Caltex breaks even with just 12 service stations

Caltex was breaking even at the height of fuel shortages in Zimbabwe with just 12 service stations throughout the country and through direct imports on behalf of clients like companies and embassies, clearly demonstrating the effectiveness of market prices.

This was said by Caltex chairman Simba Kambarami when he briefed United States embassy officials on moves by central bank governor Gideon Gono to get the four major oil companies to offer credit lines for fuel imports.

The oil companies did not have any problem with that provided they were allowed to charge for their fuel in hard currency.

Kambarami said they were negotiating the split with the central bank. Gono had proposed a 60/40 split but Caltex wanted an 85/15 split.

Kambarami was, however, quite frank. He said under the system Zimbabwe would have a two-tier system where you would have service stations selling fuel in hard currency which would have fuel and others which would sell fuel in the local currency but would have no fuel.

Full cable:

Viewing cable 05HARARE1126, CALTEX HEAD ON FUEL SHORTAGES; GOZ POLICIES

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C O N F I D E N T I A L SECTION 01 OF 02 HARARE 001126

SIPDIS

AF/S FOR L. MUNCY

NSC FOR SENIOR AFRICA DIRECTOR C. COURVILLE

E.O. 12958: DECL: 12/31/2010

TAGS: ENRG ECON PGOV EFIN EINV ELTN ZI

SUBJECT: CALTEX HEAD ON FUEL SHORTAGES; GOZ POLICIES

Classified By: Charge d’Affaires Eric T. Schultz under Section 1.4 b/d

——-

Summary

——-

¶1. (C) In an August 4 meeting with the CDA, Caltex Zimbabwe

Chairman Simba Kambarami told the CDA that the Reserve Bank

of Zimbabwe (RBZ) had asked the major oil companies present

in Zimbabwe to provide lines of credit for fuel imports to

help with fuel shortages. He said the RBZ was also

advocating increased dollarization of the sector as another

partial solution. In that regard, he noted that the GOZ was

in the process of changing the laws to allow the use of

dollars for purchases inside Zimbabwe. Caltex and the other

majors planned to concentrate their business on hard currency

stations, an approach Karambani acknowledged would result in

a two-tier system. Regular stations would sell fuel to the

general public at the subsidized price but would have no

supplies. The hard currency stations would have petrol that

those who had access to hard currency could purchase. End

Summary.

—————–

Fuel Credit Lines

—————–

¶2. (C) Kambarami told the CDA that the Reserve Bank of

Zimbabwe (RBZ) had approached the major oil companies for

fuel credits. The RBZ had asked the companies to take a

&long-term8 view of their operations in Zimbabwe. The oil

companies were considering the request, which would establish

credit lines of $7-8 million from each of the four &majors8

in country: Caltex, Total, BP, and Shell. Kambarami said

Caltex, for its part, was committed to the Zimbabwean market

for the long-term and was likely to agree to the credit line.

He added that the companies would insist that they be

allowed to pass on the cost of the credit as a price

increase.

¶3. (C) Kambarami estimated Zimbabwe,s current fuel needs at

$50 million a month. In that regard, he said neither the

requested credit nor the proposed South African loan, of

which a portion might go to finance fuel imports, would have

a long-term effect on the fuel shortages. Kambarami added

that he had heard the loan would have strict economic

conditions attached.

————————-

A Partial Market Solution

————————-

¶4. (C) Kambarami agreed with CDA that the GOZ could solve its

fuel woes by lifting price controls. However, the GOZ was

committed to using price controls as a way to control

inflation instead of reducing the money supply. That said,

Kambarami said he had begun to detect a shift in GOZ thinking

about market solutions, especially at the RBZ. The most

notable change was the decision to authorize hard currency

service stations. A year and a half ago, when Gideon Gono

had become RBZ Governor, the central bank was totally opposed

to &dollarization.8 Now it was embracing it, at least as a

partial solution to fuel shortages.

¶5. (C) Kambarami said only one hard currency station had

opened thus far, owned by the national gas company Noczim.

Caltex was prepared to open such stations provided they could

reach an acceptable agreement with the GOZ on a split of the

US$1/liter revenue. The RBZ had proposed a Caltex/RBZ split

of 60/40; Caltex,s counter-offer was 85/15. Kambarani said

the other issue that needed to be resolved was assuring the

public that it would be legal to use U.S. dollars to purchase

fuel and other items. The RBZ had agreed to change the law

to allow such purchases. Interestingly, they had been unable

to find a post-independence law that expressly forbid the use

of hard currency within Zimbabwe and were instead changing a

Rhodesian-era law.

————————–

Two-Tier Fuel Distribution

————————–

¶6. (C) Kambarani said Caltex was currently breaking even in

Zimbabwe despite the fuel shortages thanks to its direct

imports on behalf of clients like the Embassy and especially

the mining industry, and its 12 stations throughout Zimbabwe

that accept coupons purchased with hard currency. Like its

sister companies, Caltex intended to expand the number of

such stations in addition to establishing the proposed hard

currency stations. He noted tat it was an internal company

decision whether to direct fuel imports to the hard currency

stations or to the regular stations that accepted Zimbabwe

dollars.

¶7. (C) Kambarani acknowledged that the practical effect of

such an approach would be to create two-tier system. The

hard currency stations would sell petrol at roughly $1 a

liter. The price in the regular stations would be Z$ 17,500

a liter, $1 at the official exchange rate but less than half

that at the parallel rate. The result, Kambarani agreed,

would be fuel supplies would flow to the hard currency

stations rather than to the regular stations. People unable

to get access to hard currency would continue to experience

difficulties in getting petrol without resorting to the black

market. In that regard, he noted that there was already a

large and growing secondary market in Caltex coupons.

——–

Comment

——–

¶8. (C) Fuel policy is a case study in how the GOZ has

mismanaged Zimbabwe,s economy. The GOZ has long subsidized

the price of petrol, largely for ideological reasons. It is

suspicious of the market and committed to a command and

control economy that ostensibly &protects8 the average

person from the ravages of the market place. In the process

the ruling ZANU-PF party also curried favor with voters by

providing cheap petrol. In better economic days, the GOZ was

able to afford the luxury of this policy. It no longer can

and the result is widespread fuel shortages and accompanying

price increases that are actually undercutting the government

and the ruling party,s popularity.

¶9. (C) However, at this point in time, the obstacles to

changing course are no longer, or even principally,

ideological. The policy has instead, predictably, turned

into a gigantic rent-seeking exercise on the part of

government insiders, the only people who have access to

petrol at the subsidized price, which they then resell on the

black market or even in neighboring countries. The RBZ,s

proposed solution, dollarization, like all of its

market-friendly ideas, is a half-measure that will solve

neither the fuel crisis nor the government corruption it

engenders. What it will do is further exacerbate the growing

divide between government insiders and other privileged

Zimbabweans, who can access hard currency, and everyone else.

SCHULTZ

(117 VIEWS)