Indeni Petroleum Refinery is certainly the next best alternative solution to the crises in the rise in fuel prices that has hit Zambia.
Just last Thursday, December 16, the Energy Regulation Board (ERB) announced a whopping increase in the pump price of petrol and diesel, with petrol increasing from K17.62 per litre to K21.16 per litre, while the price of diesel price was raised from K15.59 per litre to K20.15 per litre.
Earlier this year, former Finance minister, Bwalya Ng’andu, suspended value-added tax (VAT) on diesel and petrol, by issuing Statutory Instrument number 125 of 2020.
This was to avert an expected price increases in petrol and diesel.
The recent hike in fuel prices is clearly a reversal of Government’s earlier decision.
In the last three weeks, this platform has been looking at cost-reflective fuel and electricity prices in the Zambian economy.
Notwithstanding, the desirability of this model, cost-reflective fuel prices, the down-side of this model is already taking a heavy toll on the economy.
This could be visibly seen from the recent spiral effects on the prices of public transport, transportation of goods and services and the eventual rise in the cost of manufacturing in the economy.
Just yesterday, the Road Transport and Safety Agency (RTSA) authorized an upward adjustment in public transport fares, with inter-city rates being adjusted by at least K55.
Of course, it’s an open secret that the cost of manufacturing goods and services as well as the cost of doing business in the country has escalated even higher.
In fact, while there is a trend towards implementing cost-reflective fuel and electricity prices, as will be discussed in this discourse, research is reliably indicating that the nature and quality of strategic decisions that Government takes or decides to take has a telling effect on the level of prices of fuel in the economy.
A number of stakeholders in the country are at pains to explain why the increase in fuel prices is necessary.
That’s exactly what many stakeholders including this platform undertook to do three weeks ago.
Explaining the necessity for the recent developments in the energy sector of the economy is not good enough and neither are high prices, nor the high cost of production and living desirable in an economy like Zambia.
The Zambian economy and its citizens are looking for lasting solutions – local manufacturers want their offerings to become competitive both locally and on international markets.
The citizens want to enjoy the purchasing power of their hard-earned money!
That’s the harsh reality – no two ways about it!
From the onset, it is important to note that it would be incomplete to discuss developments in Zambia’s oil sector without mentioning Government’s decision to stop procuring feed stock in 2019 and Republican President Hakainde Hichilema’s New Dawn Government’s decision to escalate that decision by putting Indeni Petroleum Oil refinery on care and maintenance.
The purpose of this article and the next one is to look at alternative and workable business models of tackling fuel logistics and prices on the Zambian economy.
Once again, I had to delve into the depths of the quagmire surrounding the energy sector in Zambia.
Thankfully, I was privileged once again to tap into the immense expertise of Bernard Tembo, a renowned researcher and energy-sector expert in Zambia.
Where did the current crisis in fuel prices start in Zambia in the recent years?
“The current situation started in 2019, before then and before Indeni petroleum Oil refinery was “shut down.” the Zambian Government would buy spike crude oil and pump it in the oil pipeline from Dar-es-laam.
This feed was essentially cheaper than the finished products of petrol and diesel that the country started buying when Indeni stopped operating in 2019.
Spike feed comprised 41 percent diesel, 46 percent crude oil and 13 percent of other parts of crude oil.
With this composition, diesel was much cheaper than the current option.
The output of this process was 21 percent petrol,” Dr. Tembo says
Dr. Tembo further says that much of what is used in Zambia is diesel and it eventually proved to be cheaper
The pricing of the output was between 40 and 45 percent and the finished product input 55 to 60 percent of what we are finally consuming in Zambia.
Indeni Petroleum oil refinery therefore developed a weighted price for diesel thus:
(Cost of diesel from Indeni plus total cost of inputs) ÷ (Total quantity from Indeni plus Total quantity imported)
This becomes the wholesale price at which the Government sells finished products to Oil marketing companies (OMC’s)
Dr Tembo adds that from 2020, when the Government started importing finished fuel products, this started pushing the price of petrol and diesel upwards.
According to him, the Energy Regulation Board (ERB) report on Indeni is not clear on what is wrong with Indeni!
That’s hair-raising, isn’t it?
Dr Tembo states that the main reason that has been cited in this ERB report is that spike feed stock was not available.
However, he says that spike crude feed stock has always been available on the oil market and the country used to ensure that spike feed stock was bought.
Following on, Dr. Tembo notes that Indeni petroleum oil refinery plant and the TAZAMA pipelines plants are essentially ERB regulated plants.
This means that all the processes: expected raw material inputs, outputs, plant performance parameters, fees, profit margins and selling prices are all regulated by the ERB for everyone in the sector and not just Indeni or TAZAMA.
Dr. Tembo says if the Indeni plant is inefficient, it will make losses which it cannot pass on to its ultimate customers!
The only and best way to reduce or eliminate Indeni’s losses and inefficiencies is to re-capitalise the plant to make its operations more efficient rather than shutting down the plant.
Dr. Tembo notes that the Zambian Government has not re-capitalised Indeni since time immemorial.
The one trillion Kwacha question for now is, how does an economy like Zambia that is heavily dependent on diesel, transportation and copper mining resort to finished product procurement?
How does one expect a regulated plant to perform to a tip-top performance when it’s dated and has not been re-capitalized over-time?
It’s only common sense that a dated motor vehicle, machinery, plant or equipment become more expensive and less efficient with age!
Surely how does one ordinarily expect the running costs of an old plant to be efficient and low?
How would you expect the cost of refining fuel in the economy to come down without a re-investment in the refining process?
Look out for another exciting edition on the strategic implications, pros and cons of Governments decision to shut-down Indeni and other strategic options available and their implications, in next week’s article.
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The author is the Managing Consultant at G. N Grant Business Consultant, a Chartered Certified Accountant (ACCA), a Master of Business Administration (MBA) holder, with a Specialism in Strategic Planning, and a candidate for the Herriot Watt University (Scotland) Doctor of Business Administration (DBA)