When Treasury Cabinet Secretary Ukur Yatani presented his tax measures in the Finance Bill 2020, some State agencies and a host of private sector lobby machineries went into overdrive.
One presentation after another followed with each group striving to demonstrate how specific tax measures will affect their businesses and force them to pass down the expenses to the consumer.
While some may have succeeded with the final Bill going before the President containing rejections by MPs, analysts contend that the missing trickle down when policy measures favour wananchi, has set the businesses for Treasury’s punitive taxes.
From subsidised maize to falling fuel prices and now the Covid-19-driven tax reliefs, businesses stand accused of failing to pass down the benefits to consumers, only counting the gain. When the taxes fall against them, they are quick to pass them down in the hard-to-police free market economy.
FREE MARKET FORCES
Dr Paul Gachanja, chairman of the Department of Economics at Kenyatta University, believes the realisation that there are market forces and a complicated value chain that will always bar the benefits from reaching consumers, should be Treasury’s point of awakening while designing policies in the first place.
“If you are targeting the common consumer, then you must find a way to circumvent the conventional system, which comprises organised groups who will always push for their interests.
“You need to take it directly to the consumers and then find ways of compensating traders who are then bound to obey the passing down of the benefits. Otherwise they will reap from it and shoot down any measures that don’t favour them,” Mr Gachanja told Smart Company.
The economist believes that the consumer who in many cases is never represented, will remain locked out of the benefits as long as the policies are structured to start from the top where traders are, and then trickle down.
In a free market, lax regulatory oversight and little consumer protection, prices of several goods and services, which were recently expected to fall after incentives meant to cushion consumers from the hardships of Covid-19, remain unchanged.
The opposite would have been true had the changes been in the reverse with traders effecting them overnight.
The scenario is glaring amidst the drastic reduction in fuel pricing that has seen diesel now retail at Sh74 per litre in Nairobi, way below the Sh104 it was being sold in February before the pandemic drained demand.
PUBLIC TRANSPORT VEHICLES
Public transport vehicles, which may now blame the virus for reduced capacity would have rushed to drive up fares had it climbed by Sh10 per litre. Manufactures who have always maintained that transport is a key factor in their cost of production, would have charged higher had the prices shot up.
Such market behaviours according to insiders at Treasury have informed the decisions to cut incentives after businesses hold onto them.
“They would push for cheaper electricity and when they have it, they say it is not a very significant cost production. Then they blame high labour cost and find something to peg their high prices on. When the opposite happens, they will lament how a significant cost factor has been affected, very insincere environment,” said a senior Treasury official, who did not want to be named so as not to be seen as having played a role in cutting the benefits.
The government recently removed an electricity rebate scheme that was meant to see manufacturers claim tax reliefs on higher consumption of power to increase production.
Nairobi-based economic expert Robert Shaw said there was still a way of ensuring the consumer benefited from the incentives even in the free market where supply and demand determine pricing.
“The State must first ensure that they are targeting areas that have direct link to the common man or low income earners and then ensure there are enough players in the sector, which will definitely make supply adequate and prices favourable,” Mr Shaw said.
According to him, the collusion to block benefits meant for consumers is a result of the market manipulated by a few, which results into low controlled supply and higher prices.
The lobby machinery fuelled by the business organisations is not near any comparison with consumer representation, making the pull stronger on one side.
There are also claims of legislators being induced to push for certain favourable policies (which is a global lobbying reality) and then absorb the benefits after using the consumer as an excuse to gain the benefits.
In the Kenyan market, exploitative pricing is a common feature with retailers rarely even able to adhere to the Recommended Retail Pricing even when their margins are already factored into the pricing formulas.
The concept largely applied by industry to guide how much consumers can access their products has faded away, leaving retailers to set prices more than triple the recommended price for various reasons including location.
Food and drinks are the worst affected category of consumer goods that are priced differently at diverse places, leaving consumers confused on what the real charges of the beverages should be as retailers mint extra millions from the gullible public.
It’s hard for one to tell the price of a 300ml of soda, for instance, because it’s sold between Sh30 and Sh200 depending on where you buy it. The same fate has now befallen the overall food basket with consumers bearing the burden of greedy retailers.
According to Mr Githongo Gitau, a Nairobi-based economics commentator, while the effort to block benefits structured in government policies may seem to be affecting the consumers only, the investment environment also suffers.
He told Smart Company that the businesses may eventually find the practice counterproductive by making Treasury uncertain with its policies and shifting them too fast when they seem not to bear fruit.
“This is going to start harming investor confidence, because the lobbying means no one is sure what Parliament may overturn in the policy proposals, and even if they are passed, no one can guarantee that it will survive the next year. There will be fewer investors, stifling the growth of the same businesses,” Mr Githongo said.
FREE MOBILE CASH TRANSFER
While criticising Treasury for misstructuring the reliefs, he agreed with the notion that subsidies should stem from the common man going upwards, citing free mobile money transactions for amounts below Sh1,000, which, he says, cannot be hijacked.
The frequent changes by the government in trying to find the right policy that will be passed down has also proven to be counterproductive with the businesses slow to act. Analysts contend that by the time the reduced Value Added Tax will begin to trickle down to the shelves, Treasury will be winding it down and trying a new policy.
Apart from the policies, traders have at times attempted to bend the market forces especially for products that have price controls such as fuel.
Last month when fuel prices recorded major drops with diesel falling close to Sh20 per litre and petrol prices went down by some Sh9.54 to retail at Sh83.33 per litre in Nairobi, oil marketers tried to block the lower pump prices, decrying depressed demand due to the lockdowns in two major cities and three other counties as Kenya moved to control Covid-19 spread.
Marketers had asked the Energy ministry to block the Energy and Petroleum Regulatory Authority (Epra) from factoring the cheapest consignments to enable them sell all the stock still in their storage and avert any price exposures from a further drop.
Suppliers under their umbrella body Supplycor Kenya wanted the ministry to bear upon the Epra and have the pricing formula altered and factor in about 40 per cent old stock they claim not to have sold in April due to the Covid-19 control measures that has seen many stay at home and night travel banned.
“Demand for PMS (petrol) and AGO (diesel) in the month of April declined by approximately 40 percent. This disruption of sales has, therefore, led to accumulation of older priced cargoes in the system which pose a significant commercial exposure to OMCs in the next price review.
The industry will have received two imports priced April whose cost is significantly low, but at the same time still holding more expensive inventory that has not been sold,” Supplycor chairman and Kenol Kobil chief executive Martin Kimani wrote in a letter dated May 6.
The marketers wanted Epra to ignore international crude prices for April, which had dropped to below $20 per barrel and rely on the March’s $35.58, which was used to price fuel last month in a move to cushion them from the effects of lowered sales.
The move would have seen motorists lose benefits from the crude oil plunge that touched a historic low, if Epra was allowed to factor in the more expensive fuel they imported in March, which the oil marketers claim not to have not sold.