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ZIPAR Working Paper - 02
September 2011
ZIPAR
How to Reduce Zambia’s Fuel Costs
By Alan Whitworth1
ABSTRACT
The paper shows that Zambia’s high fuel prices are largely due to in efficiencies in the way
fuel is imported. The government owned TAZAMA pipeline and Indeni refinery, which have a
monopoly over most fuel imports, are very inefficient but are protected from competition by
high tariffs on finished products. Removing tariff protection and liberalising imports of finished
products would reduce costs both by promoting competition from road tankers and railways
and by allowing different provinces to obtain supplies from the cheapest port. It would also
eliminate the risk of nationwide shortages when Indeni has unplanned breakdowns.
1
Technical Adviser, Zambia Institute for Policy Analysis & Research. The paper draws heavily on
Matthews (2010). Helpful comments from Robert Masiye and Bill Matthews are gratefully acknowledged.
1.
Introduction
Zambian fuel costs are among the highest in the world. In recent years there
have been increasing calls for fuel taxation to be reduced in order to bring
pump prices down. However, reducing taxation is not a solution because it
simply reduces government revenue. This paper argues that there is a much
more effective and sustainable solution to the problem of high prices.
Removing the monopoly enjoyed by the TAZAMA pipeline and Indeni refinery
and allowing competition from finished products transported by road and rail
should both bring import costs down permanently (by as much as 10-15%)
and increase the reliability of fuel supplies.
The cost and reliability of fuel supplies are critical to the competitiveness of all
economies and to citizens’ well being. Fuel is Zambia’s largest import and
has been a major constraint to growth since the 1960s. In addition to high
costs, frequent shutdowns at Indeni have caused extensive supply
disruptions. Continued operation of Indeni will require substantial investment,
yet it is not clear that this is economically justified. This paper examines why
fuel costs are so high in Zambia and considers how they can be reduced. It
also looks at the implications of relying on a single pipeline and refinery for
reliability of supplies and questions the role of Government in the fuel sector,
before concluding with the issues of taxation and price control.
2
Current Fuel Sector Institutions
The Government has been the main actor in the Zambian fuel sector since the
1960s. With sanctions against the Ian Smith regime in Rhodesia disrupting oil
imports, it was decided to construct a 1,710 km pipeline to transport
petroleum products from Dar es Salaam and to build a refinery in Ndola. The
TAZAMA pipeline, commissioned in 1968, is jointly owned by the Zambian
(66.7%) and Tanzanian (33.3%) governments. The Indeni refinery, a simple
hydro-skimming refinery with a design capacity of 1.1 million tonnes per year,
was commissioned in 1973. It has been 100% owned by the Zambian
Government since it acquired Total’s 50% stake in 20092. A blend of whole
crude and finished products, known as ‘spiked crude’, is imported and then
refined and separated to meet the Zambia market mix. Procurement is
handled by the Ministries of Energy & Water Development and Finance &
National Planning.3 The CIF cost of fuel procured under the supply contract
(with IPG), covering the two years 2008 and 2009, amounted to US$ 741.8
million4.
The 50 million litre capacity Ndola Fuel Terminal, adjacent to the refinery, is
used for storing and managing the distribution of refined products and is also
100% owned by the Government (and managed by TAZAMA Pipelines Ltd.).
Except for breakdowns and supply disruptions at Indeni (when finished
products are imported directly, mainly by road), all Zambia’s fuel needs since
1973 have been supplied through the pipeline and Indeni.
2
Total acquired its shares from Agip, the original project developer, in 2001. Between 2002
and 2007 Total was responsible for procurement of the petroleum feedstock for Indeni.
3
In October 2007 the Zambian Government appointed TAZAMA Pipelines Ltd as its agent to
manage the procurement of feedstock on its behalf.
