Ghana’s worsening LPG shortages: What to do?

A worsening problem that has afflicted the energy sector of our economy is that of periodic shortages of Liquefied Petroleum Gas (LPG).  The nuisance and inconvenience caused by these shortages have generated interesting public debate.  I had the privilege of listening to one such discussion on a radio station recently and from the contributions made by members of the general public, I am compelled to pass a few comments of my own on the matter.  I do this in the hope that I could humbly offer my contribution to the efforts of our policymakers to resolve this matter.

The most extreme of the suggestions that have been made so far have actually come from two schools of thought that represent perhaps some of the most authoritative sources in the country.  The first is a call on government to ban the use of LPG in vehicles.  This position has been attributed to Dr. Charles Wereku-Brobbey, an Energy Expert and a former CEO of the VRA.  The second is a suggestion for the removal of the subsidies on the price of LPG.  This recommendation has been attributed to the NPA, the regulatory institution responsible for overseeing the petroleum downstream sector that includes the LPG market.

Before proceeding to present my views on the matter, it would be useful to consider the merits and demerits of the two positions stated above:

•    Ban the use of LPG in Vehicles, especially Taxis

This call is understandable as LPG consumption in Ghana was purposely promoted and directed at the residential sector only (particularly for cooking).  This policy action was taken to encourage inter-fuel substitution in the national energy economy away from charcoal and other wood-fuels to reduce the rate of forest destruction and by extension protecting our ecological system and the natural environment in Ghana.  For this reason, the price of LPG is heavily subsidized which explains why it is currently cheaper than petrol and diesel, in relative terms.

The use of LPG in vehicles, under the current pricing arrangement, is thus clearly undesirable and even illegal.  This is so because the shortages of LPG caused by its competing use in vehicles totally defeats the purpose for which government has made huge investments to establish a viable LPG market in Ghana (including the establishment of a Cylinder Manufacturing Company) and for which government foregoes a sizable amount of revenue in subsidies, duties and levies on the price of this fuel.  The shortages of LPG on the market are gradually forcing the population to revert to the use of charcoal and other forest products with their attendant negative environmental impacts which government sought to protect, in the first place, with its laudable LPG consumption policy.  In addition to this ill, the subsidy on LPG (meant for the household sector) is, in effect, being illegally enjoyed by a non-target segment of the economy (the transport sector).

Furthermore, the shift from the use of petrol and diesel to the use of LPG by taxis and other vehicles constitutes the very serious offence of tax evasion.  This is so because, government, in its wisdom, has placed a number duties and levies (Road Fund Levy, Excise Duty, Energy Fund Levy and Exploration Levy) on the price of all fuels used in vehicles as a way of collecting monies for road maintenance directly from the road users and also for contributing to the national oil and gas exploration efforts.  As LPG is not intended to be used in vehicles in Ghana, this levy has not been placed on the gas.  Thus vehicles that are run on LPG are in effect evading the payment of this Road Levy, the Energy Fund Levy and other payments as required by law (the Customs and Excise (Petroleum Taxes and Petroleum Related Levies) Act).  In other words, drivers who have shifted to the use of LPG are committing a serious offense in that they are cheating the system by not only dodging the payment of their contribution to the maintenance of roads, established under the Road Fund Act of 1997 Act 536), even though they use the roads more than any other economic group.  They avoid their contribution to the energy fund that is used to administer the energy sector and also to develop the human capital critically needed to sustain our energy economy.  Furthermore, drivers operating on LPG escape making their contribution to the cost of oil exploration in Ghana which today has culminated into making Ghana a prospective oil producing country, the benefit of which will be enjoyed by all Ghanaians including drivers of LPG operated cars.  This situation is absolutely unacceptable.

The above points notwithstanding, banning is an overly simplistic approach to solving the current problem.  What this position (calling for a ban) is actually saying is that we should stop drivers from fueling their vehicles with LPG so that the product will be readily available for the residential sector and for cooking purposes.  This approach is called “command and control” method and has been proven to be ineffective in a free market system such as ours.  For example, smuggling (of say cocoa or textiles) is a banned activity since time immemorial but it is common knowledge that the activity has never ceased no matter how hard CEPS tries and the activity continues unabated.  Another example is that of galamsay.   The practice is a banned activity but we know that its stoppage is nowhere in sight.  Again, several unsuccessful attempts have been made in the past to ban the use of polythene bags and even the sale of sachet water as means of controlling the nuisance of littering as a result of the inappropriate disposal of plastic materials by the population.  On the contrary, the trade continues and is well patronized because the nuisance notwithstanding, a useful service to the public is also served.

The main problem with the command and control approach is that it is extremely difficult to enforce the directive for various reasons.  The approach is also inappropriate as it rather poses the risk of driving the use of LPG in vehicles underground thereby creating a black market and thus complicating an already difficult problem.

