Administrative Pricing Mechanism (APM)

BY :Amber Chourasia  Amit Agarwal

CONTENT y y y y y y y y

 About  About APM. Features of APM. How is APM operated. How does APM work in India. India.  APM dismantling. Benefits of APM dismantling. dismantling. Changes after dismantling dismantl ing of APM. Disadvantages Disadvantages of APM.

ABOUT APM. y

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 Administered pricing mechanism(APM) came into existence on 1977. 1977 .  APM was administered by oil coordination coordina tion committee(0cc) ,under the ministry of petroleum and natural gas. Prior to APM the realization realizatio n of oil companies companies was was restricted to the import party price of finished good.

FEATURES OF APM y

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The pricing of

petroleum products products for the refining refining and marketing units is based ba sed on the retention concept  where under oil refineries, oil marketing companies and the pipelines pipelines are compens compensated ated operating costs and return @ 12 1 2 per cent post tax net worth. worth. For consumers, the selling sell ing price price of a product produc t was arrived at by adding the applicable appli cable freight from the oil refinery refinery to the Depot and from Depot Depot to the Retail Retail Outlets . principle of compensating compensating normative cost cost and The principle allowing a pre-determined pre-de termined return on investments.

HOW IS APM OPERATED. y

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pricing system The entire administered pricing

is operated through a oil industry pool account wherein inflows and outflows outf lows of the pool account are are to be kept kept in balance due to to international international price variation. Price adjustments have to be made from time to time to balance the oil pool pool account.[ To maintain the prices of kerosene and domestic domestic LPG as well well as naphtha naphtha and furnace oil for fertilizer] fertilizer ]

HOW DOES APM WORK IN INDIA y

Under the APM, prices in

controlled controlled at four stages:1. 2. 3. 4.

Production Refining Distribution Marketing

the hydrocarbon sector are

PRODUCTION  The

national oil producing companies like Oil & Natural Gas Corporation (ONGC) and Oil India Limited (OIL) are a re compens compensated ated for their operating expenses and allowed al lowed a 15 per cent post-tax post-tax return on the capital employed. emp loyed. Both ONGC and OIL sell crude to refiners refine rs at $7-8 per barrel as against agains t the prevailing international price of $17-18 per barrel.

REFINING y

sector is also regula regulated ted by APM wherein wherein The refining sector the refiners are fully compensated for the acquisition acquisition cost of crude crude and other raw materials as well well as as operating operating costs with a guaranteed 12 per cent post-tax return on the net worth.

DISTRIBUTION

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 At the distributors level, the dealers deal ers commission and margins are regulated by the government to to maintain maintain uniformity in the commission commissio n rate. Freight for import of crude crude is paid to Indian shipping shippi ng companies companie s at a cost-plus rate, rate, which is much higher than the market rate

MARKETING

APM DISMANTLING  What

does the term APM dismantling mean?  Ans:-The term term literally li terally implies the removal of an administered pricing mechanism of petroleum products and a gradual shift towards towards a pricing based b ased on pure market dynamics.  Dismantling

of APM. In September 1997,the government government has decided to dismantle Administrative Pricing Mechanism (APM) in phased manner . By April, 2002 it will be fully dismantled and prices of petroleum products will be determined on the basis of import parity system.

BENEFITS OF DISMANTLING THE APM y

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Improvement in the competitiveness of domestic domes tic petroleum industr indu stryy. creating market ma rket conditions necessary necessar y to attain the economic pricing regime for petroleum products. Providing subsidies subs idies in a more transparent manner through the fiscal budget of the Government. Emergence Emergence of a free and globally globa lly competitive market with minimal intervention, thereby benefiting both the consumers of petroleum products and the petroleum industry.

CHANGES AFTER DISMANTLING OF APM y

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Consumer prices of petrol and diesel will become market determined.[ All petroleum products will be sold at market prices]] prices Subsidy Subs idy on kerosene and domestic LPG will be phased out in 3 to 5 years. Pricing of crude oil produced by ONGC and Oil India will become market determined. Govt. will also provide freight subsidies subsi dies for supply of  kerosene and domestic LPG in far-flung areas and the hilly  areas.

DISADVANTAGES OF APM