4
Equivalent to 9.3 per cent of total FOB imports, worth $7,967 million, over the two years
(IMF 2010)
Indeni does not purchase crude oil feedstock itself or own and sell the
products it produces. Instead, it operates on a tolling arrangement. The
Government (GRZ) is the supplier and proprietor of the feedstock and owner
of the products produced and lifted from the refinery. Finished products are
sold to 27 private licensed Oil Marketing Companies (OMCs), which distribute
them throughout Zambia, mainly by road tanker. While OMCs are allowed to
import finished products, since 2008 they have attracted 25% import duty,
whereas Indeni only pays 5% duty on its feedstock. With, in effect, a
monopoly in fuel importation and processing, the Energy Regulation Board
(ERB) determines maximum retail fuel prices (except for sales to mines and
certain other industries).
Zambians have relied on the pipeline for fuel imports for so long that few are
aware that there may be lower cost alternatives. The pipeline and refinery are
widely regarded as valuable national assets and it is taken for granted that a
pipeline is the most economic way of importing fuel; there is little public
debate on alternatives. However, they can only be considered genuine
assets if they provide real economic value to the country, in the form of lower
fuel prices and/or more reliable supply than alternative import arrangements.
If this is not the case, they should be regarded as sunk costs and written off.
The evidence below on costs and reliability casts serious doubt on the value
of the pipeline and Indeni.
3
Fuel Prices
Table 1 and Figure 1 show that in June 2008 Zambia had much the highest
retail pump prices in the Southern African region.
This was largely
attributable to two factors, higher product basic costs and taxes. It is important
to understand that taxes are not a real cost to the economy; they are simply a
transfer from citizens to government. What really matters is Zambia’s high
product basic costs. These are looked at first, therefore. The issue of fuel
taxation is discussed below.5
Table 1
Southern Africa Comparative Diesel Prices, June 2008
Diesel / Gasoil (US$ / litre)
Botswana
Product Basic Cost
1.19
Transport, Service Differential
0.08
Govt. Levies, Duties, Taxes
0.06
Oil Company Margin
0.05
Dealer Margin
0.06
Retail Pump Price
1.44
Source: BP (2008)
Figure 1
5
Malawi
0.96
0.22
0.34
0.08
0.06
1.67
Mozam
1.05
0.01
0.16
0.12
0.09
1.43
Namibia
1.04
0.01
0.19
0.05
0.05
1.34
RSA
1.04
0.01
0.24
0.05
0.08
1.42
Swaziland
0.99
0.02
0.26
0.05
0.06
1.37
Tanzania
1.05
0.01
0.44
0.09
0.05
1.63
Southern Africa Comparative Diesel Prices, June 2008
As noted below, excise duties on fuel were cut sharply later in 2008. Despite this, Appendix
1 shows that Zambia still had the fifth highest pump price for diesel in sub Saharan Africa in
February 2010. Since pump prices include taxes, which differ markedly between countries,
they are a poor guide to cost differences.
Zambia
1.48
0.09
0.55
0.11
0.07
2.30
Diesel Pump Prices (US$ / litre)
2.50
Dealer M argin
2.00
Oil Company M argin
Go vt. Levies, Duties, Taxes
1.50
Transport , Service Differential.
P roduct B asic Co st
1.00
0.50
0.00
Bots
Mal
Moz
Nam
RSA
Sw a
Tan
Zambia
It is no surprise that Zambia’s product basic costs are higher than those of its
coastal neighbours, because of the greater distance over which imports have
to be transported. Of concern however is that, at US$ 1.48 / litre, Zambia’s
costs were significantly higher than in landlocked Malawi ($0.96), Botswana
($1.19), and Swaziland ($0.99)6. It is noteworthy that, of these countries, only
Zambia imports fuel through a pipeline; the others use a combination of road
and rail transport.
In late 2009, as part of the World Bank Public Expenditure Review, a leading
international oil and gas downstream logistics expert was engaged to examine
why Zambia’s costs are so much higher than those of its neighbours
(Matthews 2010). He was able to review two of the three main stages in the
supply chain: the crude procurement process and refining7. Beginning with
procurement, his report noted that the ‘contractual arrangements and
supply/procurement details are not altogether transparent’ (Matthews
2010:11). The study compared how much GRZ actually paid for all Zambian
feedstock cargoes in 2008 and 2009 (CIF Dar es Salaam values) with ‘normal’
prices – i.e. with reference values for crude (derived from FOB spot market
prices at source) and for typical transportation and insurance costs for the
distances involved. The study concluded that in most cases ‘actual CIF costs,
Dar were markedly higher than the reference prices. The average differential
between actual and reference cost for all 11 cargoes 2008-2009 was
$96/tonne for Murban crude [$127/tonne for gasoil], amounting to a total of
some $43 million [$50 million for gasoil] over the period’ (Matthews 2010:22).
