In my last column, I addressed some of the anti-competitive issues which have led Zambia to have some of the highest fuel costs on the continent. Today we’ll look at the chain of problems from source to pump prices that beset oil marketing in Zambia. It begins of course with the basic costs of oil products before they arrive to Zambia.
1. Basic Product Cost
This is the landed cost at the first port of call for fuel (feedstock) coming into Zambia. The monopoly involves a state company called Tazama Pipelines ltd that imports all crude oil for our refinery in Ndola. The procurement process of crude oil is done by open tenders (annually) to all international suppliers.
The first official discontentment of the system was expressed in paper written by W. Mathews for the World Bank in 2010. His observation declares the key problems: “Zambia’s high fuel prices are largely due to inefficiencies in the way fuel is imported. The landed cost in Dar es Salaam.”
Most importantly, the report concluded with the damning assessment: “oil procurement in Zambia is far from being transparent.”
Comparatively, Zambian fuel cost at Dar-es Salaam was the highest in sub-Saharan Africa. This includes fellow landlocked countries like Malawi. The total “overcharge vs good international practice” was a whopping $93 million over a period of two years in Zambia. BP data for 2006 also showed that Zambia product basic cost were 13% higher in Lesotho and 4% higher than Zimbabwe.
The feedstock (crude oil) imported into Zambia was equivalent to 10% of the total FOB amount. And this was worth $7,967 million over a period of two years (IMF 2010).
2. Staggering transportation costs
The transportation of oil from Tanzania to Zambia is handled, again, by Tazama. Unfortunately the public is not privy to the amount charged by the monopolist pipeline co., but it is fair to assume that they are given a commission for this task by Indeni refinery, which may account for the spiraling prices that are passed on to the consumer.
But what was so disheartening was the revelation by the outspoken former Deputy Minister in the Ministry of Finance Miles Sampa who disclosed to the mass media early last year that the government (through Tazama) loses as much as 40% of the feedstock through linkages and evaporation. At first when I read this news online thousands of miles away from home my first reaction was that an uproar will ensue in the country next morning. But like many of Zambia’s worst scandals, the reaction was indifference. It appears docility knows no boundaries when it comes to national matters. Even the so-called opposition parties remained silent.
3. Inefficient refining capacity
The Ndola refinery has a capacity of one million litres per annum to process crude oil into finished products. A world renowned oil expert had this to say on the size of an oil refinery: “As a basic rule of thumb, an oil refining company should have a basic process capacity of at least 100,000 barrels per day or 5 million tonnes per annum.”
Our Ndola refinery has a capacity to produce a mere 1 million tonnes. And through the years among other hiccups had the misfortunate of some unexplained plant fire in 2001 which reduced the production capacity to a mere 750,000 tonnes.
The processing cost charged by Indeni is another thorny issue. Indeni charges $8 per barrel to cover their operational cost, which is an extraordinary high processing fee comparatively, for a simple refinery. Note the usage of the term “simple” refinery. Experts have noted that the Ndola refinery is not a refinery in the classic sense of the word with the ability to create multiple oil products (automotive petrol, diesel, kerosene, etc.). It is only a “separator” – which separates the various types of imported finished oil products.
Lastly and also shocking is the refinery loss that Indeni declares every year end. This is provided at 10% of the total feedstock processed. The world average is 4 to 5 % maximum. Also in due course the plant is beset with intermittent production shut downs.
4. Distribution to market
After Indeco refinery has processed the crude oil into finished products the company is allowed to sell after adding a mark-up. The oil is now sold to about 27 oil marketing companies to distribute throughout the country. This single source of supply is the worst folly in business. Distribution from one single source does not make sense at all.
A sizable part of finished oil products are “taken back” to some faraway places like Mbala, a place the crude oil passed en-route to the refinery. Chipata is 900 km from Ndola but only 140 km from a cheap source in Malawi. Similarly Livingstone is 800 km from Ndola but only 10 km from Zimbabwe or Botswana. If liberalisation of Zambia’s oil market were allowed, many cities and towns would be able source oil from much cheaper sources.
In an ideal situation the pump price from Indeni should be below the cost of imported finished products. But this is not the case. Comparatively the processed oil cost exceeds the finished imported cost price. So why have a processing plant that offers work to 320 employees be more important than more than 80 % of the economy that relies on fuel for their operations? Of course the answers are known to the powers that exist.
5. Other oil players (OMC)
The government in 2008 pretended to liberalise the economy by allowing OMCs to import finished oil. But the government also slumped a 25% import duty on importation of finished products. Note that the Indeni Refinery only pays a 5% import duty as an artificial advantage to compete against the OMCs. The move for this strange import tax of 25% acted as a buffer to protect Indeni. Total collapse would have ensued had they been exposed to competition.
6. Price Controls
At the end of this vexatious and diabolical chain is the ubiquitous role played by energy regulation board (ERB). As an organisation steeped more in socialist dogma than market economics, ERB has overall price control of the price to be charged by the retailers (service station). Due to long distances between places and different operational costs of oil players involved the determination of pump prices is an act in futility. The variables cannot be collated or ascertained with certainty for one to produce an equitable price. In short, price controls are antiquated and belong to people who either are time warped or succumb to a dark art so common to human failing.
The overriding question is when the general members of society will stop playing the “useful idiot role”. Taking pride in a national asset which we all know is a white elephant. When will the opposition parties raise the issue of this most important sector of our economy rather than play politics on irrelevant issues of mealie meal prices?…
What can we do?
The government should immediately remove the 25% import duty. Let the “masquerading refinery” in Ndola compete with the private sector. This arrangement can work in the short term but won’t attract large numbers of local and foreign investors. A surge in the economy that will follow the removal of import taxes will be compensated by high growth rates of economy leading to higher collections of taxes.
For the long term, oil marketing requires huge capital outlay to take advantage of economies of scale. It is not a place for pseudo operators with one tanker. Their operational costs can only land disproportionately on a poor consumer.
All our neighbours use these large corporations to import oil. These (OMCs) corporations buy oil in bulk when prices are low on the world market. And they are also mindful of prices offered by competitors on the local market so they will do their level best to compete and this ends in low prevailing pump prices in Zambia.
Multinational oil companies have also one major advantage. They use their own credit lines to purchase the oil. This will reduce the current strain on foreign exchange requirements on our account that has just recorded a deficit of $384 in the first quarter of 2014.
At this point, with record high prices and a weak currency, literally any new idea would be welcome for most Zambian families.
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