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23 September 2009

Vietnam’s fuel traders call for free market mechanism

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Vietnam should develop a market-based fuel pricing system and stop focusing on revenues for the state budget, reported, quoting local fuel traders seeking for more freedom in doing business.

Bui Ngoc Bao, general director of state-owned Petrolimex, which holds up to 60 percent of the market share, said although the government has stopped subsidizing fuel prices since September last year, traders are still not allowed to set retail prices by themselves.

“Even in less developed economies like Laos and Cambodia, the market mechanism in the fuel sector is much more visible,” Bao said at a conference on fuel trading on Monday in Hanoi.

Cao Du Son, deputy director of Hanoi-based Military Petrochemical Joint Stock Company, said right now the local fuel sector is half market-based, half regulated by the government.

This kind of administration will eventually weaken all local traders, Son said, warning that “a single foreign competitor in the market will manage to kill all 11 local traders.”

Vuong Dinh Dung, deputy general director of Military Petroleum Company, said existing policies don’t give any autonomy to fuel traders, who have to seek permission from the ministries of Finance and Industry and Trade ministries to effect any change in price.

Moreover, the government constantly amends taxing policies, making it difficult for traders to keep prices stable and competitive, Dung said.

He said the government cannot monitor fuel prices effectively as it tries to achieve different goals at the same time. The Finance Ministry wants revenues for the state budget and a fund to keep prices stable while the Ministry of Industry and Trade aims to ensure ample fuel supplies for the domestic market.

“The government should instead choose one main target and stick to it,” Dung said.

Economist Vu Dinh Anh said it was impossible for the government to ensure and balance its own interests and that of businesses and consumers at the same time because of its need to generate state revenues.

“Both the government and businesses benefits from higher fuel prices while low prices only benefit consumers,” Anh said, calling for this conflict of interest to be solved.

Petrolimex’s Bao said since 1995 the 11 fuel traders have contributed as much as 10 percent of the state budget revenues.

Anh estimated that the government collects around 55 trillion dong ($1=17,800 dong) a year, or 20 percent of its total annual revenues, by asking fuel traders to pay 5,000 dong per liter in taxes and fees.

Under a new proposal presented by ministries of Finance and Industry and Trade ministries at the conference, fuel traders will be allowed to set retail prices in accordance with the movement of a base price that will be calculated every 10 or 20 days and announced publicly.

The government would calculate the base price by adding the CIF price (cost, insurance, freight) to business overheads, taxes, other fees and payments and a profit margin.

If the base price rises above current retail prices by no more than 7 percent, traders will be allowed to raise their prices correspondingly.

If the price gap is more than 12 percent, traders can increase their prices to cover 80 percent of the gap. The remaining 20 percent will be offset by the government, using price stabilisation fund that is set up by collecting a portion of the retail sales revenues. The government set up the fund early this year to stabilize retail prices of fuel products in case global prices rise dramatically.

If the average base price is more than 12 percent higher than the retail price, the government will step in to stabilize prices by taking one or a series of measures, including cuts in taxes and fund contributions.

On the contrary, if the base price drops lower than the current retail price, traders must cut their prices by the corresponding rate. If the price gap is larger than 12 percent, the government will impose additional measures including higher taxes and fund collections.

Fuel traders refusing to lower prices will be forced to do so, said Nguyen Tien Thoa, head of the Price Management Department at the Finance Ministry.

Thoa said under the new pricing mechanism, traders would not have to ask for permission to increase retail prices by 7 percent or less. The government would only interfere if there were major price fluctuations, he said.

He said the government has not monitored the fuel market well so far. Vietnam currently imports almost all of its oil products and global prices keep changing, and local policies have failed to keep pace with the fluctuations, he explained.

Petrolimex’s Bao said the proposal enables a more transparent pricing system for the domestic fuel market, allowing consumers to keep an eye on prices and choose the best supplier.

But Dung of Military Petroleum Company said the price proposal would not change the market much.

“The proposal won’t be effective as expected because the government still has a control over the business of fuel companies,” he said.


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