ZIPAR Working Paper - 02 September 2011 ZIPAR How to Reduce Zambia’s Fuel Costs By Alan Whitworth1 ABSTRACT The paper shows that Zambia’s high fuel prices are largely due to in efficiencies in the way fuel is imported. The government owned TAZAMA pipeline and Indeni refinery, which have a monopoly over most fuel imports, are very inefficient but are protected from competition by high tariffs on finished products. Removing tariff protection and liberalising imports of finished products would reduce costs both by promoting competition from road tankers and railways and by allowing different provinces to obtain supplies from the cheapest port. It would also eliminate the risk of nationwide shortages when Indeni has unplanned breakdowns. 1 Technical Adviser, Zambia Institute for Policy Analysis & Research. The paper draws heavily on Matthews (2010). Helpful comments from Robert Masiye and Bill Matthews are gratefully acknowledged. 1. Introduction Zambian fuel costs are among the highest in the world. In recent years there have been increasing calls for fuel taxation to be reduced in order to bring pump prices down. However, reducing taxation is not a solution because it simply reduces government revenue. This paper argues that there is a much more effective and sustainable solution to the problem of high prices. Removing the monopoly enjoyed by the TAZAMA pipeline and Indeni refinery and allowing competition from finished products transported by road and rail should both bring import costs down permanently (by as much as 10-15%) and increase the reliability of fuel supplies. The cost and reliability of fuel supplies are critical to the competitiveness of all economies and to citizens’ well being. Fuel is Zambia’s largest import and has been a major constraint to growth since the 1960s. In addition to high costs, frequent shutdowns at Indeni have caused extensive supply disruptions. Continued operation of Indeni will require substantial investment, yet it is not clear that this is economically justified. This paper examines why fuel costs are so high in Zambia and considers how they can be reduced. It also looks at the implications of relying on a single pipeline and refinery for reliability of supplies and questions the role of Government in the fuel sector, before concluding with the issues of taxation and price control. 2 Current Fuel Sector Institutions The Government has been the main actor in the Zambian fuel sector since the 1960s. With sanctions against the Ian Smith regime in Rhodesia disrupting oil imports, it was decided to construct a 1,710 km pipeline to transport petroleum products from Dar es Salaam and to build a refinery in Ndola. The TAZAMA pipeline, commissioned in 1968, is jointly owned by the Zambian (66.7%) and Tanzanian (33.3%) governments. The Indeni refinery, a simple hydro-skimming refinery with a design capacity of 1.1 million tonnes per year, was commissioned in 1973. It has been 100% owned by the Zambian Government since it acquired Total’s 50% stake in 20092. A blend of whole crude and finished products, known as ‘spiked crude’, is imported and then refined and separated to meet the Zambia market mix. Procurement is handled by the Ministries of Energy & Water Development and Finance & National Planning.3 The CIF cost of fuel procured under the supply contract (with IPG), covering the two years 2008 and 2009, amounted to US$ 741.8 million4. The 50 million litre capacity Ndola Fuel Terminal, adjacent to the refinery, is used for storing and managing the distribution of refined products and is also 100% owned by the Government (and managed by TAZAMA Pipelines Ltd.). Except for breakdowns and supply disruptions at Indeni (when finished products are imported directly, mainly by road), all Zambia’s fuel needs since 1973 have been supplied through the pipeline and Indeni. 2 Total acquired its shares from Agip, the original project developer, in 2001. Between 2002 and 2007 Total was responsible for procurement of the petroleum feedstock for Indeni. 3 In October 2007 the Zambian Government appointed TAZAMA Pipelines Ltd as its agent to manage the procurement of feedstock on its behalf. 