23 Feb 2020
Background Introduction
COMALISO is a Zimbabwean, Ruwa-based liberal think tank – advocates for a free market economy. We regularly host informal meetings with progressive economists to perpetuate the free market mantra. Such meetings result in a series of discussion points that, if there is a policy implication, we refer them to relevant policy makers. A few months ago, we organised a dialogue meeting of 10 top Zimbabwean economists. Our motivation was the distortions in the fuel procurement and distribution sector resulting in shortages, distressingly long queues and weekly price adjustments. There is something fundamentally wrong with the current fuel procurement and distribution value chain. It does not seem our government has the answer to resolve this fuel crisis, but we are sure that left to its own devices, a free market economy ‘invisible hand’ can solve our problem.
Zimbabwe’s passenger and commercial vehicles range between three and five million, with a daily consumption of petrol and diesel well over 200 million litres per month. A country that does not produce oil; also with diminishing prospects of producing adequate foreign reserves cannot cope with such a monthly fuel bill under monopolistic conditions. The government has attempted to support ethanol production via a Green Fuels arrangement – deal mired in undefined contradictions. Millions of Zimbabwean’s have spent millions of hours queuing for fuel that is in short supply. The Zimbabwe Energy Regulatory Authority ZERA is caught in between liberalising the market and proposing pump prices that match the ‘open’ or interbank market for US$. Between February 2019 and now, ZERA has ‘adjusted’ the pump price from RTGS$1.50 to RTGS$20 – a massive 1300% increase in less than thirteen months!
Minister for Finance Professor Mthuli Ncube, habitually labelled ‘neo-liberal’, yet so far, failing to ‘liberate’ the fuel crisis. President Emmerson Mnangagwa is caught in between populism and pragmatism, but this ambivalence creates complications associated with illiberal practices: for example, currency controls resulting in cash shortages, high budget deficit due to large government, and shortage of goods and monopolistic media controls that lead to what economists term ‘cartelisation’ of the fuel sector. We citizens are not clear what role the National Oil Company of Zimbabwe, Reserve Bank of Zimbabwe, Trafigura, Total, Glencore and IPG play in this complex fuel supply algorithm. What we know is fuel ends up in bonded storage, but getting it out demands several processes no doubt tied to foreign currency availability and undefined ‘allocation’ systems.
2. Causes
Many reasons posited why Zimbabwe is failing to manage fuel deficiency. Our overall take is that government has unnecessarily classified fuel as a ‘strategic reserve’ – surprisingly a narrative congruent with the deposed Rhodesia Front government. Fuel is any other commodity – an enabler of quality life and production. Its widespread usage and intensity of retail access would make it impossible for any government bureaucracy to handle. The current system is flawed, only beneficial to a few suppliers connected to government and extremely detrimental to national productivity. Our economics group observed that:
3. Free market solutions
Freedom
Our overall submission is that whilst a free market approach is the solution, it is not necessarily the only panacea to all and sundry. In the case of Zimbabwe, bizarre human interplay in whatever economic system is fraught with unlimited potential for rent seeking and arbitrage. As an example, our telecommunications sector is ‘open’ but not competitive – the very reason we have no Vodacom and MTN to offer an alternative to our insane bundle charges. However, in a free market economy, an investor in fuel service stations does it based on procurement knowledge and his/her capital ‘depth’. Thus once issued with a licence – just as a ‘licence’ to operate a supermarket or a large format printing company, the investor procures diesel and petrol from whatever source they consider competitive.
Regulation
There exists sufficient levels of regulation – ZimRA, ZERA and Standards Association – to ensure quality procured is compatible with international standards. The responsibility of ‘regulating’ prices cannot be a preserve of ZERA in a free market economy. ZERA would not have sufficient information on the nature of diversified procurement, thus they must only be restricted to licensing and quality. Like we have observed above, ‘cartelisation’ may be a function of both scarcity and monopoly, but one cannot rule out possibility of price and quantity collusion in the sector. This is where the intervention of the anti-monopolies commission is vital and telling ‘justice’ of a free market economy inevitable.
Cost
Major determinant of pump prices are storage, handling, duties/taxes, oil company/dealer margins and transportation of the product. Fuel pumps into the Mabvuku storage tanks via a 500km pipeline from Mozambique. Technically, the pipelines are state-owned which again creates supply monopoly and arbitrage opportunities. It may be that Government of Zimbabwe argues how decades of investment in this pipeline cannot be discarded. Besides – goes the argument – our country’s road and rail capacities are incapable of sustaining the 30 million-litre capacity that the pipeline handles. However, we strongly feel petrol station investors can handle their own sourcing and distribution in order to define own cost structure. The current system is rigid and beneficial only to State ‘players’.
4. Policy options and recommendations
Recently, our government ‘published’ a decree that service stations with free (offshore, Nostro) funds can import own fuel supplies, but not before blundering about outlets ‘designated’ to sell in foreign currency. From the tone of our analysis, one can tell that tinkering with a single component of the value chain will not help much. As it is, even those fuel stations brave enough to sell in local currency are attracting long winding queues. We insist on a battery of policy adjustments that influence the supply and price sides. Remove petrol and diesel from the ‘strategic resource’ category. The State can put in place own strategic reserve system using own infrastructure to enable own consumption.
Allowing private investors to have a second pipeline is sustainable in the end to offer effective competition against State companies, road and rail transport. Zimbabwean consumers are burdened with unnecessary fuel taxes and ‘levies’ – apart from duty – a bewildering array of levies that act as a disincentive to import fuel, even with free funds. Zinara road levy, debt redemption, carbon tax, strategic reserve levy, storage and handling charges relating to importation, clearing agency fee, inland bridging, storage and handling related to distribution, secondary transport. By the time one adds the oil company and retailer ‘profit’ margin, pump price is well beyond comparative prices in SADC of around or slightly below one US$ per litre. Again, no one but the State benefits from these levies with no visible improvements to road and rail infrastructure. The issue of ethanol blending does not seem capable of reducing the supply and pump price paradox other than causing more distortions and controversies.
5. Conclusion
Zimbabwe’s capacity utilisation is under threat of inadequate energy supplies. State-controlled ZESA electricity company is struggling to supply power, thus if we hope to ever improve our country’s economy, this policy proposal must not be viewed a mere subject for ideological debate. There are unfounded suspicions of the so-called self-serving intentions of free market economies, but in what quagmire has ‘State control of everything’ left our country so far? Our submission is policy reform that allows private companies to change the supply and price dynamics of fuel for the good of national production. All plans of economic revival and re industrialisation come to nought without freely available fuel supplies. Let citizens play their role in development and leave government to governance and regulation, not business. Scarcity does not protect the poor but creates privileges for the elite. Zimbabwe has adequate infrastructure to support the oil industry where procurement is liberalised with each company sourcing independently.
