Deregulation Will End Petro Politics And Satisfy Ghana’s IMF Deal On Fuel Subsidies

IMANI’s Research Assistant,
Sylvester Kofi Boahen writes
‘Fuel Subsidies are back, quietly at $3m a week and could be more’, one of the most authoritative voices in the downstream petroleum sector in Ghana said to a second query by IMANI staff this week. IMANI had been informed by operators in the downstream sector two weeks ago of the introduction of subsidies. This development is disturbing and has the potential of derailing a vital component of Ghana’s IMF’s bail out package whose full details were published by the IMF on Tuesday.

As part of remedial actions required by the IMF support programme, the Government has stated that it intends to strictly implement the existing automatic price adjustment mechanisms for utility tariffs and fuel prices to eliminate subsidies (except for items that benefit from cross subsidy in the petroleum price build-up and the life line consumers of utilities).

This is in line with the expenditure measures agreed in the home-grown policy as well as in the consultative sessions the Government held on the economy (Senchi Forum). See pages 52 and 97 of the detailed IMF package. It is hoped that with the IMF watching, the Government with the understanding of Civil Society will display the political will to coherently apply the pricing formula and eventually end meddling with the fuel market.

In spite of the processes leading to a deregulated petroleum sector in Ghana having begun 18 years, no Government within that period has succeeded in fully implementing it. Successive Governments have lacked the necessary political will to do so. Meanwhile these Governments have continued to provide subsidies purportedly aimed at the poor, though lacking the financial wherewithal to fund such a social programme. Despite the much touted independence of the National Petroleum Authority (NPA), the Government still has a fair amount of control in determining what consumers pay.

Also, the formula for pricing petroleum has always been shrouded in secrecy and technical jargons. Petroleum pricing by the NPA often times fail to impute the real time effects of fluctuations in crude oil prices, exchange rates, etc. These practices by the NPA have had deleterious consequences on the operations and financial positions of players in the petroleum downstream industry.

Real and Perceived Interests of Government and Private Sector

Governments over the years have played political games through their interference in petroleum pricing and the provision of subsidies. On the back of campaign promises and political manifestoes, several Governments have interfered in the implementation of the pricing formula, making controversial decisions in the face of contrasting market fundamentals. This situation is expected considering that petro-politics is a feature of petroleum pricing in most parts of the world. The development though, coupled with the provision of subsidies that Governments cannot finance has heaped social and economic costs on the Ghanaian citizen.

As part of efforts to deregulate the petroleum industry, the function of the Bulk Distribution Company (BDCs) was established under the National Petroleum Authority (NPA) Act 691 (2005) to encourage local participation and investment in the oil downstream sector. BDCs are to import, store and distribute refined petroleum products to Oil Marketing Companies (OMCs); invest in supply chain infrastructure to augment existing investments by government. The role of BDCs is to remove major fiscal constraints from the government’s budget. The BDCs operate in a sector which accounts for over 10% of Ghana’s Gross Domestic Product (GDP). However, the BDCs have sometimes been accused of apparent inconsistencies and skewed logic.

The BDCs have argued for removal of subsidies and upward adjustment of petroleum prices when market conditions in their opinion demanded that. That position apparently shifted when they argued against downward price adjustments in the face of a reversal in market conditions. Unfortunately, these accusations against the BDCs fail to critically consider that these are organisations are profit-oriented, but most importantly are owed several millions of Cedis by the Government from under-recoveries and forex losses. Their primary goal is to operate efficiently and profitably, as such they will support policies by the NPA / Government that culminate in a reduction in the debt owed them.

Automatic Petroleum Product Pricing Formula (APPPF)

In June 2001, the Automatic Petroleum Product Pricing Formula (APPPF) was adopted, which compared Ghana’s ex-refinery prices for ten petroleum products in cedi terms during the preceding 30 days to corresponding prices for those products in northwest Europe (plus shipping and port charges), and computed the total value difference between the two (using product consumption volumes for the current month in Ghana).

The formula was deemed to be triggered, when the weighted value of domestic products diverged by more than 2.5 percent from the equivalent value based on European prices – “import parity”. Some of the issues that lead to changes in the various components of the pricing formula include crude oil prices, the exchange rate, weather conditions on the high seas, efficiency and financial strength of Tema Oil Refinery (TOR), Oil Marketing Companies (OMCs) and Bulk Distributing Companies (BDCs), and government’s fiscal regime (taxes and subsidies). The National Petroleum Authority (NPA) as part of its mandate is to monitor ceilings on the price of petroleum products in accordance with the prescribed petroleum pricing formula.

The APPPF was set up to achieve three specific goals, namely:

· A full pass through of increases in prices of petroleum in international markets;

· A full pass through of depreciations in the cedi exchange rate, and

· Cross-product price subsidization.
The first two goals were intended to protect the integrity of the Ex-refinery price by allowing it to be adjusted automatically in a transparent and regular manner devoid of political manipulation. The TOR recovery Levy was introduced to pay for accumulated debts at TOR which, threatened to collapse the country’s banking system. The Cross-Subsidization Levy was to mitigate the impact, of any required upward price adjustment, on the poor, as well as to encourage the increased use of LPG over wood fuels and charcoal for reasons of environmental conservation.