‘The total “overcharge” vs good international practice was…..$93 million over
the two years’ (Matthews 2010:22), or 12.5% of total CIF costs ($741.8
million). In other words, it appears that poor procurement practices by GRZ
result in substantially higher crude import costs (to Dar es Salaam) than
necessary.
6
While comparable data for June 2008 are not available, BP data for August 2006 shows
Zambian product basic costs were 13% higher than in Lesotho and 4% higher than in
Zimbabwe.
7
Data on the efficiency of the pipeline, the middle stage, is not publicly available.
Turning to the refining stage, as compensation for its capital and operating
costs Indeni receives a processing fee from GRZ. In late 2009 this fee was
$ 61.10 per tonne of feedstock, or $8 per barrel based on average 2008-2009
feedstock composition. This fee is incorporated in the cost-plus price formula
for retail pump prices. ‘This is an extraordinarily high processing fee for a
simple hydro skimming refinery…..it is difficult to see how $8.00 per barrel can
be justified …. in an old plant that is significantly amortized.’ (Matthews
2010:24-25). Assuming industry “good practice” costs of $4 ($2 operating and
$2 capital) per barrel, ‘the total saving if good practice were achieved
….would amount to an annual saving of $13.7 million per year based on the
three years, 2007-2009 average throughput’ (Matthews 2010:25).
An additional significant cost included in the price structure is the allowance
for “Refinery loss” at 10% of throughput. ‘In a hydro skimming refinery, the
total fuel and loss…… should be no more than 4 to 5% maximum’ (Matthews
2010:25, based on Wijetilleke and Ody 1984).
A 5% excess loss ‘is equivalent to some $17 million per year at 2008-2009
prices for crude oil’ (Matthews 2010:25).
Table 2
Estimated Impact of Identified Supply Chain Cost Savings
on Final Pump Prices, ZKw / litre
Savings Measures
(1) Crude Procurement
Good Practice Saving:
$112.62 / t (2008-09)
(2) Refining Cost / Fee
Good Practice Saving:
$30.55 / t
(3) Refinery
Fuel & Loss
Good Practice:
5%
Total Pump
Price Saving
ZKw
466
741
114
181
145
230
725
1,152
before tax
after tax & fees
501
532
123
130
156
166
780
828
before tax
after tax & fees
528
626
129
154
165
195
822
975
Product
Petrol
before tax
after tax & fees
Kerosene
Diesel
Source: Matthews (2010:26)
These findings of an industry expert suggest that the arrangement whereby
the Government is the monopoly importer and refiner of fuel is highly
inefficient and that, as a result, pump prices are much higher than they need
be. Table 2 summarizes the potential reductions in pump prices if
internationally accepted industry “good practice” could be achieved in the
three areas identified and quantified above: crude procurement (savings of
$112.62 per tonne), refining cost ($30.55 per tonne) and refinery fuel and loss
(5% of throughput). The savings for petrol, kerosene and diesel are shown
both before and after 2009 taxes and fees. Total potential savings are in the
range ZKw 725 to 822 and ZKw 828 to 1152 per litre before and after tax
respectively. Based on 2009 prices, they are equivalent to reductions in (after
tax) pump prices of 19% for petrol, 21% for kerosene and 17% for diesel.
The above illustrate the potential savings from ‘good practice’ operation of the
current Zambian system. However, even if Indeni were operated optimally, its
costs would still be higher than those achieved in modern large scale
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 100,000 barrels a day (or 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: 19-20).
With its capacity of just 1.1 million tonnes a year, Indeni is clearly a ‘subeconomic-scale refinery’. The only way it can survive is through public
subsidies and/or tariff protection. As shown below, Indeni receives substantial
protection from imports – at the expense of the consumer.
