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EFFECT OF BULK PROCUREMENT SYSTEM TO THE
TANZANIA FUEL MARKET PRICES
EFFECT OF BULK PROCUREMENT SYSTEM TO THE TANZANIA
FUEL MARKET PRICES
By
Erasmo M. O. Nyoni
A Dissertation Submitted in Partial/Fulfillment of the Requirements for Award of
Master Degree of Science in Accounting and Finance (MSc A&F)
of Mzumbe University.
2013
i
CERTIFICATION
We, the undersigned, certify that we have read and hereby recommend for acceptance
by the Mzumbe University, a dissertation entitled Effect of Bulk Procurement
System in Fuel Market Prices in Tanzania: A Case of Petroleum Industries in
partial fulfillment of the requirements for the degree of Master of Science in
Accounting and Finance (MSc A & F) of the Mzumbe University.
______________________________
Newa Makawa (Major Supervisor)
_______________________
Internal Examiner
Accepted for the Board of ………………………………
______________________________________________
DEAN/DIRECTOR, FACULTY/DIRECTORATE/SCHOOL/BOARD
ii
DECLARATION
AND
COPYRIGHT
I, Erasmo M.O Nyoni, declare that this dissertation is my own original work and that it
has not been presented and will not be presented to any other University for a similar or
any other degree award.
Signature _____________________________
Date_________________________________
© 2013
This dissertation is a copyright material protected under the Berne convection, the
copyright Act of 1999 any other international and national enactments, in that behalf, on
intellectual property. It may not be reproduced by any means in full or in part, except
for the short extracts in fair dealings, for research or private study, critical scholarly
review or discourse with an acknowledgement, without a written permission of the
Dean, School of Graduate Studies, on behalf of both the author and the Mzumbe
University.
iii
ACKNOWLEDGEMENT
I thank the almighty God for his blessings, which has enabled me and other people who
supported me in different ways to work together towards completion of this study.
I would like to extend my sincere thanks to my supervisor Newa Makawa whose close
assistance, guidance and constructive criticisms have resulted in successful completion
of this study.
Many thanks to all members of the EWURA petroleum department, Oil marketing
companies, colleagues, friends and other stakeholders who have been very supportive
by tirelessly providing me with information and guidance for my research.
I would also like to extend my gratitude to my mom Dafrosa Msemwa and brothers,
sisters and in-laws who have always supported, encouraged and believed in me, in all
my endeavors and who so lovingly and unselfishly cared for Patricia.
I also put on record, my daughter Patricia, who was born during my study and spent
many days with relatives to allow me to focus. I am deeply sorry for the time we spent
apart.
Finally and most importantly, I would like to express my heartfelt gratitude to my Wife
Theresia for her loving, supporting, encouraging, being closer and guiding me from
availing materials to advising .Thank you for always being there for me.
I also place on record, my sense of gratitude to one and all who, directly or indirectly
have lent their helping hand in this venture.
iv
DEDICATION
This work is dedicated to my Dad the late Oswald Nyoni who passed away just after my
completion of classes for MSc. A&F. But I will always remember him for moral
support and encouragement I got during his life which enabled me to successfully
complete this program. I also dedicate this work to my Wife Theresia and brothers and
sisters, to be the motivator for them to always chase their dreams tirelessly.
v
LIST OF ABBREVIATIONS AND ACRONYMS
BPS Bulk Procurement System
EWURA Energy and Water Utilities Regulatory Authority
ILO International Labour Organization
LPG Liquefied Petroleum Gas
OMC Oil Market Companies
OPEC Oil Producing and Export Countries
PIC Petroleum Importation Coordinator
TAOMAC Tanzania Oil Market Companies
TBS Tanzania Bureau of Standards
TPDC Tanzania Petroleum Development Company
PC Percentage
KOJ Kurasini Oil and Jet
FOB Free On Board
TIPER Tanzania international Petroleum Reserve
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ABSTRACT
This study was carried to establish whether the Bulk Procurement System is effective to
control fuel market prices in Tanzania market from the importation procedure to the
products’ pricing and regulation in the downstream petroleum sub-sector, focusing on
pricing strategies and core drivers. The case study research design was employed in
carrying out study. Primary and secondary data were collected, analyzed and tested
using correlation analysis and Analysis of Variance (ANOVA) both at 0.05 levels of
significance.
It was revealed that the Bulk Procurement System has managed to control prices
movement of petroleum product since was introduced without being affected follows
the general international prices trend and the costs incurred in bringing the products to
saleable state. It was also noted that international exchange rates movements has a
direct impact on Platts prices, and hence movements in Platts prices are partially a
reflection of international exchange rates movement. Regulation of petroleum sector by
Energy and water regulatory authority (EWURA) is reasonably effective as the results
shows that Oil Marketing Companies (OMCs) abide to indicative/cap prices set.
From these findings, it is recommended that, Oil marketing companies have to improve
on their general procurement practices to ensure that they incur reasonable costs. This
includes proper planning for procurement, clearance of cargo, financing arrangement
and better negotiation and sourcing. Improvement in this area may lower the total cost
of acquisition and hence lower unit cost and selling prices. EWURA needs to establish
alternative methods of allowing the multinational companies to import product from
their own source and closely monitor their prices and compare with the world market
price movement to enable to get cheap and quality product and BPS to be used for
independents companies on which their prices will be used as benchmark for the
country benefit at large.
vii
TABLE OF CONTENTS
CERTIFICATION……………………………………………………...…………..….…i
DECLARATION AND COPYRIGHT…………………………………..………..….…ii
ACKNOWLEDGEMENT………………………………………………..……….….…iii
DEDICATION……………………………………………………………..………...….iv
LIST OF ABBREVIATIONS AND ACRONYMS………………………………..……v
ABSTRACT…………………………………………………………………...….…….vi
TABLE OF CONTENTS………………………………………………………......…..vii
CHAPTER ONE………………………………………………………..………..….….1
PROBLEM SETTING…………………………………………………….....……….….1
1.0 Introduction……………………………………………………….……..…..…...1
1.1 Background Information………………………………………….……..…..…...1
1.2 Statement of the Problem……………………………………….……….…...…..3
1.3 Research Questions…………………………………………….………………...4
1.3.1 Main question………………………………………………….…………...........4
1.3.2 Specific questions…………………………………………….……………....….4
1.4 Objectives…………………………………………………….……………….....4
1.4.1 Main Objective……………………………………………….……………….....5
1.5 Specific objectives………………………………………….……………..…..…5
1.6 Scope and delimitation of the study……………………….………………….…5
1.7 Significance, rationale, and/ or justification of the Study….……………….…...5
1.8 1.8 Limitations of the study ……………………………………………………........6
1.9 Organization of the Dissertation…………………………………………….…...7
CHAPTER TWO…………………………………………………………………….…9
LITERATURE REVIEW………………………………………………………………..9
2.0 Overview………………………………………………………….………......….9
viii
2.1 Theoretical review………………………………………………………..…......9
2.1.2 About Petroleum sector …………………………………….………………......9
2.1.3 General Determinants of Prices and Pricing Decisions…………….………....10
2.1.3.1 Pricing Objectives…………………………………………………..…………10
2.1.3.2 Demand and Supply………………………………………………….………..11
2.1.3.3 Customers…………………………………………………………….………..12
2.1.3.4 Competition……………………………………………………………….…...12
2.1.3.5 Costs……………………………………………………………………….......12
2.1.4 When is Price Setting Required ……………………………………………....13
2.2 Empirical review……………………………………………………………....14
2.2.1 Public Concern on the Petroleum Sector Practices…………………………....14
2.2.2 Downstream Petroleum Sector in Tanzania……………………………….…..15
2.2.3 Definition of Bulk Procurement System………………………………….…...16
2.2.3.1 Effective Bulk Procurement System…………………………………..………16
2.2.3.2 Experience on Bulk procurement system……………………………………...16
2.2.4 Tanzania experience on Bulk Procurement System…………………………...17
2.2.4.1 Stakeholders to the Tanzania’s Downstream Petroleum Sector……………....17
2.2.4.2 Tanzania Petroleum Development Company (TPDC)………………………...17
2.2.4.3 Tanzania Revenue Authority (TRA)………………………………………......18
2.2.4.4 Tanzania Bureau of Standards (TBS) ………………………………………...19
2.2.4.5 Ministry of Energy and Minerals (MEM) ………………………………….....19
2.2.4.6 Energy and Water Utilities Regulatory Authority (EWURA)……………...…20
2.2.4.7 Consumers…………………….…………………………………………….....21
2.2.5 Importance of BPS to Tanzania Fuel market……………………………….....22
2.2.5.1 Kenya…………………….………………………………………………..…..23
2.2.5.1.1 Importation Mechanisms………………………………………………….…25
2.2.5.1.2 Costing of Crude Oil…………………………….………………….……….26
2.2.5.1.3 Costing of Imported Refined Products……………….…………….……….26
2.2.5.2 Mozambique…………………….…………………………………………......27
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2.2.5.2.1 Pricing Structure…………………….…………………………………….....28
2.2.5.3 Ghana Bulk Distribution Companies (BDCs)…………………………….....28
2.2.5.3.1 Key changes include…………………….…………………………………...29
2.2.5.3.2 Pricing Components…………………….………………………….……..….31
2.2.5.4 South Africa…………………….…………………….…………….………….32
2.2.5.5 Rwanda…………………….…………………….………….…………….....…34
2.2.5.6 India…………………….…………………….…………………………….…..34
2.2.5.7 China…………………….…………………….……………………….…….....34
2.2.5.8 Thailand…………………….…………………….………………………….....35
2.2.5.9 Australia…………………….…………………….……………………….…....35
2.2.5.10 Philippines…………………….…………………….……………………...…37
2.2.6 Conclusion…………………….……………………………………….…..…...38
2.3 Conceptual Framework………………………………………………….…..…39
CHAPTER THREE…………………………………………………………..….…...40
RESEARCH METHODOLOGY………………………………………………..…..…40
3.0 Introduction…………………………………………………………….……….40
3.1 Study area……………..……………………………………………….…..…...40
3.2 Research approach………………………………………………………..….…41
3.3 Research design………………………………………………………….….….41
3.4 Study population………………………………………………………..….…..41
3.5 Sample, sample size and Sampling techniques……………………….……......41
3.6 Types and Source of data…………………………………………….….…..…42
3.6.1 Primary data Sources……………………………………………….….…….…42
3.6.2 Secondary data sources………………………………………………..…….…42
3.7 Methods of data collection……………………………………………..…........42
3.7.1 Interviews…………………………………………………………………....…43
3.7.2 Questionnaires……………………………………………………………..…...43
3.8 Data analysis and presentation………………………………………….………44
3.9 Methodology in Practice…………………………………………………...…...45
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3.9.1 Data Manipulation……………………………………………………………...47
3.9.2 EWURA’s cap/indicative price available…………………………………..…..47
3.9.3 Data Cleaning…………………………………………………………………..47
CHAPTER FOUR………………………..…………………………………….…......48
PRESENTATION OF FINDINGS………………………..…………………………...48
4.0 Introduction………………………..…………………………………………..48
4.1 Research Findings from Secondary Data Analysis………………………….....48
4.1.1 Reporting of the Findings………………………..…………………………......48
CHAPTER FIVE………………………..………………………..…………………...55
DISCUSSION OF THE FINDINGS………………………..………………….………55
5.1 Introduction………………………..……………………………………….......55
5.2 Application of Bulk Procurement system in Tanzania………………..………..56
5.3 Determinant of effective BPS………………………..………………..…...…..57
5.5 Impact of BPS to the country economy……………………………………......58
CHAPTER SIX………………………..……………………………………………....59
CONCLUSION AND RECOMMENDATIONS……………………………..……….59
6.1 Introduction………………………..…………………………………..…….…59
6.2 Summary………………………..………………………………….…………...59
6.2.1 Key Findings and Conclusions………………………..……………………......59
6.2.2 Conclusion on Research Question Two…………………………………….......60
6.2.3 Conclusion on Specific Objective One…………………………………………62
6.2.4 Conclusion on Research Question Three and Specific Objective Two…….......64
6.2.5 Other General Observations and Conclusion………………………………......65
6.2.5.1 Measures that Can Contribute to Better Petrol Price Levels………………......65
6.2.5.2 Impact of Taxes and Levies on Petroleum Products’ Prices………………......65
6.2.6 Recommendations / Implications…………………………………………..…..67
6.2.6.1 Government………………………..………………………….………………..67
xi
6.2.6.2 EWURA………………………..………………………………………………67
6.2.6.3 OMCs ………………………..……………………………………………...…68
6.2.7 Recommended Further Studies………………………..…………………………69
APPENDICES…………………………………………………………………...……..70
APPENDIX 1……………………………………………………………………..…….70
RESEARCH QUESTIONNAIRE…...............................................................................70
QUESTIONNAIRE 1……………………………………………………………….... 70
QUESTIONNAIRE 2……………………………………………………………….....72
REFERENCES………………………………………………………………………....74
1
CHAPTER ONE
PROBLEM SETTING
1.0 Introduction
Price stability in petroleum sector which also includes efficiency in distribution and
availability of petroleum products is one of the very core drivers to countries’ economic
and social development. This is due to the fact that is among major resources in all
level of production which tend to move from where they are less required to where they
are mostly needed. The movement of outputs of the production process depends much
on the availability of resource such as labour, capital and transportation to facilitate the
movement from production areas to consumption areas. The movement of labour,
capital and goods requires energy that will generate a motion for the means of
transportation used. The energy used is mostly petroleum products which includes type
of fuels like petrol, diesel, liquefied petroleum gas and kerosene, herein referred as
“fuel”. Government revenues are also hugely contributed via various taxes and levy on
fuel.
1.1 Background Information
Tanzania is among the countries which depend much on the use of petroleum product
as the source of energy to drive its economy. Due to increase of the market demand of
the petroleum products a number of oil companies have been formed which for many
years have been dealing with both importation and distribution of petroleum product.
Recently due to unstable prices of the petroleum product in both retail and whole sale
market have caused debate all over the world which made government to intervene the
process of importation and distribution (Ewura website, 2013).
