Demystifying levies, fuel price build-up
There is more to the local fuel pump prices than meets the eye. Built in the pump price are levies on top of the actual cost. In other words, put loosely, without the levies, the pump prices should be lower than what consumers pay for.
Through the levies on every litre of fuel—mostly diesel and petrol, consumers finance projects or causes that enable government to fulfil its obligations.
Currently, there are six levies built in the price of fuel.
These are Energy Regulation which finances operations of industry regulator the Malawi Energy Regulatory Authority (Mera), Rural Electrification (also charged at 4.5 percent on all energy sales i.e. electricity, ethanol and other bio fuels), Price Stabilisation Fund (PSF), Fuel Storage, Malawi Bureau of Standards (MBS) and the popular Road Fund whose collections are used to maintain roads.
The Road Fund Levy is managed by the Road Fund Administration (RFA) and the roads maintained by the Roads Authority (RA). RFA and RA are two entities formed after the split of the functions of the National Roads Authority (NRA). For example, currently the Road Maintenance Levy is charged at K37 per litre of petrol and K32 per litre of diesel.
Worth noting is the fact that the current price build-up, at least from Mera statistics, does not have a Drought Levy (also known as Safety Net Levy). Mera says this was discontinued by the government after it had fulfilled its purpose. Perhaps that explains why “fuel” could not fund the ongoing disaster response.
In May 2012, Malawi adopted the automatic pricing mechanism (APM) designed to ensure full-cost recovery. Under the arrangement, at least in theory and all-things-being-equal, pump prices are supposed to be reviewed based on a minimum of five percent change in two parameters: the “behaviour” of our beloved but vulnerable kwacha against the dollar and international free on board (FOB) prices of petroleum products.
To ensure sanity and stability on the market, authorities chose to review the key fundamentals once every month, specifically the first Tuesday of each month. This means that for this month, on March 3 (which was a Public Holiday), the Mera board should have reviewed prices based on developments and average in February.
With the APM, the relevance of the PSF levy also came into the spotlight. Importers have used PSF to recover losses in case of changes in international oil prices or the exchange rate.
So, with APM ensuring “full-cost recovery” as we are told, do we need the PSF? This is one question I posed to Mera in the course of my research and this is the explanation I got: “[Under APM] price is only reviewed when the exchange rate and the FOB price result in a movement of more than five percent. Now, the question is, if the necessary increase in fuel is four percent and you do not raise [because it is less than five percent], who covers that cost? The PSF caters for that.
“If on the other hand, the price was to reduce by four percent, the reduction is not effected; it results in more cash collections into the PSF, which is used to cushion future price increases. A situation can arise where you need to increase the price, but if you have sufficient funds in the PSF you can utilise it to cushion the price increase.”
During the month under review, the kwacha continued to appreciate (gaining in value)—meaning importers requiring less of the local currency to buy dollars and import fuel—and international petroleum prices were on the see-saw, rising today, falling the next day. However, the rise is not substantial compared to the drop during which our local authorities looked the other side as if nothing had happened.
In fact, in Malawi the APM is not as “automatic”, so to speak as we are told there is a “one-month lag”. This means that this week’s review will consider the values that ruled in January 2015 on the international market.
Verdict: Malawian fuel consumers deserve a better deal, prices should be reduced yet again.
