The Government had to move fast to protect Pacific Island economies from the “unintended consequences” of the Auckland Fuel Tax.
The tax of 10 cents per litre would have been applied to fuel that was transported through Auckland before it was exported.
When a fuel exporter complained, the Ministry of Foreign Affairs and Trade (MFAT) briefed the Ministry of Transport that it was cornered about the impact of the tax, particularly in the Pacific Islands.
A briefing to Twyford from July 5 said: “MFAT is concerned about the short-term, as well as the long-term impact, particularly if the fuel companies pass on their increased cost to fuel.”
It said MFAT was also “concerned about these costs being passed on to fuel-buyers in the Pacific Islands”.
At this point, it was almost too late to act. The fuel tax had been in place since July 1.
But the Government got lucky. Exporters decided to absorb the cost of the tax on the understanding the Government would address their concerns.
Government responds
The Ministry of Transport advised Twyford to give assurance to fuel exporters the Government would allow them to recover the additional cost of the Regional Fuel Tax back to July 1.
This spurred the Government into action, and 19 days later, Twyford was presented with a draft cabinet paper that created a rebate for exporters whose fuel passed through Auckland before leaving the country.
The paper implored ministers to consider the issue with urgency because businesses had decided to absorb the cost of the tax instead of passing it on.
“The urgency here arises because fuel exporters have agreed not to pass the additional cost of the RFT on to their customers (as strongly advocated by MFAT),” the paper said.
“In the meantime they are absorbing the FT [Fuel Tax] amount,” it said.
Massive impact on the Pacific
New Zealand exports a lot of fuel to the Pacific. In June alone we exported 621,630 litres to the Cook Islands, the Marshall Islands, Niue, and Tuvalu. Data from Statistics NZ showed New Zealand exported nearly $5 million worth of fuel to the Pacific in the three months since the tax took effect. Some of this was in forms of fuel not subject to the Regional Fuel Tax.
While the numbers seem small, they’re big relative to the islands’ size. Collectively, Cook Islands, the Marshall Islands, Niue, and Tuvalu, where lion’s share of fuel exports, are home to just 80,000 people.
They’re relatively poor as well, Tuvalu and the Marshall Island’s have a GDP figures per capita of just US$3,800 and US$3,600 respectively. The Cooks Islands are the wealthiest with a GDP per capital of US$19,000, but still well below New Zealand’s rate of US$43,000. Niue is so small the last reliable data is from 2003.
The tyranny of distance and poor economies of scale mean that fuel is already expensive.
Data collected by the Pacific Regional Data Repository showed that in the first quarter of 2018, fuel prices in Tuvalu and Niue were substantially higher than those in New Zealand.
And that makes a difference to the cost of living. A 2010 paper from the Pacific Financial Technical Assistance Centre or PFTAC, an IMF affiliate based in Fiji said fuel prices have a “huge” impact on the “small open economies” of the Pacific.
The islands are dependent on imported fossil fuels for the bulk of their energy and, being both small and relatively isolated the “direct and indirect impacts of energy prices increases can be significant”.
Higher energy prices would impact everything from transport, to electricity and cooking.
Foreign policy blunder
The fuel tax fiasco came at an awkward time for the Government, which is trying to reengage with the region as part of its Pacific Reset strategy.
New Zealand wants to become a more important player in the region by increasing aid spending, and offering assistance that differs from the “strings attached” development strategy used by China.
Foreign Minister Winston Peters secured a massive $714.2 million increase in foreign aid in the 2018 Budget, which was prioritised towards projects in the Pacific.
It might have been awkward for the Government if, at the same time as increasing development spending in the Pacific, it also started charging Pacific motorists for roading projects in Auckland.
This was noted In the initial paper, which said that it was “unjust, and contrary to the policy underlying RFT [Regional Fuel Tax] that the RFT apply to fuel that is delivered and used outside Auckland”.
An MFAT spokesperson told Newsroom the swift resolution of the problem was an example of “Pacific Reset principles in action”.
“The Ministry of Transport realised that the regional fuel tax would have unintended collateral impact in the Pacific and proactively acted, in concert with MFAT, to make sure that we were not passing an unintended cost on to Pacific partners,” they said.
