Columnists

Electricity rebate a shot in the arm for manufacturing

stima

Last year the Government committed to developing measures for reducing the cost of electricity to a single digit level to spur the sector’s growth. FILE PHOTO | NMG

The single catalytic factor of thriving economies across the globe is energy; the cost, quality and reliability of it. Other than its use in industries and households, the ability of a country to easily access energy to power daily lives is a universally recognised marker of development and progress.

For some vital sectors of Kenya’s manufacturing sector, electricity takes the lion’s share of total production costs. For instance in the cement sector, electricity cost averages about 20 percent of total cost of production, whilst for the steel sector the cost accounts for 20-30percent and more than 10percent for the textile sector. Industry is currently the biggest consumer of electricity generated in the country, using up approximately 4,225 Gigawatt hours (GWh) as of June 2018.

Last year the Government committed to developing measures for reducing the cost of electricity to a single digit level to spur the sector’s growth. As a result, the National Treasury and Planning, through the Finance Act, 2018 amended section 15 of the Income Tax Act to enable manufacturers and other heavy power users to deduct 30 percent of their electricity expenses from their taxable income. The implication of this amendment in Finance Act, 2018 is that 130 percent of electricity cost incurred by a manufacturer is treated as an allowable expense for tax purposes subject to the condition set by the Ministry of Energy.

Despite others pointing out the fact that the rebate portends a possible reduction in the Government’s income tax from the industries, on the converse the rebate will enable firms to produce more for local and export markets thereby increasing their competitiveness, which in turn means more revenue streams for the Government. The 30 percent rebate which has now been brought into effect after its gazettement, is therefore a win-win for both the Government and manufacturers.

If we take the cement industry for instance, the electricity cost of producing a bag which is on average about 20 percent of the overall cost of production will reduce by an approximate five per cent to 15 percent of the overall cost. This should enable cement producers increase their turnover while saving on electricity cost.

The rebate programme follows the decision by Government to introduce the Time of Use Tariff whose uptake has been increasing, with industries savings doubling from Sh78.8 million to Sh196.7 million in a period of one year.

A journey of a thousand miles begins with one step. In our case we have taken some key first steps towards our end goal to reduce the cost of electricity to 9kw/h for the entire manufacturing sector. The focus is on making the effect of these steps long-term and far-reaching, in order to achieve our economic goals and boost Kenya’s ability to attract investors.

A good way to do this is for the Ministry of Energy to adopt and implement the recommendations on the Least Cost Power Development Plan. Another would be to fast track implementation of flagship projects under Vision 2030 for the creation of eastern Africa power pool electricity market.