Fuel price hike looms over railway levy

By James Anyanzwa

Fuel prices are likely to go up by around three per cent next month. This is as oil marketers attempt to recoup additional costs incurred during the first month of the implementation of the newly introduced Railway Development Levy (RDL).

The levy, which came into effect but not immediately factored into the fuel pricing formula for July has left oil marketers awash with additional cost burdens, which they cannot transfer to consumers due to regulatory constraints.

The Energy regulatory Commission (ERC), however, says a deal has been struck to compensate oil dealers who have expressed reservations over the impact of the new levy on their businesses.

The dealers reckon that their operations could easily grind to a halt if they are not cushioned from the 1.5 per cent levy slapped by the Government on all imported goods.

Shilling weakened

“We did not factor in this levy in our last fuel pricing review but we shall do that going forward starting from next month,” Eng Kaburu Mwirichia, the oil industry regulator’s Director General told Business Beat last week.  “We have discussed and agreed with the oil marketers that we shall rectify the situation and compensate them starting next month.”

ERC reviews domestic energy prices every month, with adjustments made depending on international energy prices and foreign exchange fluctuations.

The energy regulator raised pump prices for petrol and diesel for the month of July citing growing global oil prices and a weaker shilling exchange rate but cut the price of kerosene.

According to ERC, the cost of importing super petrol and diesel in June rose, while that of kerosene fell, while at the same time the shilling weakened to 85.65 per US Dollar from 84.30 in the previous month.

Consequently, the regulator raised the maximum price of a litre of super petrol in Nairobi by Sh1.34 to Sh109.52, and increased the price of diesel by Sh3.70 to Sh102.86 per litre.

The price of kerosene declined by Sh2.03 to Sh79.49. The new prices took effect on July 15, and will be in force for a month.

According to the oil marketer Vivo Energy Kenya’s chief Executive Polycarp Igathe, the additional costs induced by the new levy should be borne by the consumers otherwise it would adversely affect the operations of the market players.

 “Oil marketers will have to incur huge costs between now and next month which they cannot pass to the consumers because of this new levy,” says Igathe.

 “If we are going to absorb these costs then it means we have to revise our business models otherwise it is going to affect our profitability. But as it stands we are just consulting with the Government to ensure the price caps are changed.”

Mr Igathe, who is also the current chairman of the Kenya Association of Manufacturers (KAM), however lauded the proposed construction of a standard gauge railway line saying it would ease the transportation of cargo.

Wear and tear

In his budget statement for the 2013/14 financial year Cabinet Secretary for the National Treasury Henry Rotich introduced a 1.5 per cent railway development levy whose proceeds are to fund the construction of a standard gauge railway line in order to facilitate transportation of goods. The levy will be imposed on all imported commodities ranging from petroleum products and second-hand clothes to raw materials.

The Government expects the new levy to mobilise a total of Sh15 billion for the construction of the Mombasa-Kisumu Standard Gauge Railway line. The three-year project is expected to reduce the cost of freight.

A rise in fuel prices normally pushes up inflationary pressures and erodes household purchasing powers. According to statistics from the Kenya National Bureau of Statistics (KNBS), the overall month-on-month inflation has fallen by 5.14 percentage points over the last one year from a high of 10.05 per cent in June 2012 to 4.91 per cent in June 2013.

Ordinary person

However, the cost of transport between May and June this year as reflected through the transport Index fell by 0.66 per cent over the mainly due to reduction on the pump prices of petrol and diesel.

The economy largely depends on diesel for transport, power generation and agriculture while kerosene is used in many households for lighting and cooking.

“There will be an element of cost push inflation being triggered by the levy and consumers will bear that cost. In the short term, inflation will hit us,” said Atul Shah chief executive PKF

“If the funds are used for railway development, the overall long term benefit will be a reduction in cost of goods... if 70 per cent of the truck traffic is moved to railway, it will mean a reduction in transportation charges as well as the wear and tear on the road. In the short term, consumers will pay more.”

“The railway system will be good for the ordinary person especially in the long term. If we can get it to work, the price of goods could significantly come down,” said Kariithi Murimi a risk consultant.

“For instance, when millers import maize and use the road instead of the rail, the cost incurred using the road is about Sh5 more than if they used rail and it is passed on to consumers. When oil marketers use the road, there is an extra Sh8 per litre of fuel compared to using rail.”