For economic recovery, Mozambique cannot shun fuel marking

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The World Bank recently approved a substantial development loan of $150 million for Northern Mozambique which will directly benefit social and economic resilience by boosting grass roots initiatives in approximately 300 rural locales. The fund will bring much-needed relief to Northern communities suffering from the arrival of the global pandemic amid the rise of Islamist insurgency groups in the country’s Cabo Delgado province.

The funds are a stark reminder of the financial woes the country finds itself in, especially after the Covid-19 pandemic caused the country’s economy to contract for the first time in thirty years at a time when the economy was on its way to recover from the debt crisis and natural disasters of 2019. In 2020, Mozambique’s GDP contracted by 1.4 percent, compared to a pre-Covid estimate of 4.3 percent growth.

Worse, investments into the country’s oil and gas sector have been significantly delayed, leaving plans for increased gas exploration via the Mozambique LNG and Rovuma LNG Projects, as well as the highly anticipated increase in oil and fuel production, unattainable in the near future. Given that fuel accounts for 10% of Mozambique’s total state revenue, these developments have hit the country hard – even more so now that Maputo has decided to undermine the highly successful fuel-marking program that had been fundamental in cracking down on fuel smuggling and adulteration, thereby plugging one of the economy’s biggest and constant tax revenue sinkholes.

Given that Mozambique has no domestic refining capacity, the country imports and consumes almost 1 million tons of oil a year. This fuel, predominantly diesel, is the country’s main import by value, reaching nearly $800 million in 2017. The country’s low incomes and the price difference between kerosene, petrol and diesel means that Mozambique was the victim of both rampant fuel smuggling and fuel adulteration, which was then sold on the black market, causing the nation’s legitimate retail market large tax revenue losses. Exact numbers are hard to come by, but the global tax losses from illicit fuel trade of $133 billion provide a sense of the scale this problem poses.

The criminal underside of Mozambique’s oil industry not only causes major supply chain issues but also crucially prevents money from trickling down into communities, as it directs funds away from the country’s coffers and therefore away from directed public spending. In an effort to stop the haemorrhaging of money, Mozambique finally introduced a fuel-marking system throughout the country as an effective anti-fraud measure.

In 2017, Maputo opened a fuel-marking tender which was eventually awarded to Swiss security experts SICPA. By adding a chemical marker to fuel shipments, the state can control the legitimacy of fuel sold across the country, guaranteeing its untampered quality if the chemical marker is present at checks – and ensuring that it’s traded legally with the associated taxes paid. The scheme implemented by SICPA turned out to be quite successful at reducing smuggling and adulteration. The high-tech fuel-marking system acted as a powerful deterrent to discourage fraud, with fuel-related tax revenue seeing an uptick of 32% after its implementation, according to an Atlantic Council Global Energy Centre Report.

However, the continued success came under threat last year, when Mozambique’s Ministry of Mineral Resources and Energy reopened the public tender amid pressure from Authentix, whose own fuel-marking solution, which has courted controversy over whether it’s fit for purpose given how easily their marker could be removed, had not been selected.

The move to reopen the tender sparked fears from a local NGO, the Centre for Democracy and Development (CDD), that the program would be rolled back. After participants cited flaws in the conduct of the fresh tender which jeopardized transparency, a court ordered the tender annulled. Eventually, in December last year, the government took on the responsibility of marking their own fuel imports when the original contract came to an end.

With Mozambique hoping to restart its economy despite domestic and external turmoil, Maputo would do well to reassure international investors that it is interested in good governance. For while the World Bank loan is a relief to certain local communities, it requires proven and prudent fiscal policies, including a thorough and effective fuel-marking program, to bring order to the economy. Only then can Mozambique stand securely on both legs again.

 

Image of Maputo skyline from Wikimedia, Creative Commons 3.0.