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Thursday, 3 April 2008

ERB "response" on jet fuel pricing...

A typical bureaucratic spin from the ERB on jet fuel pricing:

“Factors that affect the price of Jet A1 include different importation and production modes, infrastructure investments, and fixed distribution costs relative to volumes traded, pricing mechanisms and tax regimes. Zambia has since 2004 been using the Import Parity Pricing Mechanism till January 2008 when this was replaced with the Cost Plus mechanism after consultations with stakeholders. Currently, Jet A1 is not subjected to any taxes apart from import duty of five per cent when it is imported into the country. However, the prices of Jet A1 are likely to be affected, considering that the price of crude on the world market has peaked at US$111 per barrel”
The problem is that this response ignores the root cause of the high prices. The reason for these high costs is just inefficiencies in refinery. Rather than explaining their procedures, ERB should be asking the fundamental question of why the refinery process in Zambia is so expensive. There story on tax is also incomplete. ERB rightly acknowledges the unnecessary 5% import duty, but it purposely ignores that jet fuel is taxed with 17% VAT, despite the fact that usually fuel is entirely tax free.

15 comments:

  1. What does he mean by "pricing mechanisms" ?

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  2. ..I think what she's talking about is how they decide what price to charge....after it goes through the refinery process..

    In Zambia there's only one refinery...because there's no competition, the ERB regulates the Indeni refinery....
    how much jet fuel cost is down to the ERB as the regulator...it basically "fixes" the price...

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  3. Ok, that's what I thought. Are all the fuel prices set by regulators or only jet fuel ?

    And how many African countries have more than one refinery ? Nigeria and SA ?

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  4. All fuel prices are regulated.
    But as I point, there are differences on taxes applied.

    Not sure on the distribution of refineries, but I know it is a legacy of socialist planning than demand necessary.

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  5. ll fuel prices are regulated.
    But as I point, there are differences on taxes applied.


    Do you think price liberalisation has a chance of having a positive effect on prices.

    Not sure on the distribution of refineries, but I know it is a legacy of socialist planning than demand necessary.

    I think it's mix of socialist planning and nationalist (protectionist) biases. It's interesting how many country insisted on having their own small national refinery and missed on the possible economies of scale bigger refineries made.
    That's the kind of things that make me think some level of political integration is somehow desirable.

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  6. "Do you think price liberalisation has a chance of having a positive effect on prices"

    Price liberalisation in a face of monopoly? No chance.

    "It's interesting how many country insisted on having their own small national refinery and missed on the possible economies of scale bigger refineries made.
    That's the kind of things that make me think some level of political integration is somehow desirable"


    Possibly cold war forces had something to do. However, there's no reason why these countries cannot look at such advantages now on a bilateral basis.

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  7. Wait is the monopoly legally-enforced or is it a de facto one ?

    However, there's no reason why these countries cannot look at such advantages now on a bilateral basis.

    Special interests usually have an easier time blocking those.

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  8. "Wait is the monopoly legally-enforced or is it a de facto one ?"

    The position at the moment is that government owns half of the Indeni Oil refinery, Total a French company owns 50%. They also manage the refinery. There's talk of bring in a third partner but its unclear how this will work. Most people now think that governent could give up some of its shares and allow Zambians to invest in the company.

    I think in theory there's nothing to prevent another supplier coming in and setting up its own refinery, but I think the costs are prohibitive (without proof). The government already has the infrastructure through the TAZARA pipeline (owned jointly with Tanzania), although I can't immediately see why a new investor cannot use the same pipeline when it is fully upgrade. Two issues in the past have been the refining capacity of Indeni (now not an issue with Total at the helm) and the TAZARA pipeline's occassion problems.

    Its cryptic!

