Pricing policy: What is the big secret, Petrojam?

BY SOPHIA WHYTE-GIVANS

Sunday, May 26, 2019

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As a Jamaican, I feel it is important to contribute to the present discourse on Petrojam's pricing policy. I have chosen Mauritius as the comparator because it is, similarly, a small economy, importer of crude oil, and price-taker for this commodity.

What I found for Mauritius confirmed that we can do better here in Jamaica. The following website of the State Trading Corporation (STC), Mauritius's version of Petrojam, is very informative — https://www.stcmu.com/ppm/faq.

In 2004, Mauritius introduced an Automatic Pricing Mechanism (APM) and prices were fixed on a quarterly basis until November 2008, when it began to make monthly adjustments. Since the introduction of Government Notice No 9 of 2011, which established the independent Petroleum Pricing Committee (PPC), prices are again adjusted quarterly. The changes during this period are online for people to review and come to their own conclusions regarding the pricing mechanism ( https://www.stcmu.com/ppm/retail-prices).

Petrojam does provide an overview of its pricing policy, but while providing the broad categories which are used, it is still very non-specific — so one cannot readily take that information and do the calculations to arrive at the changes observed at the pump, including markups by retailers. The published pricing policy cannot, therefore, be said to “ensure transparency” as Petrojam concludes by virtue of having shared its policy ( http://www.petrojam.com/resources/10/pricing/petrojams-pricing-policy).

To give concrete examples, see for yourselves what Mauritius has posted online. It has various frequently asked questions which provide answers on how the price at the filling station is determined. It establishes that the prices, faced by the oil companies and then extended to the filling stations from which consumers buy directly, are fixed in law. Similarly, there are explanations as to how the minimum and maximum increases and decreases are arrived at.

The PPC and not the STC determines the prices, thereby providing checks and balances on the STC. “The PPC consists of independent parties to STC but with special knowledge of business, oil industry, finance, statistics, and pricing.” ( https://www.stcmu.com/ppm/faq). The PPC and not the STC then makes these recommendations to the Government of Mauritius.

The STC has a link which sets out the pricing structure, with effect from May 11, 2019 ( https://www.stcmu.com/ppm/price-structure), in order to allow citizens to better understand how the price is arrived at. Note, the Price Stabilisation Account exists to shield the market and, by extension, consumers from price fluctuations. This is not to say that Jamaica ought to adopt Mauritius's approach. Rather, it is being suggested that we learn and apply what is relevant to our current dilemma.

Given the chart shown, can Petrojam truly defend its pricing mechanism as it has done over the past few weeks and countless times in recent years? Do we have the level of detail as above? Yes, we are provided with the weekly price breakdown for the years 2011 (January 6) to present ( http://www.petrojam.com/price-index). This does allow us to track the weekly movement, but do we have enough information to deductively confirm the logic behind the price?

I think I am more in agreement with the auditor general's report, having seen a good practice that exists elsewhere. The discretionary aspect undermines the transparency argument that Petrojam has put forward (Par 3.4, p. 31, A Review of Aspects of PCJ and a Comprehensive Audit of Petrojam Limited ( https://auditorgeneral.gov.jm/wp-content/uploads/2018/12/AuGD_Compendium_Report_on_PCJ_and_Petrojam_Limited.pdf)

Two final important points that I would like to make are:

(1) A review of the weekly price changes, when compared with Mauritius's quarterly changes, could lead some to call for a monthly or quarterly price adjustment to smooth out the price effect on consumers, since there is always the argument that when prices go up the consumers feel it right away, but when prices fall there is quite a lag in passing on these savings to consumers.

I suppose the fundamental argument is whether there is a greater welfare loss associated with the weekly changes. In other words, is consumer surplus larger or smaller when there is a weekly price change? Is producer surplus larger or smaller when there is a weekly price change? Is economic surplus, the sum of consumer and producer surpluses, larger or smaller when there is a weekly price change? What is the extent of the deadweight loss/ welfare loss/ loss in economic surplus within the local petroleum market? These are questions that our economists should be interested in answering, at least for the period 2011 to present.

(2) I find it strange that Petrojam's pricing policy is determined by a three-member panel. This is not to cast aspersions on anyone's character; As a former public servant I am very sensitive about this. However, using Mauritius as the comparator, Petrojam should not have to defend its pricing policy. There should be an independent body deciding this, based on clearly outlined parameters.

Sometimes public servants have to realise that these kinds of independent structures exist to protect them from the type of vitriol that may be directed at them when the general public, including our elected officials, are disgruntled. Mauritius currently has an eight-member PPC, comprised of persons with varying interests and expertise, and even a pricing expert ( https://www.stcmu.com/ppm/petroleum-pricing-committee).

No representative of STC sits on the PPC. This is good practice. This is an armslength practice. If the mechanism to derive the price changes is done internally, then who questions how it is arrived at?

In closing, instead of being defensive, let us address the issue. Petrojam is a public body accountable to the people of Jamaica, and it has a portfolio minister. Cabinet sets policy and it is within its remit to enact a policy that remedies some of the age-old concerns about Petrojam's pricing policy.

Sophia Whyte-Givans is a public financial management specialist, and senior public financial management consultant with the World Bank on disaster risk financing. She holds a BA in Economics and International relations from Stanford University, and an MSc, with distinction, in Governance and Public Policy from SALISES, UWI, Mona.


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