4
Reliability of Supplies
The costs to the economy are not limited to higher pump prices. Because all
Zambia’s fuel requirements are imported through the pipeline, whenever there
is an unplanned shutdown fuel supplies are disrupted throughout the country.
Long queues outside petrol stations countrywide are a common phenomenon,
as a result of failure to maintain and invest in the pipeline and refinery8. The
withdrawal of Total, which provided much of the technical services, from
Indeni in 2009 raises the prospect of increased supply disruptions in future
unless substantial investment is undertaken.
Reliable estimates of the amount of investment required just to maintain the
current level of operations of the pipeline and Indeni are elusive. However, the
Zambian Government has struggled to finance Indeni in the past and the
fiscal situation suggests that public funding will continue to be a constraint
(Whitworth 2011). Public investment in the pipeline or refinery is likely to
crowd out expenditure on basic social services (for which government is
clearly responsible), therefore. This calls into question the appropriateness of
direct Government involvement in commercial fuel operations.
Another concern is that the refinery cannot adapt to the changing
requirements of the Zambian market for fuel products. New engines (in the
mines and imported cars) require ‘cleaner’ fuels (i.e. low sulphur diesel, higher
octane petrol). On the other hand, supply of quality ‘black’ products such as
furnace fuel oil for the mines and other industries is sometimes problematic
for Indeni, depending on feedstock composition.
8
The ‘refinery was shut down for a total of 113 days in 2007 compared to 119 days in 2006.
The shutdowns in 2007 were mainly driven by the shortage of feedstock whereas in 2006
shutdowns were mostly attributable to technical problems’ (ERB 2007:20).
5
Role of Government
In most oil importing countries fuel supplies are seen as the responsibility of
the private sector; there is rarely a market failure or security reason for
government involvement. While it may have been necessary during the UDI
period in Rhodesia, GRZ’s prominent role in the Zambian fuel sector appears
anachronistic today. On the one hand, GRZ is responsible for procuring the
feedstock, paying TAZAMA and Indeni to transport and refine it respectively,
and for selling finished products to OMCs. On the other hand, it is
responsible for regulating the sector and fixing maximum prices. Not only is
there a conflict of interest between the two roles, but the former (commercial)
role can undermine regular functions of government. For example, on
occasions releases of budgeted funds to ministries have been delayed
because feedstock contract payments have taken priority. Also, delays in
adjusting pump prices when world prices are rising have lead to fiscal losses
on fuel operations, at the expense of regular government functions.
This might be acceptable if it were demonstrated that GRZ was performing
well in terms of fuel costs and reliability. However, as noted above, Zambia
has higher basic product costs than its neighbours and frequent supply
disruptions. International experience suggests that few governments are
equipped to conduct commercial operations efficiently. The track record of
Zambian parastatals is particularly weak, even by African standards. The
evidence above suggests that this applies equally to fuel. Given that: (a)
substantial investment is required in the sub-sector just to maintain – let alone
improve - current operations; (b) scarce public resources are urgently needed
elsewhere for basic public services; and (c) the private sector will invest (in
the right policy environment), continued GRZ involvement in fuel operations
appears hard to justify.
6
Monopoly concerns
The state currently has a monopoly over fuel importation and processing in
Zambia. This raises a number of concerns. Firstly, in economic theory,
monopoly is associated with higher prices resulting from both the exploitation
of market power and lower incentives to cut costs. The figures above appear
consistent with the theory. Secondly, relying on the pipeline for all Zambia’s
fuel requirements means that the entire country is affected by breakdowns.
Allowing competition in fuel importation would greatly reduce the risk of major
supply disruptions.
Thirdly, even if procurement, the pipeline and refinery were all run efficiently,
there would still be substantial costs and risks involved in distributing finished
products from a single point, Indeni, throughout a country as large as Zambia.
For many parts of the country direct importation is likely to be more economic.
For example, Chipata is 900 km by road from Ndola but only 140 km from
Lilongwe, the capital of Malawi. Given that Malawi has historically had
significantly lower fuel costs than Zambia, Eastern Province may be able to
procure fuel more cheaply through Malawi9. Finally, instead of relying on
competition to keep prices down, the monopoly structure of the fuel industry
has compelled GRZ to establish retail price controls managed by ERB. As
discussed below, these are not working well.