The principal criticism of the APPPF has been the inconsistent application by the NPA, largely blamed on political interference. This development though has led to debt accumulation from under-recoveries and its concomitant effects on price distortions. When the price of crude oil shot up to over $120 per barrel, it affected the prices of petroleum products in the country. However, when crude oil prices hit an all-time low in five (5) years, selling at $47 per barrel, Government announced a 10 percent reduction in prices. The NPA claimed it used the over-recoveries to defray debts from under-recoveries. Unfortunately, such incoherent practices do not inspire public confidence in the purported integrity of the pricing formula.

Demerits of Regulation and Subsidisation
In Ghana, most subsidy programmes instituted by the government have the poor as intended beneficiaries. However, poor targeting has rendered them ineffectual. For petrol and diesel (not including kerosene), the share of subsidies that in effect accrues to the poor is a paltry 2.9%. These petroleum products are used as intermediary inputs for a wide range of activities, including transportation, and as such the share of the subsidies that indirectly reach the poor is likely to be marginally higher. Kerosene is the only petroleum product that is consumed in a substantial way by the poor, that is, 20.7% of kerosene subsidies reach the poor. Though, comparatively better than other petroleum products, the yawning gap of undercoverage depicts an unwise usage of resources. Similarly, $80 million of the $110 million government subsidies on Liquefied Petroleum Gas intended for rural communities were instead used in urban areas. In the second quarter of 2014, the Government spent $85 million in fuel subsidies. Meanwhile, the provisions of basic amenities remain a challenge, and a bane to the livelihoods of households and businesses. The real cost of subsidies is the foregone spending on critical infrastructure and social projects, which could have stimulated economic growth and job creation.

Government’s constant interference in the petroleum sector has heightened its exposure to additional liabilities under the current pricing regime. The Government owes the BDCs about GHS2.1 billion. This debt profile includes price under-recoveries, forex exchange under-recoveries and Real Value Factor (RVF). The later debt profile refers to the financing cost that BDCs incur for bearing the price under-recoveries. Although, the Government has settled the price under-recoveries, the forex under-recoveries and RVF still remain. This development portend the imminent shortage of petroleum products in the immediate short term, with its attendant social and economic costs. This development is unsustainable.

Merits of Deregulation
Market pricing of petroleum products would allow consumers to benefit from cost reductions, necessitated by oil price falls. The era of asymmetrical pricing would be a thing of the past, as Government can no longer play politics with the prices of petroleum products. Moreover, competitive pricing from industry players will benefit consumers as they stand to enjoy higher service standards.

Allowing full pass-through of market prices will stimulate economy and efficient use of petroleum products, as consumers adjust their adjustment due to higher prices. This will ultimately save the country money in terms of reducing oil consumption and imports.

Firstly, de-subsidisation will release badly needed funds for Government to undertake critical capital projects that will bring about required socio-economic development. The Government will also have less financial headache as it unshackles itself completely from the risks associated with industry operations.

Is Government really committed to the Cause?

In March 2015, the Deputy Minister of Petroleum, Mr. Ben Dagadu was quoted as saying that the Government had set up a committee to discuss the option of allowing importers and marketers of petroleum products to fix their own prices by the end of year. This was part of a deregulation policy aimed at bringing in more private sector players. The Governor of the Bank of Ghana stated it will no longer guarantee the supply of forex to the downstream industry as was the convention. The Minister of Finance on the floor of Parliament also stated that forex losses will no longer be entertained by the Government. It would seem that these actions of Government are meant to usher in the era of a fully liberalized industry. However, there is growing skepticism from the quarters of the Chamber of Bulk Oil Distributors about Government’s commitment to fully disentangle itself from the industry, as reports indicate the quiet introduction of price subsidies at $3 million per week.

Conclusion
The Government’s precarious financial position as evinced by Moody’s recent downgrade, suffocating debts and the International Monetary Fund (IMF) assistance is incontrovertible proof that the Government must cease its unsustainable petroleum subsidy policy. It is mind boggling for a cash-strapped Government to subsidise petroleum products a. There is ample evidence to support the fact that petroleum subsidies are misplaced and ill-targeted. The ordinary Ghanaian will be better served by Government channeling funds to provide an improved and efficient mass transportation system rather than the mindless pursuit of unsustainable susbsidies.

The politically expedient interference in the automatic adjustment of petroleum prices must end. The Government cannot have its cake and eat it. Industry forces must be allowed to interplay, such that no stakeholder is short changed.

An end to the protracted deregulation process is long overdue. The Government’s growing fiscal challenges must not be allowed to drag an entire industry as critical as the petroleum downstream into an economic abyss. The industry is gradually heading toward a price – liberalized environment. Markets must determine how pricing should work; and competition should be allowed to drive what prices consumers will pay at the pumps. All stakeholders should be ready. The era of price liberalization is here, de facto.

Sylvester Kofi Boahen is IMANI’s Research Assistant.