The mark-up mechanism

While the technical matter of hedging for fuel prices has been widely debated by all and sundry, the more important issue of fuel liberalisation has largely been ignored.

The Malta Resources Authority (MRA) has published a consultation paper where it explains its intentions. The issue was debated by Cabinet, which decided it would postpone the date of liberalisation, that was originally due to take effect not later than the start of this year.

The MRA is confident that "that competition will ultimately yield the best competitive prices to the consumer". This view is not necessarily true as it is quite possible that the present Enemalta monopoly will give way to a less benevolent private monopoly.

The government has stated it intends to get out of the fuel market and that in future it will consider the core activity of Enemalta as that of electricity generation and distribution. It is understood that the government intends to divest itself of the petroleum storage facilities that are at present almost wholly in its hands.

This will be a form of privatisation and will provide funds for supporting the precarious position of the Enemalta electricity division and for the badly needed modernisation of the power stations that has been postponed over and over again. The new operator of these storage facilities will enjoy a de facto monopoly and will see that he recoups the cost from the public in as short a time as possible.

The intended price structure for petroleum as described in section 6.3 of the MRA consultation paper is over simple. The final price of petroleum products will be the sum of the cost of product, excise duty, VAT and a mark-up fixed by the MRA. What the cost of product includes is not stated.

Excluding taxes and profits, cost is made up of the original purchase price of the fuel (FOB or refinery price), freight, unloading charges including demurrage, primary storage charges, distribution charges and other overheads. Excise duty is charged on the tonnage and VAT on the total cost. The consultation paper does not state on what components the MRA will set its mark-up. It is not known if this will be on the total cost or if the unloading, storage and distribution charges will have to be absorbed within the mark-up.

This is an important point for otherwise there will not be any incentive to keep the costs down and the public will have to foot any avaricious cost the owners of the storage facilities will impose.

In all probability, the storage facilities will be leased by the owners to the highest bidder with the result that only one major importer will be able to store fuel, and will thus have a monopoly. This supplier will purchase his fuel from his principal; who will be a multinational oil company that will set the price at which it will sell its fuel to the Malta market. A guaranteed mark-up will then be added and the public will have no option but to pay.

There is, therefore, no advantage to the public in the proposed arrangement.

A fixed mark-up is simple to set up and frees the MRA from the complexities of fixing the maximum fuel price itself. But that is perhaps the only advantage in this system.

On the other hand, there exists a number of internationally accepted oil price indices which can readily be used to set the local price. The Brent price for crude oil and the Platt index for products are well known and used universally in the fuel trade. Moreover, the government has over 30 years experience in fuel trading and there is sufficient knowledge to set the maximum retail price in relation to international oil prices rather than to what the importer manages to pay.

With a final price based on international oil prices, the importer will have all the incentive to purchase fuel at keen prices as this increases his profit. He will also negotiate storage fees which will not cut into his profits. With such sharp prices the way will be open for competitors to offer better deals to the public and try to enter the market.

It is hoped that there will be a healthy debate by the public on this issue which will bring about profound change in the way we pay for our fuel. In larger markets, competition has benefited the public but I doubt if in Malta it will benefit more than a handful of people.

(The consultation paper can be viewed at www.mra.org.mt. The consultation period closes on Monday.)