Is Indeni the best option for Zambia’s Fuel Supply?

Alan Whitworth

ZIPAR

Overview

• Fuel Costs vs Taxes vs Prices• Why are costs so high? • 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

Zambian Fuel Costs are the highest in the region (and probably in

Africa)

Southern Africa Comparative Diesel Prices, June 2008

Diesel / Gasoil (US$ / litre) Botswana Malawi Mozam Namibia RSA Swaziland Tanzania Zambia

Product Basic Cost 1.19 0.96 1.05 1.04 1.04 0.99 1.05 1.48

Transport, Service Differential 0.08 0.22 0.01 0.01 0.01 0.02 0.01 0.09

Govt. levies, duties, taxes 0.06 0.34 0.16 0.19 0.24 0.26 0.44 0.55

Oil Company margin (rounded) 0.05 0.08 0.12 0.05 0.05 0.05 0.09 0.11

Dealer Margin 0.06 0.06 0.09 0.05 0.08 0.06 0.05 0.07

Retail Pump Price 1.44 1.67 1.43 1.34 1.42 1.37 1.63 2.30

Source: BP

Southern Africa Comparative Diesel Prices, June 2008

Diesel Pump Prices (US$ / litre)

0.00

0.50

1.00

1.50

2.00

2.50

Bots Mal Moc Nam RSA Swa Tan Zam

Dealer Margin

Oil Company margin (rounded)

Govt. levies, duties, taxes

Transport, Service Differential.

Product Basic Cost

To reduce pump prices, in 2008 GRZ cut excise duty

• petrol from 60% to 36%

• diesel from 30% to 7%

Despite tax cuts, Zambian fuel prices are still among the highest

in AfricaRetail Prices of Diesel in SSA in February 2010 (in US$ per litre)

Source: World Bank

Pump prices must be reduced by cutting costs, not taxes

• Taxes are ‘transfer payments’ from citizens to government

• Cutting taxes on fuel requires increasing them on something else (or less expenditure)

• The drop in GRZ fuel revenue from 2.7% of GDP in 2008 to 1.4% in 2009 meant lower expenditure / increased fiscal deficit

Q. Why are costs so high in Zambia?

Answer - Inefficiencies in:

• Feedstock Procurement to Dar es Salaam• TAZAMA pipeline (?) – no data • Indeni refinery• Distribution • Monopoly• Role of Government

n

Ndola FuelTerminal

Hauliers

Ship Tanker at SPMDar-es-Salaam

UnderseaPipelineTAZAMA Tank Farm

Dar-es-Salaam

TAZAMA Pipelines1706 km

INDENIRefinery

Mining

Industry

Filling Station Agriculture

Oil Rig

Road/Air Transport

Components of Value Chain

OMC

Government is main operator in Zambian fuel market

• Procures / owns feedstock• Owns 2/3 of TAZAMA (1/3 Tanzania Govt)• Owns Indeni• Wholesale supplier to OMCs

GRZ also regulates the industry and fixes prices

– conflict of interest?

ERB subject to political interference (eg 2008/09)

Feedstock Procurement

• 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

Indeni Refinery

Processing Fee

• Actual fee paid by GRZ = $8 / barrel

• ‘Good practice’ fee = $4 / barrel

Refinery Loss

• Actual = 10%

• ‘Good practice’ = 5% maximum

If ‘good practice’ was followed in procurement (spot prices),

processing ($4) & losses (5%), 2009 pump prices would have

been lower by:

Petrol – 19%

Diesel – 17%

Kerosene – 21%

Even if optimally operated, Indeni is too small to compete

with modern refineries• ‘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 tonnes 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)

• Indeni’s capacity is 1.1 million tonnes pa

Indeni only survives through tariff protection from imports

Import duty:• finished products - 25%• crude for Indeni - 5%

So Indeni / GRZ can - & do – sell for up to 20% more than price of imported finished products

Consumer pays for inefficiency

When Indeni has unplanned shutdowns, duty on finished products is waived and prices fall

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?

Security of Supply

• Unplanned shutdowns at Indeni mean the whole country runs out of fuel

• High disruption costs

• Without substantial investment, more frequent shutdowns are likely

• Direct imports to different provinces reduce risk of supply disruptions

Monopoly

• TAZAMA / Indeni is a monopoly supplier

• Monopolies usually have higher costs & prices than competitive markets

Why is GRZ involved?

• 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

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

Jobs

Liberalisation means closing TAZAMA (260 jobs) & Indeni (320). However, reducing fuel costs by, say, 15% & improving reliability of supplies should create far more jobs:

• Directly in OMCs

• Indirectly, by improving productivity & competitiveness of Zambian economy

Should GRZ sell shares in Indeni?

• GRZ paid Total $5.5 million in 2009 for its 50% shareholding

• Indeni can only make profits at expense of consumers

• Shares only have value if protection maintained

• Selling shares may entrench protection

Uniform Petroleum Pricing

• Introduced September 2010

• Transport margin between wholesale & pump price equalised throughout Zambia

• Consumers in Copperbelt & Lusaka ‘subsidise’ those far from Indeni

• Another price ‘distortion’, but minor compared to Indeni monopoly

Conclusions

• Current system represents massive waste of public & private resources

• Undermines international competitiveness

• Increases poverty

• Liberalisation should both cut costs/prices & improve reliability - without hurting revenue

• Need for informed public debate & planned transition