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New levy will put Sh2.5b pressure on us, Kenyan oil marketers say

By Patrick Alushula | June 21st 2016
Petroleum Institute of East Africa Chairman Powell Maimba during the launch of 2016 Second Quarter report on Petroleum products usage.

Oil marketing companies have estimated that the new taxes on fuel will cost them Sh2.5 billion every month in working capital.

Taxes are paid as soon as the commodity lands at the sea port, meaning some firms could be pushed to seek bank loans to settle the new obligation. Petroleum Institute of East Africa Chairman Powell Maimba said the Sh6 road maintenance levy that was added to every litre of diesel and petrol will put pressure on the marketers’ working capital.

In the 2016-17 Budget, road maintenance levy, which is only exempted on kerosene, was increased from Sh12 per litre to Sh18 per litre. “Converting product sales to working capital is a 60 to 90 days cycle and therefore most oil marketers are forced to borrow money from commercial banks. The increased taxes are an additional pressure on the working capital,” decried Maimba.

Marketers are under obligation from Kenya Revenue Authority to pay taxes as soon as ships carrying the oil dock at Mombasa port. Therefore, the only way to recover the taxes is after they have sold the commodity. “For you to meet the taxman’s obligation, you have to go to the bank and borrow. None of us has got big reserves waiting to pay taxes,” added Maimba. According to Maimba, the money is usually through short-term financing at a rate of between 15 and 20 per cent and therefore the interest expense erodes their margins.

On average, the oil marketers import 500 million litres a month. This, calculated with the landed cost, puts the industry’s monthly working capital at over Sh18 billion. With the increased tax, Maimba said that banks will make a fortune out of it because many oil companies will be looking for the additional working capital.

Marketers have been expressing concern that their margin has been fixed for a long period yet inflation and cost of doing business, especially with the county government levies, have reduced their profits. Energy Regulatory Commission (ERC), which caps the prices, previously said it had already secured funding to carry out a cost of service study. This was in order to review the pricing formula components to reflect the new market realities.

The process, according to Maimba is taking longer than the marketers had expected. He disclosed that the oil marketers are currently carrying out a joint review that is likely to ready by end of next month. “What we have done as an industry is to initiate our own review to look at what would be the ideal cost. As soon as we finish, we will engage ERC. Probably by then, it will also have finished the study,” said Maimba.

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