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State’s raid on fuel profits causes jitters

BUSINESS
By Macharia Kamau | April 18th 2021

Horizontal shot of a retail gasoline station and convenience store at dusk. [Courtesy]

 

The government engaged private maize millers in 2017 in a subsidy programme aimed at lowering the cost of maize flour.

Prices had risen to new highs, with a two-kilogramme packet of flour selling at Sh144, which did not look well on the government in an election year.

So the State got into a pact with the millers. A 90-kilogramme bag of maize was going for about Sh4,000 and the government offered to foot any costs above Sh2,300 that millers incurred per bag.

The impact of this was that a packet of flour could retail at Sh90.

Nearly four years after the subsidy campaign, private millers are still chasing refunds from the government.

Unga Ltd, which is listed and makes such details public, said in its annual report for the year to June 2020 that it was still awaiting Sh286.46 million from government for the 2017 programme.

The same script appears to be playing again, albeit in a different sector – the petroleum industry.

Oil marketing companies last week got into a deal to forego part of their revenue when the government announced the petroleum pump prices for the April – May pricing cycle.

They would later be reimbursed by the government.

The deal is, however, hazy as both industry and the Petroleum ministry are cagey on details.

The government Wednesday slashed the margins for oil marketing companies in its bid to retain pump prices at the same levels as March as it yielded to pressure from Kenyans, who protested the high fuel costs that has seen the cost of living go up.

The oil marketing companies appear to have taken the hit and will have to do with lower profit margins.

The money that the oil companies will take home has gone down to Sh7.95 per litre of super petrol compared to over Sh12 during the last price capping guide.

The companies took a Sh4.44 cut per litre of petrol, Sh3.47 on kerosene and Sh2.28 on diesel. In all, the industry expects this to add up to Sh1.02 billion, which they expect government to reimburse.

To do this, the Petroleum ministry is expected to draw the cash from the Petroleum Development Levy (PDL) Fund.

The fund itself was subject to controversy mid last year when the ministry increased motorists’ contribution from 40 cents on a litre of petrol and diesel to Sh5.40.

It also altered the fund’s mandate to include pump price stabilisation, which meant it could tap into the fund to cushion Kenyans from shocks when crude oil prices spiked suddenly.

The challenge, however, is that there are no mechanisms in place to draw from the fund.

Questions are emerging whether the oil marketers were duped into a deal that could take long before they can get their money.

The marketers’ representatives and government officials held day-long meetings on Thursday and Friday to figure out how to resolve the challenge but had not made much progress by end of the week. A source said the companies are now getting edgy and are considering ultimatums to the government.

Industry lobbies are also questioning the legality of drawing from the PDL.

Charles Wanguhu, coordinator of the Kenya Civil Society Platform on Oil and Gas, questioned what framework the government plans to use in reimbursing the oil firms their money as there are no regulations yet to operationalise the fund.

“We will be petitioning Parliament on the same, we feel that PDL is punitive and its implementation has not been well thought out,” he said.

Mr Wanguhu added that while the regulatory framework in place protected revenues of other players including government taxes, which is seen in the deal the ministry struck with the oil firms, the consumer appeared neglected.

“The pricing formula in its current format has been able to maintain an almost predictable stream of revenue for government and oil marketing companies but has not done well in protecting consumers,” he said.

Epra recently published draft regulations to replace the current ones used to determine the price caps for petroleum products.

But the civil society lobby also faulted the draft for failure to cushion consumers.

"While the regulations do a good job addressing awareness on maximum prices and controls for distortion of market forces, we expected to see incorporated within the pricing regulations how the subsidy was envisioned to take effect to reduce transfer of fluctuations in international prices to the end consumer,” said Wanguhu.

Consumers Federation of Kenya (Cofek) Secretary General Stephen Muturo also questioned the method that the government would use to pay the oil companies, adding that the deal appeared suspect.

“The deal by the government, fuel regulator and the OMCs (oil marketing companies) that temporarily appeared to stabilise fuel prices… has the making of a scandal,” he said.

“There are no regulations in place, implying that the purported stabilisation was either illegal or inappropriate considering the likelihood that compensation to OMCs could either be exaggerated or used to exploit the troubled Petroleum Development Levy Fund whose collections are well beyond Sh20 billion since July 2020 to date.”

“Our credible fears are that the government has only postponed a technical problem it chose to address politically. We are already in court over the PDL Fund. We have instructed our lawyers to study the new development and advise accordingly,” he added.

Investment stability

Others believe that shaving the oil marketers’ margins was wrong as it projected the country’s policy environment as shaky.

Patrick Obath, an experienced oil industry leader, said the country’s price capping mechanism had given investors comfort to put money in the country, but the government’s move last week left many with questions on the stability of Kenya as an investment destination.

He also cautioned against price stabilisation and subsidy mechanisms, saying they have been tried elsewhere and failed.

Mr Obath said perhaps it is time that the government recognised the role it plays in pushing up the cost of fuel.

“Price stabilisation has been tried in many countries globally and failed. For a government to stabilise prices, there could be a time when the government spends out of pocket because the fund has not had enough money going in if the prices stay high for a long time,” he said.

"It does not make sense to go that direction… the government has its own prerogatives but from knowledge and practice from around the world, it is best to let market dynamics continue working and recognise that the real problem is that about 45 per cent of the pump price are taxes."

An industry source who spoke to The Standard explained the difficulty in collecting money from the government, citing frustrations that private sector firms have experienced in trying to get tax refunds.

The senior official with an oil marketing company queried why the government cut their margins instead of removing the PDL.

He argued that it made sense to suspend the levy considering that it is supposed to play a price stabilising role.

“Why did the government remove the oil marketers’ margin without touching the levy?” he posed.

“They could have removed the levy since it is the one that is supposed to be used for price stabilisation. It is a bit off.”

“They could have suspended the levy and once the pump prices come down, they could reinstate it.”

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