In July of 2007, the Government proposed and the Parliament enacted amendments to
the Petroleum (Conservation) Act, Cap. 392 and the Energy and Water Utilities
Regulatory Authority Act Cap. 414 (EWURA Act). As a result of these amendments,
EWURA (also referred to as the Authority or the Regulator) is the de jure economic
2
regulator of the downstream petroleum (Importation, marketing and distribution) sub-
sector (EWURA website, 2013).
Pursuant to amendments made to the EWURA Act in August 2007, and provisions of
the Petroleum Act, 2008 the Authority has an obligation of performing economic
regulation of the petroleum downstream sub-sector. The Authority is empowered to
intervene and modify as and when deemed appropriate the economic behavior of
regulated suppliers aimed at narrowing choices in certain areas including prices, rates
of return and methods of procurement. These amendments were by high increase of
petroleum prices in the local market. Said by Ewura Director at Courtyard Hotel, Dar es
Salam,4th August 2009.
In August 2007, EWURA conducted an inquiry on two matters that were deemed to be
associated with the high petroleum products prices. These were:
(i) Allegations of collusion and windfall gains by oil marketing companies
(OMC’s), during the month of 3 July 2007; and
(ii) Existence of inefficiencies in the petroleum downstream sub-sector.
The Inquiry, among other things, revealed that the current petroleum supply chain has
major inefficiencies which include fragmentation of imports whereby each company
individually imports products (by multiple importation of small petroleum products
quantities), resulting in higher costs (lack of economies of scale); congestion of the
unloading facilities adding to high demurrage costs; and transfer pricing. Furthermore,
it was revealed that the petroleum downstream sub-sector is characterized tax evasion,
lack of information and data, adulteration of products and general inefficiencies in the
various segments of the petroleum supply chain.
It is the result of this inquiry, the EWURA Board of Directors, specifically on the
inefficiencies in the downstream petroleum sub-sector in the country, issued a EWURA
Order No. 07-010 of 8th October 2007. Among others, the Order spells that all Oil
Marketing Companies importing petroleum products in Tanzania shall use the bulk
importation system.
3
“All Oil Marketing Companies importing petroleum products in Tanzania shall use a
bulk importation system where importation of petroleum products will be done
competitively and transparently using an open tender system through International
Competitive Bidding”.
One of the key functions of EWURA in the petroleum sector is to ensure effective and
efficient procurement of petroleum products and promote fair competition among
service providers.
In order for Tanzania to get most reasonable petroleum products prices, and as part of
implementation of legal requirements, the Government through EWURA embarked on
Implementation of Bulk Procurement System as an efficient method of importing
petroleum products in the country. In that regard, EWURA recruited a UK based
Consultant, Petroleum Development Consultants Limited, to assist in setting up a Bulk
Procurement System in Tanzania.
The key objective of the Consultancy is to design and establish an institutional and
operational framework for the Bulk Procurement and Distribution System of refined
petroleum products in Tanzania (Ewura website, 2013).
1.2 Statement of the Problem
Despite having clear policy, standard and procedure which is well known to all market
players within bulk procurement system but still unstable prices has continue to be an
issue within the Petroleum Industry. That makes the importation of petroleum product
through Bulk procurement system to be an area that has to be looked into wider range
as ‘How effective is BPS to Tanzania fuel market Prices?’ This is a research problem
that this study addressed.
A brief but detailed review of the downstream petrol sub-sector has established that
there is a problem that has to be addressed because there is a worldwide “doubt” that
people have regarding efficiency of practices in petroleum products’ pricing. Given the
depth of impact these products have to the development in the economic and social life,
it is worth studying this area that attempt to evaluate the pricing practices fairness in the
4
petroleum downstream sub-sector and comment on the practices, strengths and
improvements required in both BPS operators and the regulator’s sides and identifying
areas where changes can be made to improve fuel prices stability and fairness for
economic and social life improvement.
The research problem arises from the public “outcry” concerning the high petroleum
prices supported with a feeling that petroleum products are overpriced to the benefit of
the OMCs, while at the same time OMCs are complaining that the regulator in
exercising its power is interfering the market prices making their business uneconomic.
OMCs also argue that their different sizes of operations have impact on their costs and
hence the price they can offer. These opinions are complicated by the experience in the
market where some OMCs manages to sell at a price below the indicative/cap prices
published by EWURA, hence confusing the consumers as to who is correct.
1.3 Research Questions
1.3.1 Main question
Does BPS effectively control the fuel market prices from going up irrespective of the
changes occurred in foreign currency?
1.3.2 Specific questions
1) To what extend has BPS managed to control price of Petroleum products in
Tanzania market?
2) What is the impact of BPS to government on taxes/revenue?
3) Does the petroleum products’ prices offered through BPS are effectively
controlled and monitored by the regulator?
1.4 Objectives
1.4.1 Main Objective
The comprehensive objective of this study is a direct reflection of the research problem.
The objective is “To establish whether the Bulk Procurement System is effective to
control fuel market prices in Tanzania market”.
5
1.5 Specific objectives
1) To examine how far BPS has managed to control fuel prices from going up.
2) To examine the effects of the bulk procurement system on taxes/revenues of the
country.
3) To examine the effects of the government Intervention on control of importation
and distribution.
1.6 Scope and delimitation of the study
The study focused Petroleum Industry on which BPS and its effect to the fuel market
price studied. This study involved different people in the petroleum sector where by in
data collection a research included Ewura employees as controller of petroleum
products, PIC staff who work as coordinator and in charge of the whole importation
process, Oil Market Companies and OMC clients based in Dar es Salaam where the
importation and distribution of petroleum product is being carried.
1.7 Significance, rationale, and/ or justification of the Study
The study is considered to be useful to the community, government as well as the
academic cycles due to the sensitivity of the issue at hand as it cuts across the interests
of many stakeholders. The stakeholders are persons concerned with the movements in
fuel prices as it directly impacts on their daily budget and the society’s disposable
income. The study will benefit the regulator and OMCs and the society at large and it
will assist in improving on their own performances as well as their relationship.
Other researches have been done on petroleum industry “around” the BPS in relation to
pricing issue but the approach of this research is unique due to the mixed approach /
methodology as discussed in the next chapter, hence it has attempted to highlight the
gaps and come up with the suggestions on what should be done to fill the gaps arising
not only from the time differences between researches but also the methodology used.
For the purpose of this research the following are expected to be realized:
6
• It will help the researcher in knowing the reasons behind BPS (which is an
importation system) introduced in Tanzanian.
• It will also help the government through EWURA to know what defects exist in
the petroleum supply and come up with possible solutions to combat them.
• It will also help strategic investors to know what strategies to draw so as to be
able to manage the conflict of provision of quality services and profitability
within their operations.
• It will also enable the clients to invest in precautionary demands incase firms
decide to close down their operations so as to enhance continuity in their
businesses.
• It will also help the consumer of petroleum product to identify other factors
contributing to high fuel prices.
The study is also important for a researcher for partial fulfillment of the award
of masters of Science in Accounting and Finance of Mzumbe University
1.8 Limitations of the study
Although this research was carefully prepared, researcher is still aware of its limitations
and shortcomings as has been identified below.
First of all, the research was conducted in Dar es Salaam region only though, Tanzania
has total of 30 regions in number under which the same research could be conducted.
Covering the whole country couldn’t be possible due to minimal resources available
such as time resources, human resources as well as financial resource.
Second, the population of the experimental group is small, only thirty people and might
not represent the majority of the stakeholders of the petroleum product. The researcher
had to ensure that he sample taken is not bias and only people who deal direct with
petroleum product are involved
Third, at the initial state, the sampled companies were hesitating to allow the study to
take place in their organization due competitive reasons as well as business
confidentiality grounds. Therefore the researcher was asked to declare that the collected
7
information will only be used for academic purpose and that a copy of the research
findings will be submitted to the respective company.
Fourth, some of the Employees from government agencies with no apparent reasons
were not willing to give out their views regarding the efficiency of Bulk Procurement
system. The researcher had to ask them to present their views in writing without putting
their names and put them in sealed envelope on which that option showed positive
results to all interviewers.
Fifth, the study was limited to resellers and importers rather than end users and
common people who don’t buy directly petroleum products rather through the use
vehicles for transportation and other needs to drive their economy.
Furthermore, through direct observation, this study also revealed that,
In spite of the efforts undertaken by the researcher to ensure the best research
methodology is used in this study, this study like any other study has some more
limitations.
• This study has partly used secondary data whose accuracy for the purpose of this
research cannot be guaranteed.
• The scope of the sample size is limited to Dares Salaam only hence may limit
applicability of the findings countrywide.
• The study has tested prices of a few OMCs.
• Cost drivers studied in-depth are rate of exchange and international purchasing price
(Platts FOB prices) only.
The researcher has to overcome the above limitations in order to complete the study.
Researcher used different data collection methods as for information which is not
accuracy in this case secondary information researcher used primary data sources
(interview and questionnaires).
1.9 Organization of the Dissertation
The study is organized in six chapters of which each has been brief summarized as
follows:
8
(i) Chapter one has covered introduction and entire study which includes the
research problem, research questions, research objectives, significance of the
research and organization of the dissertation.
(ii) Chapter two is a literature review which gives different views from different
scholars who happen to have done a related or similar study. It also defines
various concepts and definitions used in the study.
(iii) Chapter three is concern about the methodology used and narrates the
approach used to produce the study findings in chapter four. It comprises an
overview, sample selection, research instruments and data collection and
analysis approach.
(iv) Chapter four presents the study findings obtained using the approach
discussed in chapter three. The findings include the overview, respondent’s
comments on Bulk Procurement System with regards to the price control
efficiency.
(v) Chapter five a researcher aims to provide a summary of the study which is
based on the research findings, analysis and discussions.
(vi) Chapter six concludes on the findings obtained and reported in the previous
chapters and come up with conclusion and recommendation for improvements
in practice and further studies.
9
CHAPTER TWO
LITERATURE REVIEW
2.0 Overview
In this segment, a researcher will review other related studies and papers key word
being “Petroleum products bulk procurement system” and “petroleum products pricing
control”.
The main purpose of the literature review is to identify the existing knowledge on the
subject matter and as such, be in a position to identify the knowledge gap that the
current study addresses (Baradyana and Ame, 2005). Literature review is also a source
of the general knowledge on the theories of the subject matter of the research, in this
case, bulk procurement system which was brought in with intention of controlling
price. This understanding gives the researcher the picture of what the scholars have
done and what they know in the area of interest hence opening the mind of the
researcher on what to focus on in order to positively contribute to the body of
knowledge.
2.1 Theoretical review
2.1.2 About Petroleum sector
Petroleum sector is categorized into two categories namely upstream and downstream.
Upstream activities involves exploration and production activities, while downstream
includes importation, storage, transformation, export, inland transportation of crude oil
and refined petroleum products, wholesale and retail distribution of petroleum products
including liquefied petroleum gas. In the context of The Energy and Water Utilities
Regulatory Authority Act, Cap 414 the petroleum downstream is referred to as the
regulated petroleum sub-sector.
Tanzania consumes about 1.54 million cubic metres per annum of petroleum products
wholly imported from Mediterranean, Arabian Gulf and sometimes from Durban, South
Africa. Effective from January 2000, petroleum downstream sub-sector was liberalized
10
enabling Oil marketing companies to individually procure and trade petroleum products
in accordance to their market requirements and setting pump prices based on the
prevailing market forces (Ewura website 2013).
2.1.3 General Determinants of Prices and Pricing Decisions
Price of a product in the market is an integration and result of pricing objectives,
analyzed information and decision making process which considers a number of
variables in the particular market. Below are some of the variables that generally
impacts on suppliers’ pricing decisions.
2.1.3.1 Pricing Objectives
Trading organizations have different objectives that they want to achieve in their
operations. Products’ price is one of the variables that normally have a reflection
of`organization’s objectives. Some objectives that are reflected in the prices have been
identified by Kotler and Keller (2006) and are briefly explained below.
• Survival – This is the objective opted by companies overwhelmed in stiff
competition, over capacity and changing consumer wants. Under this objective the
company will ensure that the price covers all variable costs and some of the fixed costs.
This pricing strategy is viable in short run only.
• Profit – This pricing strategy is driven by profit objectives. Companies will in this
case charge the price that will result in the desired profit. It assumes a perfect
knowledge by suppliers of the demand and supply conditions of a product. In order to
arrive at the right price, this knowledge has to be integrated with expectations on
competitors’ reaction, legal restrictions on price and other marketing mix variables.
• Market share – There are a number of variations in pricing strategy for addressing
the desires market share targets. Maintenance of the current share for example may
require such a strategy as going rate pricing where company tries to match its
competitors’ price ranges. The objective to increase market share may require market
penetration pricing strategy which is normally accompanied with temporary price drops
11
(promotional prices) to boost sales. Effectiveness of price as a tool for market share
management depends on the market’s sensitivity to prices (price elasticity), level of
competition and general cost levels in the industry.
• Market skimming- Skimming" is one of the pricing objectives that may be used
when a company is targeting customers who aren't highly motivated by the cost of a
product or service. Luxury items are often priced in this way; if the product is "the
cream of the crop," it's considered worth it at almost any price as evident by its
demand. This type of pricing objective skims the cream, or highest value, from the
marketplace by providing premium, much-in-demand products to an exclusive target
audience. Selling a product at a high price, sacrificing high sales to gain a high profit is
therefore "skimming" the market. Skimming is usually employed to reimburse the cost
of investment of the original research into the product. This strategy is often used to
target "early adopters" of a product or service. Early adopters generally have a
relatively lower price-sensitivity - this can be attributed to: their need for the product
outweighing their need to economize; a greater understanding of the product's value; or
simply having a higher disposable income.This strategy is employed only for a limited
duration to recover most of the investment made to build the product. To gain further
market share, a seller must use other pricing tactics such as economy or penetration.
This method can have some setbacks as it could leave the product at a high price
against the competition.
• Other objectives – These include any other objectives not mentioned above including
product-quality-leadership, market skimming and others.
