Written by Michael Bozumbil
Since the deregulation of prices of petroleum products began in 2015, the petroleum downstream sector has witnessed intense competition. This has led to product availability, competitive pricing, improved product quality offerings, improved fuel stations infrastructure, improved customer service orientation of Oil Marketing Companies (OMCs) and better predictability in petroleum products tax collection.
Notwithstanding the above, there is a looming danger as far as the survival of Oil Marketing Companies (OMCs) which are engaged in legitimate business practices is concerned. This is due to a number of challenges they face which threaten their survival. Though these challenges are many, I intend looking at three major ones and coming up with my suggestions on how to resolve them.
The first major challenge threatening the survival of OMCs engaged in legitimate business is their fast eroding and highly unpredictable margins. This is as a result of the “crazy” price war, spearheaded mainly by the OMCs engaged in illegal and unethical practices. Some of these practices are petroleum taxes evasion, adjusting pumps to cheat the unsuspecting consumers, selling poor quality fuel to damage vehicles of consumers and compromising on safety standards to put the lives of staff, customers and the general public in danger. The low pricing pressure compels OMCs engaged in legitimate business practices, especially those operating largely in the price sensitive peri-urban and rural market segments, to shave off almost all their margins in order to be able to sell their products and pay the appropriate taxes and regulatory margins to the Ghana Revenue Authority and the National Petroleum Authority (NPA) on time to avoid sanctions and penalties.
The price war is termed “crazy” because it is not supported by legitimate figures which can be defended by the regulator. Yes, in a deregulated market, it is expected that competition should lead to efficiency and the gains of efficiency should be transferred to the consumer in the form of reduced prices. However, what we see as prices displayed by the “questionable” OMCs are certainly not products of efficiency.
Indeed, generally speaking, since price deregulation began in 2015, a good number of OMCs engaged in legitimate business have been reducing their prices whenever the legitimate market conditions call for reduction in prices. Some of them sometimes even try to sacrifice, and in some instances, shave off between 10%-40% of their margins to absorb the impact of exchange rate or international petroleum products price increases, in order to keep prices stable on the local market for the benefit of the consumers. These are always easily verifiable, and the OMCs should be commended for that. That is the beauty of price deregulation.
The irony of the current price deregulation dispensation is that whereas OMCs engaged in legitimate business practices sometimes use part of their margin to “subsidise” the consumer, the government, which used to carry the heavy burden of subsidy, now has guaranteed taxes and regulatory margins. This is because it no longer subsidises petroleum products, except premix fuel and marine gas oil, whose legitimate consumption is also relatively low, and thus have minimal financial burden on government. All that government therefore needs to do is to ensure that the Ghana Revenue Authority (GRA) and the National Petroleum Authority (NPA) do their work by enforcing tax compliance by all OMCs.
Whenever the GRA and NPA fail to enforce compliance by all OMCs, they in effect empower those recalcitrant OMCs to destroy the businesses of the legitimate OMCs whose taxes help the government execute its agenda and also resource the very institutions of state mandated to ensure compliance.
The second major challenge faced by genuine OMCs is that the regulations on which our price deregulation is anchored are not sufficient to facilitate the NPA’s execution of its mandate of also ensuring the viability and sustainability of petroleum service providers, particularly OMCs. The NPA Act 691(2005), Section 2, among others, mandates the NPA to promote fair competition among petroleum service providers and to also protect, not only the interest of consumers, but also petroleum service providers, of which the OMCs are a major part.
The current regulations require the OMCs to always submit their maximum indicative ex-pump prices to NPA every pricing window, that is, every two weeks, using a very transparent price build-up template, which has been developed by the NPA. The regulations, however, do not enjoin the NPA to also come up with minimum ex-pump prices or base prices, below which any OMCs’ prices cannot go. If this were in place, the NPA could then demand that an OMC that sells below that base price should justify the source of its products and whether indeed it has factored in all the applicable taxes and required margins. This will promote fair competition and also help in guaranteeing industry viability and sustainability.
