no fear of the real price of fuel

Having asked Masoud Khanssari head of Transportation Commission of Tehran Chamber of Commerce to join our round-table in Tejarat-e Farda, I mentioned the names of some of the other industry mangers who might be joining us in our talks about the effects of the 2nd phase of Reform Subsidy Plan, he picked Davoud Keshavarzian Deputy Roads and Urban Development Minister. So Mr. Khanssari represented the private sector and Mr. Keshavarzian attended on the behalf of government as a key player in road transportation. We had a discussion about the impacts of energy price reform on different modes of transportation and, in particular, road transportation. Fortunately, despite Davoud Keshavarzian's busy schedule, he took the time out of it and we were able to sit with two senior managers of transportation industry. It was interesting to be in Mr. Keshavarzian's office , a place where Masoud Khanssari used to work as the head of Road Maintenance and Transportation Organization seventeen years ago in the 8th government of I.R of Iran. Despite the fact that today one of them represents the private sector, both agreed on the positive effects of cutting state subsidies on fuel. They believed that it would trigger modernization of transportation fleet.

Before talking about the aspects of the 2nd phase of Reform Subsidy Plan, rising petrol prices and transportation, I should say there have been complaints from the part of the private sector about the implementation of the 1st phase and mismanagement in previous government. they assume that the amounts saved by the government wasn't directed towards transport sector and loan facilities. What is your general assessment?
Davoud Keshavarzian: As you know, although there was a dramatic rise in the price of energy carriers in the first phase of Reform Subsidy Plan they were still much lower than the global prices. At that time it was a sharp increase for Iranians. As an example, diesel price increased by 900% from 16 to 150 TOMANS per liter. Some incentive packages and support plans such as drivers' insurance plan were set which were not completely fulfilled. Before the implementation of the 1st phase, government share was 10% of the premium and fortunately it was increased by 3.5%. Despite the fact that some goals were set for modernizing the road transportation fleet, which was absolutely crucial, no budget was allocated for that. Of course I'd like to emphasize that during Mr. KHANSSARI's tenure as the head of Road Maintenance and Transportation Organization, some very good measures were taken but in previous government, the Transportation Management Center didn't do well. Consequently, some taxies and light vehicles were replaced. However, due to the high costs there were no improvements in bus transport system and freight services. In that particular period of time government income noticeably increased but surprisingly we made no progress in modernizing our transport fleet. As a result many transportation companies were no satisfied with the implementation of the 1st phase of the Reform Subsidy Plan.
Masoud Khanssari: I believe that we didn't have an actual subsidy reform plan in the 1st phase, you know the main question was: "Why should we subsidize the imported and highly priced energy carriers?" Low price was the main reason for extensive fuel consumption in Iran and this made us search for a plan in order to improve our fuel consumption patterns and cut the subsidies .This could decrease Iran's dependence on its oil sector and reduce pollution in our cities .We were moving towards having the fuel priced in real terms in Iran. What happened though was totally different. Iranian parliament had passed a law according to which 50% of the generated income was the share of Iranian citizens in cash payment and other half belonged to the industry.
Unfortunately all the money was paid to Iranian people and the government borrowed an additional 15000000 Billion Tomans which accounts for one third of the budget. This was so dangerous for our economy. Despite warnings from experts and financial elites the previous government continued distribution of cash payments. As a result there were no structural reforms in our economy and in fact subsidies were not cut and consumption patterns remained the same. This led to more budget deficit and inflation, followed by a tremendous drop in the value of Iranian currency against US dollar. We came back to the first step and all the measures were actually nullified. I think if the 10th government intended to implement the Subsidy Reform Plan in order to reform economic structures and improve the consumption patterns which lead to economic growth and stability; it should have prepared each sector in advance.
We are talking about transportation; they should have allocated a budget for modernization of the transport fleet before the implementation of the 1st phase. As you may know, new generation of vehicles reduce the fuel consumption by 40%. Even after the beginning of the 1st phase none of the targets were achieved despite the government commitments. Rising fuel prices increased the spare part prices and goods such as motor oil had an adverse effect on transportation system and, of course, it also created an unprecedented inflation.