2.1.3.2 Demand and Supply
Pricing decision depends on the nature of the market and its condition. Generally, it is
said that prices are based on the demand and supply conditions of a product and the
price is determined at equilibrium point where there is interaction between the demand
and supply curves of a particular product. The theory states that, if there is high demand
12
and supply is low then prices goes up while if demand is low and the supply is high the
prices goes down. This is a reflection of the demand theory as applicable in a perfectly
competitive market (Mansfield, 1996).
2.1.3.3 Customers
Customers are the main stakeholders of a product and they influence pricing decisions
through their power in deciding what to buy in the market (market forces). Customer
generally tends to reject the products that are sold at the prices that they feel do not
represent the expected value (satisfaction) they will earn from that product, this is
called the “customer perceived value” (Kotler and Keller, 2006). Hence in
contemplating the prices of goods, suppliers have to consider the expected value of
their products to the consumers.
2.1.3.4 Competition
The price a supplier charge is highly dependent of the prices that other suppliers charge
for a similar product. This is especially valid where products are similar and
undifferentiated and customers are indifferent between them. Existence of substitute
product requires suppliers to be efficient and innovative so that they always offer
slightly differentiated products that will slowly build a competitive advantage in their
favour and hence be able to at least maintain their market share if not increasing it. The
idea of importance of competition in pricing decision is also presented in the theory by
Paul Porter, famously known as Porter’s five forces theory (Baily, et al, 2008; Kotler
and Keller, 2006).
2.1.3.5 Costs
Costs are the crucial matter on the profitability of the company. If the operating costs
are high, a reflection must be higher prices of their products to compensate for variable
and fixed costs incurred. Understanding the cost of delivering the products enables
companies to set prices that make the product attractive to customers while maximizing
13
companies operating income (Horngren et al, 2001, Kotler and Keller, 2006) that is the
reason that suppliers have to strive to become low cost producers so as to be able to
offer competitive prices, this is sometimes referred to as cost leaders ship, which is a
theory of business unit level strategy as developed by Paul Porter (Baily et al, 2008).
The idea of importance of cost in determination of price is developed on the basis of the
fact that most of the pricing theories are based on variations of the Cost PLUS theory,
whereby a price is determined by taking cost of production plus a margin
Kotler and Keller (2006) argued that many companies do not properly handle the
pricing process. In industry where the price is a key factor like oil industry, companies
need to establish special pricing department with responsibility to set, overseeing and
assist in determining appropriate prices for their products. In Tanzania this is currently
practiced by telecommunication companies.
2.1.4 When is Price Setting Required?
Price setting is required in different incidents including when a firm develop a new
product, re-introduces older product to new distribution channels / geographical
location, in changed situations like increased competition or change in fashion and
others (Kotler and Keller, 2006). Kotler and Keller (2006) mentions key stages in price
development:
Step 1: Identifying and selecting the pricing objective for example survival, market
share, and maximum profit, market skimming or being a product-quality leadership
selling at premium prices.
Step 2: Determining demand and customer behaviors including price sensitivity,
demand forecasting and price elasticity all of which must be reflected in the prices.
Step 3: Costs estimation which assists in identifying the lowest price that you can sell a
product at and recover your costs which include fixed and variable costs in production
and operational activities. Knowing your costs also assist to identify the desired target
costs that will enable a desired pricing strategies to work.
14
Step 4: Analyzing competitors’ price, costs and offers is the next step. Companies have
to perform market survey and intelligence to know what is being offered by their
competitors in terms of prices and to come up with counter strategies. The cost
structure of the company determines competitiveness and survival of the company in
business.
Step 5: Selecting a pricing method will follow depending on the objective at hand.
These may include Mark-up pricing, Target return pricing, Perceived value pricing.
2.2 Empirical review
2.2.1 Public Concern on the Petroleum Sector Practices
One of the key issues that the world has been struggling in petroleum sector is
petroleum products’ prices as keep fluctuating. In various countries worldwide, similar
calls have been and are still being made to governments to manage the fuel pump prices
at retail sites as there has always been a feeling that Oil Marketing Companies (OMCs)
overcharge customers on petroleum products through unfair trade practices like price
zoning, price discrimination, unfair price support arrangements (price cannibalization),
cartel-like price fixing and others. On the other hand OMCs blame international
refinedoil’s fuel prices, currencies’ exchange rates and government taxes as the main
contributors of the high prices they set. (Ewura website,2013; ACCC, 2007; CPTPP,
2006;
SEPO, 2004; Wyden, 1999).Governments worldwide have not ignored the calls on the
need to check the fairness of the fuel prices especially where the sector has been
liberalized. In Tanzania, The Petroleum downstream sub-sector which is a retail level
operation was liberalized inyear 2000, the process that handled the control of the
petroleum products’ prices to the market forces. However in order to maintain and
enhance fair practices in the market, in year 2001 the government formulated a
regulatory body for the water and energy sector ( which include fuel) through the
Energy and Water Utilities Regulatory Authority Act, Cap 414 of 2001. The authority,
abbreviated as EWURA, became operational in April 2006, among its functions being
ensuring economic and technical development of the regulated sectors as well as
15
regulating the market in terms of licensing, pricing and establishing standards of
services. In that way EWURA promotes effective competition in the regulated sectors
and protects consumers’ interests. (URT, 2001) In October 2007 EWURA, in
accordance to EWURA Order No. 07-010 published its first version of import parity
based indicative prices for fuel for different regions and districts in Tanzania covering
period from 15th to 30th October (EWURA, 2013). Import parity methodology which
is also used by the Indian regulatory committee for fuel price, is also commonly used as
“landed cost” basis. It is a cost plus pricing whereby all the costs incurred from
purchase of crude oil overseas to delivery of fuel to the final destination (petrol station)
plus an allowance for overhead costs and margin are included in determination of the
price at which a product is to be sold at. EWURA has continued issuing these indicative
prices which are now issued bi-monthly and have become binding to OMCs as per
Government Notice no 5 of January 2009 where OMCs prices have to sell at price
within 7.5% of the EWURA’s indicative price (EWURAwebsite,2013). Prior to that,
the indicative prices were just for information purpose. To date, OMCs challenges
accuracy of EWURA’s petroleum price build-up formula, that the indicative prices set
by EWURA is not economic to them, but the experience is that sometimes OMCs sell
even below the indicative prices which sets the cap. The ideas presented in the
preceding part of the introduction are what stimulated the researcher to propose the
study that attempt to analyze the petroleum products pricing structure and its regulation
in Tanzania. The research is focused on a narrower range of the products as sample and
will focus on the downstream sector which is linked to the final consumer.
2.2.2 Downstream Petroleum Sector in Tanzania
Petroleum sector is generally categorized into two sub-sectors namely upstream and
downstream. Upstream activities involves exploration and production activities, while
the downstream deals with importation, storage, transformation, export, inland
transportation of crude oil and refined petroleum products, wholesale and retail
distribution of petroleum products including liquefied petroleum gas. Tanzania
16
consumes about 1.54 million cubic meters of petroleum products per annum wholly
imported from oil producers mostly from Mediterranean and Arabian Gulf (EWURA
website, 2013).Since sector liberalization in January 2000, petroleum downstream sub-
sector players the Oil Marketing Companies individually procure and trade petroleum
products in accordance to their customers’ requirements at their set pump prices based
on the prevailing market forces.
2.2.3 Definition of Bulk Procurement System
Ewura bulk procurement rules 2009 - Draft to Stakeholders 23 02 10 (2)d. defines Bulk
Procurement System as a system established pursuant to regulations made by the
Minister to govern the importation of a bulk petroleum product in Tanzania. Bulk
procurement system is being applied in the following petroleum product which includes
motor super premium, gasoil, and dual purpose kerosene and also includes other
petroleum product as are being determined by order of authority.
2.2.3.1 Effective Bulk Procurement System
By effective BPS, the researcher refers to the system with prices that are a true
reflection of all the available information, similar to the idea that finance literature
refers to as efficient market (Brealey et al, 2008). And for the purpose of this study, the
researcher relates pricing efficiency to mean the price determined by efficient market,
which makes business sense to the OMCs, being a fair and reasonable price considering
all the information available including the costs of operations.
2.2.3.2 Experience on Bulk procurement system
This section of the paper attempts to review all the matters relating to the bulk
procurement system of petroleum products in some selected countries including key
determinants of prices and their regulation. The aim is to bring an international touch to
this study and enabling the researcher to be able to conduct relevant international
comparison on pricing and regulations practices among the countries.
17
Petroleum products are mostly imported from orientated drilling and refining centers in
the Mediterranean area, the Arab Gulf, and Singapore. In order to transport the
petroleum products to the consumer countries, a lot of arrangements have to be done
for example, transportation and Insurance, storage and so on. As such domestic prices
of fuels are expected to be derived from international crude oil prices, refining charges
(where applicable), freight and insurance (CIF price), international supply and demand
of petroleum products, the prevailing exchange rate, local transportation, local taxes
including import duty and dealers costs and margins. The largest component of the
basicfuel price should be the price that importers pay in the international markets when
purchasing the products as this keeps on changing as a result of various factors
including
OPEC actions in volume restrictions (ACCC, 2007). Having the idea of price make up
and given the recent trends in our currency exchange rate against the United States
Dollar (USD), it is important to establish the background of petroleum products’ prices
trends in Tanzania by having a sub-proposition to proposition one, which link prices
with one of the key drivers, the exchange rate (Ewura website, 2013).
2.2.4 Tanzania experience on Bulk Procurement System:
The Energy and Water Utilities Regulatory Authority (EWURA) devised BPS which
became operational in January 2012 to ensure that importation of the precious liquid
was implemented efficiently and slump the retail prices between 15 and 18pc.The
Government position is that bulk oil procurement was a stop-gap measure; a permanent
solution was to put in place a strategic national oil reserve for ensuring stability in the
local market (Ewura website, 2013).
2.2.4.1 Stakeholders to the Tanzania’s Downstream Petroleum Sector
2.2.4.2 Tanzania Petroleum Development Company (TPDC)
TPDC was formed in 1969 with a primary role of overseeing the operations of AGIP,
the only concession holder then working in the country. Following the discovery of the
18
Songosongo gas reserves and subsequent relinquishment of the exploration and
development of the same by AGIP, TPDC was assigned with continuation of
exploration management and eventual appraisal. In the interim, TPDC also undertook
the role of being the sole importer of both white and crude petroleum products and
marketing in
Tanzania. Until July 1997, TPDC was importing about 70% of the total petroleum
products consumption in the country on behalf of the government and sold these to the
OMCs. The remaining 30% came from a local refinery, the Tanzanian and Italian
Petroleum Refining Company limited (TIPER).
In July 1997, the industry was partially liberalized, allowing OMCs to import fuel
through a ministerial technical taskforce which floated tenders amongst the oil
marketing companies, where a successful bidder could import fuel on behalf of other
oil companies. A further economic liberalization of the downstream sector in year
2000, lead to cessation of TPDC’s oil marketing operations and its role in downstream
sector in general. The Petroleum Act of January 2000 gave the technical task force an
interim role of regulating the petroleum sector until such time as new legislation is
adopted and regulator established. Hence, currently TPDC has no role in Tanzanian
downstream petroleum sector; it is now geared to the development of the fields as well
as exploration of petroleum reserves in the country (Ewura website, 2013).
2.2.4.3 Tanzania Revenue Authority (TRA)
The Tanzania Revenue Authority Act No. 11 of 1995 established the revenue collection
Authority abbreviated TRA which is a semi-autonomous agency of the government,
responsible for the administration of the central government taxes as well as several
non-tax revenues. Being the authority in charge of tax collection in the country, TRA
administers all tax issues including tax for imported goods which includes the
petroleum products. Revenues from taxes on importation of petroleum products
contribute about 40% of total country’s revenues on imports and about a quarter of all
19
TRA tax collections. This implies that Tanzanian downstream petroleum sub-sector is
one of the major sources of tax revenues and that malpractice such as tax evasion and
adulteration may lead the nation into a significant loss of revenues. Hence this is a
sector that the government has to ensure is properly run and regulated to ensure
efficiency which directly contributes to the nation’s economic prosperity (TRA
website, 2013)
2.2.4.4 Tanzania Bureau of Standards (TBS)
Tanzania Bureau of Standards (TBS) was established by the Standards Act No.3 of
1975as the National Standards Institute and became operational in April 1976 under the
Ministry of Industries, Trade and Marketing. The bureau was established as part of the
efforts by the government to strengthen the supporting institutional infrastructure for
the industrial and commercial sectors of the economy. Specifically, TBS was mandated
to undertake measures for quality control of products of all descriptions and promote
standardization in industry and commerce. It was subsequently renamed to Tanzania
Bureau of Standards through an amendment to the Act by Act No.1 of 1977. Its role in
the petroleum downstream sector is to set and advise on standards of quality
specification for all petroleum products to be used in the country. Selling or offering for
sale petroleum products that do not comply with TBS’s standards is contravention of
the law, and is punishable under the law (Ewura website, 2013).
2.2.4.5 Ministry of Energy and Minerals (MEM)
Downstream petroleum sub-sector falls under the energy sector of ministry of energy
and minerals. The ministry’s mission is to provide an input into the development
process
of the country through establishment of a reliable and efficient energy production,
procurement, transportation, distribution and end user system in an environmentally
sound manner. The ministry has a mandate of developing policies related to petroleum
sector.
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2.2.4.6 Energy and Water Utilities Regulatory Authority (EWURA)
As briefly hinted in instruction part, the Energy and Water Utilities Regulatory
Authority (EWURA) is an autonomous multi-sectorial regulatory authority established
by the Energy and Water Utilities Regulatory Authority Act, Cap 414 of 2001. It is
responsible for technical and economic regulation of the electricity, petroleum, natural
gas and water sectors in Tanzania. As earlier mentioned, in the petroleum sector role,
EWURA took over from the ministry’s technical task force which held that interim role
since year 2000.
One of the objectives of sector liberalization was to increase competition and
efficiency.
