Manufacturing in 2010

After the recent 15 percent fuel price hike and the subsequent public outcry about the expected impact on travel, transportation, and the prices of goods in the shops, various stakeholders have attempted to justify and support fuel price increases in view of escalating world oil prices.

The government has made public statements in the media, the Energy Regulation Board (ERB) has attempted to convince the public that price increases are inevitable, and some elements of the private sector that are engaged in the energy trade have supported the move since amongst other things, increased energy prices puts more cash into their pockets.

It is not enough for the government to make an official statement supporting the fuel price increase without opening the door for dialogue and discussion. There is a high price to pay for unilateral decisions that impact on the profit margins of the private sector. The price is usually in the form of disinvestment and increased corruption as the stakeholders look for other options to remain in business.

The ERB spends much of its time defending the fuel price increase by elaborately describing the import and processing value chain without attempting to challenge the inefficiencies that if addressed, would keep the price of fuel as low as possible.

Surprisingly, the ERB explanation that Indeni Oil Refinery was designed to process over 1 million tons of oil per year but now only processes around 500 thousand tons, emphasises on the incapacity of Indeni rather than on how Indeni can be upgraded to process at its designed capacity.

The ERB further argues that fuel prices have not been increased for the last 12 months or more, and therefore an increase in January 2010 in not a bad thing. This argument is as lame as telling a mother that since her last baby died 3 years ago she should not be surprised that another one will die this year. The argument should focus on the causes and not on the frequency of the events.

One big hurdle in the energy sector is that the ERB always attempts to speak for the government and justify the government decision rather than to stick to the role of regulator and progressively challenge the value of each player and process in the energy value chain. This has been the case in the price increases for fuel and for electricity. This bias does not do well for Zambia, nor does it help the position for the private sector as a whole.

Cooperating partners and other economists have prodded Zambia to look to the private sector to develop the energy sector through increased investment and the transfer of the energy burden from government to selected private companies.

Without the benefit of a public disclosure of the details of the energy value chain, the public can only conclude that Tazama, Indeni, and the other government owned players endeavour to run their businesses on a cost recovery basis as opposed to a profit making business. This suggests that if these players were privatised, then a profit element would be introduced at each level and the net price of fuel in Zambia would probably double. Where does that leave the country in respect to the cost of manufacturing, farming, mining, and tourism services? Everything will go up in price and Zambia will be reduced to 100 percent import dependent economy relying on mining activities to keep the population fed and clothed.

Our own recent history reveals how Total invested in Indeni, pledged huge amounts of investments to upgrade the operation to efficient production levels, then solicited government to import the nation’s fuel reserves. Fortunately, the government saw the folly of allowing the nation’s fuel processor to also be the country’s major importer of finished fuel. If the government had decided otherwise, then today Total would probably be importing all our fuel needs and Indeni would have gone to grass.

Of course some of our local entrepreneurs have seen the opportunity now that Total is out of the picture. There are huge profits to be made in the energy sector, provided one has the government and the ERB on their side, because it is a monopoly business.

The question is that no matter how much we talk smart about energy, no matter what brilliant economics we discuss on this subject, the fact is that higher costs of energy whether electricity or fuel, will lead to higher costs of production and eventually kill manufacturing, commercial agriculture, mining, and tourism.

There are some realities that we cannot ignore. Zambia is part f the COMESA Customs Union which will operate on zero tariffs amongst member states. Zambia is landlocked and has to offer some competitive and comparative advantages to investors. Zambia has a government whose primary role is to invest tax payer’s money in socio-economic infrastructure that will serve and support the people of Zambia in the long term through the promotion and facilitation of economic activity.

In the past we have seen the government borrow to invest in roads, schools, hospitals, urban water systems, bridges, airports, and telecommunications. The developed infrastructure has been the foundation for our modern and growing economy. Continued development and expansion of these infrastructures will support and facilitate rapid economic and social growth, but only if the infrastructures are cost effective to support competitive production in the regional economy.

Uganda attempted to privatise the distribution wing of the energy sector, and today the failure of that experiment still hurts the lives of many rural Ugandans who have to pay more than double the electricity tariffs that the residents of Kampala are charged.

The writing is on the wall. If we continue to talk meaningless economics and ignore the challenges that threaten our very existence then Zambia can forget about the single digit inflation targets, the GDP growth goal of 8 percent, and the vision of becoming a middle income nation by 2030.

