IMANI Report: Energy Ministry’s Policy on LPG Doesn’t Add Up.-August 21, 2011

It is now public that the Ministry of Energy is drafting a memo to Cabinet to push for a policy of ensuring that commercial drivers pay “realistic” prices for LPG.

According to an official of that Ministry, the policy was needed in view of “artificial shortages” in the market created by “unintended consumers” especially commercial drivers.

In plain English, the Ministry plans to compel commercial drivers to pay more for LPG than other consumers do in Ghana.

There is little moral basis for such a policy. Furthermore, it doesn’t address many of the core issues raised by the ongoing “No LPG” saga, nor does it promise to be effective in the medium term. Indeed the problem doesn’t defy explanation, too much has been said already to complicate what is in essence a simple supply-side shortage.

Firstly, the statistics available are not robust enough to establish the complete and accurate extent to which commercial drivers, as a category of “unintended consumers” have contributed to these “artificial shortages”. Clearly the growth in demand can only be natural in a growing economy. For all we know, hotels, bars, restaurants, kitchens in commercial real estate, such as offices, canteens, pantries in private schools, and light industrial plants, such as auto-mechanic garages have all greatly expanded their use of LPG. For all we know they collectively use more LPG than commercial drivers.

Indeed, in a study last year, Beatrice Biney and Daniel Inkoom of the Forestry Commission and the Kwame Nkrumah University of Science & Technology, respectively, argued convincingly that LPG has the potential of becoming a fuel of choice within Ghana’s industrial sector, as a partial antidote to unreliable power supply. As far back as 2006, nearly 7% of manufacturing industries were already using it. Indeed nearly forty percent of manufacturers surveyed in the study explained that the only barrier to their adoption of the fuel is reliable availability. As for the marketing companies themselves, more than 60% cited availability as the key factor preventing wider use of LPG by industry.

To reiterate, vehicles are not the single largest consumers of LPG, and commercial vehicle users are not the only group whose current and future use of LPG is/shall be predominantly for commercial (profit making) purposes. If the moral argument is that those making a profit by utilising the gas ought to be “penalised” in the wider interest of society, then there is no point singling out commercial drivers. We might as well require all “commercial users” of the product to pay the unsubsidised price for the product. Otherwise this policy will amount to unfair discrimination against a very important segment of this society whose work compensates for the lack of a public transport system 50 years after independence.

Secondly, the policy may prove unworkable. Since it has no real moral legs to stand on, it is likely to be routinely abused with the connivance of a large section of society. Commercial drivers are not “unintended consumers” but rather “natural consumers” of the product because they are obeying a simple law of economics: prices tend to dictate choices.

It is entirely likely that this policy will only create a racket in which people pay a little “something” for them to be allowed to continue using LPG even though they register as petrol-using commercial drivers, thereby fuelling corruption.

In the same light, because the policy appears to be wrestling against technology trends and the iron laws of economics, it may end up being defeated by wide recourse to these same phenomena.

People are “rational economic beings”. The history of such interventions is replete with unintended consequences. As was seen with Premix fuel, cabals grow and racketeer in the product. A simple resort to the principles of economics should point to the most effective response, which in our view is one of 2 options:

1. Increase supply or

2. Totally remove the subsidy for all users.

The Ministry’s proposed regulations, on the other hand, will at best be effective for a few months before some drivers start adopting multi-fuel tanks that can utilise both LPG and gasoline. At worst, clever technicians at Suame will develop improvised multi-fuel contraptions to thwart the registration regime. These contraptions will be removable and re-installable, thus enabling drivers to adjust their “fuel status” when the occasion demands it.

If we have any doubt that this policy will struggle to be effective in the long-term, we need only look at the current set of regulations. Some authoritative commentators have suggested that commercial drivers are violating their obligations under Act 536 since LPG does not carry the appropriate road levies.

Well, drivers shouldn’t have to suffer for bad legislative drafting. What is going to happen then when we have a lot more people using electric cars, or even hydrogen fuelled vehicles? Clearly, the real lesson from this affair is that the relevant road taxes need to be spliced from fuel pricing policy, not that drivers should be penalised.

The same restraint should be observed by those emphasising the existence of regulations related to the safe use of LPG. The fact that some drivers are not taking adequate precautions when converting from gasoline to LPG does not mean that a penalty ought to be imposed on all drivers who rely on the lower priced, subsidized, fuel. What this reality tells us is that enforcement is lax, and that the situation will not change simply because Cabinet has issued a policy. What it goes further to establish beyond doubt is that policies and regulations that do not reflect the objective conditions on the ground and is furthermore not linked to any strong moral imperative shared by the wider population are unlikely to be effective on the ground.

We agree with the Chief Executive of the National Petroleum Authority that the subsidies tied to the ex-refinery price of LPG at the pump should be removed.

