PETROLEUM FUND’S FUTURE PRAGMATIC APPROACH TO ENSURING SECURITY OF SUPPLY OF PETROLEUM PRODUCTS IN LESOTHO by Thato Mohasoa

The Lesotho Energy Policy (2015-2025) seeks to provide a strategic direction that the country should follow in the energy sector, noting the pivotal role that energy plays in driving socio-economic development of Lesotho.  In particular to petroleum products, this policy provides mandate to address, among other things, issues around importation, storage, distribution, investment and consumption. In line with this Policy, and pursuant to its statutory mandate and its new Strategic Plan (2020-2025), the Petroleum Fund came to a realisation that it had never established the extend of the need for the petroleum products in the country, based on fact, and therefore could not intelligently carry out its mandate of financing petroleum related projects and ensuring security of their supply. In order to correct this void,  the Fund undertook a country-wide Needs Assessment exercise, with a view to finding answers and recommending necessary interventions. 

The exercise would entail the undertaking of a Gap Analysis to identify gaps within the entire petroleum sector value chain; assessment of the structural policy and legislative framework, and any other factors that could be impeding on the supply of products in Lesotho. Following these assessments, necessary recommendations would be made regarding corrective measures that could be undertaken, and in particular recommendations on a compendium of projects that could be developed, particularly in the remote parts of the country, to mitigate supply challenges there. 

Gap Analysis 

A sample survey was undertaken in all districts of the country. This survey covered the whole petroleum sector value chain, within both the supply and demand sides. On the supply side, questionnaires were sent to both the liquid fuels suppliers and Liquefied Petroleum Gas (LPGas) suppliers, while on the demand side, a sample of one thousand nine hundred and eighty-one (1981) households, across the country were interviewed.  

The results show that for the rural households, 95% use paraffin and candles as their main source of energy, 37% have access to electricity and that 66% of the energy consumed is still from biomass.  Furthermore, the survey revealed that for cooking, wood is dominant at 65%, LPGas at 14% and illuminating paraffin (IP) at 5%.  For lighting, 62% use IP, 19% candles and 14% use grid electricity, and for heating, 39% use Illuminating Paraffin (IP),  37% wood and 2% LPGas.  The survey went further to assess the demand for the various petroleum products in the ten districts of Lesotho and an indication is that IP remains the key petroleum product for rural communities and it is utilised by the vast majority of households in Lesotho. 

Other Issues of importance that were found in the Gap Analysis included, lack of storage infrastructure and limited local participation in distribution networks; the restriction around regulating limited products at different levels; supply of petroleum products remained a challenge, in relation to paraffin and petrol, in the rural areas;  and poor Health and Safety Standards in the sale and distribution of products.  

Structural Policy and Regulatory Framework  

This part of the assignment examined the existing laws, institutions, and policies within the Lesotho petroleum sector, in relation to how they singularly, and collectively, make for an enabling environment. In general, the assessment points to the necessity to undertake a comprehensive policy and  legislative framework review as the current one has been found to be antiquated, and out of touch with global industry standards, market trends, and generally throttling to investment. It also does not promote participation of local investors, and  protect local consumers. In particular, the following pieces of legislation were recommended for review: 

  • Fuel and Services Control Act 23 of 1983  
  • Fuel and Services Control (Importation of Petroleum Products) Regulations, 10 of 1999  
  • Liquefied Petroleum Gas (Trade and Handling) Regulations, 93 of 1997  
  • Lesotho (Petroleum Fund) Regulations, Legal Notice No. 118 of 2009  
  • The  Lesotho Land Act, 2010  
  • Safety Guidelines and Necessary Facilities for Filling/Service Stations 
  • Lesotho Energy Policy (2015 – 2025)  

Projects 

The following projects are recommended based on the Gap Analysis and on    satisfaction that they would meet the Project Evaluation Framework:  

Centralised Information and Procurement System (“CIPS”) 

Development of a Centralised Information and Procurement System (“CIPS”) owned and managed by the Fund to collect information on the sector and allow procurement of petroleum products from key suppliers and storage depots through the system.  The system will also allow for the community to provide feedback on retailers and distributors, including highlighting shortages. CIPS will be rolled out to all stakeholders such as retailers, including the filling stations and mobile filling stations, storage depots, Oil Companies, Lesotho Revenue Authority, and Internal Distribution Companies. The purpose of this system will be to improve reporting, information collection and data analysis for the Fund, by creating a centralised information system through which all stakeholders will be required to report information to the Fund. 