4 Equivalent to 9.3 per cent of total FOB imports, worth $7,967 million, over the two years (IMF 2010) Indeni does not purchase crude oil feedstock itself or own and sell the products it produces. Instead, it operates on a tolling arrangement. The Government (GRZ) is the supplier and proprietor of the feedstock and owner of the products produced and lifted from the refinery. Finished products are sold to 27 private licensed Oil Marketing Companies (OMCs), which distribute them throughout Zambia, mainly by road tanker. While OMCs are allowed to import finished products, since 2008 they have attracted 25% import duty, whereas Indeni only pays 5% duty on its feedstock. With, in effect, a monopoly in fuel importation and processing, the Energy Regulation Board (ERB) determines maximum retail fuel prices (except for sales to mines and certain other industries). Zambians have relied on the pipeline for fuel imports for so long that few are aware that there may be lower cost alternatives. The pipeline and refinery are widely regarded as valuable national assets and it is taken for granted that a pipeline is the most economic way of importing fuel; there is little public debate on alternatives. However, they can only be considered genuine assets if they provide real economic value to the country, in the form of lower fuel prices and/or more reliable supply than alternative import arrangements. If this is not the case, they should be regarded as sunk costs and written off. The evidence below on costs and reliability casts serious doubt on the value of the pipeline and Indeni. 3 Fuel Prices Table 1 and Figure 1 show that in June 2008 Zambia had much the highest retail pump prices in the Southern African region. This was largely attributable to two factors, higher product basic costs and taxes. It is important to understand that taxes are not a real cost to the economy; they are simply a transfer from citizens to government. What really matters is Zambia’s high product basic costs. These are looked at first, therefore. The issue of fuel taxation is discussed below.5 Table 1 Southern Africa Comparative Diesel Prices, June 2008 Diesel / Gasoil (US$ / litre) Botswana Product Basic Cost 1.19 Transport, Service Differential 0.08 Govt. Levies, Duties, Taxes 0.06 Oil Company Margin 0.05 Dealer Margin 0.06 Retail Pump Price 1.44 Source: BP (2008) Figure 1 5 Malawi 0.96 0.22 0.34 0.08 0.06 1.67 Mozam 1.05 0.01 0.16 0.12 0.09 1.43 Namibia 1.04 0.01 0.19 0.05 0.05 1.34 RSA 1.04 0.01 0.24 0.05 0.08 1.42 Swaziland 0.99 0.02 0.26 0.05 0.06 1.37 Tanzania 1.05 0.01 0.44 0.09 0.05 1.63 Southern Africa Comparative Diesel Prices, June 2008 As noted below, excise duties on fuel were cut sharply later in 2008. Despite this, Appendix 1 shows that Zambia still had the fifth highest pump price for diesel in sub Saharan Africa in February 2010. Since pump prices include taxes, which differ markedly between countries, they are a poor guide to cost differences. Zambia 1.48 0.09 0.55 0.11 0.07 2.30 Diesel Pump Prices (US$ / litre) 2.50 Dealer M argin 2.00 Oil Company M argin Go vt. Levies, Duties, Taxes 1.50 Transport , Service Differential. P roduct B asic Co st 1.00 0.50 0.00 Bots Mal Moz Nam RSA Sw a Tan Zambia It is no surprise that Zambia’s product basic costs are higher than those of its coastal neighbours, because of the greater distance over which imports have to be transported. Of concern however is that, at US$ 1.48 / litre, Zambia’s costs were significantly higher than in landlocked Malawi ($0.96), Botswana ($1.19), and Swaziland ($0.99)6. It is noteworthy that, of these countries, only Zambia imports fuel through a pipeline; the others use a combination of road and rail transport. In late 2009, as part of the World Bank Public Expenditure Review, a leading international oil and gas downstream logistics expert was engaged to examine why Zambia’s costs are so much higher than those of its neighbours (Matthews 2010). He was able to review two of the three main stages in the supply chain: the crude procurement process and refining7. Beginning with procurement, his report noted that the ‘contractual arrangements and supply/procurement details are not altogether transparent’ (Matthews 2010:11). The study compared how much GRZ actually paid for all Zambian feedstock cargoes in 2008 and 2009 (CIF Dar es Salaam values) with ‘normal’ prices – i.e. with reference values for crude (derived from FOB spot market prices at source) and for typical transportation and insurance costs for the distances involved. The study concluded that in most cases ‘actual CIF costs, Dar were markedly higher than the reference prices. The average differential between actual and reference cost for all 11 cargoes 2008-2009 was $96/tonne for Murban crude [$127/tonne for gasoil], amounting to a total of some $43 million [$50 million for gasoil] over the period’ (Matthews 2010:22). ‘The total “overcharge” vs good international practice was…..$93 million over the two years’ (Matthews 2010:22), or 12.5% of total CIF costs ($741.8 million). In other words, it appears that poor procurement practices by GRZ result in substantially higher crude import costs (to Dar es Salaam) than necessary. 