By Sean Tembo – PeP President
1. In seeking to justify why they need to increase pump prices of fuel as well as electricity tariffs, the New Dawn Government has been peddling the narrative that they are merely removing subsidies on these two commodities so that they can become “cost-reflective”. Well, we are here to tell you that that’s one big blue lie. There are no subsidies on either electricity nor fuel at the moment. Government simply wants to increase prices so that they can make a bigger profit on these two key factors of production. Allow us to expose the lies which Government has been peddling, one at a time.
2. Firstly let us start with fuel. The way fuel pricing in Zambia has been operating for the past few decades is that the Energy Regulation Board (ERB) has what they call the Fuel Stabilization Fund. When world prices are low, the profit which ERB makes is deposited into this fund. And when world prices of oil are high, the deposits in this fund are used to subsidize the cost. The whole idea is for pump prices to remain stable so that we don’t have to increase pump prices up and down every time in response to changes in oil prices on the world market.
Due to the COVID-19 pandemic, the world prices of oil have been at an all-time low on the world market for the past two years, and traded below $0 (negative) per barrel for a while in 2020. What it meant for oil prices to trade at negative prices is that instead of us paying the producers of oil, they had to pay us so that we could collect their oil and prevent their oil fields from flooding!!
However, even when these world oil prices were negative, there was no reduction of pump prices here at home, which meant that ERB was putting all these supernormal profits into the Fuel Stabilization Fund, to be utilized when world oil prices rise. The next obvious question is; have world oil prices risen so much in the recent past such that the ERB has exhausted the reserves which had been accumulated when oil was trading at negative prices on the world market?
The answer is a definite no. As a matter of fact, even at current world oil prices and current fuel pump prices in Zambia, ERB is not in a deficit but still records a healthy surplus. Here is some basic mathematics to prove this point. Current average world prices for Brent crude oil are $72 per barrel. A barrel is made up of 159 liters of fuel, which gives an average cost of $72/159 liters = $0.45 per liter. Using the current exchange rate of K18 per US$, this gives us a cost of K8.10 per liter of fuel. Of course there are other incidental costs such as insurance and freight, but these are not supposed to be more than 50% of the cost, and if we added them, the cost per liter of fuel comes to about K12.15, which is still way below the current pump price. This means that ERB is still recording a surplus for its Fuel Stabilization Fund, which it is supposed to add to the huge surpluses recorded when world oil prices were negative.
3. Secondly, let us look at electricity. The Government has been peddling a false narrative that the current cost of generating electricity is 11 cents per kilowatt hour (KWH) and that the electricity is then sold at 7 cents / KWH thereby making a loss of 4 cents / KWH, which they claim to be subsidizing. Fellow countrymen and women, this is completely false. Here is the truth;
4. Let us start with the 11c/KWH alleged cost of generation, transmission and distribution. This inflated cost is based on the highest price that independent power producers (IPPs) sell the power to ZESCO. Now, we have several IPPs in Zambia and they include Maamba Collieries Limited, Ndola Energy Limited, Lusemfwa Power etcetera. Each of these IPPs sell power to ZESCO at different prices with the lowest that l know of selling at 5.3c/KWH and the highest at 10.7c/KWH which some people round off to 11c/KWH and use to make their false argument.
However, whatever the average price IPPs charge to ZESCO, the bottom line is that the power from IPPs constitutes less than 20% of the total power which ZESCO sells. The bulk of the power sold by ZESCO is generated, transmitted and distributed by ZESCO itself. The latest available cost of supply study information puts the average cost of generation for ZESCO at 3.4 cents per kilowatt-hour. That is inclusive of all the inefficiencies at ZESCO. This means that even if the power is sold to consumers at an average of 7c/KWH, ZESCO is still able to make a decent markup.
5. Let us now go to the 7c/KWH price which Government has been using to make its argument that existing electricity tariffs are too low. You may be aware that tariffs are graduated, which means that we have different tariffs for different consumers and at different levels of consumption per month. The 7c/KWH which Government has been using to make their argument is the lowest tariff for domestic consumers for the lowest level of consumption per month.
The tariffs for higher levels of domestic consumption, commercial and industrial consumers are double, triple and quadruple this rate. And for purposes of establishing the weights to be used for calculating the average tariff per kilowatt-hour, l want to put it on record that commercial and industrial use accounts for more than 60 percent of overall current consumption, and the average current weighted tariff across the board is about 15.6 cents per kilowatt-hour. This means that ZESCO is making a decent markup even with its current high levels of inefficiency. There is no subsidy here whatsoever.
6. Therefore Government should not lie to the people that by increasing fuel prices and electricity tariffs, they are just removing subsidies in these two key factors of production. There are no subsidies on fuel at the moment. ERB is still recording a healthy surplus in addition to the huge reserves that they accumulated when fuel was selling at negative prices. Equally there is no subsidy at ZESCO. Even at current tariffs, ZESCO is recording very healthy markups.
The Government should just say the truth as to why they want to increase electricity tariffs and fuel prices, instead of trying to apply cotton wool in the eyes of the Zambian people. In fact, they need to make public the conditionalities of the IMF bailout loan, so that the Zambian people can see for themselves what other punishment they have to endure as a result of Government’s insatiable appetite to borrow.