Published 26 January 2010

Fuel Hike

A fifteen percent increase in the price of fuel can be compared to a currency devaluation, when the impact on domestic productivity is assessed.

Having said that, currency devaluation may make imports costs more, but it conversely also makes exports cheaper to the foreign markets thereby stimulating higher export earnings. Fuel price hikes only benefit the oil marketing companies while the rest of the economy has to brace itself to receive the kick in the gut.

Any increase in fuel prices hits different businesses in different ways. The least affected businesses are those that import a product and sell it on the local market. The net effect of increased fuel prices affects the cost of importation via air or road as in the case of landlocked Zambia. This extra cost is usually added to the market price of the commodity and the end user, also known as the consumer, pays the higher price. Technically, a fifteen percent fuel price hike results in a fifteen percent price increase of imported products.

The impact of a fuel price hike on the four strategic sectors of our treasured Fifth National Development Plan (FNDP) namely; Agriculture, Manufacturing, Mining, and Tourism, is much more complex and can have a multiplier effect on the increased cost of doing business.

Agriculture requires fuel for transporting the seeds, fertilizers and other inputs to the farms. Higher fuel prices make these inputs more expensive. Fields have to be ploughed and harvested using tractors and other machinery that use fuels. This is another area where the cost of production goes up. After harvest, the produce requires to be transported to the urban areas or milling companies for processing. The higher cost of fuel makes this exercise more expensive. Finally, the produce such as maize and other grain crops will need to be distributed into the various markets around the country. The cost of fuel has a final bearing on the consumer price of the commodity to the average person.

Manufacturing is undermined in much the same way as Agriculture because the majority of our industry uses raw material imported form other countries and then follows a similar process as that of processed agricultural products. The multiplier effect and impact of increased fuel prices can easily be analyzed throughout the various stages of a manufacturing business in Zambia.

Mining today requires that ore is extracted from the ground at one site and transported by trucks to the processing centre which is generally a relatively long distance from the extraction site. Thereafter, the ore is processed and the metals or other selected products are batched and packed for export. Finally, the mined product is exported by road or rail out of the country to the nearest sea port for physical removal from the continent and destined to outside processing markets. Increased fuel prices add to the cost of doing business at each stage and the end product either has to fetch a higher market price to cover the increased costs of production, or as in the case of globally traded commodities such as copper, the exporter is forced to absorb the loss and therefore tighten the business operations to the extent that the business may cut corners in respect to salary increments, safety measures, health services, and allowances. These cuts are generally the ingredients for industrial disputes which often lead to production shutdowns and further losses in the mining industry. In the case of Zambia, there is potential for the country to fuel inflation and plunge the GDP growth goals from 7 percent to levels below 5 percent. This may not be a risk that a growing and promising economy may want to take.

2010 offers another opportunity for Zambia to propel the tourism sector to become possibly the highest earning sector of the country, even surpassing mining. The recent earlier opportunity was the collapse of the Zimbabwean economy which dominated the tourism market in this sub region. Increased fuel prices in Zambia now place Zimbabwe in a more competitive position for tourism as the Zimbabwean fuel becomes much cheaper than that of Zambia. Tourism investments require food and other products to be delivered to the lodges and hotels across the country. These deliveries are done by road where fuel is the driving force. Tourists have to move from one tourist site to another by road, rail, and air. These are all fuel based transport systems. Tourists have to come in and out of the country using transport systems that are fuel based. The various tourism products and events are all fuel based as game drives, boating, and even rafting support, all use fuel to get things done. Zambian tourism starts to get more expensive to foreign, regional, and local visitors to the extent that other options are chosen and Zambia loses. Zimbabwe starts to get back their lost market and the impact of 2010 World Cup on Zambia will be only the pictures on television and the media reports of how other countries in the region raked in huge profits as a result of strategic planning.

So, fuel price hikes actually undermine our own development programs. Fuel price hikes actually undermine any development activities that a country may wish to undertake. In fact, fuel price hikes tend to motivate the private sector to move away from manufacturing, processing, and developing exquisite services in the country.

