1. Is Indeni the best option for Zambia’s 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)BotswanaMalawiMozamNamibiaRSASwazilandTanzaniaZambia Product Basic Cost1.190.961.051.04 0.991.051.48 Transport, Service Differential0.080.220.01 0.020.010.09 Govt. levies, duties, taxes0.060.340.160.190.240.260.440.55 Oil Company margin (rounded)0.050.080.120.05 0.090.11 Dealer Margin0.06 0.090.050.080.060.050.07 Retail Pump Price1.441.671.431.341.421.371.632.30 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 Ndola Fuel Terminal Hauliers Ship Tanker at SPM Dar-es-Salaam Undersea Pipeline TAZAMA Tank Farm Dar-es-Salaam TAZAMA Pipelines 1706 km INDENI Refinery Mining Industry Filling Station Agriculture Oil Rig Road/Air Transport Components of Value Chain OMCOMC

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) Indeni’s 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 Indeni’s 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