In a 2001 study by the World Bank and the World LPG Association, it was found that LPG use in Ghana is heavily concentrated around urban areas and that subsidies consequently benefit the affluent in society far more than they benefit the poor. It is depressing to find us a decade later wrestling with the same situation, even as the perverse subsidy policy remains.

In the study cited above, a wide range of issues regarding the effective use of LPG as a check on indoor pollution were discussed. It was noted that the last mile distribution system for LPG in Ghana is fragmented and underdeveloped.

The cylinder testing regime was considered weak and quality management underdeveloped. Even the fact of consumers owning their LPG cylinders in Ghana was used to show how likely most conceivable mechanisms for realistic safety control can be undermined. This was opposed to the situation in other countries like Cameroon and Senegal where at the time marketing companies owned the cylinders (similar to the soft drinks distribution system that existed in Ghana until quite recently) and were thus responsible for their condition.

The choice of equipment in Ghana for utilising the LPG for domestic purposes such as cooking (stove instead of open burner, for instance) was also found to increase the end-user price point in this country in comparison with other countries.

There is very little evidence in the public domain to reassure Ghanaians that this broad multiplicity of issues has been adequately assessed with a mind to influencing the policy formation process concerning this LPG matter.

The truth is that the last time the LPG subsidy was removed in 1996, the autogas segment naturally shrunk in proportion to the overall market, but residential LPG use continued to expand steadily, increasing by more than 10% between 1997 and 1999 alone. There is no evidence that the removal of the subsidy had any lasting, adverse, effects on consumer adoption, or on environmental considerations such as deforestation.

In addition to removing the subsidy, the deregulation agenda that was begun more than a decade and half ago, but which has stalled for some years now, should be resumed to encourage investment in the overall mid- and downstream petroleum sectors.

The point has been adequately made that our maritime trade facilities are not up to the task of facilitating an expansion of imports needed to meet new and growing demand. This is construed to mean that even were government willing to expend the additional funds required to subsidise a growing volume of LPG imports, the present constraints will not completely ease.

While this is obviously true, it is also important to recognise the role the current dilapidated state of the Tema Oil Refinery (TOR) plays in the proper functioning of the LPG market. LPG is produced in direct proportion to the amount of petroleum refined. Ten years ago, TOR produced enough LPG to meet about 45% of the domestic need, and was primarily responsible for importing supplies to cover the remainder of the demand. Its hydroskimming facilities produced one ton of LPG for every 100 tons of crude oil refined.

It goes without saying that the fitful state of TOR’s production and its plant directly impacts on supplies in the open market. Its current capacity makes it chronically unviable as a refinery. It lacks the advanced technology to get more out of each unit of crude oil it receives and it lacks the scale to operate at an efficiency that will make it attractive to financial institutions interested in financing the acquisition of that technology.

That is why this Administration must be bold and begin taking steps to secure private sector participation in the mid-stream refining segment. Of course, without a further deregulation of the sector to limit the damaging effects of arthritic government decision-making there is no chance of effective private sector participation.

The same facts are applicable to the storage and distribution infrastructure, including port infrastructure. Government must reduce its level of control in the sector if it wants private sector investors to be comfortable about making long-term investments to develop the storage and transmission capacity within the country.

Some will of course maintain that the subsidy on LPG, and the continuing control of large swathes of the mid- and downstream petroleum sectors are necessary in order to protect the vulnerable in society.

What is the case is that deforestation has already reached a level sufficient to affect an upward rise in the price of biomass (firewood etc.) as a direct result of growing scarcity. From 1990 to date, 35% of our forest cover has disappeared. The vigorous push for LPG adoption from 1992 onwards has only mildly attenuated this rate. When you add the convenience afforded by the use of LPG to this fact, it is easy to see why even without subsidies LPG is becoming attractive to a wide range of residential users. As we have already said, subsidies are mostly beneficial to large consumers in the towns and cities. Of the $110 million spent annually on LPG subsidies, current use patterns suggest that $80 million of that amount goes to urban and peri-urban dwellers who have less use for it than many of their more unfortunate counterparts in rural Ghana. This is inevitable as our current subsidy administration system cannot target the genuinely vulnerable.

In a comprehensive assessment of the situation by Bertille Presta, Tara Laan and Christopher Beaton last year for the International Institute for Sustainable Development, it was comprehensively shown that in the subregion household income is not the major determinant of fuel choice anyway. Easy access to local supply is definitely more important.

The key justification for the subsidy as being necessary to protect the vulnerable by ensuring access to energy therefore wilts upon scrutiny.

What is important is that LPG has become an important driver of our economic lives and Government of Ghana must take bold and creative steps to ensure reliability and sufficiency of supply through the creation of an enabling environment for more investment in output.

Credit: IMANI Ghana (Syndicated through: www.AfricanLiberty.Org)