Fuel price hikes generally persuades any business minded person to put his or her investments into trading activities where the impact has a relatively lower effect, and leave the adventurous business of manufacturing and processing for more stable and predictable days out there somewhere in the future. This prospect is very real for Zambia, and the impending COMESA Customs Union implementation this year either motivates Zambian companies to rise to the challenges and opportunities offered, or through non supportive measures such as fuel price hikes, highlights the imminent threats posed by the more strategic and pro active regional economies in such a way that the Zambian private sector actually retreats to the safe trading grounds that buy and sell anything and everything made in the Customs Union irrespective of which country produces the commodities. What is Zambia’s strategy? Where do we want to go? What do we want to achieve? How do we intend to do it? Who are the players? Will fuel price hikes support our economic and social development goals?

Published 19 January 2010

Holiday Year

Its back to work and back to school for the nation during the month of January. A stroll through the busiest supermarkets highlights that cash is only being spent on school books and other requisites, basic food stuff such as mealie meal, cabbage and kapenta, rentals, ZESCO pre-paid power vouchers, and as always, talk time.

The butchery, alcohol, and confectionery sections of our supermarkets are deserted as the impact of reduced disposable income is experienced in reduced sales. Although it looks like the holiday season is over for Zambians, in fact the holiday season is just beginning for visitors to Africa who want to attend World Cup 2010.

Maputo is vibrating to the building excitement of the World Cup, Harare is running at full speed to capture the overspill from South Africa, Gaberone is upgrading roads to the South African borders, and other countries in the sub continent are face-lifting airports or introducing new tourism packages to mop up the spare cash that will flow into the region within the next few months.

The momentum in Zambia seems to be mainly on the free tickets to the World Cup being offered in the BP ‘Buy Fuel’ program and a few other corporate initiatives that have focussed on the 2010 soccer bonanza.

There have been many discussions and suggestions made on how Zambia can benefit from the 2010 Holiday Year. There is now need for the country to come out of the holiday spirit and engage into the business spirit by looking at the opportunities and acting rather than talking so that at least some deliberately developed benefits come to Zambia rather than the default crumbs that we have so often allowed ourselves to scramble for.

The immigration department could immediately embark on a customer care and support training program to become much more tourist friendly and accommodating in manner and action. This single act can attract twice as much tourists into Zambia than we currently do. Furthermore, visa on demand services at a much lower cost than is currently charged will multiply the number of visitors to Zambia during the 2010 holiday year.

The Kuomboka ceremony and other traditional ceremonies will be take place at the prescribed times during the year. Zambia can link these cultural events to the 2010 World Cup and expand the tourism potential to the extent that soccer focussed visitors will be exposed to our heritage and traditions during the year.

Zambia boasts of having over 15 national and game parks. The opportunity to develop holiday packages such as the 2008 ‘Destination Luapula’ is right at our doorsteps. Many foreign visitors will not know exactly what Africa has to offer them during their visit to the continent. It is up to us to create and fashion some sustainable packages and products that will thrill the visitors and also be sustainable for future tourism after 2010.

White water rafting was publicly acknowledged when the legendary ‘Kunta Kinte’ came to launch Sobek many years ago. Today, white water rafting on the Zambezi is no longer talked about and seems to have faded into oblivion. Zambia has the new opportunity to resurrect this tourism product which can be the most exhilarating experience of rafting to be found worldwide.

South Africa has traditionally built camping sites throughout the country for both domestic and foreign visitors to experience a cost-effective holiday within her borders. This can be true for Zambia too if we can develop some camping sites in all the provinces where some tourism wonders and opportunities can be identified. Government can allow a window for duty free imports of camping tents and equipment to attract investment for the 2010 holiday period.

The private sector is always available to invest where a good return can be made, and the banking sector is currently desperately looking for good projects and businesses to finance as the several new banks jostle for a market share in an economy that is not growing fast enough.

The time has come for possible the first public private partnership to kick off. Let us see private business and government get together in earnest during the months of January and February so that some quick decisions can be made on how to tap the resources of World Cup 2010.

Let us all keep in mind that 2010 is a holiday year for the rest of the world in so far as the World Cup is concerned. For South Africa and the Southern African sub continent 2010 is our year to reap the spoils of world class soccer.

Published 12 January 2010

Way Forward

2010 is now here and life must go on. The region has been in frenzy over the 2010 world cup with special impact on the Southern African countries. Even Zimbabwe, which is grappling with recovery from an economic meltdown, is targeting at least seven top world cup countries including Brazil, to set up camp in the country.

