Deregulating the petroleum downstream sector - The state of the industry (IV)
It is my considered opinion that government, as the sole shareholder of the Bulk Oil Storage Company (BOST), which is a limited liability company, should take a clear and unambiguous decision on the Petroleum Service Provider (PSP) category that it wants BOST to operate as its core business—whether as an Oil Trading Company (OTC), a Bulk Oil Distribution Company (BDC) or just a Depot Operator.
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Having taken this decision, the management of BOST should be mandated to go through the appropriate channel that all other operators go through by applying for the relevant licence from the National Petroleum Authority (NPA).
Once NPA is satisfied with their application, it then issues the relevant licence to BOST, with clear requirements to meet, failing which it can be sanctioned just like NPA sanctions GOIL whenever it fails to comply with industry regulations.
Thus, whatever category that BOST is licensed under, it will earn the margin associated with that category, as GOIL earns the margin of an OMC because it is an OMC.
Having clearly defined the category under which BOST should operate, another important area to address to ensure the smooth operation of the deregulation policy is to take a second look at the mode of operation of the Primary Distribution Margin.
In the light of the current dynamics in the petroleum downstream industry, I am of the view that the operations of the Primary Distribution Margin should be reviewed. With BDCs now licensed as bulk distributors of petroleum products, BOST should no longer be in charge of inter-depot transfer of petroleum products.
It should be the responsibility of the owner of the product to move it, in bulk, from one depot to the other and deal with any losses associated with inter-depot transfers. The situation where BOST sometimes has to incur in-transit or inter-depot losses for moving petroleum products, from one depot to the other, which it does not own, should not be encouraged.
In this regard, if BOST has its own product and wants to move it from one depot to the other, it should be its duty to do so and its responsibility to bear any associated inter-depot transfer losses. In the same vein, if a BDC has its own product, whether it is in the BOST system(depot) or a private depot, the product belongs to the BDC.
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Therefore, if the BDC intends moving its products from one depot to the other, it should be allowed by NPA to decide whether to do it by itself through contracting any other provider of bulk transport services or even contracting BOST but on a different hauling contract altogether. It should not be mandatory that BOST has to do all inter-depot transfers.
This will insulate BOST from losses that are sometimes passed on to it, thereby crippling its operations, when in actual fact those losses should not have been its headache.
Again, it will ensure that greater efficiency is brought into the petroleum products supply chain since the failure of BOST sometimes to speedily transfer products tends to adversely affect products supply in some parts of the country and this consequently leads to the innocent Ghanaian consumer suffering.
Once these measures are put in place, and given BOST’s petroleum products storage infrastructure, BOST should be able to fend for itself by putting in place the right strategies to compete effectively in the sector. Never again should we hear of BOST facing financial difficulties.
Tema Oil Refinery (TOR)
It is good that TOR’s debt has been ring-fenced to be paid over time from part of the Energy Debt Recovery Levy intended to deal with the legacy debts in the power and petroleum sectors.
I am, however, of the view that adding the levy meant for TOR’s debt repayment to that of the other sectors and having a lump figure may pose a challenge in ensuring consistency in the repayment of TOR’s debt and monitoring to see its full payment. Let’s not forget that this TOR debt has been with us for more than 10 years and thus must be dealt with frontally and taken off the industry nomenclature without delay.
Therefore, I suggest that the component that constitutes the TOR Debt Recovery Levy should be separated from the Energy Debt Recovery Levy and made to stand alone. This time around, unlike before, a dedicated account should be created by the Ministry of Finance with the involvement of the industry regulator, NPA. OMCs will now be tasked to be paying the levy into that account. Quarterly transfers will be made to TOR and quarterly update from the regulator regarding the outstanding balance of the ring-fenced debt will be made available on the NPA’s website.
Once the debt is finally cleared, government should take off that levy from the petroleum products price build-up so TOR fends for itself as a business entity like other Petroleum Service Providers (PSPs). It should also subject itself to regulatory supervision by the NPA.
Prompt settlement of government’s indebtedness to BDCs
To ensure that there is fair competition among all players in the sector under this era of deregulation, it is important that the government takes steps to immediately pay any genuine outstanding debts owed the BDCs after the auditing exercise by Ernst and Young. This is because this situation is creating unfair advantage for the new BDCs which do not have the burden of the legacy debts hanging on their necks.
The government should appreciate the fact that most of these BDCs are indigenous private operators which supported the government in implementing its policy during the difficult era of heavy government subsidy. Therefore, they should be supported to stand rather than allowed to collapse.
Review of Legal Framework for Petroleum Products
Tax Payments
Another important area I would like to suggest to government is for it to consider reviewing the legal framework for the payment of petroleum products taxes, in the light of the current changes in the industry. For instance, if the petroleum products depots are considered to be bonded warehouses for which reason the officers of the Customs Division of the Ghana Revenue Authority(GRA) are at their gates, then it is the “importer” of the product, in this case, the BDC which should be tasked to collect the taxes and pay to GRA, and not the OMC. Therefore, the shifting of the responsibility from the BDC to the OMC for payment, I think it is not fair and has to be corrected because it is posing serious financial challenges for the OMCs, especially the indigenous private ones.
If, however, there is no desire to change this system now, then I suggest that the credit days should be extended from 21 days to at least 35 days. This is because it is important to understand that the petroleum tax, especially the Special Petroleum Tax component, which is heavier than the others, is like VAT, and therefore, a consumption tax. Which means it applies only when the product has been sold to the final consumer.
Meanwhile, it should also be understood that OMCs do not sell their products at the depots; they only “lift” the products and transfer them into their storage tanks at the stations, which represent their warehouses. The depots are the warehouses of the BDCs, not the OMCs. Therefore, to start counting the period for the payment of taxes from the day the OMC lifts the product from the depot, as is the case now, instead of counting from the day the OMC sells to its customers (i.e. motorists), implies the tax regime makes OMCs pay VAT on inventory and not what has been sold.
This is a very serious issue because some OMCs, especially the indigenous private ones, are collapsing because of the heavy toll this is having on their working capital. Others are virtually working for the banks because they are relying on huge overdraft facilities with high interest rates, just so that they can meet their obligations to the Ghana Revenue Authority, else they will be stopped from operating.
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If this trend continues, the gains made so far by having indigenous operators in the sector will be eroded.
The writer is the Lead Consultant of Wellspring Petroleum Services Ltd, a petroleum business consultancy firm.
He is also the CEO of PETROSOL, an Oil Marketing Company.