New tax opens window for cheap fuel

The latest Budget read by Treasury Cabinet secretary Henry Rotich has been largely described as anti-poor thanks to increased taxes that are bound to make life harder for Kenyans.

However, a new tax in the same budget is promising to save consumers billions of shillings that are usually paid as compensation to ship owners when there is a delay in offloading fuel at the port.

Mr Rotich has introduced a tax on these earnings.

The import of the levy is that government agencies involved in the value chain are now compelled to be efficient in their operations in order to avoid the heavy cost accruing from the delays.

The cut on what ship owners gain when they are delayed will ensure proper vessel planning to minimise the delays.

While the Kenya Ports Authority will have to ensure no congestion occurs at the port for the ship delivering fuel, the Kenya Pipeline Company will also have to spend billions to boost storage, a key contributor of the demurrage charges.

The KPC has already pumped Sh1.8 billion in renovating the moribund Kenya Petroleum Refineries tanks in Mombasa in a bid to boost storage and deal with the demurrage headache.

The tanks which will boost the pipeline’s storage capacity from the current 612 million litres storage to about 752 million litres is set to boost Kenya’s strategic reserves from 12 to 30 days.

Reduce pump prices

KPC Managing Director Joe Sang said the company hopes to help reduce pump prices through the boosted storage through improved efficiencies at the ports of entry and other depots across the country.

“KPRL has both storage facilities and grounds that will be used to increase the country’s ullage (storage space) which will in effect create enough capacity for birthing vessels to discharge fuel into the KPC system.

Over time, this will see Kenya save billions of shillings incurred in demurrage charges every year for fuel vessels docking at the Port of Mombasa, a factor that could significantly reduce the cost of fuel,” Mr Sang said.

Treasury Cabinet secretary Henry Rotich proposed a 20 per cent tax on the demurrage charges made to non-residents in a bid to level playing fields with resident ship owners.

The charges which mainly occur due to poor planning and limited storage are meant to cover any delay costs associated with a ship waiting to discharge cargo to cushion owners from any losses.

The charges which amounted to Sh2.5 billion in 2016 are later claimed and loaded onto the monthly bills.

Statistics show that although demurrage charges have been coming down over time, there is still a long way to go before consumers are relieved from the costs generated by market players, and which could be avoided.

The charges which still average Sh180 million monthly were highest at Sh317 million in September 2016 attributed to the conflict in South Sudan which delayed evacuation of fuel, causing more delays.

Demurrage compensation

The industry lobby, Petroleum Institute for East Africa Chairperson Wanjiku Manyara said the tax will reduce the attractiveness of demurrage compensation forcing ship owners to plan appropriately to avoid delays.

“Quite some progress has been made to deal with demurrage but obviously all industry players will now have to beef up efficiency because the market demands still have to be met and that means more accurate planning by ship operators, the port and even storage handlers like Kenya Pipeline,” MS Wanjiku said.

ERC uses the cost recovery principle, capturing the landed cost of the product, the levies and applicable taxes, demurrage costs, pipeline transport charges, road bridging costs and the margins for the oil marketers, to determine the monthly pump prices.

The local taxes and levies which are determined by the government and are largely constant include excise tax, road maintenance levy (Sh18 per litre on both diesel and petrol), petroleum development levy (Sh0.40 per litre on all the three), petroleum regulatory levy (Sh0.05 per litre on kerosene and Sh0.12 per litre on petrol and diesel) as well as railway development levy Sh0.50, Sh0.52 and Sh0.51 on every litre of petrol, diesel and kerosene respectively. Demurrage fees unlike other charges keeps fluctuating.

100pc fuel imports

Kenya, which imports 100 per cent of its requirements for refined petroleum products also supply the landlocked neighbours including Uganda, Rwanda and South Sudan forcing the whole region to pay dearly for fuel when hitches happen at the port.

The planning is further complicated by the fact that under the Open Tender System (OTS) through which the petroleum cargoes are procured, it takes 30 to 45 days between placing an order and delivery of the cargo.

Kenya Pipeline is angling to take over the KPRL after leasing its facilities last year, a discussion said to be ongoing.

The small storage has also seen Kenya lose transit business to Tanzania, a move that recently saw an addition of 133 million litres of storage capacity in Nairobi with the completion of four new tanks for super petrol and diesel.