6 While comparable data for June 2008 are not available, BP data for August 2006 shows Zambian product basic costs were 13% higher than in Lesotho and 4% higher than in Zimbabwe. 7 Data on the efficiency of the pipeline, the middle stage, is not publicly available. Turning to the refining stage, as compensation for its capital and operating costs Indeni receives a processing fee from GRZ. In late 2009 this fee was $ 61.10 per tonne of feedstock, or $8 per barrel based on average 2008-2009 feedstock composition. This fee is incorporated in the cost-plus price formula for retail pump prices. ‘This is an extraordinarily high processing fee for a simple hydro skimming refinery…..it is difficult to see how $8.00 per barrel can be justified …. in an old plant that is significantly amortized.’ (Matthews 2010:24-25). Assuming industry “good practice” costs of $4 ($2 operating and $2 capital) per barrel, ‘the total saving if good practice were achieved ….would amount to an annual saving of $13.7 million per year based on the three years, 2007-2009 average throughput’ (Matthews 2010:25). An additional significant cost included in the price structure is the allowance for “Refinery loss” at 10% of throughput. ‘In a hydro skimming refinery, the total fuel and loss…… should be no more than 4 to 5% maximum’ (Matthews 2010:25, based on Wijetilleke and Ody 1984). A 5% excess loss ‘is equivalent to some $17 million per year at 2008-2009 prices for crude oil’ (Matthews 2010:25). Table 2 Estimated Impact of Identified Supply Chain Cost Savings on Final Pump Prices, ZKw / litre Savings Measures (1) Crude Procurement Good Practice Saving: $112.62 / t (2008-09) (2) Refining Cost / Fee Good Practice Saving: $30.55 / t (3) Refinery Fuel & Loss Good Practice: 5% Total Pump Price Saving ZKw 466 741 114 181 145 230 725 1,152 before tax after tax & fees 501 532 123 130 156 166 780 828 before tax after tax & fees 528 626 129 154 165 195 822 975 Product Petrol before tax after tax & fees Kerosene Diesel Source: Matthews (2010:26) These findings of an industry expert suggest that the arrangement whereby the Government is the monopoly importer and refiner of fuel is highly inefficient and that, as a result, pump prices are much higher than they need be. Table 2 summarizes the potential reductions in pump prices if internationally accepted industry “good practice” could be achieved in the three areas identified and quantified above: crude procurement (savings of $112.62 per tonne), refining cost ($30.55 per tonne) and refinery fuel and loss (5% of throughput). The savings for petrol, kerosene and diesel are shown both before and after 2009 taxes and fees. Total potential savings are in the range ZKw 725 to 822 and ZKw 828 to 1152 per litre before and after tax respectively. Based on 2009 prices, they are equivalent to reductions in (after tax) pump prices of 19% for petrol, 21% for kerosene and 17% for diesel. The above illustrate the potential savings from ‘good practice’ operation of the current Zambian system. However, even if Indeni were operated optimally, its costs would still be higher than those achieved in modern large scale 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 100,000 barrels a day (or 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: 19-20). With its capacity of just 1.1 million tonnes a year, Indeni is clearly a ‘subeconomic-scale refinery’. The only way it can survive is through public subsidies and/or tariff protection. As shown below, Indeni receives substantial protection from imports – at the expense of the consumer. 4 Reliability of Supplies The costs to the economy are not limited to higher pump prices. Because all Zambia’s fuel requirements are imported through the pipeline, whenever there is an unplanned shutdown fuel supplies are disrupted throughout the country. Long queues outside petrol stations countrywide are a common phenomenon, as a result of failure to maintain and invest in the pipeline and refinery8. The withdrawal of Total, which provided much of the technical services, from Indeni in 2009 raises the prospect of increased supply disruptions in future unless substantial investment is undertaken. Reliable estimates of the amount of investment required just to maintain the current level of operations of the pipeline and Indeni are elusive. However, the Zambian Government has struggled to finance Indeni in the past and the fiscal situation suggests that public funding will continue to be a constraint (Whitworth 2011). Public investment in the pipeline or refinery is likely to crowd out expenditure on basic social services (for which government is clearly responsible), therefore. This calls into question the appropriateness of direct Government involvement in commercial fuel operations. Another concern is that the refinery cannot adapt to the changing requirements of the Zambian market for fuel products. New engines (in the mines and imported cars) require ‘cleaner’ fuels (i.e. low sulphur diesel, higher octane petrol). On the other hand, supply of quality ‘black’ products such as furnace fuel oil for the mines and other industries is sometimes problematic for Indeni, depending on feedstock composition. 