What’s in fuel pump prices and built-in levies?

 Malawi Energy Regulatory Authority (Mera) adjusted upwards fuel pump prices effective October 10 2021, the debate on levies in the petroleum price build-up resurfaced.

Most consumers hold the position that fuel pump prices could be lower if some of the levies in the price build-up are either revised downwards or scrapped off altogether. This debate ensues every time there is a fuel price hike, especially one more biting such as the recent average 22 percent increase.

Currently, there are six levies in the price build-up, namely rural electrification levy, road levy, energy regulation levy, distribution fund, carbon tax and Price Stabilisation Fund (PSF). Besides the cited levies, the price build-up also includes excise duty and other obligations, including freight and storage costs.

Each levy serves a specific purpose. In fact, the levies act like vehicles to facilitate mobilisation of funds for specific programmes and to drive the government agenda.

In the case of the rural electrification levy, it is used to increase access and penetration of electricity in rural areas in a bid to spur economic growth. The road levy, as the name suggests, finances either construction of new roads or maintenance of existing ones.

In the pump price of diesel, the levies alone total K246.32 per litre while for petrol they add up to K251.75 per litre. By breakdown, on every litre of petrol purchased, consumers pay PSF at K30.46, rural electrification levy at K51.75, road levy at K141.54, energy regulation (Mera) levy at K19, distribution fund at K4 and carbon tax at K5. For diesel, PSF is levied at K29.79 per litre, rural electrification at K50.40, road levy K138.13, energy regulation K19, distribution fund K4 and carbon tax at K5.

The levies have always been a bone of contention. I recall back in 2016, in the aftermath of a fuel price hike, the Malawi Confederation of Chambers of Commerce and Industry (MCCCI) joined the calls for a revision of levies in the price of fuel.

In its submission at the time, MCCCI queried why consumers should be funding Malawi Bureau of Standards (MBS) levy and rural electrification levy. Ministry of Finance justified the rural electrification levy on every litre of petrol, diesel and paraffin, but removed the MBS levy.

The chamber further wondered why road levy should apply when buying fuel for non-road transport use such as in factories or stand-by generators. The argument was that the free on board (FOB) prices would be compensated by removal or reduction in some of the levies, thereby easing the price burden shouldered by consumers.

The PSF accumulates funds from fuel sales to cushion the price of petroleum on the local market and ensure stability, especially in cases where global prices swing like a pendulum. Thus, to ensure stability, Mera adopted a system where importers are compensated losses incurred using the PSF. This is the reason prices were not revised upwards back in July despite the market variables and fundamentals pointing to an upward adjustment.

The PSF is not immune to abuse. I recall sometime in 2015 or thereabouts when Mera acted like a financial institution and extended a K3 billion ‘loan’ to Agricultural Development and Marketing Corporation (Admarc) to buy maize. To date, Admarc is yet to pay back the money, albeit in full. Well, that is a story for another day.

The latest pump price hike has hit consumers hard because authorities chose to be populist by maintaining pump prices when the realities on the ground pointed to an upward adjustment. Market forces should be left to determine the pricing.

In my earlier write-up, I indicated that there was a limit to which the PSF can stand the pressure and by last week, the PSF could no longer hold. In fact, according to Mera update, the balance as of August 2 2021 averaged K1.7 billion which is way below the recommended minimum of K5 billion for the PSF.

Many countries use fuel levies to raise funds for specific activities. They can’t be easily done away with. Perhaps what is needed is to strike a compromise to ensure that such levies do not significantly impact the pump price