Are We The Useful Idiots? Debunking the Myth behind Fuel Subsidies

By Professor Mwiine Lubemba

I agree, the Zambian economy is in bad shape today, and that’s why President Michael Sata and everyone else is busy looking for ways they can make a little extra money to pay for bills, Mr. Sata wants the money to build roads, universities, hospitals, districts and provinces, where as the majority Zambians want the money to buy groceries, or just have a little extra to fall back on in case of emergency. And while there are many ways every Zambian goes about creating some extra income, I believe it’s better to rely on your own skills and experience to make the money.

If however, you try to go out of your comfort zone and attempt doing something you’ve never tried before, perhaps lifted from an economics book or some IMF bureaucrat, the problem is you’re going to make a lot of mistakes, like wasting a lot of time and a lot of money trying to learn about that market, business, or service before you can really start to make any money at all. If you use your current knowledge, expertise, and skills set, though, you can often find yourself making a lot of money easier than you ever thought. The myth behind the so called fuel subsidy removal and its costs in Zambia is no different; and if you want my honest opinion, there has never- been such a thing called a subsidy on fuels in Zambia…for if there was, fuel would have been zero rated right from the UNIP era…

But-let’s move on with what we know:

If it is true government has imported 216 million liters of petrol and 21 million liters of diesel and paid Trafigura US$500 million, then our government paid too much.  Surely they could have made a quick back-envelope-calculation and found that at this price and volumes, the 237 million liters translates to US$2.11 per liter or Kr11.18 per liter at the pump-and without government taxes. The old fuel price was Kr8.16 to Kr 8.23 per liter petrol. To pay Trafigura, the Government now has to find an additional Kr 3.02 to maintain the old price and this is without the government taxes. The first damage control strategy Government came up with was the removal of the so called subsidy on fuel which was in form of a ±5% tax and the price went up to Kr9.91 per liter.

Even at this new retail price of Kr 9.91 per liter, the government is still short of Kr1.27 per liter to cover the cost- again, without taxes. This shortfall translates to an additional ±Kr 301 million or (±K301 billion) that Government has to find. Government is in a- lose-lose – situation, where even the removal of the so called subsidy has not translated into savings that Government requires to pay Trafigura for the fuel. It means the usual ±72% government taxes on fuels the Government depends upon to boost the treasury coffers for infrastructure and several other government operations cannot be recovered except from increased prices to the so called rich consumers, companies and miners. As to the poor, they won’t contribute and will get zero!  This story ends here… but if you have the time, you can stroll along deeper into the matrix…

If this is what we know; why are other countries reducing fuel prices?

Zambia announced a fuel price increase on 1st May 2013 at the same time that South Africa had announced a petroleum price decrease also effective 1st May 2013. Source: Moneyweb.co.za and AllAfrica.com-Apr 26, 2013 reports.

At the current retail price of Kr 9.91 per liter that gives Government a shortfall of Kr301 million, our petrol price is already 31% higher than the average world price of gasoline. And diesel at US$1.74 per liter is now 24% higher than the average world price. We have a select few high and low fuel price countries in the table below:

 

Country                                          Unleaded (in Euro)                           Diesel (in Euro)

Australia                                         1.11                                               1.17

India                                               0.99                                               0.72

USA                                               0.73                                               0.81

Canada                                           0.96                                               0.97

United Kingdom                                1.61                                               1.68

AVERAGE                                       1.08                                               1.07

Zambia                                           1.42                                               1.32

Source:  www.mytravelcost.com/petrol-prices; also CNN/Money: Global gas prices – and www.statista.com/statistics/221368/gas-prices-around-the-world.

 

But let’s get to how Mr. Mukanga the Minister of Energy tried to explain his predicament…

 

“Fuel subsidies which were introduced by the MMD to benefit the poor only benefitted a few of the intended beneficiaries”.

“Current evidence suggests that the poor have benefitted the least from this measure. Key consumers of fuel who are the mining industries and urban dwellers that are able to own vehicles have benefitted most from this measure”.

This is strange because the above reasons are lifted from the Abstract of The IMF Working Paper titled: The Unequal Benefits of Fuel Subsidies: A Review of Evidence for Developing Countries -By Javier Arze del Granado, David Coady, and Robert Gillingham.

The authors said:

“Fuel subsidies are costly approach to protecting the poor due to substantial benefit leakage to higher income groups. In absolute terms, the top income quintile captures six times more in subsidies than the bottom”. Issues that need to be addressed when undertaking subsidy reform are also discussed, including the need for a new approach to fuel pricing in many countries.(bold emphasis ours).

We now know that Mr. Mukanga was parroting the IMF working paper word for word. He said nothing new.

But let’s quickly go the basics and debunk the myth behind fuel subsidy…

Below is what the Post newspaper wrote…

Govt signs $500m oil deal with Trafigura By Kabanda Chulu. Sat 01 Sep.2012, 10:10 CAT –

GOVERNMENT has signed a one year US$500 million contract with Netherland’s multinational commodity trader, Trafigura, for the supply and delivery of finished petroleum products because Zambian investigative wings have cleared the company- (bold emphasis ours).