8 The ‘refinery was shut down for a total of 113 days in 2007 compared to 119 days in 2006. The shutdowns in 2007 were mainly driven by the shortage of feedstock whereas in 2006 shutdowns were mostly attributable to technical problems’ (ERB 2007:20). 5 Role of Government In most oil importing countries fuel supplies are seen as the responsibility of the private sector; there is rarely a market failure or security reason for government involvement. While it may have been necessary during the UDI period in Rhodesia, GRZ’s prominent role in the Zambian fuel sector appears anachronistic today. On the one hand, GRZ is responsible for procuring the feedstock, paying TAZAMA and Indeni to transport and refine it respectively, and for selling finished products to OMCs. On the other hand, it is responsible for regulating the sector and fixing maximum prices. Not only is there a conflict of interest between the two roles, but the former (commercial) role can undermine regular functions of government. For example, on occasions releases of budgeted funds to ministries have been delayed because feedstock contract payments have taken priority. Also, delays in adjusting pump prices when world prices are rising have lead to fiscal losses on fuel operations, at the expense of regular government functions. This might be acceptable if it were demonstrated that GRZ was performing well in terms of fuel costs and reliability. However, as noted above, Zambia has higher basic product costs than its neighbours and frequent supply disruptions. International experience suggests that few governments are equipped to conduct commercial operations efficiently. The track record of Zambian parastatals is particularly weak, even by African standards. The evidence above suggests that this applies equally to fuel. Given that: (a) substantial investment is required in the sub-sector just to maintain – let alone improve - current operations; (b) scarce public resources are urgently needed elsewhere for basic public services; and (c) the private sector will invest (in the right policy environment), continued GRZ involvement in fuel operations appears hard to justify. 6 Monopoly concerns The state currently has a monopoly over fuel importation and processing in Zambia. This raises a number of concerns. Firstly, in economic theory, monopoly is associated with higher prices resulting from both the exploitation of market power and lower incentives to cut costs. The figures above appear consistent with the theory. Secondly, relying on the pipeline for all Zambia’s fuel requirements means that the entire country is affected by breakdowns. Allowing competition in fuel importation would greatly reduce the risk of major supply disruptions. Thirdly, even if procurement, the pipeline and refinery were all run efficiently, there would still be substantial costs and risks involved in distributing finished products from a single point, Indeni, throughout a country as large as Zambia. For many parts of the country direct importation is likely to be more economic. For example, Chipata is 900 km by road from Ndola but only 140 km from Lilongwe, the capital of Malawi. Given that Malawi has historically had significantly lower fuel costs than Zambia, Eastern Province may be able to procure fuel more cheaply through Malawi9. Finally, instead of relying on competition to keep prices down, the monopoly structure of the fuel industry has compelled GRZ to establish retail price controls managed by ERB. As discussed below, these are not working well. The above concerns are the inevitable result of importing fuel via a single pipeline and using import duties to prevent competition. This raises the question of whether importation via pipeline is the most appropriate arrangement for Zambia. 