The National Energy Policy of February, 2003 (the Policy) states that “In line with the
overall economic policy of the country, the market oriented concept shall apply to the
supply of energy products and services. Implicitly, medium and long-term services of
independent economic actors should determine allocation of resources. Competition on
fair Petroleum Sector Inquiry –Stakeholders Comments document and equitable
conditions among independent actors shall form the basis for market efficiency”. The
Policy further states: “A regulatory agency will be established to oversee activities in
the petroleum sub-sector and deal with the enforcement of open market and fair
competition, administration of licensing and the overall monitoring of the petroleum
market.”
The functions of EWURA include among others, licensing, tariff review, monitoring
performance and standards with regards to quality, safety, health and environment.
EWURA is also responsible for protecting the interests of consumers and promoting the
availability of regulated services to all consumers including low income, rural and
disadvantaged consumers in the regulated sectors. Furthermore, the Petroleum
(Conservation) Act, Cap 392 as amended in 2003 and 2007, mandates EWURA to
regulate the downstream petroleum sub – sector in Tanzania, ranging from importation,
unloading, transportation, storage, transporting to selling of petroleum products in the
country. EWURA’s jurisdiction in the petroleum sub – sector covers all aspects related
21
to technical, safety and economic regulation (URT, 2001). Among other regulatory
functions of EWURA, the authority is legally empowered to compute and publish the
indicative / cap prices that are supposed to be adhered to by OMCs at a maximum
upper deviation of 7.5%. OMCs have never been in favour of this legal arrangement but
the law requires them to abide to it. OMCs challenges the basis that EWURA use to
come up with the indicative prices for example how does EWURA determine of dealers
margin? The OMCs’ argument is that the importation as well as running costs of the
business is different due to such factors like quantity purchased which has impact on
the unit cost due to quantity discounts as well as overheads allocation (spread). This
means that small OMCs who deal in small quantities and depends on storage facilities
owned by large OMCs are automatically high cost operators compared to large ones
hence questionable practicability of the EWURA indicative prices to all OMCs.
However, at the same time it has been experienced in the market that some OMCs of
various sizes in terms of operations persistently affords to sell below the published
indicative prices in absolute terms (Ewura website, 2013).
`
2.2.4.7 Consumers
Petroleum products’ consumers cover all sectors of social-economic life such as
agriculture, transportation, industrial, mining and domestic. Some of these consumers
like the mining sectors import their own fuel or in some cases they do bulky purchases
from the importing oil companies. A significant proportion of the consumers not
necessarily on terms of fuel but in terms of number of people, get their fuel needs from
a chain of retail outlets, popularly known as “petrol stations” spread throughout the
country.
The major interests to this were the retail outlets consumers due to the fact that these
are the people who bear the burden of mispricing of petroleum products if any. It is the
consumer group that this study aims to assist by evaluating fairness of the fuel prices
and efficiency of price regulation (Ewura website, 2013).
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2.2.5 Importance of BPS to Tanzania Fuel market-The Bulk Procurement System
was adopted to ensure constant supply of fuel in the country and subsequently reduce
energy retail prices. However, the system is has come under fire following high prices
and fuel crises. It is estimated that fuel consumption in Tanzania is about 5 million
litres per day, excluding that the tax-exempted fuel that goes to mining companies.
Statistics show that about 1.7 million metric tonnes of petrol, diesel, and kerosene and
jet fuel are imported to Tanzania each year. And it’s a year now since the Bulk
Procurement System (BPS) of petroleum products were introduced in Tanzania.
The industry regulator says the system has been able to check transfer pricing among
oil companies, thus enable the government tap hitherto evaded taxes.
The Petroleum Act of 2008 that enabled the energy regulator to establish BPS states
that no person shall import petrol or petroleum products unless it is done through
efficient procurement. However, the bulk procurement system is in dilemma as
questions are still being raised over whether it is likely to fail after parts of the country
recently experienced acute shortage of fuel contrary to its original goal -to end fuel
supply shortcomings. The full-blown fuel crisis forced the Tanzania Revenue Authority
(TRA) to authorize local oil marketing firms to purchase fuel that was in transit to
neighboring countries.
The government admits the system, which started in earnest late 2011, had
shortcomings and would be reviewed to ensure steady oil supply. Senior officials in oil
marketing companies said the system had failed to ensure constant supply of petroleum
products because of poor ports infrastructure and inadequate storage facilities.
(Pesatimes website 2013; In2eastafrican website, 2013).
The minister for Energy and Minerals, Prof Sospeter Muhongo, concede that the system
was facing hurdles. “The system has problems so it requires remedial action. We’ve
noted how TPA and Ewura give conflicting statements on the reasons for oil recurrent
crises. Each is passing the buck to the other,” said Prof Muhongo as quoted by a local
English daily newspaper, the citizen, He also said while bulk oil procurement was a
stop-gap measure; a permanent solution was to put in place a strategic national oil
23
reserve for ensuring stability in the local market. Other stakeholders said the bulk
procurement couldn’t bear fruit if the Kurasini Oil Jet remains as the only oil-
discharging pipeline. According to them, the bulk procurement system is failing
because of the poor offloading pipelines at the KOJ and note that if immediate action
isn’t taken, the country should brace for a worse oil crisis.
Some industry sources say bulk procurement through international bidding brings down
importation costs by an average of 20pc.Fuel consumption in Tanzania is about five
million liters per day, but this excludes the tax-exempted fuel that goes to mining
companies. Available statistics show that about 1.7 million metric tonnes of petrol,
diesel, kerosene and jet fuel are imported to Tanzania each year.
Late last December, the Petroleum Importation Coordination suspended Addax Energy
SA from bulk procurement system for failing to comply with the bulk shipment
regulations and its position was covered by the Geneva – based Augusta Energy SA.
Gapco Tanzania became the first local registered firm to win the tender (no.8) to supply
petroleum products for February next after beating other five companies in an open and
at the highly competitive bidding process.
Gapco beat the other firms, after offering the lowest price of USD 52.55 per weighted
average premium (Ewura website, 2013)
Sub-proposition 1.1: There is a correlation between the experienced buying prices
from world market through bulk procurement systemand the Tanzanian shilling
to USD exchange rate movements.
2.2.5.1 Kenya
According to Ministry of Energy Kenya (2013), the Kenyan economy underwent major
structural reforms since early 1990s with a view to improving the overall macro-
economic efficiency, increase incomes, create employment opportunities and improve
the performance and productivity of public investments. These reforms included
abolition of price controls allowing the market forces of demand and supply to
determine prices and resource allocation, liberalization of foreign exchange and interest
24
rate regimes, privatization of Government stakes in non-strategic public institutions and
divesture of Government interests in activities of a commercial nature.
In line with these public sector reforms, the Kenya Government deregulated the
downstream Petroleum Market operations on October 27th 1994. These reforms
included liberalization of distribution and pricing of petroleum products and partial
liberalization of product supply. Some of the reforms included abolition of the white oil
rule, abolition of NOCK’s 30% crude oil supply quota, liberalization of transportation
modes and attendant tariffs, legalization of minimum operational stocks and
introduction of suspended duty on refined products imported directly into the country to
cushion the refinery from competition from efficient refineries in the gulf region.
In seeming to build a case for petroleum industry deregulation in Kenya, Arthur. Little,
in a study undertaken in 1993 posited that “the petroleum end-use prices would go
down in a competitive market environment free of exogenous factors as long as the
country was not going through an inflationary period”. Since liberalization, the oil
industry has attracted a number of operators engaged in importation, exportation,
distribution and wholesaling of petroleum products.
However, it has been observed that the post deregulation retail prices of petroleum
products have not closely followed the changes in international oil prices. It has been
argued variously that oil companies are quick to adjust retail petroleum prices upwards
when international oil prices are rising and slow to lower prices when oil prices are
falling. This implies that retail petroleum prices are sticky downwards which generates
non trivial economic efficiency and asymmetrical costs concerns on the downstream
gasoline market.
In particular, when the international crude oil prices were rising during 2007 and 2008
Oil Marketing Companies quickly passed on these increased costs to consumers, but
took inordinately long to pass on cost reduction benefits to consumers when
international oil prices were on a downward spiral in the last quarter of 2008. The load
25
port price of Murban crude oil dropped from a record high of U$ 137.35 per barrel in
July 2008 to US$ 42.10 per barrel in December 2008 while the pump price of super
petrol dropped from Ksh. 110.00 per litre to Ksh.78.00 per litre over the same period.
This behavior by the Oil Marketing Companies generated a lot of public concerns on
the overall economic efficiency and rationale of unfettered market mechanisms in the
retail petroleum market in Kenya and literally re-kindled agitations for re-introduction
of price controls.
2.2.5.1.1 Importation Mechanisms:
The demand for petroleum products in Kenya is met through two ways:
1. Importation of crude oil and refining the same at the Kenya Petroleum
Refineries Limited (KPRL). This supplies about 50% of the total demand.
2. Importation of refined petroleum products to meet the balance 50% of the
demand.
Crude is imported through an Open Tender System (OTS), which is coordinated by the
Ministry of Energy. All the licensed importers of petroleum products are required by
law to participate in the crude processing through Legal Notice No. 197 of 2nd
December 2003. Through this arrangement KPRL is protected through a minimum base
load processing of 1.6 million tons of crude per year, which meets about 50% of the
total petroleum demand. The licensed importers share this base load prorated to their
market shares. The balance 50% of the demand is met through importation of refined
products. The Ministry of Energy coordinates another OTS for the importation of 35%
of refined products in which all licensed companies are entitled to participate. The
companies are allowed to import the balance 15% on their own outside the tender
requirements.
26
2.2.5.1.2 Costing Crude Oil
Crude oils are traded openly in the international markets. Kenya’s crude imports are
made up of about 90% Murban crude oil from Abu Dhabi, marketed by the Abu Dhabi
National Oil Company (ADNOC). Early each month ADNOC sets the Official Selling
Price (OSP) of Murban crude oil lifted during the previous month. This becomes the
Free On Board (FOB) loading port price applicable to the tenders called in Kenya.
The balance 10% of crude imports is Arab Medium crude from Saudi Arabia.
For the purpose of the OTS, tenderers quote a fixed Freight and Premium figure to
bring the crude from the loading port to Mombasa. Crude oil is imported in large ships
(80,000 Metric tons) and therefore freight on crude is not a major component of local
prices.
The following are all the components in the landed cost of crude delivered to the
refinery:
Free On Board ( FOB) cost
Freight and Premium
0.105% for both marine and war insurances.
2.75% Import Declaration Form (IDF) fee.
0.85% Letter of credit charges.
0.5% Ocean Loss allowance (for loss not covered by insurance) .
US$ 3.82 /MT Port Handling charges.
0.5 CIF importer administration fees.
Ksh.1.50 /MT +VAT Discharge Inspection fee.
Potential demurrage.
Cargo clearing charges.
2.2.5.1.3 Costing of Imported Refined Products:
According to the (Kenyan Ministry of Energy, 2013) says that the international prices
for refined petroleum products are available on daily basis in such publications as
27
Platt’s and Reuters for the major trading markets. For imports into Kenya the relevant
prices are those in the Arabian Gulf (AG) and the Mediterranean Sea (MED).
Quotations for trading are based on the mean prices for 3-5 days around the bill lading
(B/L) day as FOB price plus a freight and premium component. For the purpose of the
OTS, tenderers quote a fixed Freight and Premium figure to bring the specific product
from the loading port to Mombasa. The tender document specifies the vessel arrival
date and therefore indirectly fixes the loading date range.
The following elements are the components to obtain a final landed cost of refined
petroleum products.
Free on Board (FOB)
Freight and Premium.
0.0998% for marine and war insurances.
2.25% Import Declaration Form (IDF) fee
1.2% Letter of Credit charges.
0.5% Ocean Loss allowance.
US$ 3.82/MT Port handling charges.
0.5% CIF Importer Admin. Fees
Ksh.9.50/MT +VAT Discharge inspection fee.
Potential demurrage.
Cargo clearing charges.
.
2.2.5.2 Mozambique
Distribution and marketing of fuels products and lubricants is carried out by the state-
owned oil company, Petromoc which controls the majority of the market share. Other
companies with a share in the market include; BP which also operates the only lube
blending plant in the country, Mobil and Caltex which is mainly involved in bunkering
activities. BP has increased its market share to bring itself to a similar level as
Petromoc in terms of market control. Both BP and Petromoc service the aviation sector
with BP holding the dominant share in the jet fuel market. Petromoc dominates the
28
kerosene market. The three ports of Mozambique - Maputo in the south, Beira in the
centre, and Nacala in the north - offer an economic supply corridor to neighbouring
landlocked countries. Presently, only Zimbabwe is transporting most of its petroleum
products through Mozambique. Swaziland, receives approximately 5% of its product
through the Maputo port and Malawi receives 18% through Nacala. Engen imports
small volumes through Maputo to Swaziland using Petromoc's depots at Matola
(Maputo). Maputo and Beira are important for domestic imports.
The pipeline between Beira and Harare has been extended and is operating close to full
capacity even with an expansion through the addition of pumping stations. Revenue
earned from the use of the pipeline is significant. A new oil product jetty
accommodating vessels of 50,000 tons has been completed at the port of Beira. The
existing jetty is being rehabilitated. The other port that can accommodate large vessels
is Nacala; however, due to low consumption in the area and poor transport connections
to the rest of the country, the importance of Nacala in the distribution of petroleum
products is diminishing (Mbendi website, 2013).
2.2.5.2.1 Pricing Structure:
The pricing formula, with the exception of LPG, overestimates the actual cost of
importing products. The tax of petroleum products is about 17%. Annual petroleum tax
revenue is approximately $11 million per annum and represents some 17% of
government indirect taxes. In an attempt to attract investment from foreign companies,
the Mozambican government has made changes to the tax system. A privatization
programme is also taking place (Mbendi website,2013)
2.2.5.3 Ghana Bulk Distribution Companies (BDCs)
According to (Ministry of Energy website,2013) shows that in Ghana there are
companies licensed by the National Petroleum Authority (NPA) to do business as bulk
distributor of refined petroleum products. These BDCs in turn supply their products to
29
Oil Marketing Companies who retail nationwide. The major BDCs in Ghana are Fuel
trade, Cirrus, Chase, ECO, Vihama, Springfield, Ebony, Oilchannel, Dominion, Alfa
Petrol, Peace, Blue Ocean, TOR, PWSL, Hask and First deepwater.