In other sectors, which are also deregulated, the regulators play a key role in ensuring that there is no undercutting in ways that can destroy the industry. In the insurance industry for instance, the regulator, the National Insurance Commission, had to step in to enforce upfront payment of premiums for insurance policies when some insurance companies were engaged in granting credit to their customers in a manner that threatened the survival of the industry. In the banking sector, the Bank of Ghana now sets Ghana Reference Rate (GRR), in place of the base rate it used to set for banks some time ago. The GRR serves as the base interest rate or minimum price from which the banks can each add their margin considering the risk profile of the customer and the efficiency of the bank. This helps in ensuring the sustainability of the banking sector. A similar approach is needed in the petroleum downstream industry to ensure the financial viability and sustainability of the industry.
The third major threat to the survival of the industry is the “unregulated” issuance of OMC licences leading to the proliferation of OMCs. It is “unregulated” because to the best of my knowledge, from policy and regulation perspective, Ghana’s licensing regime is not guided by an industry viability analysis which has determined the optimum number of OMCs required, given the size of the economy. With our relatively small economy, we have 169 OMCs and 42 LPGMCs, making a total of 211 petroleum products marketing companies as at 28th February, 2021, per NPA’s official list of OMCs and LPGMCs.
Ghana’s licensing regime certainly needs a major overhaul. The petroleum industry is a very sensitive one, given the nature of the products it deals in and the significant role the industry plays in national development. Therefore, there ought to be very stringent requirements that ensure that those licensed have the capacity to operate in line with industry best practice, without compromising on the local ownership of the sector.
The term “licence” carries a lot of weight and the entity granting a licence must carry out that exercise with circumspection. This is because the quality of the licensed companies reflects positively or negatively on the reputation of the regulator that issued the licences to them.
Therefore, when NPA issues an OMC licence to a company, it implies that NPA is acting on behalf of the state and giving a firm assurance to the public and all stakeholders that it can attest to the competence and capacity of the holder of the OMC licence to operate in line with industry best practices.
Indeed, whilst NPA is to be commended for licensing a good number of OMCs which have the competence and capacity meeting international standards, there are a lot of other OMCs with little or no clue regarding their obligations in respect of the licences they hold. Unfortunately, they are the majority in terms of numbers but contribute very little to market share. In fact, from my observation, some of these could have excelled if left to operate as retailers under OMCs in the value chain instead of being granted OMC licences which they just do not have the capacity to handle and sometimes end up running into trouble and losing their valuable assets.
The Proposed Solutions
In the light of the above, I suggest the following measures should be taken to ensure that we reverse the dwindling fortunes of OMCs committed to best industry practices.
The first is for the Ghana Revenue Authority and the National Petroleum Authority to ensure the full implementation of all the wonderful technological innovations deployed in the industry to ensure compliance by all OMCs as far as the payment of the petroleum products taxes is concerned. Over the years, this industry has received so much investment in technology such that if the agencies involved just committed themselves to fully deploying the technologies already available, without political interference, we should not still be having issues of petroleum tax evasion of huge proportions. In fact, over GHS4Billion of petroleum taxes was lost to the state between 2015-2019, as indicated by the Vice President of the Republic of Ghana, H.E Dr. Mahamudu Bawumia, during the recent launch of the National Retail Outlet Fuel Monitoring System, introduced by the National Petroleum Authority. It is hoped that laudable additional policy directives the Vice President announced at the event will be executed diligently and in a sustained manner by the NPA to sanitize the industry.
Secondly, for the NPA to ensure the financial viability of OMCs that are committed to best industry practices, I suggest that the NPA seeks the support of the Ministry of Energy to act swiftly on the proposal by the Association of Oil Marketing Companies (AOMC) for NPA to be mandated to be determining base prices for OMCs for every pricing window. This point was strongly made by the AOMC during the meeting the NPA organised in October 2019 in Accra to discuss the impact of the implementation of price deregulation policy on OMCs/LPGMCS.
