The Telegraph
Since 1st March, 1999
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Firing on all cylinders, oil firms cap cost hike

New Delhi, Aug. 17: Manufacturers of liquefied petroleum gas (LPG) cylinders, who had tried to flex their muscles earlier this year by demanding higher prices, have been put in their place by oil companies.

Sources say the fresh tenders called by Indian Oil Corporation (IOC) have resulted in only a marginal increase in the price of the new batches of cylinders. This increase is not being passed on to the consumers.

The cylinder manufacturers had virtually held the oil companies to ransom earlier this year by stating that they could not supply cylinders at the existing prices as the cost of steel had shot up.

In fact, they had gone to the extent of stating that they were ready to forfeit their security deposits.

This had led to a shortage of new cylinders and the drive to enrol new customers had run into rough weather.

However, instead of going in for an arbitrary hike in cylinder prices, IOC and BPCL decided to call their bluff by floating fresh tenders. The keen competition between cylinder suppliers has led to prices remaining in check.

The system of floating tenders for cylinders put in place by petroleum minister Ram Naik which led to a reduction of security deposit for households from Rs 700 to Rs 650 in March appears to have withstood the test.

Until 2000-01, the companies used to procure cylinders on the basis of a price formula recommended by financial consultants PricewaterhouseCoopers. The quantity allocation was made to all cylinder manufacturers approved by the government based on their performance and assessed performance.

This system functioned for 15 years. However, the practice had resulted in the formation of a cartel. With the introduction of the tendering system and oil companies individually succeeding in breaking the cartel system, the cost of procuring the cylinder came down and the oil companies were able to save over Rs 300 crore.

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