Statement On Deregulation And Pricing Of Petroleum Products

The Minister for Finance and Economic Planning, Hon. Kwadwo Baah-Wiredu, today presented Government's statement on Deregulation and Pricing of Petroleum Products in the country.

1. In his address to Parliament on the State of the Nation delivered on 3rd February 2005, His Excellency the President of the Republic had this to say about petroleum in Ghana, in the light of the global increases in crude oil prices which have become common knowledge:

2. "This year government will take a decision on the deregulation of the petroleum sector. The continued handling by government of the sector makes it difficult to respond appropriately to market forces when necessary. At the moment the unrealistic pricing makes our petroleum products the cheapest within our immediate neighborhood and prone to smuggling. Mr. Speaker, the general laws of economic reality apply to Ghana and we cannot continue to pretend otherwise. Deregulation will free government budgetary resources allowing it to cut down on borrowing and to increase allocations to vital social services. It will also allow the private sector to assume the role of a service provider within a well regulated environment."

He continued to say:

3. "Initially, this policy is bound to cause some shock to the system. In the short term, it is likely to result in a rise in inflation. However, several studies have been made and we believe that with goodwill and sound management, whatever problems will be encountered within the short term will be surmounted, and that the economy will be the healthier for this policy."

4. This is a basic backdrop for deregulation in Ghana and the adjustment in petroleum prices which constitute the essence of our meeting today.

DEREGULATION

5. The Government announced a policy of deregulation of the sector in the 2004 Budget with a view to addressing the fundamental problems of the petroleum industry in the country.

6. The deregulation of the petroleum sector aims at removing the inefficiencies in the sector by allowing private sector participation in the procurement of oil, which has previously been limited to the Tema Oil refinery. Under the deregulated regime, the private sector is now allowed to import finished petroleum products (about a third of total oil demand) into Ghana through open and competitive bidding. The first such tender for the import of finished petroleum products took place in March 31, 2004.

7. The opening up of imports of refined petroleum products by private enterprises is a step towards eventual full liberalization of the sector. The private sector will be encouraged to participate fully in the importation of crude oil for processing by TOR for sale to the local market and for export.

8. Government will be putting in place the legal and institutional framework for the new petroleum pricing regime. Draft legislation governing the deregulation of the petroleum sector will be submitted to Parliament for passage into Law.

9. Under the framework, the Oil Marketing Companies (OMCs) and other distributors will be able to set retail prices for petroleum products according to a pricing formula and without prior review or approval by any other authority. The pricing system will have parameters set to ensure that all costs and applicable taxes are fully recovered.

10. The government will continue to be concerned that the poor should have access to essential petroleum products (especially kerosene) on relatively favorable terms. This objective will be effectively achieved through careful structuring of petroleum duties and flexible formula-based pricing than it has been under the variable cross-subsidization inherent in TOR's pricing regime. The duty structure being applied for the new pricing regime has taken into account the findings of a poverty and social impact assessment study.

11. The activities of the OMCs and distributors in the industry will be subject to oversight by an independent authority to be known as the National Petroleum Authority (NPA). The NPA will have the power to intervene if the pricing formula is not applied appropriately. . The oversight body will ensure that consumers and the general public are also protected in the pricing regime.

12. The government has been engaged in consultations with all stakeholders in the petroleum industry and the public can be assured that the best interest of the Ghanaian will be protected under the deregulated market system.

13. As the government frees itself from the petroleum sector, resources hitherto used in subsidizing petroleum products will be freed and channeled into other priority sectors including health, education, agriculture, rural development etc.

14. National institutions engaged in the petroleum sector such as the TOR will be revamped through private capital infusion to enable them operate efficiently and competitively.

PETROLEUM PRICING

15. It is the end-product of government's' deregulation exercise that market forces will determine the prices of petroleum products under the eagle-eye superintendence of the NPA. Nevertheless, government, mindful of its initial responsibilities to shepherd the process to success, is currently working closely with the National Petroleum Trade Board (NPTB). In the light of the existing pricing formula, the following prices have been arrived at with immediate effect:

1. Premium 30,OOO/gallon 2. Kerosene 24,OOO/gallon 3. Gas Oil 26,400/gallon 4. LPG 5, 700kg 5. Premix 21 ,OOO/gallon 6. Marine Gas Oil 21 ,OOO/gallon

TRANSPORTATION CHARGES

16. Changes in the prices of petroleum products are mostly transmitted to the general public through the charges that are levied by operators of the transportation system. On the previous occasions of major price adjustments. in petroleum product prices, there had been a degree of disorder in this transmission of the petroleum cost increases, resulting mostly in the general public having to pay more than was justified by the increase in the cost of providing those transport services.

17. It has been agreed on all sides that the increases in transport charges will be pegged at the level of 30%. In arriving at the increases, the consultative team, comprising all road transporters and the government, took into account, vehicle operating costs, as well as the impact of transport fares on the economy in general.

18. A schedule has been prepared by the transport operators which will be publicized throughout the nation. This schedule provides a model for the transportation cost adjustments that should apply nationwide. Government therefore expects an orderly rearrangement of charges so that there is fairness throughout the system. We must thank the transportation industry and associations for the spirit of national solidarity with which they took part in the multi-lateral- consultative process which constitute a hallmark in good governance.

THE IMPLICATIONS FOR COST OF LIVING AND WAGES

19. With the increase in prices of petroleum products we are aware that cost of living in the country will go up. Government is not oblivious of the effect of this on the population especially the poorer sections of the society. Government has therefore decided to take these measures to reduce the burden of the price increase on society. 20. Wages and Salaries - Government is in consultation with all interested groups especially the TUC, the Forum and the Employers Association to negotiate and adjust wages and salaries of all workers. The Ministry of Finance will announce the details in his Budget Statement next week.

21. Public Transport - Government will increase the number of the new mass transport buses from the current number of 354 to about 950 and spread them all over the country.

22. Government has decided to absorb the fees paid by parents at the primary and Junior Secondary Schools.

23. Government will accelerate electrification of rural areas and improve electrification in other built up areas in urban centers.

24. Government will introduce improved high purchase/credit systems for workers to help them purchase essential equipment.

CONCLUSION

22. It is our great honour to present to you a comprehensive solution to the complex and serious issues facing this nation as a result of recent developments in the international petroleum m market.

23. We must place on record the appreciation of the responsible political authorities for the unstinted spirit of national solidarity that has been displayed by representatives of the participants in the petroleum industry, the representatives of organized labour, and the private sector, in arriving at a consensual model that will permit all of us to work out appropriate responses to the extremely difficult situation that confronts Ghana.

Thank you.

God bless us all.