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  9. Here is how OECD see the situation:

    Petroleum is fully imported through the 1704 km Tazama pipeline, jointly owned by Zambia and Tanzania, which transports crude oil from Dar es Salaam
    to Nodla and the Indeni refinery. Until 1999, petroleum imports were handled by the Zambian National Oil Company (ZNOC). In 2002, ZNOC was liquidated and the government proceeded with the liberalisation
    of oil procurement. The marketing and distribution of petroleum products is undertaken by privately owned oil marketing companies that have been licensed to import and retail petroleum products, as well as purchase
    refined products from the Indeni refinery. Zambia’s retail petroleum prices remain, however, among the highest in the region owing to high transport costs, the
    weak domestic currency as well as the incapacity of the Indeni refinery to guarantee supply.

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  10. among the highest in the region owing to high transport costs

    that's like the most depressing part about discussing the Zambian economy.

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  11. Zambia suffers from what Collier would call the "landlocked trap". We are heavily dependent on the good transport infrastructure of neighbouring states. And on the stability of our neighbours to the north (DRC) to the East (Angola) and now to the south (Zimbabwe).

    Having said that Botswana is landlocked and they are not doing bad. Although you could argue that is due to the closer integration with Namibia and RSA.

    What I don't understand is that everyone knows that we have little influence on the transport policies of our neighbours, but surely we have influence on ours. Zambia's own transport is WORSE than that of its neighbours it depends on. Now that is even more depressing.

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  12. Just a technicality.. But I don't think the stability of the DRC affect transport costs for Zambia. It may affect the prospect of firms in Zambia but that's all. No Zambian good ever got to DRC to get somewhere else, lol.

    So Mozambique has a bigger influence.

    Yeah, Botswana is integrated with SA, just like Switzerland or Austria rely on Germany or Italy both as markets and for their ports.

    Zambia's own transport is WORSE than that of its neighbours it depends on. Now that is even more depressing.

    Isn't it partialy a return to investmet issue ?
    I mean one could imagine Zambia investing billions in infrastructure but with the fact that Mozambique, Angola and Zimbabwe aren't getting better, the returns will be low.

    It's funny because with Zambia being landlocked, one would assume that you'd think it has more to get from regional integration, at least on the transport front.

    I once had this blog on NEPAD's transafrican highway system (and history)
    http://shakara.wordpress.com/2007/11/30/fun-with-maps-trade-and-roads/

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  13. "Just a technicality.. But I don't think the stability of the DRC affect transport costs for Zambia. It may affect the prospect of firms in Zambia but that's all. No Zambian good ever got to DRC to get somewhere else, lol."

    Interesting, but I think the stability of DRC has been quite critical in terms of transport on two levels:

    - Transportation from the copperbelt to Luapaula province via the Congo Pedicle. See the latest blog Quote of the week (Crispin Mushosha) Thats internal I agree, but critical nevertheless as a "landlocked trap".

    - Historically, the Benguela Railway played quite a critical part in Zambia's look north policy after Independence as the UDI (in Zimbabwe) cut off the South Corridor.

    "So Mozambique has a bigger influence."

    One would think so, but suprising not! This paper for example puts the Beira share of Zambia trade traffic at 1.1% compared to DRC at 8.6% [see Figure 1].

    The problem is that the amount of freight that goes through Beira more or less gets taken to Durban, so it makes sense to use Durban in the first place!

    You'll also notice that Angola does not figure there! Legacy of war I suspect. But now plans are afoot to connect the rail from Western pronvince that meets the Benguela rail in Angola. That would significantly open up opportunities.
    "Yeah, Botswana is integrated with SA, just like Switzerland or Austria rely on Germany or Italy both as markets and for their ports."

    Indeed. But hopefully now that we are seeing relative stability in the region things will improve for everyone else. DRC really is critical to development. Without DRC being viable in general and using its vast resources the long term prospects, although still positive, will be mild.

    "Isn't it partialy a return to investmet issue ?
    I mean one could imagine Zambia investing billions in infrastructure but with the fact that Mozambique, Angola and Zimbabwe aren't getting better, the returns will be low."


    To some extent, but there are two additional points.
    First, Zambia can think about overcoming these constraints in other areas e.g. encourage liberalisation of air travelling. Developing its air transpot capacity would allow it make gains in other areas. Kenya for example sales lots of roses in Europe, which are air freight there because its got a strong air freight industry! So there's always other areas to look at.
    Secondly, the need for internal infrastructure does not disappear. You always need good transport infrastructure to attract Foreign Direct Investment.

