The Zambian government last week announced that fuel prices
will go up by 21% after removing the subsidies. The removal of subsidies is a
good theoretical move but I must disagree in the execution of it.
Now most people would ask how come I don’t like the removal
of the subsidy even though conventional economics says subsidies bring about
inefficiencies. Let’s get one thing straight, the subsidy should have never
been there in the first place Zambia does not produce any oil. But if you look
at the comparisons Zambia’s price of fuel remains substantially higher than
other countries that also do not have any oil, so where is THE problem, we must
find THAT problem and solve THAT problem.
But given the fact that the subsidy was in place, you don’t wake
up one morning and suddenly remove it like that, it is bad execution. Watch how
and where Economeka differs with the Energy Minister.
Energy Minister: FUEL
prices have been hiked by an average KR1.69 per litre following the
government’s decision to scrap fuel subsidy which had kept the local pump
prices unchanged for almost two years. Energy minister Yamfwa Mukanga told
journalists in Lusaka last week that the price for a litre of diesel has been
adjusted upwards by KR1.63 while that of petrol has gone up by KR1.75.This
means that a litre of petrol which initially was costing KR8.16 will now fetch
KR9.91 while a litre of diesel which was costing KR7.50 will now cost KR9.13.A
litre of kerosene will now be fetching KR1.68 more than it used to.
According to Mukanga, the fuel subsidy has been a huge drain
on government coffers.
Economeka: Indeed
the subsidy has been a drain on government coffers we totally agree. No
argument there.
Energy Minister: Last
year, the government spent KR754 million on fuel subsidies, an amount
equivalent to 70 per cent of the total health sector budget minus personal
emoluments. The government has already spent KR1,195 million on fuel subsidies
in the first and second quarter of this year, Yamfwa said, adding that the fuel
subsidies, which were introduced by the MMD government to cushion the poor and
vulnerable in society, have not benefited the ordinary people.
“Current evidence suggests that the poor have benefited the
least from this measure,” he said.
“It is key consumers of fuel – the mining industries and
urban dwellers that are able to own their vehicles – that have [instead]
benefited the most from this measure. In view of this, it is inevitable that
the fuel subsidy is removed and fuel prices adjusted effective midnight, 30th
April 2013.”
Economeka: Now
this where I choose to disagree with the Honorable Minister. To mining
industries and urban dwellers the change in fuel price is minimal and can be
easily absorbed. But for the ordinary Zambian this is taking money right out of
their pockets. Fuel is a sensitive product. It affects the pricing of so many
other products across the board. The same poor people you refer to in your evidence
are the ones who are going to feel the pinch of this fuel hike, ordinary people
won’t even be bothered that much.
Energy Minister: “In
addition, taxes on fuel will in future be reflected in absolute and not
percentage terms as a way to mitigate increases in the price of fuel. This
measure, however, requires changes in the law and will therefore be considered
at the next sitting of parliament.”
Economeka: this
is the biggest problem we have with
the removal of the subsidy. We don’t
refute the need to remove the subsidy, but in an effort to cushion the public
from its effects, would it not have been prudent to first get the taxes on fuel
to be reflected in absolute and not percentage terms first (effectively
reducing the price of fuel), then remove the subsidy bringing it back to
equilibrium levels. We estimate few people would have noticed the change.
We at Economeka firmly believe there are structural problems
that need to be dealt with first. Our Colleagues at the Zambian Economist (www.zambian-economist.com) outlined
this 3 step plan.
STEP 1 : remove subsidies on fuel prices and stop the
rampant and retrogressive waste of resources there (which disproportionately
benefits urban folk) - DONE.
STEP 2: return Indeni to profit making levels and increase
investment, as well as normalising supply of fuel across the country - BEING
DONE.
