FEATURE: Ethiopia trades dynamic fuel market for control and stability

A shuttered fuel station in Ethiopia's capital city. The cost of leasing land has driven down profit margins for fuel retailers. (© The Messenger / Will Davison)

By William Davison for The Messenger


Leaning over a wooden desk in his rudimentary OiLibya office, Ethiopian gas station supervisor Abebe Begashaw points on his notebook where a fuel order was recorded the previous week.

“It just arrived today. For four days we were out of diesel,” he said. “Whenever there seems to be a problem, it takes a long time to fix.”

Abebe’s pumps in the Kebena neighborhood were not the only ones to run dry in Addis Ababa. Many of the capital’s gas stations have been regularly out of benzene in recent weeks. Vehicle queues hundreds of meters long formed when word went round that a tanker had replenished supplies.

Similar longstanding problems stem from a bewildering clutch of structural and logistical issues that reduce the efficiency of Ethiopia’s fuel market. While government control ensures price stability and overall supply, accompanying tough conditions for commercial enterprise contribute to patchy distribution in one of Africa’s most highly praised economies. In nearby Uganda – also a landlocked fuel importer that runs a trade deficit – a liberalized sector has plentiful outlets with no queues or shortages.

Yet, rather than considering deregulation, Ethiopia’s government, in keeping with its Developmental State model, hopes the public sector will address the market failure for what is a critical commodity.

Fixed Price

In his cramped office stacked full of oil cartons, Abebe lists multiple reasons for the inconstant supply. Foremost, he believes, is heavy demand because the nearest gas station in one direction is a few kilometers away. He’s unsure why there are delivery delays, but thinks there’s a problem with a bridge on the road to neighboring Djibouti’s port, where the Ethiopian state-owned enterprise that monopolizes fuel-imports distributes to oil companies.

The government, via the Trade Ministry, also sets the pump price every month. That reality fleshes out Abebe’s primary explanation: there are not enough filling stations in Addis Ababa, as it’s a barely viable business. With a profit margin of 7 Ethiopian cents (0.3 U.S. cents) a liter for retailers, even on a busy day selling 15,000 liters of fuel, his operation’s cut would be 1,050 birr ($46). “We are not seeing new gas stations,” Abebe said. “Probably people don’t want to get into the market.” The companies that provide to the retailers take another around 8 cents a liter. The margin was actually increased for the first time in four decades in Feb. 2015 when the government added 3 cents to it. The companies, however, want more than 1 birr per liter.

fore front
A queue forms for petrol at Abebe’s OiLibya station in Addis Ababa (© The Messenger / Will Davison)

Like others, to boost meager takings, Abebe’s team – who each earn around 700 birr ($30) a month — washes cars and sells vehicle lubricants, which have a margin of over 30 percent, and whose importation is reserved for licensed oil companies. He’s been in the business over two decades and says there have been regular negotiations with the government to make retailing fuel more attractive. “It’s always the usual response: ‘We will look into it’. Then nothing.”

The problem with raising gas prices to boost industry profits is the effect on the cost of government projects and on urban consumers already suffering from increasing living costs amid stagnant wages, according to Abdulmenan Mohammed, an auditor of Ethiopian companies and independent economic expert. And since it’s hard to get into the fuel business – new stations require investment of around 20 million birr ($0.87 million), excluding the cost of leasing land — the number of outlets is unlikely to rise. “Unless the government increases the profit margin and makes the sector attractive then no-one will be interested,” he said.

A further issue, according to Abdulmenan, is the government used to monitor fuel inventories to reimburse, or charge, retailers for fluctuating revenues caused by government pump price adjustments. Since that practice was ended around a decade ago amid widespread corruption, dealers working on tiny margins have hoarded fuel towards the end of the month in anticipation of price increases, which has worsened shortages. If they expect a price reduction, they’ll delay orders and run down existing supplies at the higher price. “After clearing stock there is some days’ lag. This causes a lot of problems in the fuel supply,” he said.

Fuel Central

Although they’re very much worried about spiking crude prices, which remain historically low globally, the authorities see the problems differently.

Tadesse Hailemariam runs the state-owned Ethiopian Petroleum Supply Enterprise (EPSE), which claims to have overseen ’50 Years Reliable Petroleum Supply’. The EPSE calculates annual fuel demand, purchases the fuel, distributes to retailers, and manages a strategic reserve. Its operations corroborate two key facts about Ethiopia’s economy: it’s growing, and it’s centrally planned.

Each year, the EPSE consults with a Planning Commission about upcoming infrastructure projects such as roads, railways and dams, which consume around 60 percent of all diesel, to estimate demand. It also consults with the Transport Ministry regarding the number of vehicles in country and expected to arrive.