Import and Distribution of Fuels in Ghana by BDCs Deregulation of the downstream
sector started in 2005 Led to introduction of different petroleum service providers
including Bulk Distribution Companies (BDCs).
The downstream Petroleum industry has seen dramatic transformation over the past
3yrs.
2.2.5.3.1 Key changes include:
Increase in BDCs from 3 in 2009 to 12 in 2012.
9 BDCs are currently operational
Removal of restrictions on the issue of BDC and OMC license
Ghana has a modest upstream oil industry with one onshore and five offshore
sedimentary basins. The main drive behind the oil and gas industry in Ghana is
the need to reduce the country's dependence and reliance on hydroelectricity.
The Statutory Corporation (Conversion to Companies) Act, 1993 (Act 461) listed
GNPC as one of the statutory corporations to be converted into limited liability
companies but the successor company has not been set up and GNPC has not changed
its mode of operating. The draft Bill refers to the conversion of GNPC to a company
limited by shares and provides that the assets, properties, rights, liabilities and
obligations of GNPC are vested in the successor company. The draft Bill provides that
the successor company shall be incorporated under the Companies Act, 1963 (Act 179)
as the Ghana National Petroleum Company to manage the commercial aspects of the
upstream and midstream petroleum activities and the operation of Government interest
under the new act. The Company shall be subject to and managed in accordance with
the Companies Act. The draft Bill is generally seen as a move forward in the right
30
direction in having encapsulated the views and opinions of industry experts, academia
and the general public as to how the new resource should be managed for current and
future generations and ensuring the oil and gas industry in Ghana continues to thrive
successfully.
Although as yet, its upstream oil industry has no crude oil production, Ghana is one of
four West African countries with an oil refinery. Tema refinery is being operated by the
Tema Oil Refinery Corporation. (TOR) has an operating capacity of 45,000 barrels per
day running on crude imported from Nigeria. The state oil company, Ghana National
Petroleum Corporation (GNPC), is responsible for importing crude and refined
petroleum products. An Energy Commission was established in 1998 to regulate and
manage the utilization of energy resources in the country.
The downstream oil industry is key to the economy. Oil-derived products supply 70%
of Ghana's commercial energy needs. Current consumption of petroleum products is in
the region of 950,000 tons per annum. Increasing power demands by industry and
domestic consumption and a need to reduce the reliance on hydroelectric power is not
only fuelling the search for oil and gas but also has set in motion projects relating to the
importation of gas via pipeline from Nigeria and Cote d'Ivoire.
Overall responsibility for control and direction of the oil industry rests with the
Government though its Minister of Energy. The state oil company, Ghana National
Petroleum Corporation (GNPC), is responsible for procurement, storage and bulk
distribution of petroleum products to the oil marketing companies.
In late 1998, the Ministry established a seven-member Energy Commission, whose
brief it is to regulate and manage the utilization of energy resources in the country and
coordinate policies. It also includes the granting of licenses for the transmission, supply
and sale of natural gas.
In Ghana, petrol prices are regulated by the National Petroleum Authority (NPA).The
Authority is vested with powers to regulate, oversee and monitor activities related to
the petroleum downstream industry. Pump prices are reviewed every two weeks and
31
issuedon the 1st and 16th of every month. To a larger extent, activities along the
petroleum production and distribution chain are handled by state owned companies
while importation, marketing and distribution are handled by private companies. The
petroleum prices in Ghana are regulated and it is the pre-requisite of the act that the
petroleum products pricing formula should satisfy three underlying conditions Full
costs recovery of all investments made to procure, refine, transport and market the
finished petroleum products on which generate revenue for government through taxes
and levies.
For this purpose special levies and taxes have been included into the price structure.
The unified petroleum pricing policy that is aimed at ensuring that pump prices are the
same throughout the country to ensure affordability by all. This has led to the
petroleum pricing formula to have four main categories being the cost of the products,
related charges, government taxes and levies and distribution charges.
2.2.5.3.2 Pricing Components:
The main components of the petroleum pricing formula and their determination basis
are:
FOB prices are taken as the averages of mean quotations as published by Platts
For each product,
freight is set on averages of prevailing rates (as at November, 2009) the
applicable
rates in the pricing formula was petrol $ 35.00/MT,
Insurance 0.126% of CFR
Offloading costs ($1.25/MT,
In-transit (0.5% CIF),
Inspectioncosts (0.11% CIF),
Letter of credit charges (1.5% CIF),
Financing costs 1.25% CIF),
Storage costs($ 4.00 / MT),
32
In-plant losses (0.35% CIF),
Rack loading cost ($5.00/MT)
Operating margin (2.25% CIF).
And government taxes and levies summingto about 18.91% of ex-refinery
costs.
2.2.5.4 South Africa
Information on South Africa’s practices on petroleum products prices and regulations
are mainly obtained from two websites, department of minerals and energy
(www.dme.gov.za) and Engen, a company engaged in refining of crude oil and
generation of fuel from coal (http://www.engenoil.com).
The petrol price is regulated by government and changed every month on the first
Wednesday of the month. The calculation of the new price is done by the Central
Energy fund on behalf of the Department of Minerals and Energy. The pump prices are
being divided into international and domestic elements. International elements are the
costs of transporting the fuel from an international refinery to South Africa while
domestic ones are the costs incurred within the country and are being added to the
international prices to get the total costs incurred and eventually added with
wholesalers’ and retailers’margins to obtain selling price.
International elements include Free on board (FOB) prices which are quoted on daily
basis, Freight from the exporting refining centers to South African ports, demurrage
charges allowed at an average of three days as published by the World Scale
Association limited, Insurance is allowed in the pricing formula at the rate of 0.15% of
the FOB value and freight (abbreviated as CFR) covering insurance and other charges
such as
Letter of credit, surveyors’ and agents’ fees, and laboratory costs, Ocean loss allowance
is 0.3% of the sum of FOB, freight and insurance (abbreviated as CIF), Cargo
dues(Wharfage) which is costs of offloading petroleum products from ship into onshore
storage facilities is allowed as set by the National Ports Authority. Coastal storage
33
which is the costs of providing storage and handling facilities at coastal terminals is
also included in the pricing formula. A financing cost of 2% below the ruling prime rate
of the Standard Bank of South Africa for 25 days based on the landed cost values of
refined petroleum products is also allowed.
In order to arrive at the final pump price, other costs are added to international costs
above, these are termed as domestic costs and they include local transport cost to
various destinations which are allowed in the formula at fixed cost per distance and
delivery costs which include handling and storage from the depots to the consumption
points (pump stations). Wholesale margin allowed is changed from time to time as the
formula is based on a set of guidelines known as “marketing of petroleum activities
Return” computed by chartered accountants. The margin level is calculated on an
industry average basis and is intended to give wholesalers a return of 15%
ondepreciated book values of assets, with allowance for additional depreciation, but
before tax and payment of interest. Retail margin is determined on the basis of the
actual costs incurred by the service operator in distributing petrol and is fixed by DME
to cover all drive away costs like rentals, interests, labour costs and margins. There is
also a charge for equalization fund levy which is a fixed monetary levy determined by
the minister of energy and minerals. The fund is used for smoothening out liquid fuel
prices fluctuations, “to afford synfuel producers tariff protection and to finance the
crude oil “premium (price differential applicable to SA oil purchases during the late
1970’s” (SASOL, 2007). The equalization fund is currently zero. There is a fuel tax
levied on fuels at the rate set by the minister of finance during the budget session,
Customs and excise levy is charged as per customs union agreement, Road accident
fund levy is charged on fuel for compensating third party victims of motor accidents
and Slate levy payable by road users for “recovering money “owed” to the oil
companies, due to the time delay in the adjustment of the petrol pump price” (SASOL,
2007).
34
2.2.5.5 Rwanda
The industry is regulated by the ministry of public works, energy and water. The
petroleum division is controlled by the ministry of commerce and consumption, which
is responsible for setting the pricing policy of petroleum products. Petrol and diesel are
the main products consumed and their prices are being fixed by the government. The
traditional fuel account for 90% of the country energy requirements because of the low
income levels and the unpredictable supply of petroleum products as Rwanda is a land
locked country importing its commercial energy in form of refined petroleum products
from Kenya and Tanzania
2.2.5.6 India
The retail prices of petrol/diesel is calculated by adding the freight costs, marketing
cost, levies, excise duties, delivery charges, sales tax and dealers commission on top of
import parity price. These are costs that the actual importer will pay for the imported
petroleumproducts. In India, the ex-storage selling price of petrol/diesel is uniform at
all refinery location throughout the country and is revised upon changes in international
market prices. The import parity pricing comprises of FOB, ocean loss, Insurance,
exchange rate, custom duty, port charges and premium and discount as published by
Platts, an international organization specialized in offering information on benchmark
prices for physical energy markets on subscription basis (Pricing of petroleum products,
6th report) “Platts is the leading global provider of energy and metals information and
the world’s foremost source of benchmark price assessments in the physical energy
markets. Since 1909, Platts has provided (Platts website, 2013)
`
2.2.5.7 China
China’s government sets the benchmark prices of petrol and diesel and the OMCs have
a freedom of varying the prices by plus or minus 8% over the benchmark prices. These
benchmark prices are being linked to international prices in New York, Singapore and
35
Rotterdam petroleum centres and once there are changes in the market, benchmark
prices changes accordingly.
China's oil relationship with other countries has shifted from that of a world exporter to
that of a world importer. This shift to dependence on foreign oil has changed the
exploration and acquisition policies of China. China's oil need overwhelms its internal
capabilities. Oil acquisition is now a process of investment in foreign lands and a
creation of an internal oil reserve in case of emergency. China has taken steps to alter
its security polices in places in the world that are rich in oil. China National Petroleum
Corporation is invested in producing, marketing, and supplying oil in China. This
company supports internal sources of oil production and reserves. Domestic oil
production supplies only two thirds of the countries oil needs and it is estimated that
China will require 600 million tons of crude oil by 2020. Based on this fact China has
begun to take drastic measures with its internal oil reserve programs (essex website,
2013).
2.2.5.8 Thailand
In Thailand, the petroleum sector was fully deregulated up to 2004. Prior to
deregulation the Thailand government had similar system to India. Petroleum products
like diesel were kept at low level by being subsidized and oil price stabilization fund
was used to protect the customer from the impact of high prices fluctuation (Energy
website, 2013)
2.2.5.9 Australia
In General the Australian petrol price where unregulated but the law provides that
theycould be regulated. The government has been intervening the market only when
there were significant price movements for example, in 1984 a Price Surveillance
Authority (PSA) was formed to manage the petrol prices but it was only involved on
wholesale prices.
36
Another intervention was in 1990, where wholesale price were frozen during the
Iraqinvasion and 1990 ACCC did a study on how international prices are translated
intolocal petrol prices. The pricing in Australia was based on import parity (landed
costs) information and insights that help clients make sound trading and business
decisions, and enable the markets to perform with transparency and efficiency.
Australia had the fourth lowest petrol price due to low taxes and excise duty (ACCC,
2007). The report from ACCC suggests that international petroleum price was to be
blamed for the relatively high petrol prices and not the government.
In December 2007 Australian Competition and Consumer Commission (ACCC)
submitted a report on the pricing practices of unleaded petrol in Australia to the
Minister for Competition Policy and Consumer Affairs (ACCC, 2007). This
commission had to undertake a study as directed by the treasurer to investigate on the
public suspicion on competiveness of the petroleum market among areas of suspicion
being price fixing through collusion at the retail level. The public questioned that if it
was possible to discount petrol prices in some days of the week why was not it possible
to do the same on a more permanent basis? Also, people in upcountry were not happy
on the price differences between city and upcountry petrol stations. Apart from these
suspicions, the ACCC in its regular price monitoring noted that there was a “substantial
divergence between movements in domestic regular unleaded prices and movements in
the international benchmarks for unleaded petrol used by Australian refiners in early
June 2007” (ACCC, 2007). The findings however indicated that there was no evidence
of collusion among OMCs however the issue was that 98% of the total Australia’s
petroleum requirements are controlled by four companies which made the market less
effective in competition as it is a “concentrated” industry. The committee advised the
government to work on hurdles that hindered independent importers’ participation
hence causing too much reliance on Shell, Mobil, Caltex and BP at wholesale level.
The retail market was dominated by the refiner-marketers and the super market
alliances and was more competitive but their prices depends on the wholesale prices,
37
hence the more competitive the wholesale prices are, the more competitive are the
retailers prices.
Another crucial finding was that retail price depends on the type of outlet. There were
owner –operated sites, commission agent sites and franchise operated sites. For
example owner-operated sites were noted to receive price-support from headquarters
that enabled them to sell at a very low price. The commission concluded that more
transparency is needed at retail level as OMCs had a tool that was providing almost real
time price updates called “informed sources price sharing service” which enabled
OMCs to respond in time while consumers had none. To manage international prices,
the commission proposed formation of buying groups where importers join hands and
do a bulk purchase which gives them a more upper hand in negotiating prices (Platts
website, 2013).
2.2.5.10 Philippines
A report by the Philippines’ senate economic planning office (SEPO) noted that local
petrol price were hugely dependent on international prices which are also impacted by
demand and supply conditions as well as currency exchange rates. The local prices are
also impacted by the levels (content) of taxes and levies charged. In trying to regulate
the price levels the government has tried a number of options aimed at stabilization of
the supplies’ availability and prices. A fund called Oil Price Stabilization Fund (OPSF)
was established to absorb price increases in crude oil purchasing prices incurred by
theOMCs. The fund was funded by collections from import duties on crude oil and
finished petroleum products. However OPSF and other similar setting controls were
abolished under the Oil deregulation act of 1998 and other mechanism were introduced
including automatic Pricing Mechanism (APM) which was put in place to make the
local prices reflect movements in international prices (SEPO, 2013).
38
2.2.6 Conclusion
The experience gained in the review of importation and pricing of petroleum product
through bulk procurement system and regulations has shed a light on areas of interest
that the current study should relate and research on, in our local setting. This is because
the basis of various countries pricing and regulations or complaints, doubts and
suspicion are also applicable to our local fuel market settings.