Considering the complications of the 1st phase of Subsidy Reform plan the current administration has started the 2nd phase. What's your evaluation? How would it be possible to modernize our transportation system in this phase? What's the share of transport sector? Some companies are concerned about the 2nd phase. They believe there are no incentive packages and loan facilities.
Davoud Keshavarzian: The previous government failed to fulfill its commitments for bank loan facilities and this caused dissatisfaction. Accordingly we have decided not to promise anything before the allocation of budget. It's obvious that both production and transportation will have a share of government earnings. At this moment, I can't be specific. There are some plans to extend universal health insurance to all Iranians and reduce healthcare costs. We also have the cash payments; therefore, we need more time to officially announce the budget for transportation.

What's the suggestion of Ministry of Roads and Urban Development for this share?
Davoud Keshavarzian: According to the Fifth Five Year Development Plan of the Islamic Republic of Iran the average life of our vehicles must be around 10 years. We also need to replace 100.000 trucks and lorries in 2 years. In a five-year period the number would be around 120.000. Let me explain that we currently have a surplus in our transportation system. I mean that some trucks wait for a couple of days at loading docks . On the other hand, average annual mileage is relatively less than other parts of the world due to the extensive number of trucks. The research findings indicate that if we replace 120 thousand aging trucks we will only need 60 thousand new ones in our system. Of course that wouldn't be cheap and can't be fulfilled with a relatively low state budget. Because the fuel price is subsidized in Iran, we can't have a routine modernization process. With globally priced fuel in Iran we won't have to beg for money to modernize the transportation system and there will be no more pressure.
An old truck's average consumption is 50 liters per 100 KM, yet the figure is 35 liters per 100 KM for new trucks. When the price of fuel is less than the global levels, maintenance costs will have a significant share of the total costs of driving each month. With real prices the driver can have a balance between his income and expenditures.
Today if a driver leases a truck he has to pay monthly installments of about 7 or 8 Million Tomans so he won't be able to make the ends meet even with 10 million Tomans per month.
In my assumption, subsidized prices are the main obstacle in the way of modernizing our transport fleet. At present a European truck is worth 450 Million Tomans, so a fifty-million bank loan won't do good and with a three-hundred million bank loan with 30% interest rate the driver won't be able to cover other costs of living.
Our current situation goes back to many years ago……….
Masoud Khanssari: Mr. KESHAVARZIAN you are a government official let me have the critical approach as a private sector representative "you should be more conservative"
"You are right, but these are technical topics … " said Mr. KESHAVARZIAN

What are your expectations as the representative of private sector for the 2nd phase of Subsidy Reform Plan to be more effective?
Masoud Khanssari: As a private sector representative I admit there are flaws in our transportation industry. We don't have a company with a detailed schedule because there is no portal , you know I think that the main obstacle is our pricing policy and mechanism .
Diesel is around 8000 TOMANS in Turkey comparing to 250 TOMANS in Iran. A truck is worth 400 to 500 million TOMANS. If we lift the limitations, Turkish trucks will dominate our market because the effect of fuel on the transportation process is far less important than the other factors. As Mr. KESHVARZIAN mentioned, truck mileage in Iran is much lower than international norms, 67000 KM comparing to 260000 KM in Turkey. Accordingly, there would be no difference between a 50-year old Mack truck and a modern truck. Of course there are also some structural problems in our system … Anyway how do you expect a driver to spend money to replace his old truck when everything is the same? How do you expect anything to happen in a non-competitive market?
We definitely need to have a competitive market, there is a 10 to 20 percent limit of annual increase in prices, with regard to the rise of the cost of driving it will actually be nullified. In a competitive market the cost of transportation might even decrease. In such conditions a cement bunker would be able to operate 2 or even 3 times a day which means a lower tone/ KM price . Unfortunately in our country there are wrong parameters in the economy .So with real global fuel prices no one will use a lorry with a consumption of 70 liters per 100 KM . Companies will only have two options: either to improve the quality of their vehicles and replace them or to go out of business! I assure you that in a competitive market and with global fuel prices the cost of transport will be reduced by 50%.

