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Government adopts expensive fuel importation method that could blow K3 billion more

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The Democratic Progressive Party government has decided to adopt a new method of importing fuel for the Strategic Fuel Reserves and in process could drain K3 billion from the country’s Price Stabilisation Fund (PSF), Malawi News can reveal.

This will be the case because the new method— Duty Delivered Unpaid (DDU), where the supplier uses own transport to deliver fuel— will result into increases in fuel pump prices and the PSF will have to absorb it.

Government builds PSF through a levy on pump prices that motorists pay at filling stations across the country.

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All along, the country has been buying its fuel through the ex-tank method, through which local transporters are sought to transport from suppliers abroad.

But the Department of Energy in the Ministry of Environment, Energy, and Mining and the National Oil Company of Malawi Limited (Nocma) have defended the expensive route they have taken, saying the DDU method will not require the country to handle all the logistics and bear risks such as product losses.

They also argue that the method will help in eliminating risks that could be costly.

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Malawi News has learnt that, after Nocma proposed to be using DDU, the Malawi Energy Regulatory Authority (Mera) guided that DDU is not the best option since the rates given did not demonstrate that petroleum products would be landed at a competitive price equal to or below cost currently obtaining in the existing importation regime (ex-tank basis) – where the supplier does not provide transport or any economic benefit to the country.

“The proposed shift to DDU incoterm after evaluation of bids could be viewed to be unfair to the suppliers who submitted bids in January 2017. This may be contravening [the] Public Procurement Act as the rest of the bidders were not given the opportunity to participate in the tender by submitting the new premiums under the DDU incoterm.

“This would, therefore, expose Nocma to lawsuits from suppliers and would in effect delay the whole procurement process of the petroleum products,” reads part of communication from Mera board paper, Mera/ EO35/01/2017, dated April 11, 2017 titled ‘Appeal from Nocma to Award Fuel Contracts DDU’, and which Malawi News has seen.

However, Nocma appealed against Mera’s decision to the government (through the Ministry of Environment, Energy, and Mining).

Government indicated that the impact of DDU supply of fuel on the pump price, at 1.3 percent, was fairly reasonable and could be absorbed through the PSF.

Nocma Communications Officer, Telephorus Chigwenembe, said the organisation’s analysis revealed that the DDU benefits outweigh anything else.

“When we proposed DDU, the regulator, Mera, advised that the net effect on fuel price would be an increase within one percent of the current prices. Such an increase doesn’t trigger pump price rise,” Chigwenembe said.

Chigwenembe added: “In ex-tank arrangement, Nocma takes responsibility of fuel from the port. That implies we handle all the logistics and bear all the risks such as product losses. Due to this, we pay for more fuel than we actually get into our tanks. With DDU, however, we no longer suffer such losses and we only pay for fuel that actually gets into our tanks. So DDU helps us eliminate risks that we can avoid.”

He, however, said, having carefully considered the concerns over DDU, Nocma decided to use a combination of the two systems to see how either of the two rolls out.

“As such, out of our current four suppliers, only one is supplying under DDU arrangement. The other three, who are supposed to supply under ex-tank arrangement, have not yet started delivering their quota. ”

“If we didn’t use DDU arrangement we would have no fuel in the strategic fuel reserves by now, which could have been a waste of the resources that government has already invested in the project. As we are mandated to ensure security of supply, we need a system that enables us to stock our reserves within the shortest period possible,” Chigwenembe said.

The Mera Board paper says the Director of Public Procurement already granted approval to change the award of the contracts for two fuel suppliers, namely Oryx Energies and Trafigura, from ex-Tank to DDU which they had dully accepted. The two remaining companies would still supply fuel using the ex-Tank incoterm.

Nocma says it started receiving fuel on May 24 this year and it has nine million litres of fuel as of close of business on Wednesday this week.

In the meantime, it is only Lilongwe depot that is receiving fuel, while Mzuzu and Blantyre are yet to start getting the commodity.

As we went to press, Mera’s spokesperson had not yet responded to our questions seeking clarification on whether the country will finally adopt DDU for all fuel importations into the country and the effect all this would have on the fuel pump price in the long run.

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