The above concerns are the inevitable result of importing fuel via a single
pipeline and using import duties to prevent competition. This raises the
question of whether importation via pipeline is the most appropriate
arrangement for Zambia.
7
The alternative: direct import of finished products
There are two main alternatives to current arrangements: (1) (re-)conversion
of the pipeline to a clean products line to enable it to carry finished products;
and (2) direct import of finished products by OMCs via road and/or rail.
Importing finished products by pipeline would eliminate the need for refining
and the inefficiencies at Indeni identified above.
However, conversion the pipeline to a clean products line would require
further public investment, assuming that TAZAMA remains in public
ownership. Also, the disadvantages associated with: (a) monopoly; (b)
Government involvement in commercial operations; and (c) national
distribution from a single point would remain.
The potentially more attractive alternative is liberalized direct importation of
finished products by OMCs. Instead of just buying products from Indeni for
internal distribution, OMCs would be free to procure fuel on the world market
and transport it from Indian Ocean ports to Zambia by road, rail or both10.
This is how most landlocked African countries import fuel. It is also how GRZ
has responded when Indeni has been shut down for extended periods; OMCs
were given temporary waivers of import duty.
This has a number of potential advantages relative to current arrangements.
The most obvious one is the introduction of competition into a sector where it
is sorely needed.
There would be competition both between OMCs
themselves and between different ports and transport routes. So suppliers to,
say, Eastern Province, using Durban might be competing against suppliers
using Nacala or Beira ports. Costs should come down as a result of both the
need to compete / survive and the transport savings from serving different
provinces from the nearest / most convenient ports. The potential for cost
savings is illustrated by the fact that on occasions when Indeni has been
closed the differential import duty on finished products has been suspended
and OMCs have been able to import fuel at lower cost than Indeni; once
Indeni resumed normal operations punitive duties (currently 25%) are
imposed on direct imports in order to protect Indeni revenues.
9
Similarly, Livingstone is 800 km from Ndola, but only 10 km from Zimbabwe and 70 km from
Botswana. Much of Northern Province is closer to Tanzania than to Ndola.
10
Even if Indeni achieved the above ‘’ good practice’’ savings ‘through investment and
enhanced operational procedures, it would only just compete with road tanker supply’
(Matthews 2010:41).
The other obvious benefit of competition is that it would eliminate the
countrywide fuel crises that currently result from unplanned shutdowns at
Indeni. Securing fuel from multiple sources is a much safer risk strategy than
relying solely on Indeni. If one OMC experiences supply disruptions others
can fill the gap.
Another advantage of allowing competition is that it would allow GRZ to
withdraw from active operations in the fuel sector - to focus on policy and
regulation – without turning a public monopoly into a private one. Meanwhile,
the simple presence of competition would reduce, if not eliminate, the need for
price controls on fuel.
A common counter-argument is that importing fuel by road tankers instead of
by pipeline would increase road maintenance costs. While true for the region,
it would not necessarily apply inside Zambia. As noted above, finished
products are currently distributed by road (and, to a much lesser extent, rail)
throughout Zambia – starting from Indeni. Direct importation would open up
the possibility of, say, Eastern and Southern Provinces receiving supplies
through Malawi and Zimbabwe / Botswana respectively, greatly reducing use
of Zambia’s own roads. While increased road maintenance costs would be a
legitimate concern for Zambia’s neighbours, these should be covered by
appropriate road user charges in those countries – and therefore reflected in
Zambia’s import costs.
In order to close the pipeline and switch to direct imports of finished products
there would have to be investment in new storage capacity on the part of both
GRZ (to ensure strategic reserves) and OMCs. While the Copperbelt could
be covered by converting Indeni storage to finished products, investment
would be required at Ndola Fuel Terminal. New capacity would be needed in
Lusaka and at some provincial depots. Switching over would have to be a
gradual process. Moreover, OMCs will not be prepared to invest without
certain safeguards, e.g. over taxation and pricing policy.
8
Taxation
Fuel taxation is an important source of government revenue in most
countries11. Not only is it relatively easy to collect12, but it can support other
policy objectives such as cutting imports, energy efficiency and reducing
carbon emissions.