Zambia is also grappling with finding some solutions to the growing power deficit as industry, mining, and agriculture continue to register growth. There is a seeming impasse highlighted by the inconclusive path and way forward for Zambia’s fibre optic backbone as ZAMTEL and ZESCO struggle to come to some meaningful understanding as they roll out billions of Kwachas of tax payer’s money on infrastructure development. No solutions are yet in sight in respect to the fate of INDENI Oil Refinery.

What is the way forward? What institutions are best placed to help the country steer a course that will hopefully lead to prosperity? Where will the resources come from? How can we best use our comparative and competitive advantages for economic development? What is happening in the regional and global economies? How do we adapt to the new challenges?

It is quite obvious that one initiative for the way forward is for government to strategically partner with the private sector using both the Public Private Partnership (PPP) program and other mechanisms such as Ministerial authority to appoint boards for public institutions. This strategic alliance will bring to the table government’s national agenda for development and the private sector’s practical experiences and concerns that need to be addressed before businesses start to invest flat out in the economy.

The current problems experienced at ZESCO in respect to the future developments of the national fibre optic backbone indicate the lack of dialogue between the board and their parent Ministry, and also the seemingly lack of dialogue between the Ministry of Energy and the Ministry of Transport and Communications. Zambia needs to develop sincere and productive PPP relationships at policy formulation levels such that the national interests always come first.

In the same vein, the challenges of becoming an active player in the COMESA Customs Union requires the same partnerships because ultimately the private sector will be required to spearhead intra regional trade that should benefit the country as government recedes into the background with diminishing political influences on the trade regime. Private companies will have to take responsibility for sustaining their own businesses and remaining viable as government steps back and removes the protection that many companies have enjoyed over the decades.

One key sub sector is the insurance business which is currently protected by legislation from outside competition. Already the COMESA yellow book third party insurance for motor vehicles is blind to sovereign borders and this phenomenon will only grow with other insurance products. Poor performers will soon become vulnerable to losing business to the good service providers when the Customs Union becomes active. For the private sector, getting involved in strategizing on how business can be best done under the Customs Union regime is a matter of survival and not choice. This also applies to the government because a growing and vibrant private sector reflects higher tax collection which finances the national budget and other development programs.

At Government level, the need to be more prudent with government expenditure is of prime importance. To this end, monitoring and evaluation of the budget roll out is one way forward to ensure that public money is building the economy. This does not necessarily mean that government should trim down the size of the civil service, but on the contrary, government should become more efficient, cost effective to the tax payer, and possibly should employ more civil servants to deliver the services that the growing economy requires. The size of the government workforce is dependant on the service demands made by both civil society and the private sector. A strong continuous monitoring and evaluation system in government, coupled with a remedial system that will patch up the weaknesses and gaps, will go a long way towards developing an effective and delivering public system.

The way forward in 2010 is to move on from the hype and marketing of economic zones, to the implementation stage. Value addition for copper and other minerals will develop the economy exponentially. Food processing and other assembly plants will be strategic as feed stock for products into the region. The opportunities for private sector employment and emerging small businesses are great when focused on the impact of economic zones on the economy. Some useful ideas and diversification options can be unlocked through the economic zones initiative.

The Sixth National Development Plan (SNDP) is on the table awaiting finalization. A PPP approach to streamline this document for the private sector to use in business development will surpass the achievements made by the FNDP. More private sector input will give the SNDP credibility and will channel the strategies and investments that government will make in developing the economy towards real issues and concerns faced by the private sector.

Partnership at the domestic level prepares the nation to deal with the challenges of the global economy. Zambia is negotiating with the European Union to finalize an economic partnership agreement, and at a higher level, the country has to input at the World Trade Organization meetings to ensure that developing economies are not trampled by the developed nations, but are supported to grow and become self sustaining. These pressing negotiations require the full wit of the nation through strong partnerships at the domestic level and good partnerships at the regional level.

Every economy has the challenge of building infrastructure to service the aspirations of the people and to promote, support, and facilitate economic development. The way forward for Zambia is to first decide clearly about what infrastructure should be built by government to support both social and economic development, and what infrastructure can be left to the private sector to develop for business enhancement. This distinction is paramount to deciding the role of government in economic development and the role of the private sector in building a country. The way forward for Zambia in 2010 is actually in our own hands.

Published 5 January 2010