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'Zimbabwe's fuel pricing structure is flawed, uncompetitive'

10 Jul 2020 at 07:11hrs | Views
AS the country reels under acute fuel shortages, compounded by the depreciating Zimbabwean dollar and limited foreign currency, senior reporter Tinashe Kairiza (TK) this week spoke to National Oil Infrastructure Company (Noic) chairperson Daniel Ncube (DN, pictured) on how the entity is addressing the crisis.

Ncube spoke against the ethanol blending monopoly enjoyed by private company Green Fuel and the forces which have scuttled Zimbabwe's plans to build a second fuel pipeline that could have transformed the country into an energy hub. Below are excerpts of the interview:

TK: The bulk of Zimbabwe's imported fuel ends up being sold on the black market. What is causing this problem and what measures have you put in place to address it?
DN: The solution here lies in the pricing structure. If we are going to sort out the pricing structure, then we can kill the parallel market. You will remember the period when we were selling fuel for ZW$25 per litre yet the black market rate was way above.

What would happen is that the fuel would be delivered at the service station, and then they would just sell fuel to a few motorists. The rest would be taken to the black market where it was sold in United States dollars. This dual pricing encourages fuel dealers to hedge one against the other. This is where the problem lies.

TK: And what is the solution to that?
DN: The solution can only lie in the convergence of the pricing structure, the Zimbabwean dollar and the US dollar. When they converge, there will be stability. We will see how the foreign currency auction system is working. When it started, it was around US$1:ZW$57 now it is around US$1:ZW$65, so it is slowly creeping to a stable level. As soon as we hit that stable level, then it all hinges on how successful the auction system will work.

As far as we are concerned, we would like to see this as soon as possible because the situation as it is now is totally unsustainable. At one time, I suggested that maybe we should have the auction system twice every week so that we can build confidence around it. But it is still being carried out once every week. If we were to do it on Tuesday, then on Friday (it would be better). Then on Friday, those with fuel will not have to hold it anticipating that maybe the rate next week will go up. That way, it will become easier to manage their risk. Let us just see what is going to happen in the next month. That is the key.

TK: Why is Zimbabwe still insisting on blending petrol yet the high cost of ethanol has rendered this unsustainable?
DN: There are many reasons for that. I think, as I once said to the energy parliamentary portfolio committee, blending is a requirement. It has to remain like that. What is important is to interrogate the pricing structure of ethanol. Why is it so high? Why is it not 50% of what it is? But the problem is that the ethanol industry is dominated by one player. So the entity can actually dictate the price. We, as Noic, are in a joint venture with Tongaat Hullet to produce ethanol as a by-product of fuel. Yet Green Fuel dedicates their sugarcane to ethanol only. They produce larger volumes of ethanol than we do.

TK: What is being done to curtail the effects of that monopoly?
DN: Right now, our thinking going forward is that we are trying to see if we can expand our sugarcane fields under our partnership with Tongaat. As a matter of fact, we were in the Lowveld last week to see some of the fields. That way, we will be a critical player in the production of ethanol. The way it is now, it is unsustainable, truly speaking.

The other component is that we cannot be solely relying on fossil fuels. The world is changing, moving to green fuels because of the carbon footprint. Right now, Sweden imports ethanol. In actual fact, government realises that. We have been identifying some more irrigation schemes which span 100 000 hectares which are going to be implemented at Kanyemba. This also involves bringing in other players so that they can produce sugarcane at a large scale. It is not ideal to just have two players. We want to open up the sector so that at least you can negotiate. Negotiating with one player who has a big chunk of the market, you will be doing it at a disadvantage.