•    Remove the Subsidies on LPG

The call to remove subsidies on the price of LPG is also understandable.  As already explained above, subsidies were placed on the price of LPG for very good reasons.  It was done as a means of getting the population to shift from wood-fuels to LPG for the sole purpose of conserving our forests and thus helping to reduce global warming and its attendant climate change phenomenon.

Once the subsidies are removed, LPG could become expensive compared to charcoal and residential users of LPG would be forced to revert to the use of charcoal and firewood as they did before the introduction of the current pricing policy that favours the use of LPG.

The call to remove the subsidy on LPG will therefore be justifiable only if it is clearly established that the original objective of slowing down deforestation in Ghana has been achieved.  If not, then this call is premature and inappropriate.  Indeed, it would rather be useful to deepen the policy and continue it over a long period of time to get the population to be acculturated to a lifestyle that is hooked on the use of LPG as a much cleaner and therefore the preferred fuel that has benefits for the environment, for our health and for our general welfare as a nation that is promoting itself into a middle-income status for a Better Ghana.

So the question is: What should we do?

The current problem presents us with a good opportunity to critically look at our energy delivery system and to take bold and innovative steps to further develop and expand the market, the service delivery capacity of the industry and the complexity of the regulatory regime that oversees the market.  It is interesting to note that, in the ongoing discussion on the LPG shortages, nobody is blaming part of the problem on the fact that the country has very limited production and storage facilities for LPG.  In the whole country, only the Tema Oil Refinery (TOR) has an LPG storage facility whose capacity is only about 6,400MT while the national demand is estimated to be at least 700MT per day (about 5,000MT per week).   Furthermore, the maximum rate of LPG production at TOR is about 350MT per day (96MT/day for the CDU and 250 MT/day for the RFCC) and the capacity to evacuate the product onto the market is also limited to only 900MT per day!  Even a cursory look at these numbers shows that the production capacity, the storage infrastructure and the product delivery capability are all woefully inadequate.  These shortfalls constitute a major bottleneck in the LPG service delivery system and indeed a barrier that must be overcome if the shortages are to be permanently resolved.  This is the fact of the matter!!  Under such a scenario, shortages are bound to occur whether vehicles use the product or not.

From the above discussion, it then follows that the ideal solution to the problem of LPG shortages must necessarily be both holistic, in coverage, and sustainable, in application.

The solution must seek to simultaneously address all the issues raised and must encompass all the positive attributes of the two previous positions while at the same time cure the ills therein.  In other words, the solution must be efficient (in the pareto sense) and progressive in that it must be forward looking and envisages an expanded LPG market that now caters for two sectors of the economy:

a)    The Residential/Household sub-sector, and

b)    The Transport sub-sector.

This way, the good intensions of government for the residential/household sector can be preserved while at the same time, the use of LPG in vehicles is formalized in the transport segment of the market, recognizing the fact that LPG use in vehicles is cleaner than both petrol and diesel and thus desirable for environmental reasons.  The regulations governing the transport segment of the LPG market could then be made such that the appropriate road and other levies are paid and the current subsidies removed so that there is equity in the system.

In conclusion, I am advocating for a new policy directive on LPG consumption in Ghana.  This new policy should conserve the status quo for the residential/household sector but now recognize LPG use in the transport sector as desirable.  The policy must therefore take steps to formalize the growth and development of that market segment through appropriate regulation and controls without compromising the collection of taxes and levies that are placed on all fuels meant for road transportation.

To achieve this, a number of things have to be done:

1. A study (market research) must be conducted under the auspices of the NPA to determine the actual size of the LPG market and its utilization profile within the market.

2. The deregulation process must be further deepened to allow market forces to work in matching demand with supplies.

3. The petroleum products price build-up must be expanded to have the entry for LPG split into two –Household LPG, LPG(H) and Vehicular LPG, LPG(V).  LPG(H) must continue to enjoy the current subsidies and all the tax exemptions as the situation is, currently.  However, LPG(V) must be treated like petrol and diesel in that they must not enjoy any subsidy but rather the appropriate road fund, energy fund and exploration fund levies must be duly imposed.

4. Vehicles that run on LPG must registered as such so that a reliable database can be kept on the growing size of that segment.  Only vehicles that comply with the technical specification of the Energy Commission must be allowed to use LPG to ensure safety of operation.  Compliance with both technical and statutory requirements of vehicles run on LPG will be monitored and enforced at the time of licence renewal and of roadworthy certification.

5. For a start, the NPA must identify and license only a few LPG Distribution Companies and Oil Marketing Companies (OMCs) that can participate in this new LPG market segment, in dispensing LPG to vehicles on pilot basis.

6. Both TOR and BOST must be assisted to build additional LPG storage facilities as the current installed capacity at TOR is woefully inadequate.  Alternatively, appropriate incentives and encouragement must be given to the private sector to, as quickly as possible, establish more storage facilities for holding stocks of LPG badly needed by the market.

By Dr. Kwame Ampofo

Email: [email protected]