A leaked internal government memo has revealed that Ugandans continue to suffer from high and unstable fuel prices due to the lack of a controlled bulk procurement system of petroleum products in the country.
“The current system of acquisition of fuel products in the country depends on the fuel dealers,” reads an internal report seen by ChimpReports on Monday morning.
“The dealers order for fuel from all sources and the price per liter of fuel depends on their pricing strategy. This makes it difficult for the government to control the prices and have stable fuel prices,” the report adds.
The experts argue that the government needs to intervene to stabilize the fuel supply and prices by adopting the bulk procurement system.
“Considering the case study of Tanzania, the following should be done. Set up a bulk procurement system of fuel controlled by the government to govern the importation of petroleum products into Uganda. The Bulk Procurement System can be adopted to ensure a constant supply of fuel in the country and subsequently reduce energy retail prices,” the report reads.
This Bulk Procurement System, which is being used in other countries like Tanzania, Kenya, Mozambique, Ghana, South Africa and partly Rwanda, has helped to stabilise retail prices.
Uganda has seen a relatively higher rise compared to the neighboring countries, including the landlocked states of Rwanda and Burundi, contributing to increase in prices of other essential commodities including foodstuffs.
Fuel is one of the products used in almost all sectors of the economy and hence increase in prices has a very big impact on the overall price movement of products.
President Museveni has since refused the idea of introducing subsidies, saying they would “wipe out the country’s foreign exchange reserves and cripple the economy.”
Experts contend the bulk procurement system can be used to “import products such as Motor Super Premium (PMS); (identified as clean petroleum product in BPS); Automotive Gasoil (AGO) (identified as clean petroleum product in BPS); and Illuminating Kerosene (IK) (identified as clean petroleum product in BPS).
Other products which can be procured under the same arrangement include Jet-A1 (identified as clean petroleum product in BPS); Heavy Fuel Oil (HFO); Liquefied Petroleum Gas (LPG); and any other petroleum product as Government may declare.
In Tanzania, petroleum bulk procurement system has ensured supply at the most competitive prices, by purchasing from a pool of imports obtained from suppliers selected through a competitive bidding process to take advantage of the economies of scale.
Uganda being a landlocked country, fuel dealers have to transport fuel by either road or railway from Kenya to their respective depots. The transport cost is a significant cost on the final cost price per litre that is paid by the consumer.
Other factors affecting the price of fuel include rate of tax charged on fuel, demand and supply factors, and other factors such as the Ukraine/Russia war and elections in neighboring countries.
Participants in Bulk Procurement of Petroleum Products
Implementation of bulk procurement of petroleum products involves the key player, consisting of suppliers, OMCs (Oil Marketing Companies), and Terminal Owners and Suppliers of Petroleum products.
Suppliers of petroleum products are obtained from an international competitive bidding process with tenders being floated to prequalified suppliers only. Participation in tenders is not open to the general public.
Suppliers are both international and local entities that participate in tenders for the supply of petroleum products.
Prequalification Of Suppliers Under BPS
The process usually follows Expressions of interest which are advertised through international and national media.
Usually the criteria used to determine the companies to bid provides that a firm is a registered legal entity structured for the petroleum supply and trading business, proof of which will be sought from a certified copy of the company’s certificates of registration, memorandum/articles of association, taxpayers’ registration certificates and business license.
Multinational companies must have a gross trading turnover of at least USD 100,000,000 per year and for local companies must have a capitalization or asset base of at least thirty billion (50,000,000,000) Ugandan Shillings.
International companies must have a minimum of at least five (5) years’ experience in international trading of petroleum products; and for local companies, must have a minimum of at least three (3) years experience in local marketing business of petroleum products; they must have Letters from customers or suppliers/refineries indicating annual volumes handled; Certified copies of Bill of Loading and certified copies of the contract.
Government officials argue that the system should be managed by one of the relevant government bodies such as the Uganda National Oil Company (UNOC) or the bulk Petroleum Procurement Agency should be formed in case UNOC cannot handle this system.
“The bulk oil procurement is a stop-gap measure and at the same time a permanent solution that should be put in place as a strategic solution to the national oil reserve and ensure stability in the local market,” reads the confidential internal memo sent to President Museveni.
“The roles of the Agency to manage this system should be forecasting demand and supply requirements, conducting international bidding, and concluding and administering contracts.”
Process of Procurement of Petroleum
Under the bulk petroleum system controlled by the Government, the oil companies prequalified by the agency such as UNOC submit their bids to the Petroleum Agency.
The Agency collects all the requirements in terms of volumes required and goes for the auction.
In this case, they get to know all the data regarding the required volumes for the country for a month and also the purchase price.
The winning bid gets the products from the Agency and the retail prices are set by the Agency.
In Nigeria, the country with the lowest cost of petrol at the pump on the African continent, the government subsidizes the price by about 40% under the Price Control Act, which prohibits selling fuel above the government-regulated price.
This Act was introduced in 1977 when there was a worldwide increase in the price of fuel similar to what we are facing.
Similarly, in Rwanda, the government introduced subsidies on petrol and diesel in May 2021 as global oil prices began to rise and moved further to set prices of fuel. In addition, in Tanzania, the government intervened in price negotiation to stabilize fuel pump prices so that it’s affordable to Tanzanians.
Smartson Ainomugisha, a researcher at the Economic Policy Research Centre recently said, “it is evident that market forces of demand and supply are not working well for Uganda… The government should come up with a regulated price and an act that prohibits selling fuel above the government regulated price, especially during supply shocks.”
With the bulk procurement system, it is easy through the system to check transfer pricing among oil companies, thus enabling the government to tap hitherto evaded taxes.
The system also is seen as instrumental in controlling and boosting the country's economy as it can manage to control the fluctuation of fuel market prices irrespective of changes in the exchange rate of the local currency against the United States dollar.
The system also helps to control the quality of the products that come into the country.
The system helps to identify taxes and levies that contribute to price determination and the percentage contribution of taxes and levies on petroleum products prices in the country and compare them to other countries.