The Energy and Petroleum Regulatory Authority (Epra) announced on July 14,2024 that petroleum prices will drop marginally.
Super petrol, diesel, and kerosene decreased by Sh1, Sh1.5, and Sh1.3 per litre, respectively. However, hidden within these price reductions was a substantial surprise – an increase in the Road Maintenance Levy (RML) from Sh18 to Sh25 per litre.
The implementation of this increase has raised some questions. Was it approved by Parliament? When was the increase officially announced? Also, what happened to the feedback from public participation?
The former Cabinet Secretary in charge of Roads had mentioned that the levy increase would only be implemented "when we are certain that any revenue measures adopted will not result in a rise in the cost of living." What has changed within a week to justify this decision?
If the implementation of the RML goes through, there could be some economic and social issues. The Kenya Roads Board (the board) argues that the levy increase is necessary to generate funds for the development and maintenance of Kenyan roads. The Board states that the country has a Sh727 billion accumulated deficit in road maintenance, partly attributed to the stagnant collections of RML.
According to the board, the RML has remained at Sh18 per litre since 2016, despite changes in Kenya's economic characteristics, such as the exchange rate fluctuation and inflation. By raising the rate to Sh25, the Board expects to collect Sh115 billion annually, up from the Sh80 billion.
The board made assumptions that may not hold in the Kenyan market. Firstly, it argues that the price increase will not decrease consumption. However, according to the principles of demand and pricing, a price increase will likely result in a decrease in demand, with a few exceptions.
The Finance & Planning Committee in Parliament, in their review of the now-dropped Finance Bill, 2024, noted that the decrease in RML collections in the year 2023 was due to reduced demand caused by higher fuel prices.
Additionally, when VAT on fuel was increased to 16 percent, Epra reported more than a 5 percent drop in petroleum product consumption in Kenya from July 1, 2023, to December 31, 2023. This demonstrates that an increase in fuel prices affects demand. Therefore, the argument that demand will remain the same is flawed.
