WEEKLY POLICY ISSUE
Zambia’s fuel cost is among the highest in the region. In some instances Zambia’s fuel sells for over 3 Zambian kwacha above most countries in the region. This is because our feedstock into Indeni is expensive due to its structure and the high taxes Government imposes on it. Government taxes account for almost 40% of the fuel cost in Zambia. The simple action of reducing taxes and most importantly reducing the 25% tax charged on imported finished products can substantially reduce the cost of fuel to the consumer. The third dimension to the expensive fuel is infrastructure that is more than 30 years old. A little tinkering of Indeni could lend the plant more efficient and profitable to supply the public with cheap fuel.
Infrastructure, be it physical, technological, social sector or services is a bedrock of growth of any economy in the world. All successful economies are built of very reliable infrastructure. It is common knowledge that infrastructure generally in Zambia has continued to deteriorate, but of greatest concern at the moment is the energy sub sector of fuel. It is illogical that the price of crude oil has over the past five years been on average downwards. It was at its highest (above US$100 per barrel) between 2011 and 2012 but started easing off and fell below the US$100 mark in 2014. The downward trend has continued to date with marginal movement up and down, but all below US$75 per barrel. We are left to wonder why fuel costs at the pump in Zambia does not mirror trends or oil pricing on the international market.
The reasons are simple. Indeni, TAZAMA and the Ndola Fuel Terminal (NFT) are all, over 30 years old. The technology that is installed at Indeni is of the 70’s but is expected to produce oil products of the 21st century such as Low Sulphur Diesel (LSD). Indeni cannot process pure crude oil because it does not have the technology to do so. In order for Indeni to process crude, the crude has to be mixed with diesel and another product called Naphtha. What this implies is that Zambia has to import a finished product, diesel, at high cost, mix it with crude oil and then process it at Indeni to produce Heavy Fuel Oil (HFO), Light Fuel Oil (LFO), Diesel, yes diesel (again), Petrol, Kerosene and Jet A1. Indeni was designed to process 1.1 million metric tons of crude oil per year. It currently operates at much less capacity to the point where if it was let to compete with finished imported products, it would close. In order to protect Indeni, the PF Government has slapped a 25% tax on finished imported petroleum products which could be sold much cheaper if the Oil Marketing Companies are left to import. To illustrate this point, the importers of feedstock are charged 5% tax while the importer of a finished product are slapped with the 25%. Indeni in its current state is not profitable, this is the reason Total sold their 50% share back to Government.
Secondly, the entire crude oil procurement process is shrouded in secrecy. Tenders are awarded and cancelled and re-awarded to friends of the people in the PF Government. The Cost Plus Pricing Methodology (CPM) used by the Energy Regulation Board(ERB) last time we checked, has 12 cost components, half of which were costs related to middle men. All these costs associated with the middle men are calculated in the final price that the consumer pays. Why should the consumer pay the price for the middle man when that middle man can be cut out just by changing the fuel procurement processes? The PF is wasteful and is not interested in the reducing the cost of living for the Zambians but are only interested in enriching themselves and their friends at the expense of the Zambian citizen.
- A UPND government will address this issue of high fuel prices in this manner:-
In the short term, we shall open the import market of finished products so that Oil Marketing Companies (OMCs) can import the finished commodities at a cheaper price for the benefit of the Zambians. This is what a responsible Government would do. But the PF will not do it because they need the 25% being charged on finished products because they have over borrowed and need to service the incurred debts.
- Support local businessmen that would like to participate in the construction of new refineries and strategic fuel reserve facilities to obtain affordable financing. This will provide a buffer against fluctuating crude oil prices on the international market as well as exchange rate volatility.
- Cut off the middle men in the oil procurement process. With strategic fuel reserves facilities, Zambia can afford to negotiate directly with Governments that supply oil so that we pass on the benefit of cheap crude oil to the consumers
- Indeni needs to be redesigned and the correct technology deployed. Indeni should have capability to process pure crude oil without cracking it by adding Diesel and Naphtha. Indeni is inefficient at the moment; its inefficiencies are being passed on to the consumer in the form of high fuel costs. The inefficiency coupled with that tax on the finished products charged by Government are making fuel expensive in Zambia. A credible investor cannot invest in Indeni because of the protectionist approach Government has taken.
- We will encourage research and investment in biofuels. Malawi is already doing it. Brazil can switch between fossil and biofuel when the crude oil prices go beyond a certain threshold.
It is an undeniable fact that fuel is one of the major costs in production. It is a known fact that Zambia continues being none competitive because of the high cost of production. A ton of sugar in Brazil is produced at one third the cost of producing the same ton in Zambia. The European Union will, in 2017, stop the aid for trade programme that saw Zambia Sugar export sugar into the Eurozone. How do we hope to compete with Brazil in supplying cheap sugar into Europe with such a disparity in production costs? This is the fundamental question that we need to answer as we implement these solutions starting in 2016 because I can assure you, PF will not do anything about our current state of affairs.
“Together we can”
Issued by: UPND National Campaign Centre, Lusaka