We have seen many wonderful statements which have being made
by Ministry of Mines and Energy that has signalled significant progress in this
area. For example, the 10 million litres
Lusaka-West Fuel storage terminal is now operational. The Ministry of Energy
says Government has embarked on the construction of other storage facilities in
Mongu, Mpika and Solwezi to increase the number of delivery Fuel points in the
country. That excellent development is critical in stabilising oil supply
across the country in the short term.
It was also announced that Indeni Petroleum Refinery will
start declaring dividends to its sole shareholder, GRZ, for the first time in
20 years. Government has run Indeni since Total SA pulled out in 2009. Last
year, Indeni’s Managing Director Maybin Noole stated that Indeni had posted
profits amounting to KR80 million in 2010 and KR54 million in 2011. Of course
Indeni needs this money but the process of declaring dividends is vital in
ensuring transparency and public accountability - something we have lacked in
the past. It shows that change is happening in this area.
Other sectors also appear to benefiting from the new shift
in this area. It was recently announced that we are expected to produce at
least 100,000 cubic litres of bitumen-based fuel per day once the manufacturing
plant currently under rehabilitation at Indeni Petroleum Refinery starts
operating. 75 per cent of rehabilitation works had so far been completed and it
will be ready to produce bitumen in August or thereabouts. The plant had been
non-operational for the past 10 years but will soon roar to life.
This is good news. The government has invested US$20 million
for Bitumen production. The huge quantities of bitumen are needed to complete
the Link Zambia 8000 and pave Zambia 2000 road projects. It is allegedly
currently costing Government US$1,200 to import a cubic litre of bitumen from
South Africa and the Middle East. The plant is a huge leap forward.
These and many other positive changes underline the
determination make progress under Step 2 that requires wide support from
ordinary Zambians if this sector is to improve. Without public support change
will not be possible. But change also requires bold leadership and it is clear
that the Ministry of Mines and Energy is making important strides and ministers
must be commended for their boldness.
STEP 3: reform the wholesale fuel supply system consisting
of fuel imports, transportation, and processing. This supply system is
dominated by a vertically integrated government monopoly consisting of Tazama
Pipelines Limited, the Indeni Petroleum Refinery Company Ltd., and the Ndola
Fuel Terminal.
Because there's no competition, this system suffers from
operational and structural inefficiencies, therefore high costs, the burden of
which is shared by ordinary Zambian consumers. (and previously by taxpayers
through subsidies which were meant to keep fuel costs low but have now
thankfully been removed). The energy regulator (ERB) is unable to control costs
effectively. Indeed, it cannot without sorting out the fuel supply system.
Part of the solution to the supply chain issues is to remove
the 25% import duties on petroleum finished products so that prices can be
reduced across board. The duty exists largely to protect Indeni. Indeni of
course needs protection because Government is not just interested in stable
fuel prices but also to ensure a uniform price across the country (Mukanga,
2013) .
The Problems
• Why are costs so high?
• What is the Role of Government
• TAZAMA / Indeni not competitive
& dependent on tariff protection
• Costs & security risks of
relying solely on TAZAMA / Indeni
• Case for liberalisation / import of
finished products by OMCs
Why are Fuel costs so
high in Zambia?
Fuel is high because of
Inefficiencies in:
Feedstock Procurement to Dar es Salaam
Comparison of CIF Dar es Salaam prices paid by GRZ in 2008
& 2009 with reference (spot) prices shows over-payment
‘The total “overcharge” vs good international practice
was…..US$ 93 million over the two years’ (Matthews 2010) , or 12.5% of total
CIF costs
TAZAMA pipeline is the only supply of Oil in the country.
Inefficiencies along this mode of transportation are protected traits of a
monopoly.
Indeni
Indeni refinery has a limited capacity of 1.1 million tons a
year. ‘Economies of scale are particularly important for refining…..As a basic
rule of thumb, a refinery needs to have a processing capacity of at least … 5
million tons a year… to be economic in a liberalized market. ….A sub-economic-scale refinery is unlikely
to be able to compete with product imports from large and efficiently run
refineries’ (Kojima et al, 2010)
Distribution
·
Distribution throughout Zambia by OMCs from a
single point, Indeni, increases transport costs and supply risks
·
Chipata is 900 km from Ndola, but only 140 km
from Lilongwe
·
Fuel costs are lower in Malawi
·
Can Eastern Province obtain supplies more
cheaply through Malawi?
