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Push to tame fuel prices fails to ignite hope for cosumers

By Macharia Kamau | July 28th 2020 at 09:59:07 GMT +0300

The government has over the years made numerous attempts to cushion consumers from the sudden surge in fuel prices to no avail.

Earlier this month, however, the Petroleum and Mining Ministry in the boldest move to this end gazetted a new Petroleum Development Levy, with the money remitted to the kitty being used in future to stabilise the retail price of fuel.

In the legal notice dated July 10, Cabinet Secretary John Munyes increased the levy to Sh5.40 per litre of super petrol and diesel from 40 cents.

The money collected, he noted, would be invested in the development of the oil industry, “including to stabilise local petroleum pump prices in instances of spikes occasioned by high landed costs.” 

But what may have been a good intention by the CS has kicked up a storm, with stakeholders noting the failure by the ministry to show how the fund will be administered.

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They have also questioned how the money previously collected through the levy had been used.

The sharp rise in the levy also comes at a time when Kenyans are reeling from the effects of the coronavirus pandemic and can ill-afford more spikes in the cost of transport as well as other basic goods, with transporters and manufacturers likely to pass on the extra cost to consumers.

It has also raised debate on why previous attempts to stabilise retail prices of fuel had failed.

These include giving the National Oil Corporation (Nock) a mandate for price stabilisation, a proposal to set up the Petroleum Strategic Reserves and to an extent the price capping formula.

The levy has the potential to generate upwards of Sh2 billion per month from super petrol and diesel going by consumption levels in June, which were, however, lower compared to last year due to a slowdown in the economy due to the effect of Covid-19.

The money could be substantially higher as the two are not the only petroleum products that will attract the higher levy.

Others include jet fuel and heavy fuel oil that will also attract Sh5.4 per litre.

Kerosene will attract a lower rate of 40 cents per litre, a similar rate to that of every kilo of cooking gas.

“The levy shall also be used for matters relating to the development of the oil industry, including to stabilise local petroleum pump prices in instances of spikes occasioned by high landed costs above a threshold determined by the authority (Energy and Petroleum Regulatory Authority),” reads the notice by Munyes in part.

“The Cabinet Secretary may by writing to the administrator, request for a drawdown from the Petroleum Development Fund to stabilise local petroleum pump prices where he deems it necessary.”

Lobby groups Consumers Federation of Kenya (Cofek) and the Motorists Association of Kenya (Mak) faulted the lack in details on how the money would be used, including at the unspecified point where the CS would deem it necessary to draw money from the fund.

Petroleum Principal Secretary Andrew Kamau noted that other mechanism to stabilise pump prices failed due to price controls introduced in 2010.

He noted that, for instance, if National Oil was to be tasked with that mandate today, it would not make any money and would instead be heavily dependent on the government for survival.

Nock was set up in the early 1980s and charged with, among other mandates, a price-stabilising role and arresting “any cartel-like behaviour by private marketers.”

The State-owned oil marketer had been allocated a 30 per cent petroleum procurement quota, whereby it was given a hand to import a third of all local petroleum requirements on behalf of the industry.

It was expected that through government-to-government relations, Nock could procure petroleum products from other National Oil Corporations (Nocs), especially in the Middle East at relatively lower prices. This would, in turn, be used in stabilising products locally.

“Kenya is a price-controlled market. Do you want them (Nock) to make money or do you want the government, which to an extent means the taxpayer – to subsidise them?” posed Mr Kamau.

Despite operating like other firms, the State-owned oil marketer is not necessarily better going by its past financial results. “That mandate was when prices were not controlled,” said the PS.

He declined to give details as to when it could be deemed necessary to draw money from the fund or even where the money collected through the levy had been invested. Instead, the PS said everything “is in the Act.” 

The Petroleum Development Fund Act, 1991 stipulates that the money paid into the fund can be used “for the development of common facilities for the distribution or testing of oil products and for matters relating to the development of the oil industry.”

It also adds that the money cannot be used where the government would be in competition with the private sector.

To date, the country lacks adequate common user facilities, especially to handle Liquified Petroleum Gas (LPG) imported into the country and relies heavily on private sector investments.

It is cited as among the reasons why the government cannot regulate retail prices of cooking gas.

“We are concerned about the procedure. For instance, there are no adequate regulations to oversee the fund as well as its administration,” said Cofek Secretary General Stephen Mutoro on the levy introduced early this month.

In the gazette notice, the Petroleum CS has appointed Kenya Revenue Authority’s (KRA) Commissioner of Customs and Excise to collect the funds.

The CS would then request funds from KRA when there are spikes in pricing.

Mutoro noted that the notice fails to show when this would be necessary and whether the money would go to oil marketing companies or be used by the government to import petroleum products in bulk, which would then be sold to oil marketers at subsidised prices.

“There is lack of clarity on who or how they will intervene. There is also the PFM (Public Finance Management) that gives Treasury power to set up such funds, which appears not to have been followed,” he said, adding that the ministry should also have consulted the public considering the size of the kitty.

“You do not come up with such a big fund on July 10 and it starts being implemented on July 14, at the very least you could have consulted the public. If you can singularly raise a levy from 40 cents to Sh5.40, what stops you from raising it to Sh10 next month?”

Mutoro noted that petroleum appears to be easy to tax going by previous tax measures.

“The truth could be that the government is looking for revenues and one of the quickest and easiest ways is to introduce levies on petroleum and at the end of the day, they will be counting several billions,” he said.

“The problem is also the accountability part of it. If you look at the Petroleum Levy collected over the years, what has it achieved? The Finance Act has also reintroduced road tolls. This multiplicity of taxes on petroleum and at a time when the whole world today is enjoying lower costs on fuel, Kenyans cannot enjoy because they are mopping up money that consumers do not have.”

The lobby filed a case in court seeking a stay on the implementation of the levy owing to the issues of clarity on the implementation of the levy. The high court is expected to give directions today (August 28).

Peter Murima, the Motorist Association of Kenya chairman, noted that the decade-old price capping formula was supposed to offer a degree of predictability in pump prices but had failed owing to frequent fluctuations.

“Fuel price controls were supposed to help reduce the fluctuations in retail prices of petroleum products… we would like predictable prices for planning, but now they are adjusted every 30 days,” he said.

Murima added that he levy further tilts the scales in favour of the government while leaving consumers worse off.

Currently, at Sh100.48 for a litre of super petrol in Nairobi, 53.3 per cent or Sh53.6 goes to the government in forms of different taxes and levies, while the balance is shared by the rest petroleum supply chain, including the cost of acquiring the refined product in the international market and getting it to an outlet in Nairobi and its outlets.

“The levy has not had any value on motorists or the transport sector. It is just another revenue collection method,” said Murima.

“The petroleum policy at the moment is in favour of the government’s revenue-raising measures and at the detriment of the transport sector. Transporters are targeted alone, and that is discriminatory. The economy is supposed to be run by taxes from all Kenyans, including the building and maintenance of roads.

"It should not be the preserve of a section of Kenyans. There is a misconception that vehicle owners have money… and because of that taxes now account for more than half of the cost of a litre of fuel.”

Other proposals to tame fuel pump prices include constructing the petroleum strategic reserves. The giant storage facilities would enable the country procure huge amounts of petroleum products when oil prices are low as recently experienced and store them locally.  

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