The full deregulation of the petroleum downstream sector has ended the litany of heated political debates on fuel pricing and subsidies on the airwaves, newspapers and on the social media.
The politics that used to characterise the increment in the prices of petroleum products have disappeared since the commencement of the full deregulation regime in the country’s petroleum downstream sector, some months ago.
Even when there is a change of government from National Democratic Congress (NDC) to New Patriotic Party (NPP), debate on fuel pricing is missing.
The deregulation of the petroleum sector has been on the drawing board of various governments in Ghana for decades but the fear of implementation has now been buried totally by the erstwhile John Mahama-led government which was defeated by Nana Addo Dankwa Akufo-Addo of the New Patriotic Party (NPP) in the 2016 election. There are indications that the new government under President Akufo-Addo would allow the full deregulation to continue.
This followed the historic passage of the National Petroleum Authority (NPA) (Amendment) Bill, 2015 into law on 15th March, 2016 by Parliament.
The coming into effect of this law means that the government has fully adopted a full deregulation policy which halted its continuous intervention in the pricing of petroleum products in the country.
The new law therefore ensures that the full cost recovery and uniformity in pricing of petroleum products would be determined by the market and competition.
Under the previous law which has been amended, the National Petroleum Authority had the mandate to price petroleum products in the country.
The NPA Act which was passed in 2005 introduced private participation in the downstream petroleum business allowed Oil Marketing Companies (OMCs) and other private companies to import petroleum products which was been priced by government.
The NPA, the regulator of the country’s petroleum downstream industry started its first step towards the implementation of Petroleum Product price deregulation on 16th June 2015.
Per a circular from the NPA, all OMCs were requested to announce their ex-pump prices for petroleum products and display same at their retail outlets.
NPA since the effective date for the deregulation has been monitoring the application of the Prescribed Petroleum Pricing Formula to ensure that all Petroleum Service Providers apply the formula in the right way. Defaulting OMCs are supposed to be sanctioned by the NPA.
Sharif Mahmud Khalid, Director of Research at the Energy Policy & Research Institute (EPRI), an Accra-based energy policy think-tank is confident that the deregulation has the potential of ending frequent shortages of fuel in the country, thereby maintaining availability of fuel all year round.
“If the deregulatory regime is effectively managed, persistent fuel shortages and fear of long queues at pumps stations will be a thing of the past”, he maintained.
Fuel subsidy regime
It is evident that the fuel subsidy regime in Ghana created huge debts and deprived the OMCs the needed capital for effective and sustainable business operations. For instance, as of 23th May 2016, BDCs claimed that the government owed them an amount of GHc2.5 billion which made it difficult for them to get loans from the banks.
The amount is largely due to forex exchange losses, price under recoveries, higher interest rates and fuel subsidies. It is therefore clear from the government’s huge indebtedness to the BDCs that securing letters of credit from the banks for petroleum imports will be extremely difficult for OMCs.
The debt owed to BDCs posed liquidity challenges for the BDCs resulting in supply constraints and thereby creating shortages and smuggling of petroleum products, Dr Razie lObeng-Okon, renowned economist told African Eye Report.
To this end, the deregulation is important not only to clear the outstanding debt of government to the BDCs but also to ensure that government no longer subsidises the cost of fuel to pile up additional domestic debt, according to him.
Ghana’s IMF programme recognises that some decisions like removing subsidies on petroleum products through deregulation are hard to implement during election years which is why the fiscal adjustment for Ghana is frontloaded in 2015.
“This means that many of the hard decisions would have already been taken before the election year. No wonder, there was a significant push for the successful implementation of the deregulation which is currently paying off. 2015 has witnessed lower prices of crude oil which have made the implementation of the Special Petroleum Tax also feasible even with the deregulation”, Dr Obeng-Okon who is also a Public Accounting lecturer at GIMPA said.
BDCs
The BDCs have been successful in convincing government and the NPA to remove the Price Stabilization Margins of GH ¢0.3720 on super and GH¢0.2812 on diesel per liter when the deregulation was about to start on June 16, 2015.
Since the deregulation started the BDCs have given the OMCs very tight credit periods within which they are expected to sell and pay. Some of them provide good discounts to the OMCs willing to pay cash on demand.
Indeed, the credit days given to OMCs have improved by over 50%, reducing from more than one to two months to about one to two weeks credit days. Thus, the current liquidity position of the BDCs is improving but there is still a huge backlog of over-due balances from government and OMCs which have created a debt-trap for some of them. A number of them would have gone out of business without the deregulation.
“Competition has become very intense within the BDCs market space because of differences in prices depending on the sources of import by the BDCs. This has helped the OMCs to bargain well and to purchase more from those with better ex-refinery prices”, Dr Obeng-Okon further said.
That notwithstanding, OMCs must be careful not to buy poor quality petroleum products because some of them are chasing only on the basis of price. The country’s regulators especially the NPA must continue to monitor the quality of petroleum products imported so that competition does not breed poor quality.
No more blame games
Prior to deregulation, the OMCs used to blame the NPA for the reduction of margins but the deregulation regime has witnessed lower margins by some OMCs than the pricing regime under the NPA before deregulation.