7 The alternative: direct import of finished products There are two main alternatives to current arrangements: (1) (re-)conversion of the pipeline to a clean products line to enable it to carry finished products; and (2) direct import of finished products by OMCs via road and/or rail. Importing finished products by pipeline would eliminate the need for refining and the inefficiencies at Indeni identified above. However, conversion the pipeline to a clean products line would require further public investment, assuming that TAZAMA remains in public ownership. Also, the disadvantages associated with: (a) monopoly; (b) Government involvement in commercial operations; and (c) national distribution from a single point would remain. The potentially more attractive alternative is liberalized direct importation of finished products by OMCs. Instead of just buying products from Indeni for internal distribution, OMCs would be free to procure fuel on the world market and transport it from Indian Ocean ports to Zambia by road, rail or both10. This is how most landlocked African countries import fuel. It is also how GRZ has responded when Indeni has been shut down for extended periods; OMCs were given temporary waivers of import duty. This has a number of potential advantages relative to current arrangements. The most obvious one is the introduction of competition into a sector where it is sorely needed. There would be competition both between OMCs themselves and between different ports and transport routes. So suppliers to, say, Eastern Province, using Durban might be competing against suppliers using Nacala or Beira ports. Costs should come down as a result of both the need to compete / survive and the transport savings from serving different provinces from the nearest / most convenient ports. The potential for cost savings is illustrated by the fact that on occasions when Indeni has been closed the differential import duty on finished products has been suspended and OMCs have been able to import fuel at lower cost than Indeni; once Indeni resumed normal operations punitive duties (currently 25%) are imposed on direct imports in order to protect Indeni revenues. 9 Similarly, Livingstone is 800 km from Ndola, but only 10 km from Zimbabwe and 70 km from Botswana. Much of Northern Province is closer to Tanzania than to Ndola. 10 Even if Indeni achieved the above ‘’ good practice’’ savings ‘through investment and enhanced operational procedures, it would only just compete with road tanker supply’ (Matthews 2010:41). The other obvious benefit of competition is that it would eliminate the countrywide fuel crises that currently result from unplanned shutdowns at Indeni. Securing fuel from multiple sources is a much safer risk strategy than relying solely on Indeni. If one OMC experiences supply disruptions others can fill the gap. Another advantage of allowing competition is that it would allow GRZ to withdraw from active operations in the fuel sector - to focus on policy and regulation – without turning a public monopoly into a private one. Meanwhile, the simple presence of competition would reduce, if not eliminate, the need for price controls on fuel. A common counter-argument is that importing fuel by road tankers instead of by pipeline would increase road maintenance costs. While true for the region, it would not necessarily apply inside Zambia. As noted above, finished products are currently distributed by road (and, to a much lesser extent, rail) throughout Zambia – starting from Indeni. Direct importation would open up the possibility of, say, Eastern and Southern Provinces receiving supplies through Malawi and Zimbabwe / Botswana respectively, greatly reducing use of Zambia’s own roads. While increased road maintenance costs would be a legitimate concern for Zambia’s neighbours, these should be covered by appropriate road user charges in those countries – and therefore reflected in Zambia’s import costs. In order to close the pipeline and switch to direct imports of finished products there would have to be investment in new storage capacity on the part of both GRZ (to ensure strategic reserves) and OMCs. While the Copperbelt could be covered by converting Indeni storage to finished products, investment would be required at Ndola Fuel Terminal. New capacity would be needed in Lusaka and at some provincial depots. Switching over would have to be a gradual process. Moreover, OMCs will not be prepared to invest without certain safeguards, e.g. over taxation and pricing policy. 8 Taxation Fuel taxation is an important source of government revenue in most countries11. Not only is it relatively easy to collect12, but it can support other policy objectives such as cutting imports, energy efficiency and reducing carbon emissions. After several years of relative stability, fuel taxation policy in Zambia has been erratic in recent years. Table 1 shows that in June 2008 Zambia had much the highest ‘government levies, duties and taxes’ in Southern Africa, at 55 US cents per litre. While taxes had been among the highest in the region for some time, this was aggravated by the impact of the jump in international oil prices in mid 2008 on Zambia’s ad valorem fuel taxes. Ad valorem taxes are levied as a fixed percentage of import values, whereas most of Zambia’s neighbours have specific tax rates which do not vary with world prices. Excise 11 For example, in Uganda fuel taxes averaged 2.2% of GDP between 1991 and 2006 (Cawley and Zake 2010:111). 