It has been noted and it is generally accepted and expected that the local fuel prices are
a reflection of international crude oil prices and exchange rates trends between the local
currency and the main international trading currency specifically the USD. This
deserves to be studied on, and it is another sub-proposition to proposition one.
Sub-proposition 1.2: There is a correlation between the international crude oil prices’
movements (in USD) and the trends in the prices of petroleum products in
Tanzania.
Another important area that has been identified with a number of variations is the
regulated price formula contents. Different countries have different formulas that are
suitable for their local setting. This is worthy to be studied on as a sub-proposition to
proposition two established earlier to look for effectiveness of BPS. It will be important
to qualitatively look at EWURA’s formula and check its comprehensiveness and
sufficiency.
Lastly but not least, regulating the prices by establishing controls like regulated pricing
formulas, price stabilization funds and any other controls, is useless unless the
indicative prices established are obliged and complied with. This translates on
importance ofmonitoring compliance. This idea led to another area that this study
looked at as a subproposition to proposition 2.1.
Sub-proposition 2.1: There is evidence that Oil Marketing Companies’ prices are
within the acceptable range to the indicative /cap prices published by EWURA.
Additionally, the study has qualitatively reviewed the process in which EWURA
monitors compliance to its indicative and cap prices by the OMCs.
39
The Effects (both positive and negative) tothe petroleum industry and the nationaleconomy as a whole.
2.3 Conceptual Framework
This study hypothesizes the relationship between the causes of fluctuation of fuel
market prices in Tanzania which will act as the independent variable (presumed causes)
and their effects of BPS to the economy which will be the dependent variables
(presumed effects) influenced by the challenges facing oil multinational companies in
Tanzania Petroleum industry considered as intervened variables.
Table1- The relationship between Independent and dependent Variables
INDEPENDENT VARIABLES DEPENDENT VARIABLES
Source: Developed by researcher, 2013
Demurrage charges.
Foreign exchange.
Government Fees
Currency instability
Inefficiency of regulatory
authorities.
Quest for improved
profitability
Transfer price
Market forces of demand and
supply
40
CHAPTER THREE
RESEARCH METHODOLOGY
3.0 Introduction
This chapter describes the methods, data and techniques that were employed in this
research.
(Kothari, 2008) defines research methodology as a way to systematically solve research
problem. It was so important for the researcher to design the methodology for the
problem by considering the logic behind in the context of research study and explain
why using particular method or techniques and not using other to the extent that
research results are capable of being evaluated either by the researcher himself or by
other people.
The study was mainly focused on examining the effect of bulk procurement system
with aim of lowering fuel market prices in Tanzania.This chapter includes type of
study, area of study, study population, sampling technique, methods of data collection
and data analysis and presentation. It discusses the research design, type of data
sources, collection procedures, sampling procedures, sample size, data collection, data
manipulation, data cleaning, data reliability and sampled companies. The data collected
were tested using correlation analysis and ANOVA, where necessary as allowed by
exploratory approach and as proposed, the researcher conducted additional tests in
order to get corroborative evidence on the results.
3.1 Study area
The study was conducted in Dar es Salaam where data were collected from government
employees in the energy sector (EWURA), PIC, OMC’s clients and strategic investors
in the petroleum industry. The place Dar es Salaam was chosen by researcher because
is the region where most of these OMC,s are based and Ewura as the main actor in
petroleum industry in position of controller and price regulator of petroleum product.
41
3.2 Research approach
The study approach/strategy is the framework for conducting a research project, which
specifies the details of the methods and procedure necessary for attaining the
information needed to structure and/or solve marketing problems.
During the study the researcher used both qualitative and quantitative method in
studying the event/action of variables to be tested. The reason using the two methods
was due to availability of both qualitative and quantitative data, therefore this has
improved an evaluation by ensuring that the limitations of one type of data are balanced
by the strengths of another. This has also enabled to ensure that the understanding is
improved by integrating different ways of knowing. Quantitative data these are
numerical data which are presented in numbers while qualitative data these are data
presented in form of text, images.
3.3 Research design
The case study research design was employed in carrying out study; the philosophy
behind the case study is that, by looking carefully at practical real life will give a full
picture of action interaction of variables or events.
3.4 Study population
The study covered 30 respondents who were included government employees in the
energy sector (EWURA), PIC, OMC’s clients and strategic investors in the petroleum
industry.
3.5 Sample, sample size and Sampling techniques
Thirty (30) respondents were included in the study of which 10 were government
employees in the energy sector (EWURA) and PIC, and another 10 respondents were
represented Oryx, Puma Energy, GBP and Engen who presented investors while the
rest 10 respondents were represented resellers who are OMC’s clients.
42
Non-probability sampling technique was used in the study where by members of each
targeted groups had unequal chance of being selected and the selection was based on
his position carrying in the particular organization.
3.6 Types and Source of data
The researcher used both primary and secondary data. For the purpose of establishing
scope of the study, the researcher opted to collect and analyzed data for periods from November
2011 when EWURA started issuing indicative prices to April 30th, 2013.
3.6.1 Primary data Sources
Primary data were obtained through the use of both questionnaires and interview.
Thirty (30) respondents were included in the study of which 10 were government
employees in the energy sector (EWURA) and PIC, and another 10 respondents were
represented Oryx, Puma Energy, GBP and Engen who presented investors while the
rest 10 respondents were represented resellers who are OMC’s.
3.6.2 Secondary data sources
While the secondary data were obtained from other studies done by other institutions
and organizations on same area of study and sources these data are online websites,
government reports and journals.
Therefore, Local and international refined fuel prices were obtained from the proposed
secondary sources as narrated in Table 3-2, and in addition some of the OMCs petrol
prices were sourced from secondary sources like daily newspapers including but not
limited to the Guardian newspaper.
3.7 Methods of data collection
Interviews and questionnaire and documentary sources were used in data collection
43
3.7.1 Interviews
The researcher used interview method to collect information from the government
employees in the energy sector (EWURA), PIC, OMC’s clients and strategic investors
in the petroleum industry. This was involved both face to face interviews and
Telephone interviews were ten setup questions were asked with aim of obtaining
information from them. The approach used was depending to the accessibility various
targeted offices and people.
3.7.2 Questionnaires
As proposed, the researcher also conducted the study by collecting primary data
through questionnaires that had specific questions relevant to each of the specific
objectives as well as questions exploring on the general views of the respondents
regarding the effectiveness of Bulk Procurement System to the control of Tanzania fuel
market prices.
The researcher used questionnaires method to collect data from the government
employees in the energy sector (EWURA), PIC, Oryx, Puma Energy, GBP and Engen
were by were given seven days to respond to the distributed questionnaires and were
collected from the respondents after seven days. On this approach Paper-pencil-
questionnaires were used for all targeted thirty (30) numbers of people who were asked
the same guided questions.
The purpose of the questionnaire was to get the sub-sector’s experts’ opinion in order to
compare their views with the analyzed secondary data results collected for the same
purpose. The questionnaire had ten questions, two open and seven Likert scaled
questions with ranking of one (for least) to five (for Most) (See Appendix 1).
A total of 30 questionnaires were administered to 30 targeted respondents ,and 26
(86.7%) responded. Among of the questionnaires some administered to industry experts
currently in the fuel sector or have links to the sector through various consultancies like
audit, tax consulting. Some key respondents come from Tanzania Petroleum
Development Corporation (TPDC), Tanzania Revenue Authority (TRA), OMCs (Total
44
Tanzania ltd, BP Tanzania Ltd, ORYX Tanzania ltd, and ENGEN Petroleum (T) ltd),
EWURA and a few knowledgeable consumers with knowledge and experience on the
researched topic.
3.8 Data analysis and presentation
Both qualitative and quantitative approacheswere used by the researcher in analyzing
the data obtained and applied to the data obtained by questionnaires and interviews
schedules. For easy interpretation, data after being collected have been organized using
charts and tables. This has enabled with easy presentation and further analysis.
(Creswell,2003) identified two major approaches to researching which are Qualitative
approach and Quantitative approach, from which a hybrid approach called mixed
approach, is formulated.
Table 3.1 : Summary of research approaches
Quantitative Research Methods
(QnMA)
Qualitative Research Methods
(QnMA)
Mixed Methods Research
Methods (MMA)
Predetermined instrument based
questions
Performance data
Attitude data
Observational data and census
data
Statistical analysis
Emerging method
Open ended Questions
Interview data
Observation data
Document data and audio visual
data
Text and image analysis
Both predetermined and
emerging methods
Both open ended and closed
ended questions
Multiple forms of data drawing
on all possibilities.
Statistical and text analysis
Sourced: Creswell(2003)pg17,Table 1.3 and page 20 Table 1.4
According to Creswell (2003) quantitative approach is the oldest methodology utilizing
mathematical approaches and inferential statistics in establishing relationship among
the variables. Qualitative approach is more based on non-mathematical approach it is
45
more appropriate for studies that utilizes subjectivity and are opinion based developed
from a study of environment surrounding certain facts.
For the purpose of the current study, a mixed approach was used due to the fact that the
nature of study and the propositions developed requires a comprehensive approach that
will analyses and interpret quantitative data and wherever applicable corroborate the
evidence gathered with qualitative information that will be obtained to substantiate the
quantitative evidence.
3.9 Methodology in Practice
The data used for this are directly related to the propositions developed. The table
below summaries the data collected and the method of analysis for each of the
proposition.
Table 3.2 Summary of data used and analysis methodology for propositions
identified.
Proposition Data used and method of analysis
Proposition 1: The fuel prices in the Tanzanian downstream sector are a fair and reasonable reflection of
the trends in the core costs of the petroleum products resulted from BPS.
Sub-Proposition 1.1
Data used for this proposition are USD periodic average exchange rates from
BOT and commercial banks that match the collected periodic petrol prices from
OMCs and Indicative prices by EWURA. A correlation analysis was then used
to test the evidence of any correlation between petrol prices and the exchange
rates. Expectation was a strong positive correlation.
Sub-Proposition 1.2 Data used are periodic average international crude oil prices from Platts in
USD (which are used as FOB standard price worldwide) that match the
collected periodic petrol prices offered by OMCs and indicative prices issued
by EWURA. A correlation analysis was then used to test the evidence of any
correlation between local and international petrol prices and Expectation was a
strong positive correlation.
46
Proposition 2: The petroleum products’ prices offered thru BPS are effectively controlled and monitored
by the regulator.
Sub-Proposition 2.1 Data used for analysis in this proposition are EWURA’s indicative cap prices
from November 2011 to March 30th, 2013 and average prices charged by five
OMCs over the same period for Dar es salaam only (OMCs prices individually
and a collective average).
The testing approach was the use of Analysis of Variance technique (ANOVA)
to test for means’ differences between:
(i) EWURA’s indicative prices and Individual OMCs prices.
(ii) EWURA’s indicative prices and average OMCs prices (Collective prices).
The expectation under these tests was that if the OMCs prices are fairly
determined and are in line with the published indicative cap prices the result
from ANOVA tests would indicate a non-significant means’ difference and that
is an indication that there is compliance to EWURA directives. And,
additionally the study identified other measures that can be used to monitor
compliance and commented on them.
Source: Developed by researcher, 2013
From the table above, it can be noted that both secondary and primary data sources
were utilized to clarify the methodology which including reports from the regulator
(EWURA), submissions to regulator by OMCs and data from various reliable sources
including but not limited to the Bank of Tanzania (BOT) and Ministry of Energy. The
purpose of primary data based tests was obtaining corroborative evidence to secondary
data based tests.
Given the large number of data collected over the period from November 2011to April
30th, 2013 (N> 30), ANOVA was a suitable test statistic as the sample with more than
30 elements is statistically assumed to be normally distributed (Baradyana and Ame,
2005). The propositions were tested at level of significance of 0.05 (5%) or Confidence
interval of 95% which is a commonly used level (Baradyana and Ame, 2005; Kothari,
2008).
47
3.9.1 Data Manipulation
EWURA issues indicative/cap prices monthly on first week applicable from
thefollowing day of the same month.
3.9.2 EWURA’s cap/indicative price available.
For the purpose of obtaining OMCs average price, an arithmetic mean was used where
OMCs price obtained were summed and divided over the number of OMCs for each
particular day of analysis. On the primary data obtained through questionnaire, the
missing data for the fourtargeted respondents who never responded were ignored in
analysis, but the missing data for respondents who responded for some but not all
questions were considered as missing data and included.
3.9.3 Data Cleaning
For the purpose of the study and tests intended, it was a must that for each day
considered for testing at least EWURA indicative/cap prices must be available to be
compared with at least one OMC’s prices, therefore for all the days where EWURA
prices were not available or none of the OMCs price were not available such data were
excluded for testing and analysis.
48
CHAPTER FOUR
PRESENTATION OF FINDINGS
4.0 Introduction
The research findings have been reported into two sections, the first section based on
the findings from the secondary data analysis and the second section based on the
primary data analysis obtained from interviews and the distributed questionnaires,
which for the purpose of this study constitutes corroborative answers to the secondary
data analysis which is considered to be the primary test. The primary data were used in
order to get experts’ opinion for comparing and confirming the results obtained from
the secondary analysis.
4.1 Research Findings from Secondary Data Analysis
4.1.1 Reporting of the Findings
As it can be recalled, the main objective of this study was to establish whether the BPS
is effective to the fuel market prices in Tanzania. This main objective and related
specific objective where then interpreted into two propositions and a total of three sub-
propositions that were tested using relevant test statistics as proposed.
As mentioned earlier, the first section of the findings’ reporting is done in the next
paragraph and this focuses on statistical analysis of the OMCs prices, Tzs /US$
exchange rates movements, International crude oil prices movements and EWURA cap
prices as collected from various sources and analyzed using the proposed test
statisticsspecifically measures of central tendency (arithmetic mean) and correlation.
The statistics and findings on these propositions are now reported, and to start with
Table 4.1 presents an overview description of data analyzed
49
Table 4.1 Is there any relationship between Price and Exchange rate?
