About fuel prices and Ghosts

Filed under: Business,Special Comments |
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Sean Tembo

By Sean E. Tembo

1. Last evening as l was driving home, l was tuned in to one of the local radio stations and the issue of discussion was the fuel increment that had been announced by ERB earlier in the day. Of course the majority of the callers were non too pleased, and for good reason for that matter. The cost of living has been going up and up while people’s incomes have pretty much stagnated due to low economic activity. However, in the midst of all the incensed callers, there was one caller whom l felt stood out from all the previous callers. This caller posed a challenge to opposition political parties. She asked what the

File: Mount Meru fuel service station

energy policy of opposition political parties is, how better it is from the current energy policy and how it would help mitigate the recent upward trend in fuel prices? In other words, this caller was challenging us the opposition to provide our alternative solution to this national problem of high fuel prices, instead of us climbing the tallest anthills and condemning government on the fuel hike without explaining how we would have done things differently had any of our parties been the ones running the affairs of this Republic.

2. As a strong proponent of the need for all opposition political parties to not only provide checks and balances but also provide alternative policy solutions, and having ourselves developed a PeP 2018 Alternative National Budget which was a first of its kind in modern times, l felt both challenged and enamored by this caller. Challenged because as a Party President for the Patriots for Economic Progress (PeP), it just occurred to me that in the past when Government had increased fuel prices, we had only condemned the move and had not, ourselves outlined what our energy policy is and how it is better than that of the PF government. Of course our energy policy is clearly outlined in the PeP Manifesto, but there was need to elaborate it separately. I was enamored by this caller because it was gratifying to note that a larger part of our society is now realizing that opposition political parties ought to be judged on the basis of their alternative solutions to national problems and not on any other basis such as performance in last elections, countrywide reach etc.

3. The PeP energy policy is anchored on three main principles; price stability, price efficiency and price priority. Talking about price stability, this principle emphasizes the need for energy prices not to be subjected to frequent changes and also ensure that any price changes are gradual and not too significant as to cause price shocks, which would trickle down to economic shocks. The current government energy policy appears to appreciate the principle of price stability as evidenced by the recent establishment of a Price Stabilization Fund by the Energy Regulation Board (ERB). However, despite the PF government appearing to appreciate this important concept of price stability and appearing to take active steps to achieve it, they have totally failed to properly implement it in all its forms. For example, in 2017, the ERB made two significant fuel adjustments, about 8 months apart. The first was a reduction of about 22% and the second was an increment of about 32%. Now, firstly these adjustments are too significant in the context of ensuring price stability. If you want to ensure price stability, you need to make use of your Fuel Stabilization Fund by ensuring that it smoothens out all price adjustments to plus or minus 5%. Secondly, these two major adjustments that were made to fuel prices in 2017 were in opposite directions; one down and the other up, all within the space of 9 months? If ERB was properly managed, it would’ve utilized its Fuel Stabilization Fund to net off these two planned adjustments and absorb the difference within the fund so that there would’ve been no price adjustment at all in 2017, thereby achieving the objective of price stability. Therefore, based on the poor quality of decisions that are coming out of ERB, it is evident that the ERB Board is dysfunctional just like the majority of parastatal boards are dysfunctional. A dysfunctional board comes about when you stuff a board with incompetent people who are usually chosen on the basis of their patronage to the ruling PF as opposed to their competence. Under a PeP government, all appointments will be based on merit and this will ensure that parastatals do not become dysfunctional the way the ERB is dysfunctional.

4. The second principle of the PeP energy policy is price efficiency. When we talk about price efficiency, what we are saying is that the pump price of fuel must be a reflection of the prices of oil on the world market. In the current scenario, it is not. The reason is that, for one reason or the other, the PF government decides to use a multitude of middlemen in the procurement of oil feedstock for Indeni or processed fuel. Based on our recent assessment, there are as many as 10 middlemen involved in the procurement of oil. Now, what must be understood is that every middleman than is involved in a transaction needs to make a markup and increases the final price of fuel at the pump for an average Zambian citizen. The question is why does the PF government involve too many middlemen in the procurement of oil, thereby failing to achieve price efficiency? In our assessment, there are two primary reasons; incompetence and corruption. It is worth noting that this appetite by the PF government to involve middlemen is not only restricted fuel procurement but transcends across the entire government in all sort of procurements. For example, what was the value of using a middleman in the name of Grandview International in the purchase of fire tenders, who ended up making more than 1,000% markup? Why didn’t the PF government procure the fire tenders directly from the manufacturer? What value was the middleman adding which would justify the 1,000% markup? Are our government officials afraid of traveling to Europe to meet a manufacturer? These middlemen are the ones that increase the pump price of fuel for citizens. In fact, according to our analysis, about half of the money we pay for fuel goes to finance the markups of middlemen. This means that if the PF government was serious with price efficiency with regard to fuel, and they cut off all the middlemen, the pump price of fuel can be cut down to half! This is exactly what a PeP government will achieve once ushered into office.

5. The third principle on which the PeP energy policy hinges on is price priority. The concept of price priority looks at the depth of the trickle down effect of a price adjustment in any good or service. The economy is made up of a web of variables whereby an adjustment in one variable will have trickle down effects on other variables. For example, an increase in the price of mealie meal may result in higher demand in substitute products like rice and if there is limited supply, may result in an increase in the price of rice. The concept of price priority is especially important for energy products like fuel and electricity because they are used as a key production input for most goods and services in the economy. That means an adjustment in the price of fuel is likely to have a great ripple effect to the rest of the economy. For goods that have a greater price priority, it may be necessary to cushion price changes. We believe that is partly the reason ERB established the Fuel Stabilization Fund, but the problem is that this fund is not operated in the manner it is supposed to operate, primarily because it lacks depth. In simple language, not enough money was put into the Fuel Stabilization Fund for it to be able to effectively serve the purpose for which it was established.

6. Until we get rid of the ghosts that exist in our national procurement processes, the Zambian people will continue to suffer high prices for fuel. The PF government will continue to give excuses that do not hold water on why our fuel pump prices are high or why our electricity tariffs are unaffordable. If only they could attach as much effort to competently running the affairs of this Republic as they do to creating smoke and mirrors to dupe citizens, this country would’ve been very prosperous by now.

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