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Thursday, 25 July 2013

Let us liberalise the oil sector

Energy Minister Chris Yaluma recently announced that Cabinet has approved the sale of 49% of Indeni Petroluem (the nation's sole oil refinery). Government is in talks with a number of parties interested in investing in Indeni but it is not revealing who these interested companies are. Zambia imports nearly all its crude from the Middle East, but GRZ wants the refinery upgraded to enable it to refine crude from Angola. In addition, government is allegedly looking for at least $410 million to build a new refinery to ensure stable fuel supply.

This is the latest in the long running shambles at Indeni Petroleum. In 2009, Total International pulled out of Indeni (giving up 50% shares) because the MMD government allegedly failed to contribute financially towards rehabilitation.  In 2010, the MMD government alleged that several companies had expressed interest in running Indeni in partnership with government, but nothing materialised.  In 2011, when PF assumed power it announced that the focus would be on recapitalizing Indeni rather than seeking a new partner. It wanted full ownership. In 2013, the PF has changed the tune and has decided to sale 49%. Interesting it is 1% lower than the MMD sale. Presumably to maintain a controlling stake.

The problem is that the government is caught in a dilemma. It wants to keep Indeni in place because it sees this as part of its "energy security" policy. But at the same it knows that Indeni is very inefficient and does not have economies of scale to deliver cheap refined fuel in the long term. So to protect it Government maintains high fuel import taxes on oil marketing companies (OMCs) which stops them from importing finished petroleum products. This creation of artificial barriers to the market was the MMD policy and it is also PF's current policy.

As Dr Musokotwane said recently, "Without taxes, Indeni will not be able to compete with OMCs. There are several taxes that limit the participation of OMCs". And he should know because he increased the taxes when he was Finance Minister. This view is also echoed by the Zambia Association of Manufacturers (ZAM) who have joined the increasing calls on government to liberalise the fuel sector and allow oil marketing companies (OMCs) to enter into direct importation of finished products in order to reduce the cost of fuel : 
Fuel costs may come down if government liberalises the fuel sector and allows OMCs to enter into the direct importation of finished products. By giving up the current monopoly, government would by a stroke of the pen do away with the current five per cent on imported crude as well as do away with the current 25 per cent duty on finished products.
Fuel costs may come down if government liberalises the fuel sector and allows OMCs to enter into the direct importation of finished products. By giving up the current monopoly, government would by a stroke of the pen do away with the current 25 per cent duty on finished products. The up shot is that  Zambians can have much cheaper oil today, but that will leave Indeni with surplus oil that it can only offload at a loss. This is a great injustice because it means Zambians are bearing the cost of the recent removal of fuel subsidies unnecessarily. To make matters worse with the Government's plans of Indeni being  partly privately owned in the future, poor ordinary Zambians will be cross subsidising these new rich private investors. The proposal is dull and absolutely scandalous. 

The solution is to completely liberalise the sector. The price of fuel can come down considerably if only the tax restrictions on OMCs are eliminated. Most importantly Government can regulate the OMC industry in such a way that only companies with significant shares by indigenous Zambians can operate.  The misguided issues of security  can be met by Government procuring sufficient reserves, in same way that it does for agriculture through the FRA. I have always said this is what we need to focus on instead of seeking to reinstate inefficient subsidies. The challenge now is to fight for the removal of these unnecessary costs on consumers.

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.

Chola Mukanga | Economist | Writer
Copyright © Zambian Economist 2013


  1. don't you think the oil companies would just from cartels and keep reaping huge profits at the expense of the general population? look at the mobile phone market and the number of operators but that has not brought about lower tarrifs

    1. The concern is legitimate but it can be handled by having a strong and well resourced energy regulator, as well as a proper Competition Commission. So the reason you have stated is interesting but inadequate.

  2. I may not have figures but I do recall that between 2002 and 2003, Government drastically reduced taxation on fuel. The reduction was mainly on Excise Duty which resulted in lower VAT payments. When we did calculations, the net reduction on taxation came to 50%. However, we did not see a corresponding reduction in pump prices. Prices went down marginally by about 15%! So you got the benefit the tax that Government had foregone? What has happened this time which can prevent the scenario from repeating?
    May be we need to look at the advantages of having both; a modern and reliable refinery and importation of finished products at reasonable tax rates and see how the two can compete. One moving real crude (not the type we get at Indeni at the moment) through a pipeline, that is in bulk and another one moving refined products by road in tanker trucks (each taking not more 35,000 litres) and moving thousands of kilometers from source and stopping at each and every border and at each road block and weighbridge along the main transit routes before discharging to wherever in Zambia. For now, road transport is the immediate alternative to pipeline since the region’s railway system is very unreliable. The cost benefit analysis and feasibility of both options should be clearly studied and made public otherwise choosing one option over another without considering the final effect on the Zambian population may not be the best!


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