A couple of months ago during the unstable political situation in Mozambique, it was reported that at least three Malawian fuel tankers were burnt. The potential disastrous consequences on Malawi’s economy of the disruption of fuel imports due to the conflict were massive. Fortunately, the situation has not escalated; however, the strategic lessons from the incidents for the country are immense.
The critical role that fuel plays in the lives of Malawians and the economy cannot be underestimated. These products are crucial to the economy in terms of transportation of goods and performance of the industry in general. It is, therefore, crucial that the arrangements surrounding the fuel importation and distribution is critically analysed to ensure that risks are clearly identified and mitigation plans are put in place.
Transport costs account for over 56 percent of the value of the country’s exports. This means that any strategies to reduce transport costs make Malawi’s exports very competitive. The resultant improvement in the competitiveness of the country’s exports as well as the reduction in the cost of goods sold domestically since fuel price contributes more to the prices of goods in the local market will lead to the improvement of the welfare of the people. It is, therefore, common sense that these reduced transport costs could reduce inflation as well.
The Automatic Pricing Mechanism (APM) that is used in Malawi would give the mistaken belief that fuel prices are solely dependent on the international oil prices. Not necessarily, that is why, for example, while the international prices of oil have drastically reduced, the price of fuel in the country has not reduced by the same proportion. This is because in additional to the international oil prices, the value of the Malawi kwacha against the US dollar and the distribution arrangements and marketing structure in the country has a much greater contribution to the price determination. This is because transport costs contribute to 60 percent of the fuel import bill and the APM uses the In Bond Landed Costs (IBLC) in its calculation of the five percent trigger point for price adjustment.
In Malawi, fuel is regulated by the Liquid Fuels and Gas (production and supply) Act, Cap 50:03 of the Laws of Malawi. The Act provides for the production, blending, extraction, conversion, importing, transforming, transporting, storing, distributing and selling of liquid fuels and gas in a liberalised market. Among others, the objectives of the Act include ensuring that the liquid fuels and gas supply in Malawi are adequate, reliable, efficient and economical for the country and the consumers and eliminate discrimination or preferential treatment of any participant, and prevent monopolistic control of any segment of the chain of supply.
Unfortunately for Malawi, the fuel arrangements while described as oligopolistic, they are actually monopolistic in nature, and everyone knows that monopolies and oligopolies are inefficient and run counter to a liberalised economy which Malawi claims to be. In Malawi, the importation, wholesaling and retailing of fuels has the same players directly or indirectly involved in the supply chain. Currently, all of the country’s fuel is imported by Petroleum Importers Limited (PIL), a joint venture of Petroda, Puma Energy Malawi, Engen Malawi and Total Malawi each with 25 percent of the shares and imports at least 80 percent of the country’s fuel.
The members of PIL despite having import licences do not import any fuel and source their supplies from PIL in order to enjoy economies of scale since PIL, as a bulk purchaser, is able to negotiate lower prices from suppliers. These same oil marketing companies (OMCs) also own about 95 percent of distribution and retail network of oil in the country, practically, the whole oil value chain from importing to retailing is owned by the same foreign companies.
Despite all these economies of scale, PIL does not have any reserves of its own; this is a very high risk for the economy bearing in mind that Malawi’s monthly fuel demand is 22 million litres while the total storage capacity of all the OMCs is 21 million litres and can last only for less than 20 days in case of any shock that would disrupt the importation of fuel. A landlocked country like Malawi should at any one time have a 90-day fuel stock as strategic reserves.
The primary role of government should not only be to address the cost implications of fuel but also the security of supply of fuel into the country in case of a shock like the Mozambican case. The current arrangement is very high risk and detrimental to the economy and consumers, and it puts pressure on the exchange rate, yet these companies keep on externalising their dividends. It is time someone took decisive actions in the corridors of power!