SURINAME'S SERVICE-STATION OWNERS DEMAND HIGHER

UNCLAS PARAMARIBO 000044 SIPDIS SENSITIVE DEPT FOR WHA/CAR MSEIBEL E.O. 12958: N/A TAGS: ECON EPET PBTS FR NS SUBJECT: SURINAME'S SERVICE-STATION OWNERS DEMAND HIGHER PROFIT MARGINS AFTER FOUR YEARS OF HIGH INFLATION SENSITIVE BUT UNCLASSIFIED -- PLEASE TREAT ACCORDINGLY -------------- SUMMARY -------------- ¶1. (U) On January 6, Suriname's service-station owners threatened to resume a December 2003 strike to protest the government's refusal to negotiate an increase in profit margins, which had remained stagnant since a 1999 agreement. Since that agreement, service-station owners have suffered a steady decline in profits, while the average inflation for the period was over 50 percent. In response to the December 2003 strike by service-station owners, the GOS granted the local subsidiaries of international oil companies Shell, Texaco, and Esso, which import and distribute gasoline in Suriname, a $0.01 USD per liter increase in their commercial margin, which they in turn passed on to service stations in a hefty 50 percent increase, but far shy of the 200 percent increase service-station owners had demanded. With the GOS wary of the political ramifications of another gasoline price hike, it is unlikely to pass along the increased cost, leaving it to absorb increased fuel costs in terms of lower tax revenues. Still, Suriname's bargain-basement gasoline provides a booming business to fuel smugglers who service French Guiana where consumers pay nearly twice as much for gasoline as their "subsidized" neighbor. End Summary. -------------- -------------- Service-station Owners Demand Profit-Margin Increases after Four Years of Inflation and Rising Costs -------------- -------------- ¶2. (U) On January 5, Suriname's service-station owners threatened to resume a December 2003 strike to protest the government's refusal to increase service-station profit margins. Service-station owners demanded a 10 percent per liter profit margin versus the previous margin of 2.9 percent per liter. The government steadfastly refused to negotiate with service-station owners, insisting that the owners negotiate instead with the local subsidiaries of international oil companies Shell, Esso, and Texaco, which import and distribute gasoline in Suriname. -------------- Price Controls and Profit Margin Limits -------------- ¶3. (U) The center of the service-station owners' dispute is the GOS's intricate system of price controls through controlling profit margins. In 1985 during Suriname's period of military rule, the GOS established price controls on a basket of goods (which included among other things onions, brown beans, bread, and cooking oil) to ensure that basic needs were met. In 2003, the GOS began to eliminate those controls, reducing that basket to baby formula, flour, milk, and gasoline. ¶4. (SBU) The price control on gasoline provided for the cost of gasoline on the world market, a margin of profit for the oil company and the service station, and taxes to the government. In 1999, with local inflation running 112 percent, the GOS established a fixed price for gasoline at 1.10 Surinamese dollars (SRD) and reached an agreement with the service-station owners to grant them a $0.0172 USD per liter profit margin. In a country where hard currency is not always available on the commercial market, the 1999 agreement ensured that the GOS would provide oil companies and service-station owners US dollars to pay for gasoline imports. (Although in October 2003, one Exxon representative reported to the Embassy that Exxon was frustrated because it was unable to get the GOS to allow for repatriation of profits.) With the sometimes wide gap between the official rate and the parallel market rate, the 1999 agreement also provided for a formula to give service-station owners compensation for the gap. Under this complicated price- control formula, as the world price of oil fluctuated and the gap between the parallel market and official exchange rates grew, the GOS's absorbed the difference in terms of lower tax revenues on gasoline. -------------- March 2003 GOS Vows to End Gas Price Controls... -------------- ¶5. (U) By March 2003, the GOS revenues on gasoline disappeared as gasoline prices rose, leaving the GOS essentially subsidizing gasoline. The GOS made the politically tough decision to fix a new price for gasoline, shifting the price from SRD 1.10 ($0.41 USD) to SRD 1.60 ($0.60 USD) per liter of gasoline, a hefty 45 percent increase. At the time, Minister of Finance Humphrey Hildenberg announced that the GOS would stop controlling the price of gasoline and allow the market to set the price. This, however, has so far not materialized. -------------- ...But Fails to Keep its Word -------------- ¶6. (U) Despite the hefty gasoline price hike, none of that increase was passed on to either the service-station owners or to the oil companies. And with five years of high inflation (which averaged over 50 percent over that period),service-station owners have been hard pressed to make ends meet on the fixed profit margin. On December 16-17, 2003, service-station owners held a strike to demand that the GOS honor the 1999 agreement and renegotiate the profit margin. The GOS responded that it was not responsible for setting profit margins but rather the oil companies, Shell, Texaco, and Esso, were. Chairman of the Suriname Service-station Exploration Union (SSEB) Robert van Dijk told the Embassy that the union called an end to the strike after agreeing to resume negotiations with the oil companies. -------------- --- GOS Usurps Oil Companies' Role in Profit Margins -------------- --- ¶7. (SBU) Suriname's Esso director Abraham Brandon explained to the Embassy that the GOS's 1999 agreement usurped the role of oil distribution companies. The service-station owners don't have a contract with the government, Brandon said, but rather with the oil companies and, therefore, negotiations should be between oil companies and service-station owners. Brandon told the Embassy that in late December the GOS agreed to give the local oil companies a $0.01 USD per liter increase (from $0.0725 USD to $0.0825 USD per liter) in their commercial margin and that the oil companies would negotiate the service-station owners' profit margins directly. On January 5, oil companies and service- station owners agreed to a 4.27 percent per liter profit margin (a 50 percent increase) versus the 10 percent per liter margin they sought. SSEB was very unhappy with the agreement and in a January 6 press briefing announced that it was still considering resuming the strike. Brandon called the service-station owners' 10 percent demand "ludicrous" and said that it amounted to a 200 percent increase. ¶8. (SBU) Brandon told the Embassy that he did not expect the GOS to raise gasoline prices to pass on the increased profit margin to consumers. The government should have planned for the profit margin increase when it raised gasoline prices in March 2003, Brandon told the Embassy. Now the government will have to absorb the profit margin increase in the way of lower revenues, he concluded. -------------- Comment: -------------- ¶9. (U) The GOS is very slowly weaning the Surinamese consumer away from price controls, subsidies, and price supports, but it seems that this one will have to wait until after the next elections. With an estimated 200,000 cars on the road, Surinamers like their cars and have come to expect cheap gas, which makes increasing the price of gasoline a politically high-risk move. It is unlikely that the GOS will pass on the higher cost of gasoline to consumers or that it will abandon profit margin limits on gasoline anytime soon. In the meantime, the GOS will continue to be a generous neighbor to French Guiana where fuel smugglers have reaped handsome profits ferrying Suriname's bargain-basement gasoline unfettered across the Marowijne River -- and all at Surinamese taxpayers' expense. End Comment. BARNES NNNN 2004PARAMA00044 - Classification: UNCLASSIFIED v1.6.3