The proposed NPA’s base price will consider the average ex-refinery price and factor in all the approved taxes, all the approved regulatory margins, the Unified Petroleum Price Fund (UPPF) Margin and a basic OMC Margin. The basic OMC margin can be arrived at using an industry sustainability margin model, which already exists. With this NPA base price, each OMC will now be expected to make a decision whether to keep to that base price and grow market share or increase its margin, looking at the extra investment it makes in raising standards of infrastructure and enhancing quality of its products, which it believes its consumers will be ready to pay extra for.
Meanwhile, to ensure that the interest of the consumer is protected against abuse by some OMCs, the AOMC further proposed that there should be a maximum indicative price or a price ceiling for each window, to be established by NPA, for monitoring purposes. For instance, the NPA can say that as OMCs compete among themselves on price, no OMC should charge the consumer more than 10 pesewas per litre above the base price. Thus, with this mechanism, the maximum price difference among OMCs will be 10 pesewas per litre instead of the current “crazy” and unsustainable differences of between 50-90 pesewas per litre for an industry that globally has very close ex-pump prices among competitors because of its slim margins.
Thirdly, I propose the NPA convenes a stakeholders’ dialogue forum to discuss the following:
• The optimum number of OMCs for the Ghanaian economy, looking at sustainable minimum volume for an OMC that wants to do the right thing.
• The optimum number of retail outlets or fuel stations for the country, looking at sustainable minimum average throughput or volume of sales per station.
• The appropriate OMC licencing requirements, taking into consideration the technical/infrastructural, financial and managerial competences required to achieve the industry standards and ensure the good corporate governance practices we all so desire for OMCs operating in our country.
• The development of a roadmap for industry consolidation, with a focus on mergers and building synergies, but still ensuring indigenous control of the sector, so that we can have solid and enduring OMCs.
Fourthly, there is the need for the owners and directors of OMCs to understand that the sustainability of their businesses depends on them investing in raising standards, building systems and structures as well as building the capacity of their staff. They are also expected to be financially disciplined and good corporate citizens by paying their taxes dutifully for government’s programmes to be implemented.
The industry is changing with lots of technological innovations and industry players must catch up with the changes. In fact, it is expected that operators’ standards should be higher than the standards of the regulators because what the regulators set are supposed to be the minimum standards.
Finally, I would like to indicate that government should begin to pay a greater attention to the petroleum downstream sector, with particular emphasis on the OMCs and Liquefied Petroleum Gas Marketing Companies (LPGMCs). Since Ghana discovered oil in commercial quantities in 2007, there has been a shift of the attention of government from the petroleum downstream sector to the upstream sector, with the expectation that the upstream sector can solve Ghana’s problems. Unfortunately, the upstream sector is largely an enclave economy, with minimal direct impact on the lives of the citizens compared with the downstream sector. This is because the downstream sector, especially OMCs and LPGMCs, not only creates a lot of employment for Ghanaians across the country, it is largely managed and owned by Ghanaians whose profits remain in the Ghanaian economy.
Additionally, the downstream sector generates more sustainable tax revenue for government than the upstream sector because the upstream sector is prone to intermittent shocks as international crude oil prices are very unstable. For instance, but for OMCs that largely kept the Ghanaian economy running during the height of the COVID-19 pandemic, through consistent petroleum tax payments, the economy would have ground to a halt last year because the upstream sector was on its knees.
In fact, Ghana’s power or electricity sector rests largely on OMCs to survive. Whenever the sector runs into financial crises, OMCs have always been called upon to carry the burden through the payment of energy sector levies. The ESLA Bond which was raised to pay energy sector debts largely rests on the back of taxes paid by OMCs.
It is therefore very important that the Ministry of Energy, the Ministry of Finance and the Economic Management Team take keen interest in expeditiously addressing issues affecting OMCs and LPGMCs, especially those that are committed to legitimate business practices, so as to ensure their survival and sustainable growth for the benefit of the Ghanaian economy. Let us therefore support them to continue supporting the economy.
• Michael Bozumbil is the Chief Executive Officer of PETROSOL Ghana Ltd, a leading Ghanaian Oil Marketing Company (OMC). He is also the immediate past Vice Chairman of the Governing Board of the Association of Oil Marketing Companies (AOMC).