Internal Distribution Network 

Creation of an internal distribution network owned and operated by local entrepreneurs. The Fund will select and appoint 3 key distributors to deliver to all registered retail outlets on the Centralised Information and Procurement System (“CIPS”).  Each of these distributors will be granted a concession in terms of a region where these distributors will have the exclusive right to deliver to registered outlets in the region, in return for delivering to all of these outlets at an agreed price, including existing filling stations. The purpose of this initiative is to reserve ownership of local transportation of petroleum products for local Basotho Entrepreneurs. 

Mobile Filling Station Network 

Development of a network of mobile filling stations in key locations in the highlands and rural areas to improve access and distribution of petroleum products in those areas. The purpose of these mobile filling stations is to improve access to petroleum products in underserviced areas, specifically the highlands and rural parts of the country. 

 Paraffin Automatic Dispensing Machine (“ADM”) Network 

Establishing a network of Paraffin ADMs across the country, especially in the underserviced areas of Lesotho. Paraffin can be bought directly from these ADMs either through the use of a prepaid card or code, similar to acquiring airtime.  The Fund will create a concession for the roll out, support and maintenance of the Paraffin ADMs nationally by a locally owned company to be selected by the Fund. 

 Self-Contained LP Gas Cylinder Filling Stations 

There shall be established the LP Gas Cylinder Filling Stations to existing infrastructure such as traditional filling stations, as well as mobile filling stations.  It is recommended that, as a secondary priority, the Fund investigates the possibility of rolling out these self-contained LP Gas Cylinder Filling Stations (LPFS”) at existing Filling Stations and new Mobile Filling Stations. This will allow the Fund to leverage existing infrastructure, reducing the potential costs of establishing the infrastructure, and operational costs in terms of security, management, labour and electricity. 

Projects Transaction Structures 

There are various models that have been recommended for financing of these projects, which include the following: 

Build Own Operate Transfer (BOOT), BOOT projects are typically developed by a private sector company.  

Build Operate Transfer (BOT) in this case, a private company finances, builds and operates the project. At the end of an agreed period, the project is then transferred to the contracting authority.  

Build Transfer (BT) where Private Company would finance and execute the construction and rollout of the project. Upon completion, this would be transferred to the contracting entity such as the Fund.  

Build Own Operate (BOO) is similar to BOOT however; the project is not transferred to the contracting authority. Effectively a privately owned asset with the contracting authority having initiated the development of the project. 

Rehabilitate Own Operate Transfer (ROOT) which is a variant of BOOT refers to a rehabilitation of an existing facility. 

Projects Financial Feasibility 

For each project, the following key elements will need to be determined: 

a) Capital requirements – including development capital, capital for facilities and equipment, working capital and contingency capital; 

b) Estimate funding needs – identify equity sources and capital availability, identify debt and equity sources, assess expected financing requirements, and establish debt to equity levels; and 

c) Alternatives: Depending on the type of project and the structure determined to be most suitable, a different evaluation method may be most appropriate. The primary focus will be on projected cash flows. 

Conclusion 

The Fund will be holding a series of consultative meetings with relevant stakeholders, such as businesses, financial institutions, and many other institutional players, who will be critical in the successful rollout of the identified projects.  While the purpose of the consultancy was to assess the extent of the supply of petroleum products in the country, it also had a twin objective of unearthing possibilities for business opportunities in the petroleum space, for ordinary Basotho, particularly in the remote areas of the country. It will be a seminal guide in the continued quest to stimulate the economy and create jobs in Lesotho. 

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