Over a year after the application of the Prescribed Petroleum Pricing Formula (PPPF) in the petroleum downstream sector, the litany of heated partisan political debates over fuel subsidies and prices on Ghana’s airwaves and in the social media seems to be taking a bow.
At present, the hot political arguments that used to characterise the increment in the prices of petroleum products and subsidies are reducing since the commencement of the full deregulation regime of the petroleum sector. But the debates are not totally over yet.
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 incumbent National Democratic Congress (NDC) government. This followed the historic passage of the National Petroleum Authority (NPA) (Amendment) Bill, 2015 (Act 691) into law on March 15 by Parliament. The coming into effect of the amended Act means that the government has fully adopted a full deregulation policy which takes off its hand in the pricing of petroleum products. The new law, therefore, seeks to ensure that full cost recovery and competitive pricing of petroleum products is determined by the market, using the PPPF.
Under the previous amended law, the NPA 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 the first step towards the implementation of petroleum price deregulation on June 16, 2015. Per a circular, the NPA asked the OMCs to announce their ex-pump prices for petroleum products and display same at their retail outlets (see editorial of GB&F July 2015 edition). The NPA has since been monitoring the application of the PPPF to ensure that the OMCs apply the formula in the right way. Defaulting OMCs are supposed to be sanctioned by the NPA.
But some of the oil market operators have fallen foul of the law and went unpunished. So what is the muscle of the NPA? Does the NPA bite at all?
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. “If the deregulatory regime is effectively managed, persistent fuel shortages and fear of long queues at pump stations will be a thing of the past,” Khalid maintains.
Huge debts and deprived OMCs
It is evident that the fuel subsidy regime created huge debts and deprived the OMCs the needed capital for effective and sustainable operations. For instance, as at May 23, the Bulk Distribution Companies (BDCs) claimed that the government owed them an amount of GHS2.5 billion which made it difficult for them to get loans from the banks. The amount is largely due to foreign exchange losses, price under-recoveries, higher interest rates and fuel subsidies.
Dr RazielObeng-Okon, renowned economist
But last month Moses Asaga, the CEO of the NPA, said the government cut the debt from GHS1.5 billion to GHS500 million. “We must also give credit to the government for reducing the debt to GHS500 million. It started at probably GHS1.5 billion,” Asaga added. It is clear from the government’s huge indebtedness to the BDCs that securing letters of credit from the banks to pay for petroleum imports is extremely difficult for the 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 RazielObeng-Okon, renowned economist, tells GB&F.
To this end, the deregulation is important not only to clear the outstanding debt of the 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 Ghana Institute of Public Administration (GIMPA), says.
The Price Stabilisation Margins
The BDCs have been successful in convincing the government and the NPA to remove the Price Stabilisation Margins of GHS0.3720 on super and GHS0.2812 on diesel per litre when the deregulation was about to start. 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 the OMCs have improved by over 50 per cent, 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 the government and the OMCs which have created a debt-trap for some of them. A number of them would have gone out of business without deregulation. “Competition has become very intense in 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 tells this magazine. That notwithstanding, OMCs must be careful not to buy poor quality petroleum products because some of them are purchasing 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.
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 per cent in April 2015 to about 8.00 per cent just before the deregulation.
Currently, some OMCs are making just about 7.00 per cent 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 determinants of the price mechanism.
The 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 the GRA have become a further drain on the liquidity of the OMCs. Usually, the OMCs are expected to pay the 17.5 per cent 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 the OMCs with the GRA. The GRA needs to be sensitive to the plight of the OMCs and flexible in enforcing the guarantees before loadings if the deregulation is to be successful.
Price liberalisation opens up market
Khalid explains: “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 almost year would create a level playing field to attract new entrants and private investors into the sector.
Alhaji Mustapha Iddrisu, an energy policy analyst at the EPRI, adds 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 litre of gasoline costs US$1.02 in Ghana, it costs about US$1.17 and US$1.19 in Cote d’Ivoire and Burkina Faso respectively. This differential attracts some people to smuggle petroleum products commodities into those countries. He observes 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 Region and Aflao in the Volta Region have become hubs for smuggling of refined petroleum products across the borders into the neighbouring countries. These towns are regarded as the most lucrative fuel smuggling centres in the country.
“Smuggling therefore costs the country dearly in terms of fuel loss and decline in revenue. A main aim of the liberalisation policy is to help eliminate the incidence of these smugglings that are causing the country so much. Price liberalisation therefore becomes disincentive for smugglers,” AlhajiIddrisu states. Furthermore, the removal of fuel subsidy has allowed the government to invest the subsidy money into other sectors of the economy. Competition among the BDCs and the OMCs has led to reduction in margins, and therefore lower prices for consumers of the products. Some vehicle owners and commercial drivers now shop around to buy from OMCs with the lowest prices. The consumer is the winner of the deregulation of the petroleum prices.
Subsidises the cost of fuel
The deregulation is also beneficial to the government because it ensures the paying of the outstanding debt to the BDCs as well as ensures that the government no longer subsidises the cost of fuel. It is also in line with Ghana’s programme with the International Monetary Fund (IMF) which prescribes the removal of subsidies on petroleum pricing. Under the deregulation, the BDCs have successfully convinced the government and the NPA to remove the Price Stabilisation 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.
The US dollar, which is the de facto determinant in the pricing of petroleum products, needs to be stabilised. A weaker Ghana Cedi vis-à-vis the dollar, the local currency, means further increment in fuel prices. Managers of the Cedi should take stringent measures to stabilise it. Ghanaians will benefit tremendously if the Cedi is managed more effectively. The recent price hikes are as a result of the wobbling Cedi.
Another important consideration has to do with the issue of transparency in the price build up. The NPA should play an active role in the deregulatory exercise. This is absolutely necessary in order to prevent cartels emerging from the OMCs. Much as it would create economic sanity in the downstream sector, it could also be an avenue for profiteering and exploitation by the OMCs.
BY Masahudu Ankiilu Kunateh, GB&F