Energy market data provider S&P Global Platts is used to predict a price, allowing EPSE to make a foreign currency request of up to $2.5 billion to the central bank – that’s almost equal to revenues from Ethiopia’s annual export of goods. For this calendar year, the country was supplied with 3.4 million metric tons of all products, around 65 percent of which is diesel. According to Tadesse, the process is fairly accurate with a historic margin of error of around 10 percent. In recent years, EPSE’s fuel order has increased up to 15 percent, which includes a buffer of approximately 3 percent, roughly correlating with economic growth that the government claims has averaged around 10 percent annually over the last decade.

The EPSE’s main supplier is Kuwait Petroleum Corporation from which it buys around 60 percent of its diesel, as well as jet fuel for state-owned Ethiopian Airlines. About 40 percent of Ethiopia’s benzene comes from neighboring Sudan, a regional oil producer and refiner. It’s on this route that a weakened bridge is delaying tankers, Tadesse said — not the highway to Djibouti, as Abebe suspected.

In recent years, the enterprise started using commodities traders, first Vitol Bahrain, now PetroChina, for the rest of its diesel and over half of its benzene. Those deliveries, along with the Kuwaiti fuel, arrive at Djibouti’s port, which is around 700 kilometers and two days’ drive from Addis Ababa along a mostly worn highway. Rather than a failure to balance supply and demand, the main problem is distribution logistics, Tadesse believes. In 2015, Black Rhino Group, an investment vehicle owned by U.S. private equity firm Blackstone Group LP, agreed to build a 550-kilometer pipeline to import fuel from Djibouti to the central town of Awash, but the government has made little progress with the $1.6 billion project, as it dithers on deciding how to structure private-public partnerships. A new Chinese-funded railway should get cargo from port to storage tanks in around 12 hours, once it’s connected to Djibouti’s fuel depot. That will make the pipeline project less critical, bringing its implementation into question.

Mines Minister Motuma Mekassa, explained recent shortages were exacerbated by another constraint: the resumption of blending benzene with 5 percent ethanol produced by state-owned sugar factories, a process the government mandates to reduce its import bill. “Previously transporters took fuel from the port and then directly to fuel stations. Now an additional one step is created,” he said about the bottleneck.

Yet amid all the talk of logistical difficulties, Tadesse acknowledges that the problem in Addis Ababa is also structural: it’s under-supplied by fuel stations. Southern neighbor Kenya, which has 54 million people, has 1,700, while Ethiopia, whose population is probably almost twice that, has 700. In Addis, there is a station per 4,000 vehicles, he said. The city is estimated to need 40 to 65 more outlets. “The problem in Addis is the quantity of the stations is very very small,” he said. “The government thinks that it’s not the margin which does not encourage the companies, but there has to be another unknown, hidden thing.”

Liberalized Flows

Drivers arriving at Abebe’s station looking for gas will often find a roped-off forecourt signaling empty tanks, maybe an attendant wagging a discouraging finger, or a queue of vehicles. There’s no grocery store, fuel prices aren’t displayed, and payments are made only in cash directly to the dispensers who handwrite receipts.

Attendants.jpg

It’s a contrasting situation at gas stations in Kampala, Uganda’s capital. The sector is governed by a 2003 law that states: ‘Except where a petroleum supply emergency has been declared…the prices for petroleum products throughout the supply chain shall be governed solely by the laws of supply and demand in a competitive and free market.’

The liberalized sector is dominated by Total and Shell, who compete on prices that are always displayed electronically for passers-by to see. A cast of over 30 other smaller operators means there are gas stations every few hundred meters in the capital, with rural areas also well served. There are rarely outages or queues, and most stations also have well-stocked convenience stores.

In early April in Kampala, benzene was selling at from 3,400 shillings (94 US cents) to 3,660 shillings ($1), while diesel ranged from 2,900 (80 US cents) to 3,180 (88 US cents). Addis Ababa’s respective prices were 18.54 birr (81 US cents) and 16.35 birr (71 US cents). While in Ethiopia the government-fixed price only fluctuates from region to region on transport costs, in Kampala it varies depending on the relative wealth of neighborhoods in the capital, competition, and, according to the multinationals, the quality of the product. As in Ethiopia, gas stations are often owned and operated by dealers as franchise operations, and they make a profit of at least 150 Ugandan shillings a liter (5 US cents). Fuel is directly imported from Kenya by the oil firms, who offer incentives to dealers. “That is why we’re fighting for the targets,” said Shemmy Semakula, who runs a Shell station.

infographic - liberalized vs ethiopia

In 2008, Shell left the Ethiopian market, selling its operations to OiLibya, which is owned by the North African country’s sovereign wealth fund. The other big player aside from Total is National Oil Company, or NOC, whose majority shareholder is the Ethiopian-born Saudi billionaire Mohamed al-Amoudi, a major Ethiopian investor. Other local companies include Dallol, Taf Oil, YBP and Sudan’s Nile Petroleum. A manager at one of the majors, who asked not to be named, said all tricks to make businesses profitable have been exhausted. “What’s now left is either people who will be out of the game, and there are some indications to that effect, or else the government will have to do something about the margin.”

