The Tribune

• Minister rules out increased pump costs for Bahamians

• Sir Franklyn: Gas station shut down counter-productive

• Wholesalers suffering too: ‘It ain’t like we’re making it’

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

A Cabinet minister yesterday ruled out increased margins for gas station dealers as “a non-starter” even though a major petroleum supplier conceded that current volatility “calls into question the fairness” of the industry’s pricing structure.

Michael Halkitis, minister of economic affairs, speaking ahead of today’s meeting between the Government and Bahamas Petroleum Dealers Association (BPDA) representatives, said agreeing to the latter’s call for greater margins “would lead directly” to increased gasoline prices at the pump “and that won’t happen right now”.

While he pledged that the Davis administration will seek to “bring them some relief” where it can, the minister’s remarks effectively pre-empt and head off the central demand from the Association and its members - a 50 percent increase on their current margins, and shifting the basis for how it is calculated from a fixed, price-controlled sum to a percentage.

Such an increase would take retail (gas station) margins from the present 54 cents per gallon to 81 cents per gallon but, mindful of the impact this will have for transportation-dependent businesses and consumers by further hiking already-high pump prices, Mr Halkitis confirmed that the Government will not approve any such rise.

“It’s a very volatile business to be in,” he told reporters of the petroleum industry. “We understand that. But I can say that, too, in this environment we look at the whole picture, [and] to seek to increase margins, that would only lead to higher prices at the pump for Bahamians. It’s safe to say that’s a non-starter at this time... Raising the margins would lead directly to more increases at the pump, and that won’t happen right now.”

Sir Franklyn Wilson, chairman of BISX-listed FOCOL Holdings, the Shell distributor/wholesaler, yesterday told Tribune Business that while current global oil price volatility had again raised questions about the equity of the industry’s price-controlled fixed margins, there was virtually zero appetite among policymakers for change given the potential economic, social and political ramifications.

Echoing the position voiced by Mr Halkitis, he said of current market conditions: “Obviously it calls into question the fairness of the fixed rate margins, and it plays out every so often when the matter comes up. What they [the gas station dealers] say is we need a higher margin, and the Government says the public cannot afford it.

“That tension is there, but I can’t imagine the Government agreeing to a higher margin or much of a change because it will hurt consumers.” Sir Franklyn added that he spent little time dwelling on whether price controls on the Bahamian petroleum industry should be eliminated, and the margins switched from fixed to a percentage, because there was minimal to no chance that this will happen. 

“The [fixed margin] system has been in place for so long that it would be such a material change in government policy,” he argued. “I don’t spend much time thinking about it. You accept what you cannot change. This has been the policy of successive governments for so long that I don’t imagine any Cabinet would find it easy to do something.”

Instead, calmer global oil markets and reduced price volatility - something that lies completely outside The Bahamas’ control - is “what we have all got to pray for”, Sir Franklyn added. “When prices spike to this level, and margins are fixed, it affects both the wholesalers and retailers. They need to spend more money to purchase the fuel, and they get the same margin even though they have to spend more to buy it. It’s a challenge. It’s a tough battle.”

The FOCOL Holdings chairman argued that any Easter weekend shut down by gas station operators would be counter-productive, as they would suffer while also harming the Bahamian economy. “Individuals may make some decisions, but these people have families, it’s their livelihoods. That’s a big decision to close their business. How does that help?” asked Sir Franklyn.

“Let’s think it through. If you close the business, you lose even more. You lose your sales from the convenience store. At least that’s not price controlled. If you look at what is happening with the service stations, you will see increasingly the gas part is used to draw traffic [to the store]. If you close, you lose your sales and gross margins from the convenience store. That’s not going to help you. That’s not going to improve your viability.”

Mr Halkitis yesterday said the petroleum industry’s structure, and the fees levied on independent gas station operators by FOCOL, Rubis and Esso (Sol Petroleum), were among the concerns voiced by the Association in its letter to the Government requesting today’s meeting.

“They wrote us a letter requesting a meeting in which they laid-out some of the difficulties that they are facing,” the minister said. “They particularly mentioned increases in bank fees, fees for cash deposits, credit card fees, increased mortgage rates, increased liability and property insurance and some others. They are requesting that we look at the regime that they operate under....

“I know, just from my research in advance of the meeting, that some of the issues that have been plaguing them are the very high cost of renting their premises, the fact that the company that controls the premises also takes off a sum of the convenience sales, the see-saw sales, off the top, and some of them have to pay what is known as franchise fees, so they have a very, very high cost structure.”

It is difficult to see exactly how the Government can assist the gas station operators with these issues as all are governed by contractual relationships, and it would be intervening and interfering with private commerce if it moved as such. The only thing within the Government’s power to change is the industry’s price-controlled, fixed margin structure and the amount of tax it earns on every gallon of gasoline and diesel sold.

Petroleum wholesale suppliers earn a fixed margin of 33 cents per gallon, and Sir Franklyn, who confirmed the majority of FOCOL’s operators are independent dealers, defended the distributors’ operating practices and argued that such concerns only surfaced when oil prices were high and volatile - as they are now.

“For each of the large wholesalers generally, I am satisfied that, in normal circumstances, the arrangements they have with the wholesalers are reasonable,” he added. “The cost of capital being what it is, in any number of instances the terms are very favourable to the dealers.

“The wholesalers are in the same position. The fact of the matter is the cost of carrying the inventory is a hell of a lot higher. We’re in the same boat. This is the nature of the business. The wholesalers are in the same boat. It ain’t like we’re making it and they’re not. The same forces affecting them are the same forces affecting the wholesalers.”

Mr Halkitis, meanwhile, said the Bahamas Petroleum Dealers Association had made no threat of a shutdown in its letter to the Government. Besides the impact on cash flow and credit lines from the increased cost of fuel purchases, he added that the sector was also concerned about a further impact to its expense structure from the impending minimum wage increase.

The minister also denied that the Public Treasury was benefiting significantly from the rise in gasoline prices via taxation, saying: “The Government is not benefiting from the increase in the cost of fuel because the Government has a fixed tax on gasoline. For diesel it’s combination of fixed and what they call ad valorem, which means it fluctuates, but for gasoline, which most individuals consume, the price is fixed.

“So whether the price goes up or down, the Government tax remains the same. It’s not that we’re benefiting from any increase in the price of fuel.” However, sources subsequently questioned the comments on the gasoline tax structure, saying they understood it consisted of a flat $1.14 per gallon levy plus 10 percent VAT. As VAT is a percentage, the Government’s take goes up as fuel prices increase, they said.