And energy permanent secretary George Zulu has claimed that the MMD government paid for six shipments of crude oil from Nigeria that has never been delivered.


Responding to questions from journalists after signing the contract for the supply and delivery of 216 million liters of petrol and 21 million liters’ of diesel yesterday in Lusaka with Trafigura – Puma Energy’s parent company, Zulu said the engagement of suppliers for both finished and petroleum products and feedstock had gone through a transparent process-(bold emphasis ours).

From this story, we see that even the post newspaper story was shy to get the truth about the inadequacies in the procurement process of this fuel… but we leave it to their conscious.

Zambia is importing 237 million liters of refined product at a cost of US$500million from Trafigura. Trafigura knows the average World pump retail price is ±Euro 1.08 per liter (as in table above). If Trafigura went from one filling station to another they would have paid ±EUR 255.96 million or US$337.557 million for 237 million liters.  We assume, even as Trafigura were submitting their bid they were already sure of making US$162.443 million profit on the Zambian oil deal. Hold on to this…

 

Let’s get back to the price increase of Kr 1.68 per liter that has caused the pump price to rise from Kr8.23 to Kr 9.91 keeping in mind Trafigura could have paid US$337.557 million if they used the average world retail prices from which they could have made US$162.443 million profit. It means overall, Mr. Mukanga wants another ±US$73.47 million in addition to this US$162.443 million to be paid to Trafigura to make it US$235.913 million. But Trafigura shareholders didn’t become rich by acting stupid…the company bought its refined products at world refined fuel spot prices:

So what? What are the world spot market prices for refined products?

There many sources but let’s pick on Gulf Coast Spot Market Refined Product Prices – found at below… www.petrostrategies.org/Graphs/gc_spot_product_prices.htm. The prices for Gasoline- conventional regular, No. 2 Diesel -Low Sulfur and Kerosene were all selling for under 265 US$ cents per gallon from late December 2012 through April 2013 when Trafigura should have locked in supply contracts for the Zambian 237 million liter cargo.

We now have a price of US$2.65 for every 3.7854 liters (1 US gallon = 3.78541liters). Please keep track. Trafigura were paid US$500 million to supply 237 million liters or 62,608,971.31 gallons which we now know should have cost them not more than US$165,913,773.972. With these numbers on hand, Trafigura made a whooping profit of more than US$334,086,226.0285 on this deal before shipping costs. The next question is;

What were the shipping costs to Dar es Salaam?

Let’s assume Trafigura used the highest rate of US$120m³. For 237 million liters or 237,000m³ we get US$28,440,000. The C&F to Dar now comes to US$ 194,353,773.972. If we add insurance at a ridiculous 2.5% we get US$ 4,858,844.349 and we now have a CIF Dar cost of US$ 199,212,618.321.

We now need to transport the cargo to Ndola Tazama National storage depot. Trafigura opted to use expensive road tankers not Tazama pipeline. Let’s assume at a (ridiculous) rate of US$120m³. To move 237,000m³ adds another US$ 28,440,000 to our cost and freight price, thus our final CIF Ndola price has now gone up to US$ 227,652,618.321.

We need to add miscellaneous costs such port handling, storage fees, clearing charges -say throw in another US$100m³ and we get to US$ 23,700,000 we add it to the total CIF Ndola/Tazama cost and arrive at US$ 251,352,618.321.

But wait! Trafigura is in business, they need a good 25% margin, now they have got their US$ 62,838,154.58 as a margin, so we add this number to our CIF costs and arrive at CIF Ndola of US$ 314,190,772.901. But remember Mr. Zulu paid US$500 million. The numbers don’t add, unless Trafigura was again overpaid by US$ 185,809,227.099 million?  But Mr. Mukanga has imposed a price increase of Kr1.68 per liter (US$73.47million) on the same cargo where we’ve already overpaid the supplier by US$186 million. Why?

What should have been the real fuel price in Zambia?

Trafigura contract price should have been ±US$314.2milion not US$500million and the recent price increase would not be necessary. In fact like South Africa and many other countries in the region, our pump prices should have been reduced from 1st May 2013 to US$1.33 per liter or Kr 7.049. In addition the Government could have saved US$ 186 million or Kr 4.16 per liter which could easily translate into pre-pump taxes. But even if Government wanted to be greedy and taxed another Kr 1.68 per liter to get their Kr 398.2 million back to the treasury, the filling station pump price shouldn’t have exceeded Kr 8.73 per liter, a nice increase of Kr0.5 per liter.

From this we don’t see where fuel prices are subsidized, it’s a myth! We challenge the authorities to give us the true data that explains their situation how they’re able to subsidize fuel that is already cheaper than the value of the so called subsidy on the market. The fuel prices are high due to an error even the ACC couldn’t see or explain. Therefore, just as the top rich few will lose out due to this error in the fuel procurement contract, so will the poor be hurt even more because there will really be no money coming from the so called fuel subsidies removal to cover pro-poor programs. Trafigura and its insiders know this – and they are using all of us as their useful idiots…

Just a thought…

Sincerely,

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