Is Indeni the best option for Zambia

1
Is Indeni the best option for Zambias Fuel
Supply?

• Alan Whitworth
• ZIPAR

2
Overview

• 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

3
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
Source BP
4
Southern Africa Comparative Diesel Prices, June
2008
5
To reduce pump prices, in 2008 GRZ cut excise duty

• petrol from 60 to 36
• diesel from 30 to 7

6
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
7
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

8
Q. Why are costs so high in Zambia?

• Answer - Inefficiencies in
• Feedstock Procurement to Dar es Salaam
• TAZAMA pipeline (?) no data
• Indeni refinery
• Distribution
• Monopoly
• Role of Government

9
n
Components of Value Chain
TAZAMA Pipelines 1706 km
Undersea Pipeline
Ship Tanker at SPM Dar-es-Salaam
TAZAMA Tank Farm Dar-es-Salaam
INDENI Refinery
Oil Rig
Industry
Mining
Road/Air Transport
Ndola Fuel Terminal
OMC
Hauliers
Filling Station
Agriculture
10
Government is main operator in Zambian fuel
market

• 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)

11
Feedstock Procurement

• Comparison of CIF Dar es Salaam prices paid by
  GRZ in 2008 2009 with reference (spot) prices
  shows over-payment
• The total overcharge vs good international
  practice was..US 93 million over the two years
  (Matthews 2010), or 12.5 of total CIF costs

12
Indeni Refinery

• Processing Fee
• Actual fee paid by GRZ 8 / barrel
• Good practice fee 4 / barrel
• Refinery Loss
• Actual 10
• Good practice 5 maximum

13
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

14
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)
• Indenis capacity is 1.1 million tonnes pa

15
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

16
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?

17
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

18
Monopoly

• TAZAMA / Indeni is a monopoly supplier
• Monopolies usually have higher costs prices
  than competitive markets

19
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

20
Liberalisation can reduce pump prices increase
reliability without hurting GRZ revenue

• Removing Indenis 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

21
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

22
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

23
Uniform Petroleum Pricing

• 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

24
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