After several years of relative stability, fuel taxation policy in Zambia has been
erratic in recent years. Table 1 shows that in June 2008 Zambia had much the
highest ‘government levies, duties and taxes’ in Southern Africa, at 55 US
cents per litre. While taxes had been among the highest in the region for
some time, this was aggravated by the impact of the jump in international oil
prices in mid 2008 on Zambia’s ad valorem fuel taxes. Ad valorem taxes are
levied as a fixed percentage of import values, whereas most of Zambia’s
neighbours have specific tax rates which do not vary with world prices. Excise
11
For example, in Uganda fuel taxes averaged 2.2% of GDP between 1991 and 2006
(Cawley and Zake 2010:111).
12
This applies in particular to Zambia because excise duty is collected at a single point,
Indeni. A switch to direct import by OMCs would require collection at border posts.
duty rates on petrol and diesel were cut twice between June and September
2008, from 60% and 30% to 36% and 7% respectively. Duties were cut to
defuse public concern at increasing pump prices. In effect, GRZ cut duties to
offset the impact of rising world prices. However, even though world prices
fell sharply within a few months of their mid 2008 peak, duties (and pump
prices) were not revised until January 2010. Moreover, the increase was
modest; diesel excise duty was only raised from 7% to 10% (cf 30% pre June
2008), while petrol duty was unchanged.
The combined impact of: (a) reductions in excise duty; and (b) falling world
prices and import volumes, following the global financial crisis, was that
monthly fiscal revenues from oil products (customs, excise and VAT), which
had averaged about US$ 25 million per month between January 2007 and
mid-2008 (peaking at US$ 60 million in mid-2008), declined to an average of
about US$ 15 million in 2009 (Matthews 2010:22)13. The timing of the
decrease was unfortunate because it aggravated a general decline in
government revenue resulting from the global crisis and other developments
(Whitworth 2011).
As in many countries, recent changes in fuel taxation appear to reflect a
political desire to keep fuel prices low. Fuel prices are a key factor in
transport costs, so revenue maximisation should not be the sole criterion in
determining tax rates. However, if fuel taxes are to make a sustainable
contribution to government revenue they must be stable and predictable.
One way of moderating price fluctuations while sustaining revenue would be
to replace ad valorem taxation with specific (fixed) rates per litre. Whereas ad
valorem taxes cause domestic prices to increase (or decrease) by more than
increases (or decreases) in world prices, specific taxes are counter-cyclical.
They are also harder to evade because the rates are fixed and known and
there is no scope for under-invoicing. However, rather than adjusting taxes,
a more sustainable way of reducing fuel prices (without damaging GRZ
revenue) is to reduce basic product costs through increased competition and
efficiency.
9
Price Control
Whenever a market is characterised by monopoly there is a case for statutory
price controls to protect consumers. As noted above, the importation and
refining of fuel for the Zambian market is a pure monopoly. The Energy
Regulation Board, therefore, determines ex-Ndola Fuel Terminal prices
periodically using a cost-plus formula14. The principle of cost-plus pricing is
that the final price should cover all costs in the supply chain plus a ‘fair’ profit
margin15. However, this system was effectively suspended between late 2008
and January 2010, seemingly in response to political pressure. Despite
13
Fuel taxes represented 2.8%, 1.6%, and 2.2% of GDP in 2008, 2009, and 2010
respectively (author’s calculation from Zambia Revenue Authority data).
14
Although there is a degree of competition at the distribution, wholesale and retail levels,
ERB also issues ‘indicative’ pump prices which the OMCs observe (Matthews 2010:16).
15
A common criticism of cost plus pricing is that, by covering all costs, it provides little
incentive to cut costs and ‘rewards’ inefficiency.
significant increases in world prices, Zambian pump prices were not adjusted
at all during 2009. The cost of the delay in adjusting pump prices was borne
by: (a) Government16 which, in addition to cutting excise duty, used scarce
fiscal resources to subsidise oil consumers; and (b) OMCs, whose margins
were frozen in nominal terms. This calls into question ERB’s independence
and the usefulness of price control in current circumstances. Of course, if
competition from direct imports was allowed, there would be no need for price
control.