The preceding weeks to the deregulation, the NPA reduced the total retail margins from over 9.00 percent in April 2015 to about 8.00 percent just before the deregulation.
Currently, some OMCs are making just about 7.00 percent or less total margin on the ex-pump price to drive volumes.
Margins are rather shrinking among the OMCs because buyers have become so sensitive to price than quality. OMCs can no longer blame the NPA for the determination of total retail margins even in the face of increasing ex-pump price. Competition and the forces of demand and supply are now the main determinant of the price mechanism.
Liquidity positions of the OMCs have become very tight as most of them now have a shorter working capital cycle because the BDCs now require earlier payment than before. Some OMCs had to put a stop on using the BDCs monies to fund the construction of service station because working capital has become very essential for their survival.
To make matters worse for the OMCs, the Special Petroleum Tax (SPT) and OMCs’ Guarantees to GRA Customs Division have become a further drain on the liquidity of the OMCs. Usually, OMCs are expected to pay the 17.5% SPT on their loadings within two weeks whether or not they have sold the products.
Sometimes, taxes are paid on unsold products and this is very worrying. The payment of SPT also impacts negatively on the guarantee ceilings of OMCs with Customs Division. The GRA needs to be sensitive to the plight of the OMCs on the flexibility of enforcing the guarantees before loadings if the deregulation is to be successful.
Price liberalisationopens up market
Khalid explained: “Price liberalisation also opens up the market for competition. It enables oil stakeholders and private oil marketers to import and market petroleum products that would in the long run be beneficial to the consuming public”.
Following government’s deregulation in the telecommunication industry, there has been intense competition leading to a reduction in call tariffs and improved telecom services.
Previously, the price regulatory regime deprived OMCs the needed financial muscle and capacity to be competitive in the downstream market. But the deregulation which has been going on for over a year would create a level playing field to attract new entrants and private investors into the sector.
Fuel smuggling
Alhaji Mustapha Iddrisu, Energy Policy Analyst at the Energy Policy &Research Institute (EPRI) added that more so, due to the low prices of the petroleum products under the subsidy regime, smuggling of fuel to neighbouring countries was on the ascendency.
For instance, while a liter of gasoline costs $1.02 in Ghana, it costs about $1.17 and $1.19 in Ivory Coast and Burkina Faso respectively. This differential attracts some people to smuggle in the fuel commodities into those countries.
He observed that smuggling has therefore become an obstacle associated with the downstream petroleum sector in Ghana. Border towns such as Bawku in the Upper East Region, Elubo in the Western and Aflao in the Volta Region have therefore become hubs for smuggling refined petroleum products across borders into neighboring countries. These cities are regarded as the most lucrative fuel smuggling centres in the country, according to him.
“Smuggling therefore costs the country dearly in terms of fuel loss and decline in revenue. A main aim of the liberalization policy is to help eliminate the incidence of these smugglings that is causing the country so much. Price liberalization therefore becomes disincentive for smugglers”, AlhajiIddrisu stated.
Furthermore, the removal of fuel subsidy has allowed the government to invest the subsidy money into other sectors of the Ghanaian economy.
The Final Consumers
Competition among the BDCs and OMCs has led to reduction in margins and therefore lower prices for final consumers of petroleum products. Some vehicle owners and commercial drivers now shop around to buy from OMCs with the lowest prices. Obviously, the final consumer is the winner of the deregulation of petroleum prices.
The deregulation is beneficial to government because it ensures the paying of the outstanding debt of government to the BDCs as well as ensure that government no longer subsidizes the cost of fuel.
It is also in line with the Ghana’s IMF programme which recognises the removal of subsidies on petroleum pricing through deregulation.
Under the deregulation, the BDCs have been successful in convincing government and the NPA to remove the Price Stabilization Margins from the pricing formula.
The deregulation has also improved the liquidity position of the BDCs through the reduction of credit days for the OMCs.
Competition among the BDCs has reduced the ex-refinery prices for the OMCs and thus lower prices for the final consumer. In spite of the benefits of the deregulation, liquidity challenges continue to impact negatively on OMCs due to short credit days from BDCs and the payments of SPT within two weeks on supplies.
The regulator needs to monitor the quality of petroleum products as consumers shift their attention to just the price.
On other hand, the dollar which is the ‘de facto’ determinant in the pricing of petroleum products needs to check to ensure that it is stables it is now.
A weaker local currency therefore means further increments of fuel prices and vice versa. It is therefore, suggested that managers of the cedi should take stringent measures to stabilize it in order to prevent perennial increments as a result of foreign exchange losses.
Ghanaians will benefit tremendously if the forex is managed more effectively. It is sad to note that recent price hikes are as a result of the wobbling nature of the cedi. Government should therefore put prudent measures in place to effectively strengthen the local currency.
Another important consideration has to do with the issue of transparency in the price build up. The NPA should have an active role in the deregulatory exercise. This is absolutely necessary in order to prevent cartels emerging among the OMCs. Much as it would create economic sanity in the downstream sector, it could also be an avenue for profiteering and exploitation by them.
By Masahudu Ankiilu Kunateh, African Eye Report
