Over taxation can limit the effectiveness of Price Controls
By Samantha Luseno
It has been ten years since the establishment of the fuel price regulation formula and while it seems to have streamlined some challenges in the sector, it has failed to protect the consumer from extreme upward fluctuations in the crude oil prices and has even deprived them of benefiting from downward fluctuations in the market. For example, in 2020 while the COVID-19 pandemic triggered an unprecedented demand shock in the oil industry, leading to a historic market collapse in oil prices, this was not necessarily felt in the pockets of consumers.
From an economic standpoint, price controls are viewed as a form of market distortion and in some instances, if not well enforced can lead to serious long-term effects including shortages, rationing, inferior product quality and the upsurge of black markets in a sector. However, despite the vastly documented criticism of such mechanisms, governments around the world have enacted them majorly to manage the affordability of certain goods specifically those identified as essential goods.
Kenya is no different and established a Price Control (Essential Goods) Act allowing the national government to from time to time declare particular goods as essential commodities and for that purpose determine a maximum price for the commodities in consultation with the industry. Considering the numerous interlinkages between fuel and other sectors including transport, and food security, it was declared an essential good and a regulatory body was established to streamline a price control mechanism leading to the roll out and implementation of the pricing formula.
KCSPOG’s concern on this issue, is while the price control formula may have been established to enhance affordability of fuel and regulate market forces that interfered with this, it has majorly been used by the government as a tool to expand its fiscal space and has maintained an almost predictable stream of income for oil marketing companies.
According to Kenya Annual Public Debt Management Reports, public debt increased by over 15 per cent from 49.5% in 2012 to 65.6% of GDP in 2020. A tool popularly used for servicing public debt is raising taxes. The oil and gas sector has been a victim of tax policy changes over the years that have not only served to increase government revenues, but are also currently being felt on the pockets of the mwananchi.
In 2018/19 oil revenues grew by 16.3 per cent mainly driven by Kshs. 17,220 million additional revenue as a result of Tax policy changes specifically, the introduction of 8 per cent VAT to petroleum taxes. In the year 2020, the Tax Laws (Amendment) Act, 2020 came into force with provisions to include taxes and levies as part of the vatable base for petroleum products. Despite, this intervention KRA in its revenue report for the Financial Year 2019/20 reported a decrease of 1.4 per cent in oil revenues for the year.
At the beginning of the 2020/21 Financial Year the government through a gazette notice increased the Petroleum Development Levy (PDL) by Kshs. 5 which took effect in the July/August 2020 period of the price review. This effect was not immediately felt on the pockets of the citizens at the time because the cost of international crude oil prices were lower. However, though the pump prices were generally higher for the period July/August period in 2019, the contribution of taxes and levies had increased by 6.73 per cent, and 6.34 per cent, for super petrol and diesel, respectively. This only comes to exacerbate the impact of other levies including the Road Development Levy which is the tax with the highest contribution to the retail price at Kshs. 18.
Prior to the review of the downstream and midstream petroleum regulations, beyond Petroleum Development Levy Fund Act, No. 4 of 2004 there were no elaborate guidelines or regulations to streamline the use of funds collected through the petroleum development levy. Despite that the CS Petroleum and Mining responded to uproar by citizens by stating before parliament that motorists will enjoy a state subsidy on fuel when crude oil prices in the global market crossed $50 per barrel. Which in itself is limiting considering motorists in Kenya and households are reliant on other products (super petrol and kerosene), but it is acknowledged as a step in the right direction.
International crude oil prices hit pre-pandemic levels of above $60 in early February. This was after an almost proportionate increase in the February-March period. This was on account of crude oil prices reaching pre-pandemic highs in early February and fluctuations in the dollar exchange rate which had an impact on the landed cost of petroleum products. This notwithstanding the delayed impact of tax policy changes cannot be overlooked. This can be linked to a number of other socio-economic sectors such as the transport industry where consumer prices have increased by 2.33 per cent between January and February and 16.73 per cent since February 2020. This is illustrative of the fact that these increments are compounding the effects of social distancing measures imposed on public transport on its cost.
The Energy and Petroleum Regulatory Authority (EPRA) has also recently reviewed the petroleum pricing regulations and held public hearings for them. Reflected within the regulations were provisions that sought to address the possibility of market distortion. Some of the key provisions put forward towards this were: the requirement that licensed petroleum businesses display petroleum prices; and non-disclosure of prices before publication by EPRA. Concerns of private oil marketing companies especially those engaged in wholesale petroleum product distribution were also considered through the introduction of inventory costs in the pricing formula.
However, with the exception of the monthly disclosure of maximum retail pump prices it has not been effective in protecting consumers from the transfer of the effects in international fluctuations in crude oil prices. The pricing regulations remained silent on how the government intends to implement the diesel subsidy in future pump price calculations.
When probed about this, Mr. Daniel Kiptoo, the Acting Director General of the Energy and Regulatory Authority (EPRA), midstream and downstream petroleum regulations stakeholder consultation remarked that taxation was not in the mandate of the regulatory body and that the governance framework for the utilization of the Petroleum Development Levy Fund was currently being debated in parliament. He further stated explicitly that he would relay the concerns put forward to those in charge for action. KCSPOG has launched a monthly pump price tracker where we intend to not only monitor fluctuations in local and international oil prices, and review micro-economic distributional effects of these fluctuations, we will also regularly monitor the adoption of policy options such as the reviews to taxation policy that limit the effectiveness of the implementation of the pricing formula. The scope of the Monthly Pump Price Tracker Project will include reaching out to key stakeholders including those in charge of tax policy like the national treasury.