So the diesel price should have been more than 250?
Masoud Khanssari: In my assumption, the 11th government has acted conservatively in energy carriers pricing. We had a 100 TOMANS increase in the price of diesel (150 to 250) but recent increase of the exchange rate of US dollar, there hasn't been any increase in diesel price. I firmly believe what we needed at this stage was 700 TOMANS per liter. I mentioned that the real cost of transportation in a competitive market isn't affected by fuel price. In 2020 (the 1st phase of the Subsidy Reform Plan) we saw 900% increase in the diesel price, however the tone /KM price increased by only 18%. In this stage there was this capability and potential for more increase. The policy makers in the government decided to start the 2nd phase of the plan with a moderate increase in the price of fuel of course there are many reasons for this approach, such as the political groups and parties and concern about the inflation. These all led to a conservative approach in the body of the government.
But I tell you that the only remedy for our economy would be moving towards global fuel prices in Iran. After that, we can have a competitive transportation market. Today we are lagging behind many regional countries and soon we won't be able to compete with them.
Davoud Keshavarzian: We have no other option; globally priced fuel is the key solution to many of our problems in transportation industry. There are more than 390000 old trucks in Iran. Considering the current budget deficit and other issues, the government is not able to allocate enough credit to replace all of them. I do agree with Mr. KHANSSARI, I think that mismanagements in the implementation of the 1st phase by the 10th government have made this government more conservative. There were wrong decisions for cash payments to everyone and decreasing the budget for construction projects. As a result, today utility companies are in debt. Construction projects are halted and consumption patterns haven't improved. These policies also triggered inflation. Unfortunately there isn't a national consensus on the Subsidy Reform Plan, many believe that it hasn't been successful and all of the issues that we face today are caused by this plan. The mismanagements in the implementation of the 1st phase have raised doubts in the society. Anyway, we are on this path today. The 11th government promised to control the rising inflation in the first months and it has so far been successful. The hike in fuel price has been less than our expectations. I spoke to Mr. AKHOUNDI Minister of Transportation on this issue. I told him with global fuel prices we would not have any concerns about the state budget for modernizing transport fleet .
Masoud Khanssari: I think that in next phases of the Subsidy Reform Plan the fuel price must be raised and we should move towards global fuel price in Iran. The current slow increase of the price of energy carriers is not an actual reform. High fuel price doesn't directly lead to inflation although I believe in the psychological expectations for inflation. What causes the inflation is the money supply growth and the monetary base ratio .As I said earlier, the 900% increase in 2010 didn't lead to the same amount of increase in inflation. There were other reasons and policies in the previous government which led to inflation. What we need is one or two more steps to reach to real prices for fuel in Iran in order to be able to compete with other regional players. Countries such As Afghanistan, Tajikistan, Iraq and Uzbekistan have already outstripped us.

what are your plans for public transportation fare increase ? This sector expects bank loan facilities and customs exemptions .As you know other costs have also increased (spare parts, oil …)
Davoud Keshavarzian: As I mentioned earlier I can't be specific. We must wait for the official allocation of state budget but in this sector there aren't many difficulties with regard to the competitive market. In this sector, we have the free price system, so we had an agreement at the beginning of the year to increase the prices by 20%. In previous years and after the New Year holidays, we used to decrease the prices. This year we don't insist on that. Transport cooperative companies haven't urged the government to increase their prices .We have also asked them to be more patient for a one or two months in order to control the psychological effects of fare hike. After that we'll negotiate with the Transport Companies Association of Iran to reach an agreement .Decisions will be made at the beginning of summer. Moreover, in freight sector there are objections. We have also asked them to wait for a while in order to prevent panic in the society.