In his 2017 Budget Address to Parliament, Minister of Finance Honourable Felix Mutati stated that with effect from 1st march, 2017 government will disengage from the procurement process of refined petroleum products and allow the private sector to import fuel for themselves. Government will remain with regulation which include control of pump price. He cited the need for efficiency as part of the reasons for disengagement.
While the Forum commends government for taking bold steps to migrate electricity tariffs to cost reflective figure by end of 2017 and for attaching visible political will to diversifying the energy mix, the Forum wishes to oppose government disengagement from fuel procurement for the following reasons:
Impact on small and medium oil companies
Women, youth and citizen empowerment which was being achieved or which could be achieved by encouraging Transnational OMCs to partner with citizen owned OMCs for the purpose of participating in the national procurement process which government wants to disengage from will be lost. Fuel procurement is not only a multi-billion dollar business but also presents the easiest vector for local empowerment. This is the vector that should be creating billionaires for Zambia. By disengaging without adequate measures in place, government is transferring a multi-billion dollar business into the laps of Transnational OMCs which dominate the local market.
Multinational oil companies will be able to leverage economies of scale and land fuel with better margins. This arbitrage will significantly impact other OMCs and ultimately kill them. In addition, TAZAMA will lose significant revenue since part of its income comes from handling at least 500 million litres of refined fuel imports per year.
Logistics and storage capacity
Zambia is yet to build adequate strategic fuel tanks to hold sufficient national strategic reserves to last a minimum of 90 days which is in tandem with good global practice. More often than not, the country has fuel reserves covering less than a month. In addition, the combined storage capacity held by the private sector is not enough to be entrusted with this national responsibility at a time when fuel consumption has significantly increased. What would happen if OMCs refuse to import fuel on account of government failure to increase the pump price? The power of Transnational OMCs must never be underestimated. Further, from a financial perspective, a number of OMCs have actually been struggling to comply even with the most basic license requirement of keeping a minimum of 15 days of stock in their tanks at any given time.
Impact on Biofuels roll out
Government has promulgated biofuel standards and to this end, significant investment is currently under development. Growing Biofuel crops has great potential for job creation and will reduce the amount of forex required to import fuel by at least $100m per year. To successfully roll out this exercise, there is need to establish focal points for biofuel blending. When all private players start to import fuel, it will be a challenge to manage quality and biofuel blending.
Currency fluctuation and weak economy
African economies including the Zambian economy are in a fragile state for government to disengage from managing the fuel procurement process without adequate safety measures. Our judgement is that the Zambian Kwacha will remain vulnerable and susceptible to fluctuations for some time. This will mean the OMCs will be calling for frequent fuel price increase failure to which they may be unable to import fuel. In addition, financing imports will have a more adverse effect on small and medium companies especially that OMC margins still remain low.
Product Quality Management
When everyone starts to import from different sources, product quality control will become a major issue especially that some importers will have to share storage facilities since there is inadequate storage facilities in the country, and a number of OMCs do not have their own storage facilities.
Energy Forum Zambia wishes to advise government to handle the proposed policy cautiously. It may seem easier especially that it was implemented at one time; but that was some decades ago when fuel demand was not this high and the global economy was not fragile. In our view, whatever has caused government involvement to become unsustainable and inefficient may also affect private players given that government will remain with price control. The following is proposed:
Put on hold the disengagement from fuel procurement until government has built enough strategic fuel reserves to last a minimum of 90 days. This will mean building more storage facilities.
Government to Government fuel procurement still remain a better option and has the potential to lower pump prices even without subsidies.
Research how other countries such as Namibia, Mozambique, Kenya and Ghana have been going about fuel procurement without government involvement but in a way which does not side line and potentially kill other oil companies especially small and medium companies.
In some of these countries, there is an independent body which administers a tender system for the private petroleum sector to ensure that one or two oil companies are selected every six months to import fuel into the country while the rest of the OMCs buy from them at a regulated price. This implies that all registered OMCs singularly or through alliances are given an opportunity to import on behalf of the rest. This is one way of empowering citizen owned OMCs.
The Forum appreciates the significant challenges government is facing and remain hopeful that government will placate the nation without exposing it to significant risks through rushed decision implementation which is not anchored on adequate safety measures. The Forum wishes to assure government of its support in pursuing progressive policies.
By Johnstone Chikwanda (PhD Cand.)
Energy Forum Chairperson