TK: Do you think the Green Fuel monopoly is being protected by a higher authority? DN: Give Green Fuel the credit in that they thought forward. This is forward planning. They had to invest in this thing. You can see the trends, market trends. If you take the risk, the returns are high. The company was able to have a good vision, and
they saw that this would yield dividends. TK: In your view, was it wise for the government to legislate for a monopoly on fuel blending, does this not violate consumer
DN: Fuel is a strategic commodity. So blending becomes a strategy. Government has to intervene in that respect. What happens if you bring your car and then you say I do not want to use blended fuel? Because of the strategic nature of the commodity, government has to put measures to ensure that its policies are fulfilled. I do not know what other countries are doing. But that is the way we see it.
This commodity is strategic in terms of security. Government had to come in with a subsidy in order to cushion the motoring public. If government feels there is need to subsidise, it will subsidise. This is a deliberate intervention. But what it means is that you are selling below cost. It is not sustainable in the long run.

TK: The fuel blending cost structure has never been revealed, are motorists getting a fair deal in terms of the pricing of ethanol?
DN: The cost structure is revealed by Zera (the Zimbabwe Energy Regulatory Authority). It is only fair, because the public is buying. Sometimes they are buying at a premium, sometimes at a subsidised price. All that information should be availed to the public to create confidence.

TK: Why is Zimbabwe not importing ethanol from countries where it is cheaper?
DN: Again, I would rather refer that question to the Ministry of Energy. It is a
good question in terms of ethanol being cheaper in Brazil where it is around 25 US cents per litre. But it is rain-fed, it is not irrigated. We should encourage local industries to produce.
If you are capable of producing a commodity locally, surely, a certain percentage of the local component has to be incorporated. The pricing structure also has to be as competitive as possible. We have to interrogate the pricing structure.

TK: Government has defended ethanol blending as an import substitution strategy. How much is Zimbabwe saving?
DN: We actually save quite a bit of money. But I cannot give the figures now. But let us remember, even some of the ethanol producers are agitating to be paid in US dollars, so there is another sting in the tail there.

TK: How safe is blended fuel to vehicle engines?
DN: We are blending at almost 20%. Sometimes during the rainy season we come down to 5%. All new vehicles have catalytic converters. New vehicles allow you to even blend at higher levels, even up to 60%. Motorists have no reason to be unsettled. Blending at 20% has no effect at all on the health of the engine. It has no effect on the combustibility of fuel. It remains at optimum levels. People were claiming that with blended fuel, you get fewer miles. That is unfounded.

TK: When Noic blends petrol, the resultant commodity is sold in US dollars and Zimdollars. Why is it that service stations, which sell in US dollars, do not even reflect the Zimdollar component?
DN: It is a good question, but only for Zera to address. These guys, even if they use free funds, they blend it before it is sold. There is a local component which must be passed on to the motoring public. Zera should be able to explain that question.

TK: Noic is accused by the Indigenous Petroleum Association of giving preferential treatment to foreign companies when allocating fuel. What is your comment on this?
DN: The fuel industry, like any other industry, has several players. So some will cry foul, others will be happy. We must recognise that there are local players and they must be given preferential treatment. They need to be supported to grow. They provide a service and employment. We do not deliberately discriminate against them. If we are doing that, it is an oversight on our part. We give them fuel.

TK: How are fuel imports financed, how much fuel do we consume per month?
DN: Ideally, we need about six million litres per month. The letters of credit are generated by the central bank. They will have the details of how much they are setting aside for fuel imports; where the money is coming from? It comes from mobilisation of foreign currency inflows in the country.

TK: What would be a sustainable solution to Zimbabwe's fuel problems?
DN: A sustainable solution would be to grow the economy. Right now we have a suppressed economy. We want the economy to trend upwards. When we have the economy ticking, it means we are in a position to mobilise money.
The other challenge we have is sanctions. Trust me, it is a big problem in terms of generating letters of credit. They have to be confirmed by a prime bank. Those prime banks are in the West. We only have a few banks which have confirmed our letters of credit. JP Morgan will not confirm as well as Manhattan. Do you think HSBC will confirm? The answer is no. Those are big players. We are restricted to a few banks which are loyal to Zimbabwe. It is a big handicap.

TK: To what extent is the issue of Western sanctions a big handicap?
DN: It is actually a huge handicap. Confirmation of letters of credit is problematic. The Reserve Bank of Zimbabwe (RBZ) does not have enough space to move. We are highly constrained.

