Fuel’s Small Profit Margin Creates Strain Between Private Sector, Government
Private investors involved in the sale and distribution of fuel know Ethiopia has the smallest profit margin on these goods in Africa – just 1Pct. As a result, investors shy away from the business, thereby contributing to imbalanced supply and demand, even as the number of vehicles in the country increases on a daily basis. To remedy this, the government has stepped in, announcing plans to build fuel stations throughout the capital. However, private sector insiders say they should work instead to improve the profit margin. EBR’s Ashenafi Endale spoke with key stakeholders to learn more about the debate and the growing tension between the public and private sector.
Abebe Tsigu, 52, has been running a fuel retail business for nearly 30 years in Wolayta Sodo, located 328km outside of Addis Ababa. Although he’s managed to stay in the business for years, he finds it difficult to stay afloat due to the small profit margin fuel stations enjoy in Ethiopia.
On October 15, 2016, Abebe was in Addis Ababa to discuss the dynamics of the fuel market with his distributor. “Even though I have been running the station for the last 28 years, I could not open another station or expand the business,” he told EBR. “This is because of the profit margin set by the government and the unpredictable future of the business.”
Abebe has been getting a gross profit of ETB1,800 from a truck of benzene, which carries 45,000 litres. This figure increased to ETB3,100 per truck over the last two years, after the government increased the profit margin of benzene for retailers to ETB0.0715 per litre, up from ETB0.04.
Despite the increase, Abebe argues that the profit margin is a hindrance and the fuel market is currently filled with faulty players. “I could not expand the station because the profit is very small, nor could I invest it in other businesses because fuel retail business ties capital for a long time,” he stresses. “I also could not close it because the government always promises it is going to revise the profit margin.”
Despite Abebe’s hesitation to expand, the number of stations in his area has dramatically increased – to nine in the last few years, with two currently under construction: “The town only had three stations for decades.”
It is not only in Wolayta Sodo that the number of stations is increasing; fuel consumption is increasing at a rapid rate throughout the country. As a result, the number of fuel retail companies and stations is steadily growing, especially in recent years. According to information obtained from the Ethiopian Petroleum Supplies Enterprise (EPSE), the number of fuel retail companies increased from 9 to 13 in the past two years, while fuel stations grew to 774 from 682.
Petroleum by-products – often referred to as fuel – are currently the most widely used source of energy in Ethiopia. The EPSE currently imports regular gasoline, gasoil, kerosene, heavy fuel oil, light fuel oil and jet fuel. As of the end of the 2015/16 fiscal year, the total consumption of the country stood at 3.12 million metric tonnes, which amounted to USD1.32 billion. The volume was just 2.01 million metric tonnes in 2011/12, amounting to USD1.9 billion, according to data from the EPSE. The total cost has dropped due to the decline in fuel price in the international market. Ethiopia imports 75Pct of its benzene via Sudan, while the rest comes through Djibouti.
The EPSE imports and supplies fuel to distributing companies with its own profit margin. The government last adjusted the margin in January 2015, after which the figures have increased by 0.03 on average. As of January 2015, EPSE’s profit margin stood at ETB0.0977 from benzene, ETB0.08 from kerosene and ETB0.1017 from naphtha per litre. The fuel retail companies, which distribute products to stations operating under them, also get a margin of ETB0.091 from benzene, ETB0.0835 from kerosene and ETB0.086 from naphtha.
Even after the increment, industry players complain – and it’s not limited to retailers. In fact, both the fuel retail companies and the EPSE express concerns about the low profit margin, which they say has hindered them from additional investment and developing the industry. “Starting with a ETB20,000 capital; currently, I barely reached ETB1 million,” claims Abebe.
After the adjustment, the combined profit margin of distributors and dealers is roughly 1Pct of the pump price, which is the lowest in Africa. The average profit margin in other African countries is 10Pct, according to the Fuel Retailers Association.
The meagre profit margin has implications for the growth of fuel stations. For instance, in Kenya, where the profit margin for fuel distributors is USD0.067 per litre, the number of stations has reached 1,700. However, the number of stations in Ethiopia, a country that has a population roughly twice the size of Kenya’s, stood at 774, even as the number of vehicles in the country is increasing.