Frequency Percent Valid Percent Cumulative Percent
Valid Yes 42 84.0 84.0 84.0
No 8 16.0 16.0 100.0
Total 50 100.0 100.0
Mean
Median
1.16
1
Source: Research data, 2013
Figure 4.1 Relationship between price and exchange rate
Source: Research data, 2013
Table 4.2: Price Survey
50
SN NAME MAXIMUM PRICE MINIMUM PRICE EXCHANGE RATE1 EWURA 2227.40 1826.40 1576.002 BP/PUMA ENERGY 2227.00 1820.00 1600.003 TOTAL 2220.00 1800.00 1526.004 ENGEN 2225.00 1790.00 1556.005 ORYX 2219.00 1780.00 1520.006 GBP 2215.00 1770.00 1546.00
WHOLE SALE PRICES FROM NOVEMBER 2011 TO APRIL 2013
Source: Research data, 2013
Please below each figure and or figure you must indicate the source/citation
Observation: From the descriptive statistics it has been noted that none of the OMCs
has ever had a maximum price above the EWURA maximum cap prices of Tzs
2227.40, though some of OMC’s went below Ewura lowest price of Tzs 1,826.40
during the period which was below EWURA’s Tzs1770 (Ewura website, 2013) and
Individual price survey,2013)
Specific Objective: To examine how far BPS has managed to control fuel prices from
going up specifically with the change in currency exchange rates and purchase prices.
This specific objective has been analyzed by two propositions:-
`
Proposition 1: To what extend is BPS has managed to control price of Petroleum
products in Tanzania market? This proposition aimed at studying and establishing
relationship (if any) between the petrol prices offered at the pump stations and the core
business costs’ drivers in the sector. The initial drivers identified and tested were the
exchange rates movement between USD and Tanzanian shilling and the international
refined oil’s free on board (FOB) prices. Each of these was tested using Pearson
correlation analysis.
51
Table 4.3 below has details of results.
PUMP PRICES FOR THE YEAR 2012/2013
MONTH PETROL DIESEL IKE ROE US$/TZS
Jan-12 1,956 1,977 1,963 1597
Feb-12 1,991 1,977 1,951 1592
Mar-12 2,144 2,095 2,056 1595
Apr-12 2,231 2,098 2,068 1575
May-12 2,183 2,044 2,068 1588
Jun-12 2,189 2,004 2,068 1574
Jul-12 2,179 2,041 2,028 1581
Aug-12 2,009 1,943 1,926 1570
Sep-12 2,300 2,142 1,993 1576
Oct-12 1,994 1,950 1,993 1582
Nov-12 2049 1989 2026 1602
Dec-12 2,119 1,999 2,023 1579
Jan-13 1,919 1,893 1,899 1583
Feb-13 2,004 1,964 1,952 1620
Mar-13 2052 1974 1991 1612
Apr-13 2078 1959 2023 1632
May-13 2073 1934 2023 1630
Jun-13 2057 1892 1951 1630Source: Ewura website, 2013
Table 4.4 Does BPS has managed to control Pricesfrom going up?
Frequency Percent Valid Percent Cumulative Percent
Valid Increase 17 34.0 34.0 34.0
Decrease 33 66.0 66.0 100.0
Total 50 100.0 100.0
Source: Research data, 2013
52
Figure 4.5 Analysis on effect of BPS to the price control
Source: Research data, 2013
Specific objective-To examine the effects of the bulk procurement system on
taxes/revenues of the country.
This proposition aimed at studying and establishing relationship (if any) between the
taxes/revenue collected from petroleum product and the pump at stations under BPS
purchase. The initial drivers identified and tested were the tax rates used before and
after introduction of BPS which never changed. Each of these was tested using Pearson
correlation analysis.
53
Table 4.6 -Analysis of government revenue earns through BPS
Source: Research data, 2013
Third Specific Objective: To examine the effects of the government Intervention on
control of importation and distribution.
This proposition aimed at studying and establishing relationship (if any) between the
product availability and quality met as per country standard. The initial drivers
identified and tested were the public complains andincidences occurred in the cause of
application of BPS. Results showed there was products scarcity in the period of 2011
when BPS was brought into practice where by some of retailers decided not to sell fuel
as Ewura pump prices went down. Results shows that pump prices did not change at
all retail sites but it affected the public on availability of product.
54
Table 4.7 Analysis control and monitoring of prices
Source : Research data 2013
The results have shown that through government intervention prices have remained
stable regardless to the fall of our local currency against United States dollar in the
period of study.
55
CHAPTER FIVE
DISCUSSION OF THE FINDINGS
5.1 Introduction
In this chapter a researcher aims to provide a summary of the study which is based on
the research findings, analysis and discussions. This study was focused much on the
efficiency of Bulk Procurement System to the fuel market price in Tanzania.
5.2 Application of Bulk Procurement system in Tanzania
The introduction of the Bulk Procurement System to Tanzania oil market aims at
improving efficiency in the petroleum downstream sub-sector, with much emphasize to
improve reliability, efficiency, transparency, and cost competitiveness of the
importation of petroleum products for consumption in the local market. The effective
BPS is expected to provide fair mechanism where, on the one hand, investors are
guaranteed their returns; and on the other, ensuring that there is a system through which
services are provided efficiently, economically and at fair prices.
Petroleum products are essential inputs to all areas and sectors in the economy of any
country. These areas include transportation, industries, agriculture, mining and
households. A reliable, efficient and stable supply system of these vital products is
always a concern not only to service providers and consumers, but also to the
Government and the economy at large.And due to the importance of the petroleum
sector that the Government gave EWURA powers to intervene and modify as and when
deemed appropriate, the economic behaviour of regulated suppliers aimed at narrowing
choices in certain areas, including prices, rates of return and methods of procurement of
petroleum products for the Tanzanian local market.
Because of the importance of the petroleum sector to the economy of our country, and
in consideration of the need for broad expertise and experience needed to handle the
proposed Bulk Procurement System, a consultant, M/S Petroleum Development
Consultants (PDC), was hired by EWURA to assist in the designing and
implementation of the system. The Consultant signed a contract with EWURA on 5th
56
February 2009, to that effect and submitted various reports at different stages of the
preparation of the system. The reports were presented and shared with stakeholders in
order to improve the report and ultimately, have in place a workable, efficient and
effective petroleum products procurement system in the country.
I order to enable the BPS to operate effectively Ewura through consultant prepared
Bulk Procurement System Implementation Manual and the Petroleum (Bulk
Procurement) Rules to be applied by all OMC’s during importation.The System
Implementation Manual has a role to regulate all matters related to invitation to bid, bid
evaluation, bids qualification and award of the bid to supply a bulk petroleum product
(Ewura website, 2013).
5.3 Determinant of effective BPS
BPS has been introduced with aim to be applied in acquisition of petroleum
productfrom the external source. It is favorable that the petroleum product are
appropriate and that are procured at the best possible cost to meet the needs of the
purchaser in terms of quality and quantity, time, and location. The BPS is said to be
efficiency whenall factors which classify its output have been met such delivery and
handling quality product, marginal benefit are fair, and price fluctuations is being
controlled. Based on the consumption purposes of the petroleum product in the country
throughout the period where BPS is in practice is expected to control Cost of
importation on which will help to control price fluctuation in the local market.
According to the responded and analyzed data the results showed that BPS has
managed to control price fluctuation in the country compared to those years back when
importation was done independently. As Ewura was getting difficult to track the actual
cost of consigned product since companies which were importing fuel were many and
Ewura to get indicative prices used monthly average cost obtain from different
companies (Ewura website, 2013).
57
5.4 The performance of Bulk Procurement System
The recently-introduced system of importing oil in bulk in order to reduce downstream
costs has already run into problems that should have been foreseen. Among other issues
that stake holders explained that from beginning there was a rise of skepticism about
how the new 'bulk oil procurement' method would combine price efficiency with
quality oil. Basing on those reasons 18 people out of 25who were question to give their
opinion on the performance of BPS since came in practice said that those in charge of
the processes don't seem to have found an answer to the problems of quality, the fuel
retailers said much on the imported oil that is bad and the controllers vacillating about
that. Though in between the Tanzania Bureau of Standards (TBS) issued a statement
denying that some substandard oil was imported under the new system. However, other
authorities in the same field seemed to hold a different stance. As statement released on
Tuesday of 28 August 2012 by the Petroleum Importation Coordinator (PIC) said that,
in an effort to control fuel adulteration, a three-month ban had been imposed on
importers of substandard oil under the bulk procurement system said one of
respondents.
PIC Chairman Mansoor, who is also the Member of Parliament for the Kwimba
Constituency, said much success has been recorded since the bulk procurement method
was adopted. For one, the Tanzania Revenue Authority (TRA) was now in a position to
make realistic tax collection projections – which is, on the face of things, a good thing.
However, analysts were wondering what else has been achieved apart from simplifying
tax collections as quality control seems to run into institutional contentions, with TBS
saying there is no problem, and PIC insisting that there are problems.
It was noted that regular assessment is needed as to improve the system were necessary
in order to ensure it meets desire of stakeholders. The chances of proper control of
quality on existing institutional premises are limited as the success in that process
chiefly depends on PIC shouting down TBS all the time, as EWURA and TPDC watch
from the sidelines.
58
5.5 Impact of BPS to the country economy
BPS has been proved to be chiefly instrument tocontrol and boost the country economy
as it has managed to control fluctuation of fuel market pricesover year now
irrespectiveof changes in exchange rate of local currency against United States dollar.
Among the respondents said that the system started showing good results as the process
authorities adopted changes made by different stake holders during the implementation
time. Through data analysis the results shows that in most cases the OMCs prices were
below Ewura indicative prices which were being published monthly, for those results
were totally good to the country economy. The rise of fuel prices has got direct impact
to the prices of goods and services at a direct proportional of the fuel price increase
rate.
59
CHAPTER SIX
CONCLUSION AND RECOMMENDATIONS
6.1 Introduction
This chapter concludes on the findings obtained and reported in the previous chapter
and come up with conclusion and recommendation for improvements in practice and
further studies.
6.2 Summary
The objective of this study was “to establish whether the bulk procurement system in
Tanzania is effectively control fuel market prices’’ And in order to address this
objective, specific objective and research questions were developed to facilitate
collection and analysis of data that would at the end sum up to address this main
objective. The next section will provide research conclusion on the specific objectives
and research questions that address the main research objective
6.2.1 Key Findings and Conclusions
In order to address the main objective three specific objectives were developed and
against each of them research questions. The result on the research questions directly
reflect on the result on the specific and main objective.
Discussion on findings on research question one: Is there any relationship between the
experienced pump price trends in Tanzania and the Tanzanian shilling to USD
exchange rate movement?
The practice of BPS was brought forward with aim to mitigate the impact on the
movement of exchange rate in the world market that Tanzania has been facing.
Therefore this question was tested through correlation analysis on secondary data,
descriptive analysis on primary data and a supplementary arithmetical analysis. An
initial test on correlation analysis indicated that the movement in exchange rate does
not have a statistically significant impact on the petroleum prices trends. This is an
60
experience to which public outcry has always centered on. It is a general expectation
that the deterioration in local currency power against major international currencies will
be accompanied by the increase in petrol prices and vice versa. However, from the
study although the fall in Tanzania shilling value had a positive correlation with the
petroleum prices increases, the correlation was not significant indicating little
importance of exchange rate in determination of petrol price.
In contrast to correlation results, analysis on expert opinion obtained through
questionnaires, arithmetically ranked the exchange rate as the second most powerful
determinant of petrol prices after taxes. In the study other variables that tested
positively as core costs in determination of the petroleumprices supporting exchange
rates were international Freight charges to Tanzania and transfer prices that
multinational companies have been using to transfer product to its affiliates,
International Insurance charges paid on shipments and levies imposed on petrol by the
government agencies.
In a supplementary test that was conducted based on a set of assumptions developed by
the researcher, it was noted that international exchange rates movements has a direct
impact on Platts prices, and hence movements in Platts prices are partially a reflection
of international exchange rates movement. This then meant that since Platts reflects
exchange rates movements indirectly, then it impacts on the level of reflection expected
directly in exchange rate correlation to the petrol prices. This is considered to be the
reason that the correlation test failed to establish the relationship between the
exchangerate and the petroleum prices to be a significant one.
6.2.2 Conclusion on Research Question One
Based on the preceding explanation on the results in various tests that were done on
impact of exchange rates on petrol prices determination, we conclude that local
exchange rates’ movement between Tanzanian shilling and US$ (and other major
currencies) have a significant impact on the petroleum products prices because it does
impact on the level of operating (importation) costs in local currency.
61
As the results it is concluded that the nature and strength of impact of exchange rates on
the petroleum prices is largely determined by thedegree of elasticity of the local
Tanzania shilling / US$ exchange rate to the US dollar performance (strength) in the
international money markets. And base on the preceding results which show that the
importation of fuel through BPS was the best tool to prove that prices of fuel sometime
could go down regardless to increase of exchange rate in the local market. And this has
been prove with the test that Ewura prices sometimes were going down when our local
currency was getting weaker against US$.Different levels of elasticity changes the
correlation from negative to positive and vice versa. This can be an interesting area for
further studies.
Discussion on findings on research question two: To what extend is BPS has managed
to control price of Petroleum products in Tanzania market? Similarly to the first
question, this question was also tested using correlation analysis based on secondary
data and descriptive analysis on primary data collected through questionnaire.
In all tests conducted BPS prices were found to be stable overlong period compared to
the changes on exchange rate which could cause prices going up as we used to
experience that on prior to the introduction of BPS. The correlation identified that on
individual importation falling of local currency was main base of price going up
leaving OMCs with uncontrolled super profit which was threat to the country economy
at large.
During the test other variables that came in support of international crude oil price as
core determinants of petroleum products’ price levels were financing costs charged by
lenders who finance purchase / business and international insurance charges paid on
shipments.
From the experts’ opinion, descriptive statistics indicated a mean score of 4.65 out of a
maximum of 5, indicating international crude oil prices to be among the core
determinants of the petroleum products’ price levels. It was ranked third after taxes to
central government and exchange rates impact.
62
6.2.3 Conclusion on Research Question Two
At this point, we can confidently argue that the real life experience indicates that the
changes brought in importation through BPS normally were reflected through in the
local pump prices and the public is aware of this trend and always expect impact on
local petrol prices whenever PIC announce for new tender to import fuel.