TK: Do you think it is wise for the government to finance fuel imports or it should be left to private players?
DN: In an ideal situation, the state should open, but because right now if the state does not intervene, how do we get our fuel? Most of our depots are bonded warehouses. Traders bring their fuel, in tankers for example, and put it in tanks at Msasa and Mabvuku. But we cannot access that fuel unless there is a letter of credit. In our situation, private players are not in a position to raise those letters of credit. Government has to step in. It is unavoidable.

TK: Let us talk about the pipeline, who owns the infrastructure and who is responsible for managing that infrastructure?
DN: Let me explain the structure of the pipeline. The pipeline was owned 50% by government. That is the stretch from Feruka to Harare. The other 50% was owned by Lonmin, previously known as Lonhro. So we have since bought the 50% from Lonmin. The pipeline is managed by a company called Pipeline Zimbabwe, which is a subsidiary of Noic. You pay as you use the pipeline. We have full control of the pipeline as it stands. The usage rates currently stand at seven US cents per litre.

TK: There is talk that it makes sense for Zimbabwe to construct a second fuel pipeline. Is this something you are working on?
DN: We are actively pursuing that now. It is a very good idea. You cannot rely on one pipeline. If you have two pipelines, you can create a fuel hub in Zimbabwe. We will be in a position to feed Zambia, Democratic Republic of Congo (DRC), South Africa and Botswana. We have the storage capacity here standing at almost 500 million litres. We have the biggest storage facilities within the region. As long as we make our pricing structure attractive so that a truck does not bypass Harare and go all the way to Beira to collect fuel for DRC; it does not make economic sense.

TK: Is your board prioritising the construction of the second pipeline?
DN: We should have been in Mozambique last month to discuss this had it not been for the (Covid-19) lockdown. We want to do a public-private partnership (PPP).The other partners will bring in their finances and recover their money over time. They will literally be printing money with the pipeline.

TK: Which company are you negotiating with in Mozambique?
DN: I cannot say at the moment. I cannot reveal that.

TK: What would be the cost of laying this pipeline?
DN: We are looking at about US$800 million, all the way from Mozambique to Mabvuku.

TK: I understand at some point you were negotiating with Mine, Oil and Gas Services (Mogs), a South African company, which wanted to construct a second pipeline. Are you still negotiating with Mogs?
DN: We are no longer negotiating with Mogs. We had clear construction timelines. It was going to take two years to construct the pipeline. We had another idea. We were planning to bring in another pipeline carrying gas at the same time with fuel. The gas pipeline would terminate at Feruka. The fuel one would come all the way to Harare. That way, it will increase our energy mix. In that way, we can have a gas-fired power station which can actually produce 600 megawatts.

TK: How true are claims that plans to construct a second pipeline have faced fierce resistance from political forces? Has it not taken the country too long to widen its pipeline options?
DN: My answer would be yes, we have taken too long. We have been dragging our feet. Let me say this. Yes, there is some resistance. While we own the pipeline from Feruka to Harare, the Mozambicans own the pipeline from Beira to Feruka. We are a captive market. Naturally, they are not excited about our plans. They really have been making good money out of us. So you have those sentiments coming out. When you have a big project of this nature, you are bound to face these sentiments. When you are in this field, remember you are dealing with huge volumes. Big volumes mean big investments and huge sums of money.

TK: We are currently experiencing the Covid-19 pandemic. Why is it that Zimbabwe has failed to take advantage of low international fuel prices and replenish its stocks?
DN: The lockdown period caught everyone unawares. It affected our industries' foreign currency inflows. That militated against our capacity to stock fuel. The general trading between countries also decreased, and it affected us.
We also had some structural problems which we needed to address. When you have a number of big players in the industry, those ones can also discuss among themselves and the prices will not vary too much. I am not saying that is what happened, but it is not something that can be ruled out. The whole fuel structure has to be looked at in terms of how we bring fuel into the country. It is something we are working on.

Source - the independent
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