Monopoly
·
TAZAMA / Indeni is a monopoly supplier
·
Monopolies usually have higher costs &
prices than competitive markets
Government Involvement
·
No market failure – OMCs will supply
·
Most governments in region leave fuel supply to
OMCs
·
Paying for feedstock can disrupt budget releases
to conventional public services
·
Fiscal loss / unbudgeted subsidy of US$ 90
million in 2009
Cost of Production
The Private Sector Development Association (PSDA) has said
the recent fuel hike, coupled with the imminent upward adjustment of
electricity tariffs, will impact negatively on investment in the country.
Association chairperson Yusuf Dodia said this was because
the cost of doing business is likely to go up in all sectors of the country’s
economy. Mr. Dodia told ZANIS in an interview that because of these developments, it will be
difficult to stimulate the growth of the economy. “Our biggest worry is that
prices of fuel and electricity are going up. This means that the cost of doing
business in whatever sector will go up,” he said. He said the expected rise in
the cost of production might cause Zambia to be less competitive than her
neighbouring countries as the local products will be more expensive than the
imported goods (Lusaka Voice, 2013) .
And a Lusaka based economist Trevor Simumba has advised
government to consult stakeholders each time it wants to effect a new policy. Mr.
Simumba said it was important for government to get the input of various
stakeholders on its policy pronouncements so that such policies have the
reflection of all interested parties. Mr. Simumba said the removal of fuel
subsidies will impact negatively on consumers as the prices of basic commodities will go up.
He said the very poor people that government said were not benefiting from the
subsidies will be the same that will feel the pinch of the increase (Lusaka Voice,
2013) .
Solution to the cost
of Fuel
A recent parliamentary report on the state of petroleum
industry in Zambia is embedded below. It notes that :
"....petroleum products in Zambia, which are the
highest in the region, could be cheaper....fuel products are being kept
superficially high due to impediments in the petroleum sector which include
issues of policy, planning, recapitalisation, procurement and
taxation...".
The problems facing oil supply in Zambia are the same
problems facing maize marketing. Inefficient government involvement in systems
where its role should be purely to maintain strategic reserves and leave the
rest to market forces, underpinned by appropriate favourable taxation framework
(Mukanga, 2013)
The Solutions
·
Pump prices must be reduced by cutting costs not
taxes.
·
GRZ Could sell its shares in Indeni and remove
the protection
·
Distribution sources need to be diversified to
reduce transport costs. Each province can get oil from its nearest country ie.
North western from Angola and Eastern from Malawi.
·
Liberalisation can reduce pump prices &
increase reliability without hurting GRZ revenue
·
Removing Indeni’s tariff protection &
encouraging OMCs to import finished products directly means
·
Improved efficiency from competition
·
Lower transport costs, as provinces are served
from nearest port (eg Eastern - Nacala, Lusaka – Beira, Northern – Dar)
·
End of nationwide shortages
·
No further public investment (except storage),
so GRZ can focus on public services
Bibliography
Lusaka Voice. (2013, May 2). Lusaka Voice.
Retrieved May 6, 2013, from PSDA worried about fuel price hike:
http://lusakavoice.com/2013/05/02/psda-worried-about-fuel-price-hike/
Mukanga, C. (2013, May 3). Zambian Economist.
Retrieved March 6, 2013, from Bold Leadership on Fuel Prices:
http://www.zambian-economist.com/2013/05/bold-leadership-on-fuel-prices.html
Kojima et al, (2010) Economies of Scale for Refining
Mathews ( 2010) . International Oil Refinery Practice
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This is a good analysis.
ReplyDeleteThank you very much for your feedback, Much appreciated
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