10
Conclusions
Zambia no longer has the highest pump prices in the region. However, this is
not a result of improved efficiency. Instead, it is the result of a sharp reduction
in excise duties and the use of price controls to prevent / delay increasing
import prices feeding through into pump prices. The costs of suppressing fuel
prices have been borne by the Treasury, contributing to the deterioration in
Zambia’s fiscal performance in 2009 and 2010, and by those people affected
by the resulting cuts in public expenditure17 (as well as by OMCs). Given
Zambia’s fiscal prospects, this is not a sustainable strategy.
Bringing fuel prices down permanently will require efficiency improvements
which cut basic product costs. The data presented above suggests that there
is considerable scope for cutting costs, particularly if Zambia ends its total
dependence on TAZAMA and Indeni, and switches to direct import of finished
products by OMCs. Not only could such competition cut costs, but it should
also increase the reliability of fuel supplies and allow GRZ to withdraw from
commercial operations.
Public concern over high fuel prices in Zambia usually takes the (misguided)
form of demands for public subsidies or tax cuts. GRZ gave way to such
demands between 2008 and 2010, at substantial fiscal cost. There is little
public understanding that the underlying reason for high fuel prices is that for
decades GRZ has been protecting a highly inefficient pipeline and refinery
monopoly from competition. This inefficiency is implicitly recognised by GRZ
(though not the public) in the form of the 25% import duty on finished
products, which is solely intended to protect Indeni, not to raise revenue.
GRZ ownership and protection of a fuel supply monopoly is anachronistic in
what is otherwise one of Africa’s most liberal economies. Giving up the
monopoly and allowing the direct import of finished products, by eliminating
the difference in import duty between crude (5%) and finished products (25%),
should result in a significant reduction in fuel costs and prices with little
reduction in GRZ revenue.
An understandable reason for GRZ reluctance to liberalise the fuel sector is
that 320 jobs would almost certainly be lost at Indeni and 260 at TAZAMA.
Both organisations can be expected to resist liberalisation. However, it is
important to understand that new jobs would be created, both directly in
16
The fiscal loss / unbudgeted subsidy in 2009 / early 2010 was US$ 90 million (IMF
2010:37).
17
Most of whom are unaware that their public services have been crowded out by fuel
subsidies.
OMCs and indirectly through the improved competitiveness of the Zambian
economy resulting from permanently lower fuel prices. Moreover, almost all
Zambians will benefit from lower fuel prices resulting from improved efficiency.
This paper suggests there is a strong prima facie case for radically altering
Zambia’s fuel import arrangements. While there are complaints whenever
increases in world prices are passed on to pump prices, the Zambian public is
largely unaware of the scope for sustainably reducing fuel costs (and
improving reliability of supply) through domestic policy reform. The pipeline
and Indeni are still widely seen as national assets long after their main
rationale – sanctions against Rhodesia – ended. Public discussion focuses
more on the issue of ownership, such as who should acquire Total’s shares,
than on whether they are still needed. A properly informed public debate is
long overdue.
Appendix 1 Retail Prices of Diesel in Sub-Saharan Africa in February
2010 (US$ per litre)
4.00
3.50
3.00
2.50
2.00
1.50
1.00
0.50
Source: World Bank Africa Transport Unit
Senegal
Congo
Cameroon
Zimbabwe
Gabon
Uganda
Chad
Mauritius
Malawi
Burkina-Faso
Burundi
Sudan South
Zambia
Cote I’voire
Rwanda
CAR
Cape Verde
Djibouti
Eritrea
Sierra Leone
Nigeria
Sudan North
USA
Botswana
Ghana
Mozambique
Liberia
Guinea
Lesotho
Congo, DRC
Madagascar
Mali
Ethiopia
Benin
Spain
South Africa
Niger
Togo
Tanzania
0.00
References
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Oxford University Press.
ERB (Energy Regulation Board). (2007). Energy Sector Report 2007. Lusaka.
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Waiver of Non-observance of Performance Criteria and Modification of
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Wijetilleke, L. and Ody, A. (1984). ‘World Refinery Industry, Need for
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