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State's fuel subsidy programme leaves a deeply scarred industry

The government in September eliminated subsidies for super petrol while substantially reducing those for diesel and kerosene. [Michael Mute, Standard}

The fuel subsidy that the government has implemented since April last year has cushioned consumers from high fuel prices.

Saving Sh74 per litre of kerosene and Sh66 per litre of diesel came in handy at a time when the cost of everything was going up.

The relief to consumers, however, came at a cost to the industry and the impact that the subsidy had on the local petroleum retail industry is now beginning to emerge.

Numerous small oil marketers have had to shut down operations owing to high cost of running their businesses, rendering thousands of Kenyans jobless.

At the same time, two out of every 10 major oil marketers have been locked out the fuel importation system due to lack of funds.

This is all tied to the delay by government in refunding money owed to oil marketers.

Since the State started implementing the subsidy, the companies have been foregoing their margins at pump, a move that cushioned consumers from feeling the full impact of high cost of fuel.

The marketers would then be compensated later but the process has been slow, affecting the operations of the firms that are now having difficulties financing new fuel cargoes.

Hardest hit, however, are the small oil retailers.

The industry claims that more than a third of independent oil marketing companies shut down their operations over the last one year.

An industry presentation made to the Ministry of Petroleum shows that of the about 3,000 independent oil marketing companies, 1,200 of them have recently shut down due to high operating costs that depleted their margins.

The independents, which typically run small petrol stations - some with as few as one or two fuel pumps - could not keep up with the rigours of a high cost fuel regime.

The price of the product meant that the companies could not afford to stock up as much as they had in the past owing to working capital constraints.

Additionally, they had to grapple with difficulties in securing products from major oil marketing companies that import fuel into the country, which were charging exorbitant rates - there have been claims that the wholesale prices were at times at par with the retail prices.

The importers were said to have been trying to cushion themselves from government delays in refunding their margins.

In the presentation, the oil marketers said there were 2,966 independent oil marketers in the country, employing some 45,000 people.

“(Of these) 1,200 shut down because of the high cost of running the business,” they said.

The government in September eliminated subsidies for super petrol while substantially reducing those for diesel and kerosene.

It is expected that the two products where consumers are still enjoying subsidies might see further cuts or even elimination when the regulator announces new prices mid this month.

The move has been lauded by petroleum industry players, big and small.

Martin Chomba, chairman of Petroleum Outlets Association of Kenya (POAK) that represents small and mid-sized firms accounting for about 40 per cent of the retail market, told The Standard in a recent interview that the association had been opposing the subsidy as it resulted in petroleum importers pushing up wholesale prices to the point that it was driving them out of business.

He said that at times the wholesale prices, which are not capped, would be comparable to the maximum prices published by the Energy and Petroleum Regulatory Authority (Epra).

Major oil marketers with wide networks have benefited from the closure of some of the smaller stations.

Rubis’ parent firm, in its financial results for the half year to June, said its Kenyan unit reported strong growth in sales.

Other than its rebranding efforts paying off, it noted that it “exceptionally benefited from the closure of small independent stations during the crisis that affected the market in March-April”.

The country was plunged into a nationwide fuel shortage between March and April. The real cause of the crisis was not revealed, despite the Directorate of Criminal Investigations opening an investigation and questioning chief executives of leading oil marketers.

There were, however, claims that the the oil marketing companies (OMCs) were hoarding fuel in protest against the government’s delay in refunding their margins that they have been foregoing to keep fuel prices stable.

Export markets

There were also reports that the companies were pumping to the export markets more fuel than they are allowed.

Unlike in Kenya where they had to wait, sometimes for months, before the government reimbursed their margins, in markets such as Uganda, Rwanda and DR Congo they would get their margins upfront.

The retail prices in these markets are also not controlled, unlike in Kenya.

The major oil marketers have also not been spared. While they may not have shut down operations, they are unable to import products.

According to the presentation that the players made to the Petroleum ministry, 17 companies that used to participate in the Open Tender System (OTS) are no longer able to due to such challenges as inadequate funds to finance products.

OTS is a system supervised by the ministry through which the oil firms pool their fuel needs and import in bulk. The tender to import is awarded to the lowest bidder.

“Seventeen OMCs have fallen off the system due to...cash flow challenges impacting OTS payment, late payment of cargoes extending beyond three weeks, reduced product evacuation due to delayed payment,” said the oil marketers.

According to computations by the marketers, their petrol stations are also operating in losses. They say the retail margin of Sh4.14 per litre provided in the pricing formula is inadequate to cover the cost of running a petrol station, with the outlets now making a loss of 29 cents per litre.

This is compared to a profit of 54 cents previously in the Sh4.14 retail margin.

At the moment, the companies are owed Sh60 billion for July and August pricing cycles. Over the September-October cycle, the State gave the biggest subsidies at Sh74 per litre of kerosene, Sh66.17 per litre of diesel and Sh54.91 per litre of super petrol.

Also hard hit are petroleum products transporters. The companies charge a rate that is regulated by Epra to move fuel from the depots run by the Kenya Pipeline Company to the petrol stations.

This rate was last reviewed in 2019 and since then, fuel prices have doubled.

In their presentation, the marketers said the transporters are making losses as the Epra rate of Sh0.54 per litre was last reviewed in 2019.

“Fuel cost in 2019 was Sh87 per litre against Sh165 today, a 90 per cent increase in the cost of fuel,” they said.

There are about 919 petroleum product transporters employing about 20,000 people directly.

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