Why pain at the pump may get worse for consumers in Kenya

The decision by the Government to reintroduce excise duty on kerosene and increase road maintenance levy will hurt consumers.

And as global oil prices stabilise, motorists and households will have to dig deeper into their pockets to afford petrol and kerosene. While justifying the decision, National Treasury CS Henry Rotich said that absence of tax on kerosene has led to adulteration, a practice where some rogue oil marketing companies mix kerosene with other commodities such as petrol to make unfair profits.

“This has denied the oil marketers business in the neighbouring countries in addition to giving them a bad reputation. In addition, adulteration negatively impacts car engines and increases their maintenance costs,” Rotich said in his budget statement on June 8, 2016.

To rectify this anomaly, Rotich reversed what his boss Uhuru Kenyatta did in 2010 when he was the Finance Minister. “In order to discourage this harmful practice, I propose to introduce excise duty on kerosene at Sh7, 205 per 1000 litres,” said Rotich. That means that for every litre of kerosene consumers purchase, they will be giving the Government Sh7.21.

Until June 1979, taxes on petrol, diesel and kerosene were equal but when global oil prices nearly doubled, the Government moved to cushion consumers of kerosene. With global oil prices having touched a record 12 year low and Kenya Revenue Authority under pressure to meet its Sh1.37 billion revenue target, the State has decided to come back to tax kerosene, a commodity viewed as a social good due to its popularity with low income earners.

Unscrupulous

According to General Manager for Petroleum Institute of East Africa (PIEA) Wanjiku Manyara, the move is justified. “As a result (of putting subsidies on kerosene) government sacrifices approximately over Sh10 billion of revenue annually to sustain the no-tax policy on Kerosene yet the real beneficiaries of this tax subsidy are the unscrupulous business persons,” she says.

Motorists, many of them already complaining of not having felt full impact of low oil prices, were not spared either. They will have to pay Sh18 per litre, up from the current Sh12 as road maintenance levy. “With the increasing expansion of our road network, there is a corresponding increase in the cost of maintaining our roads,” Rotich said.

But going by recent rise in oil prices announced by Energy Regulatory Commission (ERC) and global oil prices hitting above $50 (Sh5,059) per barrel, the highest this year, the going may get tough for consumers. The Government’s decision means that come July, none of the three petroleum products will be retailing below Sh58.

For example, using Energy Regulatory Commission formula for mid-June to mid-July prices, the road maintenance levy will push the cost of petrol in Nairobi to above Sh92.17 per litre while that of diesel will not retail below Sh79.71. The excise duty on kerosene will push it to above Sh58 per litre in Nairobi, meaning that those far away from the port of Mombasa such as Northern Kenya will get it at even higher prices.

While consumers may have rejoiced that they have a few days to enjoy excise duty free kerosene, the regulator on Friday evening delivered the bombshell. “The commission has recalculated the maximum pump prices for kerosene that will take effect from June 18, 2016 (Saturday last week) taking into account the additional excise duty,” said ERC on Friday in an addendum to the earlier retail prices it had announced on June 14.

ERC said that the duty took effect on June 10, which was outside the period the body sets the prices. The pricing regulations usually consider costs and volumes of cargoes arriving in Kenya between 10th of previous month and 9th of pricing month.

This duty, going by Rotich’s statement is the price for adulteration. However, this decision comes at a time when ERC has imposed hefty penalties on those found adulterating fuel. For instance, in March, the regulator fined 56 filling stations amounts ranging from Sh100,000 to 1.5 million, with 27 stations being suspended from operating.

However, Ms Manyara says that ERC fines cannot be defined as hefty since the maximum that an offender can pay is just Sh2 million. “Sh2 million is peanuts compared to the millions an offender has made out this this malpractice and will continue to make anyway for as long as the incentive-huge tax difference between petrol and kerosene- is available,” she said.

According to 2013 Energy Regulations, the regulator is empowered to publish a list of retail dispensing stations that commit offenses such as selling adulterated fuel or fuel meant for export. In March, of the 1,493 petrol stations inspected, 96 per cent were complying.

Since the tax on diesel and petrol has increased by Sh6 while that on kerosene is by Sh7.21, a difference of Sh1.21 may still make economic sense for the rogue oil marketers. The net effect of lumping taxes on all the three commodities mean that the net effect is a reduction in the price disparity by just Sh1.21. According to PIEA Chairman Powell Maimba, even though tax difference is narrow, he hopes it will have an impact. “We believe that though the tax difference between kerosene and diesel remains due to increase in road maintenance levy, adulteration will become expensive and hence the incentive to do so will decrease,” he said.

LPG Usage

The Government has introduced incentives on stoves and gas cookers. The import duty on stoves has been reduced from 25 per cent to 10 per cent. Value added Tax (VAT) on liquefied petroleum gas has also been scrapped. In the words of Rotich, this will give Kenyans access to clean, safe and efficient household energy, protect forest cover and reduce premature deaths.

According to Ms Manyara, the decision to remove VAT from LPG is in line with their submissions to Treasury. “Gas cylinders, accessories and LPG which attract VAT earn government about Sh1.4 billion yet globally, over half a million premature deaths occur annually as a result of indoor pollution caused by household use of firewood and charcoal,” said Manyara.

This will help in gradual transition from use of charcoal to kerosene before the use of LPG peaks. “We expect to observe further expanded usage of LPG especially in the peri-urban and rural areas. This will trigger investment in LPG infrastructure to meet the demand,” said Ms Manyara.

While this is a wait and see scenario, the price of petrol, diesel and kerosene may get even higher. A further rise, compounded with 16 per cent VAT on petroleum products which will take effect in September next year, will throw the prices to the ceiling. —[email protected]