    Your point I think is very relevent when we start thinking about how such infrastructure is funded and whether the government pot is the right pot!

    "It's funny because with Zambia being landlocked, one would assume that you'd think it has more to get from regional integration, at least on the transport front."

    I have to admit that like Collier, I sometimes countries which are landlocked like ours never became countries in the first place! The colonialists could have been more clever in dividing us up! But on the other hand Zambia has vast resources and there's no excuse for our predicament. Besides our process is one of decline since independe rather than real improvements. So lack of port access is not the problem. We have enough areas where properly projected we can move forward with confidence. Ours is simply a problem of poor governance and lack of a Zambian vision of development. I am ranting now :)


    "I once had this blog on NEPAD's transafrican highway system (and history)
    http://shakara.wordpress.com/2007/11/30/fun-with-maps-trade-and-roads/"


    Wow!

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  14. Oh no. I knew about the Predicle ! And for some reason, in my head the Benguela Raiway cross to Angola in Zambia and not DRC.
    Well, that will teach me about talking too fast. lol.

    DRC really is critical to development. Without DRC being viable in general and using its vast resources the long term prospects, although still positive, will be mild. 


    I just need to stop being the transportation gap. lol. (i'm a bit unfair, the gap is really the two Congos + Gabon).

    But I'm not as optimistic as you. I think there are serious ideological hang-ups and special interests that will could prevent them for correctly using their potential.

    Kenya for example sales lots of roses in Europe, which are air freight there because its got a strong air freight industry!

    Did the infrastructure or the demand come first ? In Rwanda, the flower production opportunity is why they invested in air infrastructure but with Kenya and Ethiopia it's hard to figure out, it was so long ago.

    But you're right.

    I have to admit that like Collier, I sometimes countries which are landlocked like ours never became countries in the first place! The colonialists could have been more clever in dividing us up! But on the other hand Zambia has vast resources and there's no excuse for our predicament. Besides our process is one of decline since independe rather than real improvements. So lack of port access is not the problem. We have enough areas where properly projected we can move forward with confidence. Ours is simply a problem of poor governance and lack of a Zambian vision of development. I am ranting now

    I used to be very suspicious of the claims that being landlocked was such a big issue. After all, that didn't prevent Switzerland, Austria, the Czech Republic or Luxembourg from being some of the most develloped societies on earth.

    But then there are several factors. Those countries were adjacent to other develloped ones. It's quite hard to manage to stay poor when you're between Germany, Northern Italy, etc.. There's also the fact that geographically, they were close to the ocean, or at least the European waterways network (being landlocked is not as much of an issue for Lesotho as for Chad).
    But most importantly, that was all before the natioanist area. And our countries were designed to maximize rent and stuff.
    That's why you have things like Ethiopians crying for their lost access to the ocean in Erytrea while the port they used even before was Djibouti.
    That's also why you won't see a boom in infrastructure investment, because countries think of their self-interest in terms of ownership.

    But yeah, I'm ranting now..

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  15. "Oh no. I knew about the Predicle ! And for some reason, in my head the Benguela Raiway cross to Angola in Zambia and not DRC."

    Thats because it makes more sense for it to a direct link. But of course historically, the case was always stronger for it to pass through DRC. The mining companies always view the "Congo Copperbelt" as one area of economic activity. But on the political level, it was always a matter of the nationality of the companies operating there, and that was the function of the ability to get concessions from whichever Chief admistered a specific part of the belt!

    "Did the infrastructure or the demand come first ? In Rwanda, the flower production opportunity is why they invested in air infrastructure but with Kenya and Ethiopia it's hard to figure out, it was so long ago."

    Well, in so far as transport is a derived good, then obviously demand for those goods come first! But to some extent that is less crticial question because there's plenty of freight related markets that can take advantage of air transport infrastructure.

    "That's also why you won't see a boom in infrastructure investment, because countries think of their self-interest in terms of ownership."

    AfDB have put forward a vision for transnation network. Its cited in this paper with a map in one of the Annexes.

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