The Kenya Roads Board (KRB) has proposed a doubling of the petroleum levy in a move that could significantly increase the cost of transport countrywide.
The proposal seeks to have motorists pay Sh9 more per litre of fuel to finance the increased cost maintaining an expanded roads network.
If adopted, motorists will pay Sh18 for every litre of petrol or diesel — pushing up pump prices by nearly 10 per cent.
“To accommodate this increase in construction costs, we propose that the rate be increased to Sh18,” the roads board says.
The roads agency argues that the current rate of the levy, set in 2006, is no longer feasible given the rise in cost of raw materials, labour and transport.
The KRB, which collects the duty and manages the Road Maintenance Levy Fund (RMLF), has written to the Treasury, saying the seven-year freeze on the Sh9 levy charged on every litre of petrol has strained the fund, forcing it to scale down its work.
“We are engaging the Treasury, through the Ministry of Transport, to review the fuel levy,” said Francis Nyangaga, the KRB executive director. “The cost of road works has doubled since the last review, extremely stretching out the fund.”
The KRB wants the new rate to come into effect next year, a move that could spark a fresh wave of inflationary pressure in the wake of a recent rise in consumer prices following September’s introduction of value added tax (VAT) on a wide range of basic services and goods.
Transport is a key service whose pricing affects costs in all sectors of the economy.
“It will result in cost-push inflation as a result of the increases in cost of goods and services given that fuel is a primary resource for industrial producers,” said Atul Shah, chief executive of PKF Eastern Africa.
“Fuel touches on everything and the ripple effects will be significant. The burden will be borne by consumers.”
But Dr Nyangaga argued that even though the additional cost will be painful to consumers, maintaining a sound road network helps reduce poverty by lowering the cost of goods and services, improving access to social facilities, administration centres and improving safety and security.
A litre of diesel and kerosene is projected to go up by about 10 per cent to retail at Sh121.27 and Sh113.47 respectively going by the current pump prices set by the Energy Regulatory Commission (ERC) for Nairobi.
Higher diesel prices would particularly increase the cost of producing and distributing goods given that it is the main fuel for machinery in the agricultural sector, which contributes almost a quarter of Kenya’s gross domestic product (GDP).
This will result in higher food prices and the subsequent rise in the cost of living or inflation means consumers will have to spend more to acquire the same amount of goods.
Kenya’s inflation eased to 7.76 per cent in October from 8.29 per cent in September after the taxman moved to remove VAT on packaged milk and all types of bread.
The expected rise in food and fuel prices could push Kenya’s inflation to double digits, given that foodstuffs, electricity and petroleum are key consumer price index drivers.
It will also have adverse effects on the cost of electricity given that thermal power constitutes a third of Kenya’s energy basket; further compounding the situation for Kenyan consumers.
Kenya Power charges electricity consumers fuel expenses incurred in generating power as a pass-through cost.
The fuel cost adjustment, currently charged at Sh5.63 per kilowatt hour for November meter readings, is influenced by the amount and price of petroleum used in diesel-fired plants.
Fuel remains one of the most taxed commodities in Kenya, attracting multiple charges such as road maintenance levy, petroleum development levy, excise duty and railway development levy.
Kenyans also pay Sh0.40 per litre of fuel as petroleum development levy, which goes towards a fund known as Petroleum Development Fund.
Excise duty on fuel is taxed at the rate of Sh10.31 per litre.
And because Kenya imports all her oil, marketers pay the 1.5 per cent duty imposed on all imports to raise funds for building a new standard gauge rail track from Mombasa to Malaba.
Patrick Obath, the former chairman of Kepsa, said the RMLF had performed well and that increasing the levy is a pain Kenyans should bear given that road tolling is not very popular in the country.
“We need not just build roads and highways. They need to be maintained to be sustainable in the long run and help ease the cost of doing business,” said Mr Obath.
The roads levy was introduced in 2003 at the rate of Sh5.80 per litre before rising 55.1 per cent to Sh9 per litre in 2006. Kenya has added hundreds of kilometres to its tarmacked roads network, a move that is aimed at improving farmers’ access to markets and promoting internal trade.
A survey conducted by the KRB in 2006 found that 27 per cent of classified road network is in bad state and urgently needs repair. The KRB says given the limited avenues it has to raise funds for road maintenance, the only way out is to increase the fuel levy.
The fuel levy contributes 99.5 per cent of the KRB’s annual budget with the balance coming from transit toll collections and cess charged on products such as coffee and sugarcane.
Collections of the fuel levy have more than tripled to Sh24.9 billion in the year to June compared to Sh7.8 billion in 2001.
The KRB argues that the increment is necessary because the cost of gravelling and recarpeting of roads has tripled to Sh1.55 million and Sh14 million per kilometre respectively, straining its purse and making it hard to keep up with the growing need for road maintenance.
Data from the roads board show that the cost of resealing and upgrading a road to bitumen has more than doubled to Sh8.5 million and Sh100 million per kilometre respectively.
The KRB calculations show that Kenya needs Sh50 billion per year to maintain its roads and doubling the fuel levy would help bridge the financing gap.
However, the additional funding would still not clear the backlog of maintenance estimated at Sh230 billion attributed to the fuel levy freeze.
In the year to June, the fund rehabilitated a total 61,644 kilometres of roads through interventions such as routine and periodic maintenance as well as spot improvement.