Demelash Alemu, who works at the EPSE, says revising the profit margin could have solved so many problems within the sector: “This could not only help in stabilising the sector but also in enabling the ESPE to invest in additional depot constructions, truck standardisation and technologies, so our capacity matches the fuel demand of the economy. “Currently the EPSE’s capacity is behind the demand of the economy.”
Due to the demand of the economy, the capacity of the EPSE’s depot has fallen far below covering 45 days of the country’s consumption needs. “Margin complaints have been taking place for a long time,” according to Demelash, which he says has pushed some companies out of the sector. “Government considers the macro-level impact, because margin increment affects the economic capacity of every citizen,” he argues. “Since using trucks is expensive, the upcoming railway and pipeline via Djibouti will ease the tariff.”
However, fuel companies suggest that unless the regulatory framework improves, the situation will be bleak. “The economic growth is creating big fuel demand in each sector, especially from construction projects. However, the profit margin does not allow us to invest and open new stations,” says Eshetu Zeleke, Marketing Manager of OiLibya. “Every year, we plan to open 10 to 15 new stations, hoping the margin will improve.”
OiLibya, one of the two multinational fuel companies operating in Ethiopia, has 180 stations across the country. Established in 2008, the company only built 65Pct of the stations currently operating in the country, most of them were built during the initial years of the company’s operation, while independent dealers built the rest. But in recent years, the company has built only two stations, according to Eshetu.
According to information obtained from the EPSE, the market share of OiLibya currently stands at 22Pct. National Oil Ethiopia (NOC), an indigenous company, has a 35Pct market share while the other multinational company, Total Ethiopia, enjoys 23Pct. Yetebaberut Beherawi Petroleum, TAF Oil, Kobil Ethiopia and Dalol Oil have a combined share of 11Pct in the distribution. Six other fuel retail companies comprise the remaining share.
Tadesse Tilahun, CEO of NOC, has also complained about the lower profit margin, which he says is hurting the growth of the sector, during a presentation at the third African Refiners Association Forum held in Addis Ababa in November 2016. “Even though the oil consumption is growing significantly, the profit margin for distributors and dealers in Ethiopia is the lowest in Africa, affecting the growth of the network of stations and the supply,” he told participants.
Government officials spoke to their concerns: “We will look for room to revise the margin, as long as the tariff stays affordable for the public,” said Motuma Mekasa, the newly appointed Minister of Mines, Petroleum and Natural Gas (MoMPNG), who also spoke at the Forum.
Hailu Tekleab, acting Director of the Petroleum Downstream Operators Regulatory Directorate at the MoMPNG, agrees that the profit margin is comparatively low in Ethiopia. However, he is more concerned about what the lower profit margin problem has caused on the industry, traffic accidents and the economy than its impact on the profitability of the companies and dealers.
“The unethical players joining the sector and dealers dismayed by the lower margin are using kerosene, which is subsidised by the government, and currently creating chaos in the industry and beyond,” he argues.
The Ministry of Trade (MoT), which is entitled to revise the fuel price as well as the profit margin, says improving the profit margin requires more than their mandate. “First of all, a committee led by the Prime Minister determines fuel, not just the MoT,” explains an official at the MOT. “Second, the international market determines the price of fuel. There is a big caution that any price increment in fuel might affect the public.”
Haji Ibsa, Director of the Public Relations and Information Directorate at the Ministry of Finance and Economic Cooperation, agrees that profit margin revision is unthinkable at this time, when the fuel price in the international market is low: “Companies always want to double their profit and there is no competence in the sector. They could have worked hard…they could have received huge profits by serving at a higher volume with a small margin. Instead, they’ve caused problems on the economy by disturbing fuel distribution.”
However, insiders argue that the lower margin has resulted in a higher degree of adulteration in the fuel industry especially among the newer stations. “Adulteration is deep rooted in the industry, where the profit margin issue is creating more chaos,” says Abebe.
He even claims that new entrants in the industry asked him if he would become their partner and participate in adulteration, even offering to contribute ETB1 million towards the construction of a new fuel station. “However, after discussing it with my distributor, who told me that new entrants work unethically and will leave the market after snatching enough profits, I refused to cooperate,” he says.
