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