Is Indeni the best option for
Zambia’s Fuel Supply?
Alan Whitworth
ZIPAR
Overview
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•
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Fuel Costs vs Taxes vs Prices
Why are costs so high?
Role of Government
TAZAMA / Indeni not competitive &
dependent on tariff protection
• Costs & security risks of relying solely on
TAZAMA / Indeni
• Case for liberalisation / import of finished
products by OMCs
Zambian Fuel Costs are the highest
in the region (and probably in
Africa)
Southern Africa Comparative Diesel Prices, June 2008
Diesel / Gasoil (US$ / litre)
Botswana
Malawi
Mozam
Namibia
RSA
Swaziland
Tanzania
Zambia
Product Basic Cost
1.19
0.96
1.05
1.04
1.04
0.99
1.05
1.48
Transport, Service Differential
0.08
0.22
0.01
0.01
0.01
0.02
0.01
0.09
Govt. levies, duties, taxes
0.06
0.34
0.16
0.19
0.24
0.26
0.44
0.55
Oil Company margin (rounded)
0.05
0.08
0.12
0.05
0.05
0.05
0.09
0.11
Dealer Margin
0.06
0.06
0.09
0.05
0.08
0.06
0.05
0.07
Retail Pump Price
1.44
1.67
1.43
1.34
1.42
1.37
1.63
2.30
Southern Africa Comparative
Diesel Prices, June 2008
Diesel Pump Prices (US$ / litre)
2.50
2.00
Dealer M argin
Oil Company margin (rounded)
Govt. levies, duties, taxes
1.50
Transport, Service Differential.
Product Basic Cost
1.00
0.50
0.00
Bots
Mal
Moc
Nam
RSA
Swa
Tan
Zam
To reduce pump prices, in 2008
GRZ cut excise duty
• petrol from 60% to 36%
• diesel from 30% to 7%
Despite tax cuts, Zambian fuel
prices are still among the highest
in Africa
Retail Prices of Diesel in SSA in February 2010 (in US$ per litre)
Source: World Bank
Pump prices must be reduced by
cutting costs, not taxes
• Taxes are ‘transfer payments’ from
citizens to government
• Cutting taxes on fuel requires increasing
them on something else (or less
expenditure)
• The drop in GRZ fuel revenue from 2.7%
of GDP in 2008 to 1.4% in 2009 meant
lower expenditure / increased fiscal deficit
Q. Why are costs so high in
Zambia?
Answer - Inefficiencies in:
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Feedstock Procurement to Dar es Salaam
TAZAMA pipeline (?) – no data
Indeni refinery
Distribution
Monopoly
Role of Government
Components of Value
Chain
TAZAMA Pipelines
1706 km
TAZAMA Tank Farm
Dar-es-Salaam
Undersea
Pipeline
Ship Tanker at SPM
Dar-es-Salaam
INDENI
Refinery
Oil Rig
n
Ndola Fuel
Terminal
Industry
Road/Air Transport
Mining
O
M
C
Hauliers
Filling
Station
Agriculture
Government is main operator in
Zambian fuel market
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•
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Procures / owns feedstock
Owns 2/3 of TAZAMA (1/3 Tanzania Govt)
Owns Indeni
Wholesale supplier to OMCs
GRZ also regulates the industry and fixes prices
– conflict of interest?
ERB subject to political interference (eg 2008/09)
Feedstock Procurement
• Comparison of CIF Dar es Salaam prices
paid by GRZ in 2008 & 2009 with
reference (spot) prices shows overpayment
• ‘The total “overcharge” vs good
international practice was…..US$ 93
million over the two years’ (Matthews
2010), or 12.5% of total CIF costs
Indeni Refinery
Processing Fee
• Actual fee paid by GRZ = $8 / barrel
• ‘Good practice’ fee = $4 / barrel
Refinery Loss
• Actual = 10%
• ‘Good practice’ = 5% maximum
If ‘good practice’ was followed in
procurement (spot prices),
processing ($4) & losses (5%),
2009 pump prices would have
been lower by:
Petrol
– 19%
Diesel
– 17%
Kerosene – 21%
Even if optimally operated,
Indeni is too small to compete
with modern refineries
• ‘Economies of scale are particularly important for
refining…..As a basic rule of thumb, a refinery needs to
have a processing capacity of at least … 5 million tonnes
a year… to be economic in a liberalized market. ….A
sub-economic-scale refinery is unlikely to be able to
compete with product imports from large and efficiently
run refineries’ (Kojima et al, 2010)
• Indeni’s capacity is 1.1 million tonnes pa
Indeni only survives through
tariff protection from imports
Import duty:
• finished products - 25%
• crude for Indeni - 5%
So Indeni / GRZ can - & do – sell for up to 20% more than price of
imported finished products
Consumer pays for inefficiency
When Indeni has unplanned shutdowns, duty on finished products is
waived and prices fall
Distribution throughout Zambia by
OMCs from a single point, Indeni,
increases transport costs and
supply risks
• Chipata is 900 km from Ndola, but only
140 km from Lilongwe
• Fuel costs are lower in Malawi
• Can Eastern Province obtain supplies
more cheaply through Malawi?
Security of Supply
• Unplanned shutdowns at Indeni mean the
whole country runs out of fuel
• High disruption costs
• Without substantial investment, more
frequent shutdowns are likely
• Direct imports to different provinces
reduce risk of supply disruptions
Monopoly
• TAZAMA / Indeni is a monopoly supplier
• Monopolies usually have higher costs &
prices than competitive markets
Why is GRZ involved?
• No market failure – OMCs will supply
• Most governments in region leave fuel
supply to OMCs
• Paying for feedstock can disrupt budget
releases to conventional public services
• Fiscal loss / unbudgeted subsidy of US$
90 million in 2009
Liberalisation can reduce pump
prices & increase reliability without
hurting GRZ revenue
Removing Indeni’s tariff protection & encouraging
OMCs to import finished products directly means
• Improved efficiency from competition
• Lower transport costs, as provinces are served
from nearest port (eg Eastern - Nacala, Lusaka
– Beira, Northern – Dar)
• End of nationwide shortages
• No further public investment (except storage), so
GRZ can focus on public services
Jobs
Liberalisation means closing TAZAMA (260
jobs) & Indeni (320). However, reducing
fuel costs by, say, 15% & improving
reliability of supplies should create far
more jobs:
• Directly in OMCs
• Indirectly, by improving productivity &
competitiveness of Zambian economy
Should GRZ sell shares in Indeni?
• GRZ paid Total $5.5 million in 2009 for its
50% shareholding
• Indeni can only make profits at expense of
consumers
• Shares only have value if protection
maintained
• Selling shares may entrench protection
Uniform Petroleum Pricing
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Introduced September 2010
Transport margin between wholesale &
pump price equalised throughout Zambia
Consumers in Copperbelt & Lusaka
‘subsidise’ those far from Indeni
Another price ‘distortion’, but minor
compared to Indeni monopoly
Conclusions
• Current system represents massive waste
of public & private resources
• Undermines international competitiveness
• Increases poverty
• Liberalisation should both cut costs/prices &
improve reliability - without hurting revenue
• Need for informed public debate & planned
transition