Restructuring of petroleum product prices.

Over the last couple of months, we have engaged the public in an open discussion on the challenges confronting our nation with regard to the pricing on petroleum and the debt overhang at the Tema Oil Refinery, TOR.

We initiated these discussions in the belief that such matters of very significant national importance should be publicly and openly discussed among all stakeholders. The discussions have been frank and intense and we wish to thank all those who contributed to the healthy debate. In particular, we want to express our thanks to the press for providing the fora for the discussions.

The Challenges

The challenges that confront us today are twofold: The price of petroleum in the country is dependent largely on two factors. The price of Crude oil and the value of the Cedi in relation to the US dollar, which is the currency in which crude oil is priced.

The combined effect of rising crude oil prices and Cedi depreciation in recent times has had a dramatic effect on the cost of petroleum. Crude prices fell in the second hall of 2001 but during 2002, crude oil prices started rising once again with dramatic increases in the latter part of the year because of the events in Iraq and, of late, in Venezuela. Today, the per barrel price of Crude oil is around US $32.

There has also been a slow depreciation in the exchange rate to ?7,050 some two years ago in March, 2001, which was the last time petroleum prices were adjusted.

Consequently, there has been an under-recovery by TOR at the ex-refinery level of an aggregate of ?296 billion to end September 2002 which is estimated to be ?500 billion by end of December 2002. In other words, under this Administration, an estimated amount of ?500 billion has been added to the TOR debt we inherited.

Secondly, there is the problem of the huge debt overhang. The under-recovery of ex-refinery cost in 1999 and 2000 resulted in a total debt of ?3.4 Trillion as at February 2001.

The Tema Oil Refinery (TOR) debt exceeds the total primary capital of the banking system in Ghana and because 90% of the debt is owed to only one bank, that bank is overexposed and is in critical danger.

Such is the gravity of the problem that we face as a country.

The persistent under-recovery of costs by TOR has resulted in a situation where in our immediate neighborhood, Ghana currently has the lowest price of petroleum products. The price of a gallon of premium petrol in Ghana, for example, is ?10,500 compared with the equivalent of ?33,264 in Cote d’Ivoire and ?33,660 in Burkina Faso, and ?23,027 in Togo. And while it is true that the per capita income of Cote D’Iviore at US $660.00 is higher than Ghana’s US $390.00, it is also true that Burkina Faso’s per capita income is substantially less than that of Ghana at US $230.00

Be that as it may, the grave consequence of our low pricing is that it has generated a huge smuggling industry around our borders possibly adding an extra 25% to our oil imports.

The mounting losses are clearly unsustainable and if left unchecked, can cause permanent damage to our economy. The effect of this smuggling on our economy would be substantially less if we were achieving full cost recovery.

In formulating the new policies to address the problems in the petroleum sector, Government has been guided by a number of considerations, many of which are being expressed in the public discussions. Some of these are:

? There must be no further accumulation of petroleum debt.

? The Tema Oil Refinery (TOR) Debt must be repaid within a reasonable period.

? Government should improve upon management performances and put in measures to check corruption and inefficiencies at TOR as a matter of urgency.

? Trading risks, from procurement to distribution, must be spread throughout the industry rather than being borne solely by TOR as at present.

The Way Forward

From the extensive consultations Government has engaged in with key stakeholders, and in-depth studies and analysis of the problem and taking account the issue of affordability, Government has adopted two broad objectives.

? To enhance the efficiency of the petroleum sector and avert the financial collapse of TOR with severe implications for the banking system, the petroleum sector must be restructured in terms of pricing and participation of the private sector.

? Government will open up the refinery business to private sector participation and competition.

Policy Recommendations

Government appreciates that price hikes in petroleum products have rippling effects in the economy as a whole. Consequently, in coming to the decisions, Government has been mindful of the impacts on the economy as a whole and on individual budgets.

The following policy decisions have been taken for immediate implementation.

? An immediate increase in petroleum prices to bring them in line with full cost recovery.

? The implementation of the automatic price adjustment formula based on full-cost recovery.

? The setting of an initial maximum integrated margin of US cents for the oil sector.

Implementation Actions

To ensure effective implementation of the policy recommendations, Government has further decided that:

? The National Petroleum Tender Board will be given the independent responsibility to set the maximum allowable ex-refinery price and integrated margin on petroleum products on a quarterly basis.

? Oil marketing companies will be required to erect billboards to visibly display their prices. Future price changes will be “announced” through the billboards.

Recovery of TOR Debt

At over ?4.5 Trillion, and rising daily, the Tema Oil Refinery (TOR) debt has significant economic implications. Government issued TOR Bonds for ?976 billion of TOR debt in 2001 and has issued bonds to Ghana Commercial Bank (GCB) to cover another ?1.4 Trillion of TOR debt owed to GCB. The financing of the TOR debt through the issue of bonds should be considered as a bridging operation while the option of obtaining external financing on the international bond market is pursued.

Significant cost savings would be made if the debt is parceled and sold on the international bond market.

Government will seek to repay the TOR debts through any windfall gains that accrues in future and from increased operational profits that will result from a revitalized and reorganized TOR and proceeds from any privatization of TOR.

IMMEDIATE PRICE INCREASE

With the world price of Crude Oil currently at about $32 per barrel and an exchange rate of ?8,800, the full recovery price, including debt servicing, of gallon of premium petrol should be ?23,210, made up as follows; Import Parity, Duties, Levies e.g. Road Development Fund, Distributions Margins and debt servicing.

Given the arrangement that government has made about dealing with the debt and expectations of improvements in the management at TOR, government has therefore decided to set the price of petroleum products at the following levels.

Premium per gallon, ?20.000, Diesel, ?17.5000, Kerosene, ?17,500,000 Marine Diesel, ?16,000, Pre-Mix, ?16,000 and LPG at ?3,800 per Kg.

Future price revisions will be determined by the automatic price formula published in June 2001 and implemented by the National Petroleum Tender Board (NPTB).

EFFECTS OF PRICE INCREASE – 13% ON COST OF LIVING

The Government has undertaken a painstaking impact assessment of the effect of these changes of petroleum pricing, and increases of about 12% in utility prices and a premium payment towards Health Insurance expected in March. The impact assessment shows that these three increases will result in those earning least having to pay an extra 13% for their living costs. For those in the medium to higher income groups the extra cost is substantially the same level.

The government has decided to put in place a number of measures to reduce this burden.

The tripartite committee is being tasked to agree on a new minimum wage by the end of next week. This is to be at a level that will cover the expected impact but not such as to reverse the gains we have made in controlling and reducing inflation.

Additionally the Government is taking the following steps to immediately increase the mass transit fleet available. ? 10 large volume buses are being cleared from Tema harbour and will be on the road by Monday.

? 50 completed Neoplan Buses will be introduced by Wednesday.

? 200 Italians buses are being delivered, with the first batch expected by mid February.

? 250 buses have been ordered from Holland.

? and an additional 100 buses are being ordered from China.

These initiative are to highlight government’s commitment to delivering on mass Transit. The ticket pricing on these buses will be competitive and will help to hold transportation costs to an acceptable level.

Agreed private transport charges will be announced this within the next 24 hours.

In order to show leadership in bearing this national burden, there will be no increment in salaries and allowances payable to members of the executive, that is the President, the Vice President, Ministers, Deputy Minister, Metropolitan, Municipal and District Chief Executive and Special Assistants, etc

Further, fuel and utility allowances for all government officials will be reduced.