Administered Pricing Mechanism (APM)

BY :Amber ChourasiaAmit Agarwal

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

ABOUT APM.

Administered pricing mechanism(APM) came into existence on 1977.

APM was administered by oil coordination committee(0cc) ,under the ministry of petroleum and natural gas.

Prior to APM the realization of oil companies was restricted to the import party price of finished good.

FEATURES OF APMThe pricing of petroleum products for the refining

and marketing units is based on the retention concept where under oil refineries, oil marketing companies and the pipelines are compensated operating costs and return @ 12 per cent post tax net worth.

For consumers, the selling price of a product was arrived at by adding the applicable freight from the oil refinery to the Depot and from Depot to the Retail Outlets .

The principle of compensating normative cost and allowing a pre-determined return on investments.

HOW IS APM OPERATED.The entire administered pricing system is

operated through a oil industry pool account wherein inflows and outflows of the pool account are to be kept in balance due to international price variation.

Price adjustments have to be made from time to time to balance the oil pool account.[To maintain the prices of kerosene and domestic LPG as well as naphtha and furnace oil for fertilizer]

HOW DOES APM WORK IN INDIAUnder the APM, prices in the hydrocarbon

sector are controlled at four stages:-

1. Production2. Refining3. Distribution4. Marketing

PRODUCTIONThe national oil producing companies like

Oil & Natural Gas Corporation (ONGC) and Oil India Limited (OIL) are compensated for their operating expenses and allowed a 15 per cent post-tax return on the capital employed. Both ONGC and OIL sell crude to refiners at $7-8 per barrel as against the prevailing international price of $17-18 per barrel.

REFINING

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

DISTRIBUTION

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

MARKETING

APM DISMANTLING

What does the term APM dismantling mean?Ans:-The term literally implies the removal of an

administered pricing mechanism of petroleum products and a gradual shift towards a pricing based on pure market dynamics.

Dismantling of APM.• In September 1997,the 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

Improvement in the competitiveness of domestic petroleum industry.

creating market conditions necessary to attain the economic pricing regime for petroleum products.

Providing subsidies in a more transparent manner through the fiscal budget of the Government.

Emergence of a free and globally competitive market with minimal intervention, thereby benefiting both the consumers of petroleum products and the petroleum industry.

.

CHANGES AFTER DISMANTLING OF APMConsumer prices of petrol and diesel will become

market determined.[All petroleum products will be sold at market prices]

Subsidy 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 for supply of kerosene and domestic LPG in far-flung areas and the hilly areas.

DISADVANTAGES OF APM