12 This applies in particular to Zambia because excise duty is collected at a single point, Indeni. A switch to direct import by OMCs would require collection at border posts. duty rates on petrol and diesel were cut twice between June and September 2008, from 60% and 30% to 36% and 7% respectively. Duties were cut to defuse public concern at increasing pump prices. In effect, GRZ cut duties to offset the impact of rising world prices. However, even though world prices fell sharply within a few months of their mid 2008 peak, duties (and pump prices) were not revised until January 2010. Moreover, the increase was modest; diesel excise duty was only raised from 7% to 10% (cf 30% pre June 2008), while petrol duty was unchanged. The combined impact of: (a) reductions in excise duty; and (b) falling world prices and import volumes, following the global financial crisis, was that monthly fiscal revenues from oil products (customs, excise and VAT), which had averaged about US$ 25 million per month between January 2007 and mid-2008 (peaking at US$ 60 million in mid-2008), declined to an average of about US$ 15 million in 2009 (Matthews 2010:22)13. The timing of the decrease was unfortunate because it aggravated a general decline in government revenue resulting from the global crisis and other developments (Whitworth 2011). As in many countries, recent changes in fuel taxation appear to reflect a political desire to keep fuel prices low. Fuel prices are a key factor in transport costs, so revenue maximisation should not be the sole criterion in determining tax rates. However, if fuel taxes are to make a sustainable contribution to government revenue they must be stable and predictable. One way of moderating price fluctuations while sustaining revenue would be to replace ad valorem taxation with specific (fixed) rates per litre. Whereas ad valorem taxes cause domestic prices to increase (or decrease) by more than increases (or decreases) in world prices, specific taxes are counter-cyclical. They are also harder to evade because the rates are fixed and known and there is no scope for under-invoicing. However, rather than adjusting taxes, a more sustainable way of reducing fuel prices (without damaging GRZ revenue) is to reduce basic product costs through increased competition and efficiency. 9 Price Control Whenever a market is characterised by monopoly there is a case for statutory price controls to protect consumers. As noted above, the importation and refining of fuel for the Zambian market is a pure monopoly. The Energy Regulation Board, therefore, determines ex-Ndola Fuel Terminal prices periodically using a cost-plus formula14. The principle of cost-plus pricing is that the final price should cover all costs in the supply chain plus a ‘fair’ profit margin15. However, this system was effectively suspended between late 2008 and January 2010, seemingly in response to political pressure. Despite 13 Fuel taxes represented 2.8%, 1.6%, and 2.2% of GDP in 2008, 2009, and 2010 respectively (author’s calculation from Zambia Revenue Authority data). 14 Although there is a degree of competition at the distribution, wholesale and retail levels, ERB also issues ‘indicative’ pump prices which the OMCs observe (Matthews 2010:16). 15 A common criticism of cost plus pricing is that, by covering all costs, it provides little incentive to cut costs and ‘rewards’ inefficiency. significant increases in world prices, Zambian pump prices were not adjusted at all during 2009. The cost of the delay in adjusting pump prices was borne by: (a) Government16 which, in addition to cutting excise duty, used scarce fiscal resources to subsidise oil consumers; and (b) OMCs, whose margins were frozen in nominal terms. This calls into question ERB’s independence and the usefulness of price control in current circumstances. Of course, if competition from direct imports was allowed, there would be no need for price control. 