However in some circumstances it has been noted that the local pump prices stayed low
while the international fuel prices increased. This is what caused the need for EWURA
to intervene the market and came up with BPS which has shown a very big positive
result as good price control mechanism.
6.2.4 Conclusion on Specific Objective One
Apart from tests on impact to petroleum products prices arising from specific cost
elements, that is exchange rate and international crude / refined oil prices reported
earlier, a general test on effect of BPS to the price increase possible was done under
question one and two of the questionnaire attached in appendix 1 (reported in chapter 4)
and found that pricing strategy by OMCs is decided based on a combination of a
number of factors. These factors include Cost, target profit and level of competition.
In descriptive analysis, the price changes was observed over one year period in
determining changes occurred in local market compared to the changes in exchange
rate against US$ for the period where by BPS was in practice. The analysis showedthe
changes in exchange rate hard little impact to the prices under BPS compared to the
changes occurred in previous years.
The above findings and conclusion reported under research question one and two
covered earlier, indicates that BPS brought efficiencies to the price of products as
observed in the market (secondary data) and as recommended by experts (primary data)
is an undisputed core determining factor of the petroleum products price. And from
these observations, we can hence conclude that the level of petrol prices in Tanzanian
downstream petroleum sector is a true reflection of the core BPS cost drivers which
include not only currency exchangerates and purchase price as proposed but also other
63
major costs or rather additions arising from taxes to central government and levies
payable to various government agencies. This finding suggests that it is important to
investigate and establish on how efficiently are the OMCs in managing their business
costs? Cannot they be much lower than they are currently so that the prices also
become much lower? Therefore as a move to control price levels, cost management by
OMCs and taxes’ and levies’ base widening (so as to lower number of taxes payable or
rates chargeable on petroleum products) should be the key focus areas.
Discussion on findings on research question three: Is the government Intervention on
control of importation and distribution will continue offer the same quality services?
In the initial data analysis which was done through questioner obtained from primary
dataall participants had a significant means difference with P < 0.05 indicating
compliance to quality services.
However based on descriptive analysis, it was noted that quality may be still
questionable if the proper tendering procedure are not followed which will lead the
tender committee accept his low price without considering the realistic of other cost
which build up price as the results will cause also importer find means of covering his
cost by taking cheap product found in the world market regardless to its quality. A
supplementary test was carried on this issue and the findings cleared the doubt that
procedures are being followed. The data was separated for pre and post January 2012
noting that BPS became legally enforceable.
A number of other tests were done testing effectiveness of the regulations based on
primary data aiming at getting experts opinion on effectiveness of BPS, utilization of
cap prices by OMCs, identification of efficient and effective ways to ensure that
OMCs comply withBPS and exploring the ways that can be used to manage the petrol
importation costs, quality and eventually the consumer prices. Some of these
questionnaire questions were open questions.
The experts expressed their comfort with effectiveness of the BPS in creating
awareness to consumers, restricting OMCs prices (ceiling) and that they
werecomprehensive enough to cover all costs of operators and provides for a
64
reasonable margin. However effectiveness was noted to be situational for example if
the purpose is ensuring that OMCs comply with cap prices, then yes the cap prices are
effective, however cap prices were noted to inhibit effectiveness of the market forces
and therefore work against price control. This is a serious observation that needs to be
addressed.
`
6.2.5 Conclusion on Research Question Three and Specific Objective Two
Considering the wider objective of EWURA as a regulator, this can be summed up to
be creating a fairly competitive and stable downstream petroleum sub-sector, the
findings in this research as earlier reported and discussed in the previous section,
indicates that EWURA is managing its responsibility, and its regulation of the BPS is
effective. However the rate of effectiveness in general can be improved if some
shortcomings will be properly addressed. The research has indicated some areas and
tools that EWURA can address or use to enhance its delivery.
The survey managed to get opinion on the best ways that EWURA can utilise to
enhance the observed effectiveness of the BPS by managing compliance. Currently
physical inspection by inspectors is the practise, to enhance compliance experts have
supported the proposed new mechanisms and also suggested on other possible tools to
enhance compliance. The use of technology through micro chip installed in pre-
registered petrol pumps that will be transmitting the details of each sale including
quantities and price indicated was among the proposed tools (similar to TRA’s
electronic fiscal devices), others are EWURA opening regional offices and increase
frequency of visits and establishment of toll free lines where consumers can call for
free and report malpractices noted (whistle blowing).
The experts have also encouraged EWURA to enhance trustful and transparent
dialogue sessions with OMCs in order to get right information for its decisions and
work closely with other government agents and stakeholders like TRA, Tanzania
Bureaus of Standards, Weights and Measures agency , police force and others, to
ensure that thepetrol sector becomes more competitive through a level playing field
65
where all operators adhere to standards of quality, safety, health and environment
protection and fight such practices like fuel adulteration and tax evasion so as to ensure
that all operators operates at realistic costs and offer same value for money. This is due
to the fact that for example if a certain OMCs sells adulterated fuel at a lower price,
although that price will be within the indicative/cap range, but in actual fact there is no
compliance.
6.2.6 Other General Observations and Conclusion
6.2.6.1 Measures that Can Contribute to Better Petrol Price Levels
The surveys also seek expert opinion on other measures that may help to reduce the
petrol prices level through question seven and nine in the questionnaire.
Among the recommendations was that government should reduce taxes payable on
petroleum products and operators (OMCs) should utilize bulky procurement to enhance
their bargaining power.
Other suggested measures in the side of OMCs were that OMCs to improve their cost
management, optimization in procurement practices including better negotiation,
sourcing and financing options, proper planning of deliveries to avoid unnecessary
costs like storage and financing costs as well as working closely with EWURA so as to
ensure that the regulator has correct information for cap prices and hence be able to
determine and issue cap prices that make business sense.
6.2.6.2 Impact of Taxes and Levies on Petroleum Products’ Prices
As noted and indicated in findings in specific objectivequestions of this research, taxes
and levies have been identified as among the key contributors to price determination
hence researcher did an analysis on percentage contribution of taxes and levies on
petroleum products prices in Tanzania as compared to other countries. The source of
data for this analysis is same to literature review sources.
When reviewing the EWURA price buildup formula, most of the observed costs
notedwere different taxes and levies imposed on the petroleum products. When
66
compared with data available for other countries, Tanzania emerged to be among the
countries which have a high taxes and levies proportion to the final prices.
Figure 5-1 summarizes the taxes’ percentage on the petroleum products for selected
countries. The percentages were computed by setting the ex-refinery (FOB) prices as
100% and adding on it all other costs to the point of consumer price. Tanzania has taxes
and levies accounting for equivalent of 82.69% of the e-refinery (FOB) prices for
petroleum products which is fairly high and only comparable to Australia and India
who have high taxes and levies too. This indicates that in Tanzania, taxes and levies
have a great impact on the petroleum prices as those charges are passed on to the final
consumer.
Figure 5-1: Analysis of impact of taxes on petrol prices: An international comparative
Source :( Researcher data findings, 2013)
This observation suggests that, our government has to relook at its tax base and widen it
to release some of taxes and levies on petroleum products. Unless this is done
petroleum products prices will continue to be relatively high and BPS we be looked as
ineffective.
67
6.2.7 Recommendations / Implications
This study has enabled the researcher to develop recommendation / implication on
some issues that may help to improve the effectiveness of BPS and levels as well as
enhancing regulations’ effectiveness and general sector practices in Tanzania.
Therecommendations have been divided into three major sub-categories each
addressing one key stakeholder as presented below.
6.2.7.1 Government
There is a need for expansion of KOJ to be able to discharge big volume within a short
period of time that will help to reduce number of time that a ship takes to be on queue
waiting another ship to finish discharging and that has been causing OMC’s to be
charged heavily as demurrage charges on which later the same cost is being transferred
to consumer. This will help EWURA in perfecting the petrol pricing formula and
hence the Cap prices and avoid OMCs operational inefficiencies to be passed on to the
consumers in terms of excessive margins to cover overheads and other unnecessary
operational cost.
• Government taxes should be reviewed in order to reduce number of taxes or tax rates
on petroleum products because taxes have a great impact on fuel price.
`
6.2.7.2 EWURA
• EWURA has to periodically review its bulk procurement policy to ensure that
procedures are up to date and that it is economic and relevant to both consumers and
OMCs. This is because even currently although OMCs comply with the BPS, but the
extent of accuracy of the cap prices themselves is not 100% known due to the fact that
some OMCs affords to sell at low prices even from indicative prices, the question is
how do they afford this? Is it because of cost management efficiency, procurement
effectiveness or selling adulterated fuel?
• EWURA should be conducting researches that will avail relevant information for it to
determine relevant regulations for the sector.
68
• EWURA needs to establish alternative methods of allowing the multinational
companies to import product from their own source and closely monitor their prices
and compare with the world market price movement to enable to get cheap and quality
product and BPS to be used for independents companies on which their prices will be
used as benchmark for the country benefit at large.
• On the other extreme, it is the view of the researcher that EWURA should not be
publishing the indicative and cap prices and instead leave the market forces to
determine the proper prices. In this case EWURA will compute the prices as it
currently does and it will intervene the market only when the freedom is violated by
charging higher than expected prices.
• In order to stabilize the sector and address interest of its stakeholders, EWURA
should enhance its cooperation with other government agents whose responsibilities cut
across the petroleum sector. This includes for example Tanzania Port Authority (TPA)
(on speed of offloading to avoid demurrage / storage charges), TBS, Weight and
measures agency and police force (fuel adulteration and malfunctioning pump scales),
TRA (importation records data for various purposes) and ministry of Finance (for
various fiscal policies issues).
• Although experts did not buy this idea, establishment of stabilization fund whereby
OMCs contributes to a central fund from which significant purchasing costs changes
occurring are funded from has been practiced in some countries like Australia and seem
to be successful, it can be tested in Tanzania.
6.2.7.3 OMCs
• OMCs have to push for their orders on bulk procurement when there is political
interference on ship berthing by ensuring berthing schedule is clearly followed. In
efficiency of discharging will increase cost on the consignment as the results will
increase cost to product and make Bulky procurement system to be inefficient.
`• OMCs have to improve on their general procurement practices to ensure that
theyincur reasonable costs. This includes proper planning for procurement, clearance of
69
cargo, financing arrangement and better negotiation and sourcing. Improvement in this
area may lower the total cost of acquisition and hence lower unit cost and selling prices.
• OMCs have to properly use the indicative / cap price as guides only and not the price
at which they sell their products which seeming to be their currently practice.
6.2.8 Recommended Further Studies
A number of interesting areas of study can be deduced from the body of this study,
some of which are proposed as per below
• A similar study is proposed but with an extended (much wider) cost driver base.
• A similar study is proposed but it should cover other effective ways of fuel
importation with aim to lower more pump pricesthan other member of East
Africa Region such as Kenya.
• A study on petroleum prices that will check on the fairness of prices from the
final consumer perspective.
• A similar study that will include more than five OMCs and most of the big
players in the downstream sub-sector.
• A study on relation (elasticity) of the Tzs / US$ exchange rate in Tanzania to
trends in international money markets.
• A study that will look at the OMCs’ cost structure and efficiency in cost
management.
This proposed further study is in line to the recommendation that EWURA should be
doing research to get data that will enable to find other better way of controlling price
and quality rather than depending on BPS only which once the system fails will cause
scarcity to product and have big impact to country economy.
70
APPENDICES
APPENDIX 1
RESEARCH QUESTIONNAIRE
QUESTIONNAIRE 1:
SECTION A
Personal Background
1. Sex
Male Female
2. Age
18 - 25 26 – 33 34 - 41 42 - 50
50 and above.
3. Marital status
Married Single
4. Educational level
Primary Secondary University Other tertiary
SECTION B
5. Do you think introduction of BPS has affect petrol Prices of the Tanzanian
market?
Yes
No
If yes,
how?……………………………………………………………………………...
……………………………………………………………………………………
6. What do you think has happened to price level of petroleum in the country after
the BPS has been introduced?................................................................................
71
……………………………………………………………………………………
……………………………………………………………………………………
7. Do you think after the government taken over the control of importation of
petrol has it continue offering quality product to its customers?
Yes
No
8. Does it serve any purpose for the government to restrict OMC’s individuals to
purchase from their own source?
Yes
No
9. What types of economic regulation should EWURA employ to ensure the
reliable and efficient delivery of downstream petroleum products in a way that
protects the interests of providers and consumers alike?
……………………………………………………………………………………
……………………………………………………………………………………
10. Are there any factors affecting fuel prices in the country?
Yes
No
If yes, please state some of them……………………….....................................
……………………………………………………………………………………
……………………………………………………………………………………
11. Do you think the government intervention will it help to lower fuel prices?
Yes
No
72
If yes what strategies should government employ to control fuel market prices?
……………………………………………………………………………………
……………………………………………………………………………………
QUESTIONNAIRE 2:
SECTION A
Personal Background
1. Sex
Male Female
2. Age
18 - 25 26 – 33 34 - 41 42 - 50
50 and above.
3. Marital status
Married Single
4. Educational level
Primary Secondary University
Other tertiary
SECTION B
5. Do you introduction of BPS has an effect on oil prices in Tanzania?
Yes
No
Comment…………………………………………………………………………
……………………………………………………………………………………
73
6. What do you think are some of the main factors of fuel price instabilities facing
the Tanzanian petroleum subsector?
……………………………………………………………………………………
……………………………………………………………………………………
7. Comment on whether the liberalization of downstream petroleum industry has
succeeded in the Tanzanian economy.
……………………………………………………………………………………
……………………………………………………………………………………
8. Are there any defects in the petroleum subsectors?
Yes
No
If yes, which ones?...............................………….………………………………
……………………………………………………………………………………
9. Comment on what you think will happen to the supply and provision of quality
services after the government takes over the importation of petroleum product
in Tanzania.
……………………………………………………………………………………
……………………………………………………………………………………
10. What do you think will happen to price level in the country after the
introduction of BPS?
……………………………………………………………………………………
……………………………………………………………………………………
74
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