Corruption, incompetence and the fuel crisis

Zimbabwe: Corruption and incompetence [and the fuel crisis]

Eddie Cross

24 February 2019

[Photo added: Petrol queue in December 2018]

Zimbabweans are incredibly patient and have put up with many failures of the State for many years. But the present shambles in the fuel industry simply goes too far. It is time heads rolled and those responsible punished. Enough is enough.

I think it is clear to everyone that since 2014, a cartel of private and State interests has been taking massive profits from the system for their own benefit and to support the retention of power by our political elite. The sums involved are staggering for a small country like ours and could exceed US$2 billion in the past four years. That is more than the national health budget.

It started in 2014 with a corrupt decision by the Minister of Energy to allow a private sector company backed by a multinational group, to take effective commercial control of the pipeline that supplies Zimbabwe with fuel. In the next three years this cartel manipulated the domestic prices for fuel and the tariffs on the pipeline to the extent of skimming off the system about US$1,5 billion in corrupt profits. Most of this massive flow of illicit resources, going to politically connected individuals, including the State President.

This flow of corrupt funds was made possible by two main events – the decline in global oil prices in 2014 when crude oil prices collapsed from US$137/140 to a barrel to less than US$35. What the cartel did then was to skim off the bulk of the margin enabled by this global price collapse. When prices started rising in 2018, reaching US$75 a barrel at the end of the year, the extraordinary margin available on fuel trading was replaced by a sharp rise in inflation in Zimbabwe, reaching hyper levels in November while the Reserve Bank of Zimbabwe (RBZ) maintained the artificial rate of 1:1 on the local currency.

This practice, made possible after the GNU by the re imposition of exchange control, enabled the sRBZ to take over US$3 billion in hard currency earnings by exporters each year, and replace it with local currency at the rate of 1:1. In reality this involved a direct subsidy on all imported goods financed by the exporters. This arrangement was essentially a tax on the most productive and competitive sectors of our economy and a State subsidy on everything that was being financed by allocations from the RBZ, including politically connected individuals and specific forms of State expenditure in hard currency (luxury cars for Ministers?)

By the end of 2018, when free markets valued the US dollar at 3.5 to 1, this subsidy/tax was equal to Z$4,5 billion dollars a year – more than the combined value of the national budget. That is a lot of margin to play games with and many were having a field day – no more so than the Cartel in the fuel industry who were being allocated over US$1 billion a year for fuel imports. But in the process all imported items were now available on the local market at a third of their real value in local currency. The result an explosion of demand that outstripped our ability to supply. Fuel consumption doubled and Zimbabweans were once again in queues. We ran out of bread and cooking oil.

Zimbabweans know that when physical shortages of anything occurs – the players in the market abuse their position and exploit the consumer. It was the same this time – fuel importers used their position to make money, a great deal of money and much of it in hard currency from the RBZ.

Why did this madness not take place during the Government of National Unity (GNU)? Simple really, a Minister of real personal and corporate integrity – Elton Mangoma, who knew what was needed. He took over a totally corrupt system – closed down the main culprits and opened up the system to the private sector on a competitive basis. Anyone could import fuel, bring it up the pipeline and sell it on the local market through filling stations that had to display their prices. No miracles there – just plain common sense and free open markets. There was no exchange control and no price control. We paid a price competitive with regional markets and demand was met in full and this lasted from 2009 to 2013.

Everyone who is watching will note that after weeks of wrangling at the top of Government we had a Monetary Policy Statement last week. Quite dramatic stuff but the Governor held onto his grip on both the right to take over the hard currency earnings of the country and to fix its price and then control the allocation. This is, after all, the basis of his leverage and influence over the economy. But no one trusts the Bank to do the right thing and they have every right not to do so. The record of the Reserve Bank is abysmal in every quarter of their corporate compass.

One of the things Mr. Mangoma did not get done during his term in office was to conclude his plan to build a new oil pipeline from the Port of Beira to Harare to create a regional market for liquid fuels based on the largest underground storage facilities in Africa at Mabvuku. Had he concluded this project an international company would have built a major new pipeline to Harare and raised the capacity of the system to over 8 million tonnes of refined fuels a year. This in turn would have made Harare the energy capital of the Southern African Development Community (SADC) region and created a market in Harare trading fuel worth over US$6 billion a year.

The new system would have transformed the railways of the region as these would have had to be upgraded to carry fuel to all regional market from Harare. Foreign currency earnings of the railways in Zimbabwe would have exceeded US$200 million a year. This project was to be a purely private sector initiative although the investors proposed to give both Mozambique and Zimbabwe a 50 per cent stake to ensure strategic interests were protected. Wholesale prices for all fuels would have been maintained at world market levels – presently below US$0,50 a litre.

Instead of taking over this project from the GNU, the Mugabe administration choose to go in the opposite direction. The motivation? Not the interests of the region or consumers in Zimbabwe, but protection for the Cartel and the margins available on a corrupt basis. The project died. Self-interest won.

So where are we now? Immediately after the Monetary Policy Statement I got a call that said a young businessman had an allocation of hard currency from the RBZ to buy fuel in bulk from South Africa. He did not have an import license and asked if I would recommend someone who did and who could handle local sales. Does that make sense to you? It certainly does not to me and I know a great deal about the local industry. My father was an oil company executive and fuel controller for the Federation. It smells of corruption in the allocation of hard currency and in fuel distribution and sales.

And so we have chaos – deliberate, organised chaos in local markets with the majority of poor consumers queueing and suffering in silence. Yet the solutions are so simple, scrap exchange control, give exporters full control over their revenue streams and allow market forces to distribute scarce resources such as hard currency and fuel on a competitive, open market basis. No subsidies, no queues for anything. Sanity at last.

Last of all get our infrastructure fixed so that we can move our needs efficiently and in a cost effective way. Get the railways back on their feet, get the pipeline back under private control with State supervision, get tariffs down to world market levels, get the new pipeline built and turn Harare into the energy capital of SADC and do it now!

Eddie Cross

Eddie Cross is a renowned independent Zimbabwean economist and founder member of the mainstream Movement for Democratic Change party led by the late Morgan Tsvangirai. Mr Cross is currently the Policy Coordinator General and Secretary for Local Government.

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