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We need to review tax policies to boost demand for new vehicles

Opinion
 Importation of used vehicles has led to reduced demand for locally assembled vehicles. [iStockphoto]

The government in May announced a ban on importation of second-hand buses and trucks following the implementation of new standards aimed at increasing safety on Kenyan roads.

The ban on importation of used vehicles more than seven metres long, which became effective on July 1, will ultimately support the growth of Kenya's vehicle assembly industry.

The automotive industry is one of the key sectors expected to contribute to the achievement of Kenya’s industrialisation and economic transformation. The market for vehicles in the country is growing, supported by a consistent per capita income rise over the last two decades. The market for passenger and commercial vehicles is growing rapidly but for the most part is largely supplied by imports of used vehicles.

According to the Kenya National Bureau of Statistics, the number of registered vehicles increased by a compound average growth rate of nine per cent between 2011 and 2019, rising from 1.6 million in 2011 to 3.3 million in 2019.

Estimates for Kenya’s motorisation rate range between 26 and 40 vehicles per 1,000 persons depending on the source of information. This is however forecast to increase to approximately 70 vehicles per 1,000 persons by 2030.

Importation of used vehicles has led to reduced demand for locally assembled vehicles. This is attributable to imported second-hand products having an unfair cost competitive advantage which inhibits the growth of local assemblers. The government has sought to address this abnormality by adopting a National Automotive Policy to increase the number of vehicles assembled locally.

The policy seeks to provide an enabling environment for local automotive industry players to reach their full potential and position Kenya as a major automotive assembler. The government is banking on the policy to bolster the industry and is seeking to double vehicle production and reduce dependency on second-hand imported vehicles.

The automobile sub-sector has huge potential for growth under the right policy environment. In 2017, for example, Kenya’s motor vehicle assembly industry had an annual turnover of Sh68.6 billion and employed over 12,000 people.

The commercial car assembly consumed locally produced materials to the tune of Sh15 billion. The industry contributed annual tax revenues to government of Sh9.1 billion.

The cost of acquiring a new modern vehicle may be out of reach for many Kenyans, but leasing provides an alternative for many to acquire new vehicles. Leasing avoids the cash outlay of a purchase, preserving cash for other uses which may generate a higher rate of return.

Kenya’s leasing market is currently dominated on the demand-side by government and large corporate customers. Leasing is based on the proposition that income is earned through the use of assets rather than from their ownership. For the small entrepreneur, it presents a convenient way to acquire a vehicle.

Large customers present huge efficiencies of scale for leasing companies, saving customer relations, legal and other costs. Individuals and SMEs do not enjoy economies of scale or scope and often lack intimate understanding of leasing process.

Incentives similar to the ones offered for mortgage finance can make leasing more attractive for individuals and SMEs. The government needs to review the automobile policy to allow for tax incentives for those who opt for leasing as this could stimulate a huge demand for new vehicles.

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