10 Conclusions Zambia no longer has the highest pump prices in the region. However, this is not a result of improved efficiency. Instead, it is the result of a sharp reduction in excise duties and the use of price controls to prevent / delay increasing import prices feeding through into pump prices. The costs of suppressing fuel prices have been borne by the Treasury, contributing to the deterioration in Zambia’s fiscal performance in 2009 and 2010, and by those people affected by the resulting cuts in public expenditure17 (as well as by OMCs). Given Zambia’s fiscal prospects, this is not a sustainable strategy. Bringing fuel prices down permanently will require efficiency improvements which cut basic product costs. The data presented above suggests that there is considerable scope for cutting costs, particularly if Zambia ends its total dependence on TAZAMA and Indeni, and switches to direct import of finished products by OMCs. Not only could such competition cut costs, but it should also increase the reliability of fuel supplies and allow GRZ to withdraw from commercial operations. Public concern over high fuel prices in Zambia usually takes the (misguided) form of demands for public subsidies or tax cuts. GRZ gave way to such demands between 2008 and 2010, at substantial fiscal cost. There is little public understanding that the underlying reason for high fuel prices is that for decades GRZ has been protecting a highly inefficient pipeline and refinery monopoly from competition. This inefficiency is implicitly recognised by GRZ (though not the public) in the form of the 25% import duty on finished products, which is solely intended to protect Indeni, not to raise revenue. GRZ ownership and protection of a fuel supply monopoly is anachronistic in what is otherwise one of Africa’s most liberal economies. Giving up the monopoly and allowing the direct import of finished products, by eliminating the difference in import duty between crude (5%) and finished products (25%), should result in a significant reduction in fuel costs and prices with little reduction in GRZ revenue. An understandable reason for GRZ reluctance to liberalise the fuel sector is that 320 jobs would almost certainly be lost at Indeni and 260 at TAZAMA. Both organisations can be expected to resist liberalisation. However, it is important to understand that new jobs would be created, both directly in 16 The fiscal loss / unbudgeted subsidy in 2009 / early 2010 was US$ 90 million (IMF 2010:37). 17 Most of whom are unaware that their public services have been crowded out by fuel subsidies. OMCs and indirectly through the improved competitiveness of the Zambian economy resulting from permanently lower fuel prices. Moreover, almost all Zambians will benefit from lower fuel prices resulting from improved efficiency. This paper suggests there is a strong prima facie case for radically altering Zambia’s fuel import arrangements. While there are complaints whenever increases in world prices are passed on to pump prices, the Zambian public is largely unaware of the scope for sustainably reducing fuel costs (and improving reliability of supply) through domestic policy reform. The pipeline and Indeni are still widely seen as national assets long after their main rationale – sanctions against Rhodesia – ended. Public discussion focuses more on the issue of ownership, such as who should acquire Total’s shares, than on whether they are still needed. A properly informed public debate is long overdue. Appendix 1 Retail Prices of Diesel in Sub-Saharan Africa in February 2010 (US$ per litre) 4.00 3.50 3.00 2.50 2.00 1.50 1.00 0.50 Source: World Bank Africa Transport Unit Senegal Congo Cameroon Zimbabwe Gabon Uganda Chad Mauritius Malawi Burkina-Faso Burundi Sudan South Zambia Cote I’voire Rwanda CAR Cape Verde Djibouti Eritrea Sierra Leone Nigeria Sudan North USA Botswana Ghana Mozambique Liberia Guinea Lesotho Congo, DRC Madagascar Mali Ethiopia Benin Spain South Africa Niger Togo Tanzania 0.00 References BP (British Petroleum) (2008) Southern Africa Comparative Diesel Prices, June. Cawley, C. and Zake, J. (2010). ‘Tax Reform’ in F. Kuteesa, E. TumusiimeMutebile, A. Whitworth and T. Williamson (eds), Uganda’s Economic Reforms, Oxford University Press. ERB (Energy Regulation Board). (2007). Energy Sector Report 2007. Lusaka. IMF (International Monetary Fund). (2010). ‘Zambia: Fourth Review under the Three - Year Arrangement under the Extended Credit Facility, Requests for Waiver of Non-observance of Performance Criteria and Modification of Performance Criteria, and Financing Assurances Review’, 11 June. Washington, DC: IMF. Kojima, M., Matthews, W. and Sexsmith, F. (2010). ‘Petroleum Markets in Sub-Saharan Africa’. Extractive Industries for Development Series No.15. Washington, DC: World Bank. Matthews, W. (2010). ‘Analysis of the Fuels Industry in Zambia’. Background paper for the Zambia Public Expenditure Review. World Bank (mimeo). Whitworth, A. (2011). ‘Zambian Fiscal Performance, 2002 to 2010’. Zambia Institute for Policy Analysis and Research Working Paper. Wijetilleke, L. and Ody, A. (1984). ‘World Refinery Industry, Need for Restructuring’, Technical Paper Number 32. Washington, DC: World Bank.
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