Eshetu, on the other hand, says OiLibya operates ethically. “While there are so many court cases on adulteration, we have not faced one,” he stresses. “We even have proposed to the EPSE to introduce a monitoring mechanism to control adulteration.”
However, a 2015 study entitled ‘Assessment of Regular Gasoline Adulteration at Addis Ababa Fuel Stations’ by Tegegne Mekuria reveals that the quality of regular gasoline (benzene) in the Addis Ababa market is questionable since it does not meet the standards set by the Ethiopian Standard Agency, which is an indication of adulteration.
The mixing of adulterants, which are substances that change the quality of fuels, in petroleum products can be done in different forms and at various level of the supply chain: at the distribution level as well as while transported and in the hands of station dealers before reaching the final consumers.
One study from the Global NEST Journal entitled ‘Impact of Using Adulterated Automotive Diesel’ indicates the unfortunate consequences of fuel adulteration, which range from malfunctioning of automobile parts such as the engine, valve bend, gears and bearings to increased tailpipe emissions that can cause health problems.
Tegegne’s study also indicates that the low profit margin is the main reason behind adulteration because most fuel stations cannot survive with the small profit margin after covering their operational cost.
Industry insiders also point their fingers on the huge price difference of different petroleum products used in Ethiopia as the main motivational factor for adulteration. “The government subsidised kerosene to protect the poor,” argues Hailu. “However, fuel companies and dealers are abusing it by blending it with naphtha and benzene.”
In Ethiopia, the price of kerosene is not taxable and subsidised, while the price of regular gas oil and diesel stood higher than that of kerosene, which may be a motive for mixing the cheaper petroleum product with the more expensive one, thereby increasing a retailer’s profit margin.
Some in the private sector argue that instead of supporting investors in fuel retailing, the government seems to engage in the sector itself. On November 16, 2016, the EPSE floated a tender to build its own fuel stations. The Enterprise has secured plots of land to build 50 stations in the capital, which is part of its plan to open 140 fuel stations across the country.
In addition to the EPSE, the government has also re-established the former Ethiopian Petroleum Development Enterprise as the Mineral, Petroleum and Biofuel Corporation, so it can get involved in the exploration, refining and retailing of petroleum products, among others. The Corporation, which announced the commencement of its operation just a month ago, was established with ETB15 billion authorised and ETB4 billion subscribed capital. It plans to create a joint venture with foreign mining and refinery companies, and expects to generate USD500 million a year by 2025.
“The huge gap in the fuel sector has led the government to establish this Corporation,” said Mulugeta Seid, CEO of the Corporation, during its inauguration. “However, the Corporation currently has no money, because the government has not released the capital.”
The Corporation has inherited the Kenticha Tantalum Production Site from the Mineral Development Share Company, the sole tantalum producer and exporter in the country. It also has 1,000 employees. “Because the price of tantalum in international market has fallen, the Corporation has no finance. It has not even paid the employees for months now,” says Bante Wodajo, Communications Director for the Corporation. “We are trying to get 25Pct of the capital injection from the government as soon as possible.”
Although officials say that the government is getting involved in the fuel retail business because the private sector isn’t investing in it robustly, and has even tried to create shortages by refusing to distribute fuel, private fuel retailing companies and dealers strongly denounce the involvement of the government in the trade.
“The government could have solved the fuel problem by encouraging private investors through improving the profit margin and providing incentives,” according to a manager of a fuel retail company who spoke to EBR on the condition of anonymity. “However, it jumped into the business itself. It finally answered the profit margin question in the very wrong way.”
Hailu stresses that the involvement of the EPSE and the Corporation in the fuel retail business is still unclear from a regulatory angle: “The Enterprise cannot be a supplier, distributor and retailer at once. At the retailing level, the involvement of both the Corporation and EPSE will affect the private retailers.”
Private companies and dealers that are aware of the government’s intentions are already frustrated that they will never able to compete. They say government first has to ask why giant and multinational companies like Mobil, Shell and Agip have left Ethiopia.
“One of our stations in the capital was recently removed because infrastructure development is on its way. We spotted another plot and requested for replacement. But they told us the plot is already given to the EPSE,” says the manager. “The Enterprise and the Corporation get any plot lease-free. With the skyrocketing land lease price in the capital, how can we compete with them?” EBR
5th Year • December 16 2016 – January 15 2017 • No. 46