Another industry actor, who also requested anonymity for fear his career could be affected, details another problem. Corrupt dealers, in cahoots with company officials, that were boosting profits by blending cheaper kerosene with diesel lost their appetite for business when the prices of the two products converged in February, he said. The other manager explains even when companies invest in much-needed storage depots, they do not maximize use of them because of the risk of losing money when the price changes.

“We have been operating on the edge,” he said. “Because of all the constraints across the supply chain, the moment you face any hiccup on any of these points, then problems erupt all of a sudden, as you do not have a fallback. And ultimately the public pays the price with long queues.”

“We have been operating on the edge… ultimately the public pays the price with long queues.” – Industry Insider

The first insider believes at the root of the problem in Addis Ababa is the rocketing cost of leasing land in the capital, which is the headquarters of the African Union and has a major UN, NGO and diplomatic presence. A prime plot would cost at least 25,000 birr ($1,089) a square meter in total for a 60-year lease. That means it would take 15 to 20 years to make a return on the investment at current margins. “No matter how handsome the price margin may be, investing in the retail business is unfeasible,” he said. “People prefer to build hotels rather than gas stations, as we see on some of the modernized city center roads.” With the state owning all land, the answer is for the government to allocate subsidized plots for filling stations and manage a restricted bidding process as part of its strategic economic management, he believes.

But the Ethiopian authorities don’t sound like they’re minded to start offering sweetheart land deals for oil firms.

Developmental State

The government’s large role in the fuel industry is typical of Ethiopia’s economic model, which relies on state intervention to a greater degree than regional competitors. A public utility monopolizes telecoms, foreign banks are barred, a government lender commands around 70 percent of deposits, and state-owned corporations control industries such as energy, transport, and sugar. The justification for Ethiopia’s Developmental State model is an elaboration of the Marxist-Leninist theory that the commanding heights of the economy must be in public hands. That is the only way to ensure that essential basic services reach the impoverished masses at an affordable cost, according to the doctrines of the ruling coalition, which controls every legislative seat in a multinational federation. Liberalization will only occur when regulatory capacity is adequate, domestic companies are strong enough to compete, and the population becomes wealthy enough to weather the vicissitudes of the free market.

Hence, rather than adopting measures to improve profitability for the private sector, the plan is for a state-owned enterprise to start retailing fuel in Addis Ababa. “If the private sector cannot give that access sufficiently, the government want to interfere and just break that market failure,” said Tadesse. “Until we become at least a middle-income nation, the government should control this critical commodity.”

When pressed, Tadesse is steadfast, claiming that Uganda’s free-market model risks saddling citizens with higher costs, as happened when there was supply problem in Kenya. “If you leave to the market it cannot be controlled by the government, as the marketer can do whatever he wants.”

“Until we become at least a middle-income nation, the government should control this critical commodity.” – Tadesse Hailemariam, head of the state-owned Ethiopian Petroleum Supply Enterprise

Ethiopia ensures price consistency by building up a Stabilization Fund when global crude costs fall and gets advantageous prices through government-to-government deals with Sudan and Kuwait, he said, without elaborating. Applying the logic of a powerful bureaucracy, Tadesse then argues the government’s retail experiment will be a fair test of the private sector’s claims. “Is it true that it’s not profitable? The government wants to check. Of course, if it’s not profitable, they’ll reconsider. If it’s OK, they’ll continue.”

For both the industry actors, that’s simply rigging the game further. “This is another strange move. Instead of providing a proper and fair solution to the problem they want to do it differently,” he said. “Let alone being in the retail business, even in the wholesale they shouldn’t be there. The solution is not to continue to maintain the monopoly. The solution is to enable and empower the players in the sector.”

Given the multiple problems, only a complete overhaul of the fuel industry can effect significant change and broaden economic progress currently driven by public investment, according to one of the insiders. And more generally, the public sector solution is a surprising one for a government that claims it wants private enterprise to be the country’s growth engine. “If we claim to be going towards a market economy, it’s very conflicting,” he said.


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