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Saturday, 3 January 2009

The politics of Zambian Petroleum...

Just in case you missed it, the Energy Regulation Board reduced the price of oil over the Xmas period, by setting new maximum prices. As of the 23rd December the price of Petroleum Products were revised downwards by K1, 873 for Petrol, K1,786 for diesel and K1, 166 for kerosene, based on Lusaka pump prices. The reduction is due to falling global oil prices.






All of this is meant to signal Government's willingness to see Zambians pay lower prices for driving their cars and of course it is meant to cushion the impacts on the mines. But actually Government's aim is a little more complicated. Its desire is to ensure that Indeni continues to make profit, as we found out last week when it decided to increase increased fuel import tax to 25 percent from 5 percent to compel oil marketing companies (OMCs) to stop importing finished petroleum products. In the words of Lameck Chibombamilimo "We hope (the tax rise) will make oil marketing companies stop importing fuel because it will not be competitive to local fuel". Basically Zambians can have much cheaper oil today, but that will leave Indeni (50% owned by GRZ) with surplus oil that it can only offload at a loss, thanks to the inefficiency of Indeni. To make matters worse, Indeni cannot hold onto the oil because it has no capacity to store the refined fuel.

The bad news of course is in the long term. Increasing the taxes may prop-up Indeni and ensure that it remains viable, but it sends the wrong signals to OMCs (and Indeni). In the event that Indeni had to shut down due to an emergency, the OMCs may well be unable to resume imports in quick time as they would have no incentive currently to develop their supply chains.


Indeni of course is not the first parastatal to be proped up in face of inefficiency and it won't be the last. But its the first one where the Government appears to have successfully convinced people that they have best deal on the table.

5 comments:

  1. The truth of the matter is that Indeni is thoroughly inefficient in its production process. I may not have the statistics now, but counting the number of shut downs it has had between 1999 when it was gutted by a major fire (when would have thought that it was going to be completely rehabilitated rather than repaired after that fire) to date, you wonder what the government is trying to achieve by introducing that 500% duty on finished petroleum products because Indeni is so unpredictable when it is going to shut down or not.
    Tazamais another pain in the wrong place with a pipeline with more holes than a mealie meal sieve. You never know when it will stop pumping crude from Kigamboni in Tanzania.
    Making Indeni and tazama sacred cows will just prove to be more painful to the ordinary Zambians who have no control on the tankers that bring in finished petroleum products.

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  2. Why didnt the government just erase the 25% excise duty it charges on crude oil? This would have reduced Indeni's production costs. One of the major reasons why petroleum products are expensive in Zambia are the numerous taxes levied at the various stages of the petroleum market. Refineries in South Africa do not pay duty on imported crude and this translates into cheaper final products. That is the reason why a countries like Malawi and DRC import their energy products from South Africa rather than neighbouring Zambia. Besides if I were in Govt I would removed all the taxes in Indeni's petroleum chain at least for all the products that are exported. It is a bit silly really to have petroleum products in your hands for the dubious reason of lack of a market. As Zambians we are really so lacking in initiative and business acumen.

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  3. Great blog!

    BTW, Kenya is flirting with price controls... I have blogged extensively on this matter. I was among the few voices (well, the only one I know who was overt) who told it as it is.

    In Kenya, the media & (most) citizenry swallowed the government's line & blamed EVERYONE (especially OMCs) except themselves. It turned out that Kenya Pipeline Company (100% gov't owned) was to blame all along!

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  4. Responsible privatization is key... Of course, this means the gov't should NOT have control of the key assets.

    I have no problem with majority government ownership with EXISTING assets but then the management should be 'outsourced' to someone else.

    Note that this would mean a 2-tier ownership structure i.e. gov't owns non-voting shares but yet eligible for dividends.

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  5. Fuel cost structure:

    http://www.daily-mail.co.zm/media/news/viewnews.cgi?category=18&id=1291366911

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