Malawi Government’s decision to reduce the road levy on fuel by roughly 63 percent has not gone down well with the European Union (EU) which has threatened to suspend up to 16 million euro (about K9 billion) in aid, The Nation has established.
Apart from jeopardising counterpart funding, the move—according to the Roads Fund Administration (RFA)—also spells doom for the roads sub-sector, which derives 90 percent of its funding from the road levy.
In the February 2013 fuel build-up schedule, the Roads Fund Fuel levy was K30 (about 0.075 US cents) per litre for diesel and K35 (about $0.85 US cents) per litre for Petrol.
But the fuel build-up schedule beginning March 2013, which we have seen, shows that the road fuel levy on petrol has been reduced from K35 to K12 (about 0.03 US cents), representing a 66 percent reduction.
On diesel, the levy has fallen from K30 to K12, which is a 60 percent slash for diesel, leaving RFA to largely depend on International Transit Fees and Interest Income which contribute less than 10 percent of the road funding.
EU Ambassador Alexander Baum confirmed the threat to freeze funding in an e-mail interview last week.
“We would have to suspend any further disbursements, which would be in the vicinity of 12-16 million euro in the current budget and the same in the forthcoming budget,” he said.
Baum added: “The European Court of Auditors has already raised concerns around the previous disbursement of 12.7 million euro in August 2012; hence, there is little marge de manoeuvre for interpreting the agreement.”
While noting that the EU was yet to get official confirmation from government on its decision to cut the levy by an average of 63 percent, Baum warned that should that be the position, “the EU would in such a case certainly not take up the void” left by the defunding that comes with the levy’s slashing.
To the contrary, he said, the Malawi Government “would fail to honour its obligations under the Road Sector Budget Support Agreement” with the EU.
In the fuel price increase at the beginning of March this year, government removed a number of levies and reduced some—including the road levy—in an attempt to hold down runaway fuel prices which have jumped by more than 140 percent since the Joyce Banda administration took over power in April 2012.
As part of tough economic reforms, which are free-market centric, the Banda administration reintroduced the automatic fuel price mechanism (APM), which triggers fuel price movements whenever three key variables—the kwacha exchange rate (which is also market-determined now), global oil prices and in-bound landed costs—have moved by at least five percent either way.
RFA has since said it has not received any official confirmation of the Roads Fund Fuel levy’s slashing, but hinted that such a move poses legal and funding complications.
“Appropriate government authorities are aware of the legal establishment of the Roads Fund and the financing role of the Roads Fund in the roads sector. We believe that they cannot scrap off the Roads Fund Fuel levy without arranging for alternative funding mechanisms as included in the Roads Fund Administration Act,” said RFA spokesperson Masauko Ngwaluko in an interview this week.
RFA—established by an Act of Parliament to finance the construction, repairs and rehabilitation, maintenance and feasibility studies on public roads as well as finance other road sector programmes in local councils, Road Traffic Directorate, Road Safety Council and road traffic police—may now have to find alternative sources of funding.
The establishment of the RFA followed an agreement between donors and Malawi Government, which saw the splitting of the National Roads Authority to form the Roads Authority and RFA to enhance accountability.
The initial set-up was that the NRA was a buyer and seller of road maintenance services, a combination that did not provide the best precondition for a business-oriented road management approach, according to the 2009-2014 RFA Strategic Plan.
Recently, RFA has also taken over the Public Works Programme (PWP) formerly under the European Union, where communities work on rural feeder roads in exchange for K500 (about $1.25) per day.
Treasury spokesperson Nations Msowoya did not respond to our questionnaire sent two weeks ago on what other sources of funding government has put in place to ensure road maintenance continues.
The Ministry of Energy declined to comment, saying fiscal policy decisions are the preserve of the Ministry of Finance.
But the EU has warned that Malawi will soon see the reprisals of reducing or removing road fuel levy.
“This will show in the very near future in a rapidly increasing number of unsealed potholes on the bitumen network, not to mention the gravel network,” said Baum.
He stressed that Malawi has an obligation to ensure the maintenance of the road network, including the bituminised network.
Baum noted that for a number of years now, the policy decision has, however, been to prioritise the limited available funds on upgrading and new roads, which increases in the medium term the maintenance cost and deprives resources notably from rehabilitation and periodic maintenance.
The drastic reduction comes at a time the RFA is still reeling from a stifled operational base with its funding drastically reducing following the erratic fuel supply in the last three years of the Bingu wa Mutharika rule.
“It is also worth to mention that the fuel crisis of the last years had a serious negative consequence for the routine maintenance programme,” said EU head of infrastructure department Mauro Di Veroli in another e-mail.
The Roads Fund Fuel levy is collected by Malawi Energy Regulatory Authority (Mera) from petroleum companies under the Petroleum Importers Limited consortium.
Mera owes RFA around K7 billion (about $17.5m) in unremitted levies collected in the past few years.
According to records we have seen, the RFA has collected up to K 2.8 billion (about $7m) since 2008 from other sources other than fuel levy.
In financial year 2007/08, RFA collected K407 million (about $1.01m), which increased to K517 million (about $1.3m) the following fiscal year.
In 2009/2010, this jumped to K571 million (about $1.4m), whereas in 2011, it came to K607 million (about $1.5m) before rising to K699 million (about $1.7m) last year.
Comparatively, RFA made K31.31 billion (about $78.2m) through fuel levy between 2008 and 2012, making the levy by far the biggest source of roads funds.
In the current financial year, RFA has, from the fuel levy, committed to funding some five agencies—the Roads Authority (RA), the National Road Safety Council of Malawi, the Road Traffic Directorate and the Income Generating Public Works Programme apart from its own activities.
A schedule also shows that RFA will give RA K1.1 billion (about $2.7m) in administrative costs, while K534 million (about $1.3m) would go into RFA’s own administrative costs.
Effect on roads
The RA has already awarded contracts worth K3.2 billion (about $8m) and was relying on funds from the now sharply reduced fuel levy to pay contractors in the current fiscal year.
In a separate interview, RA spokesperson Portia Kajanga said they use fuel levy funds “for maintenance of the country’s 15 451 km of designated roads and 9 478 km of what are called community roads.
“Maintenance of these roads helps to preserve the road asset and ensures that the road remains safe, motorable and open throughout the year in most cases,” she said in a written response.
Kajanga said unavailability of the Roads Fund would lead to serious deterioration of the road asset which would in turn lead to various consequences such as unmanageable potholes and ungraded roads resulting in high vehicle operating costs and road accidents.
Among others, RA uses funds from fuel levy for pothole patching, grading and reshaping of roads, road centre and edge line marking, accident spots improvements, road signs replacement, emergency and urgent works, special backlog rehabilitation of city roads, bridge maintenance and reconstruction, sectional periodic maintenance and rehabilitation, grass and shrub cutting and supervision of all the works by consulting engineering companies.
Currently, grass and shrub cutting is under way along paved roads and RA has planned to carry out grading and reshaping of unpaved roads between April and June 2013.