the industry by paving way for the entry of new players. Militant groups have been calling for the abolition of the law, believing that the government should have a say on how oil prices should be determined. The oil deregulation law of 1998 aimed to encourage new investments in the downstream oil sector. Regarding a proposal to use the state’s gas royalties to lower power rates, meanwhile, Mrs. Arroyo said the Cabinet was concerned about ensuring that end-consumers would really benefit. "These are being discussed. But let us say PNOC-EC (Philippine National Oil Co.-Exploration Corp.) would give up the Malampaya earnings, the savings will be passed on to the Napocor (National Power Corp.) ... Assuming Napocor passed all the savings to the utilities, it would be hard to monitor if these savings are passed on to consumers," she said. "Maybe you can say you can look at their finances and examine but it’s really very difficult, first of all ERC (Energy Regulatory Commission) is the one that has the authority to examine the private utilities, and ERC is independent so we cannot also just tell ERC to do that ... It is the administrative difficulty of monitoring the private sector players in this chain of savings." She said economic managers would discuss ways to use the gas royalties to provide relief to consumers during the energy summit to be held from January 29 to February 7. Mrs. Arroyo also said the government would ask the ERC to increase the discounts for small users in a bid to provide immediate relief.