Fuel subsidy addiction bad for taxpayer

For the past couple of days, there has been concern among Kenyans about the rising cost of fuel and the lack of it at the pumps.

Now, before I get into that let me start with a subject closely related to this. Kenya Airways #ticker:KQ has announced that it has received approval from the board to hedge prices for more than 35 percent of its fuel needs.

Fuel hedging is basically entering into a contract to pay the current market price throughout the agreed period, a common strategy for airlines against the volatility of prices.

But deploying this strategy is a big gamble and requires a meticulous forecast of global oil prices. So, when KQ says it will be using this strategy, has KQ thoroughly done its homework on forecasting on fuel prices? Is KQ seeing that fuel prices will continue to rise steadily in the foreseeable future?

In 2016, the airline hedged on fuel only for prices to dramatically fall, leaving the airline with a Sh26 billion loss largely incurred from the hedging strategy. The airline to this date has never recovered from that loss.

Then came 2020, and the airline in a turnaround strategy hedged for a six-month period between February to July. Oil prices tumbled drastically because of the Covid-19 pandemic effects, with countries shutting their borders and completely grounding airlines.

So, KQ deploying this strategy again after heavily bleeding twice is quite bullish of the management. I am curious how diligent KQ has done its forecasting homework. The Ukraine-Russia war has been the main reason the world has seen a sharp rise in the price of oil and gas.

Some analysts have forecast that the cost of a barrel will get as high as $300 because of the uncertainty over the war. But the situation remains fluid for anyone to bank on those analysts.

We are already seeing signs of de-escalation in the war, with suggestions that a peace deal brokered by Turkey could be sealed.

So, betting that price of oil and gas will be rising for a period of six months, or more is quite bullish of KQ. But we wait to see if KQ was diligent enough this time around with the fuel hedging strategy since it’s taxpayers’ money being burned here.

Back to pump prices that Kenyans are crying about. We seem to be heading the KQ way too of burning billions in taxpayers’ money. In a move to cushion Kenyans from the high fuel prices, the government has chosen to convert the Petroleum Development Levy Fund designed for the fuel stabilisation programme into a fuel subsidy scheme.

This transition should worry many of us looking at how subsidies have always gone wrong and the economic implications. First, the numbers the public is being given by the government don’t tally and there is need for an audit of the fuel stabilisation programme initiated by Parliament.

In a recent TV interview, Petroleum Principal Secretary Andrew Kamau said that so far the Petroluem Development Levy Fund had collected Sh40 billion and paid out Sh36 billion.

But oil marketing companies claim the government hasn’t compensated them under the fuel stabilisation programme for months and owes them Sh32 billion in arrears. The government has disputed this claim and says it only has arrears of Sh13 billion. So, who is telling the truth here?

Second, subsidies are expensive for the taxpayer to maintain, and trends show that the cost has the tendency of continuing to rise.

We are already seeing that the Treasury is planning to allocate Sh10 billion to compensate oil marketers for the month of March and another Sh15 billion for April under the supplementary budget. Once we go the subsidy way there is little room to turn back, and the taxpayer will have to finance this addiction.

Lastly, fuel subsidy is simply transferring taxes meant for socio-economic development for ordinary Kenyans in education and health to the non-durable consumption of fuel by car owners, and this has a negative redistribution effect.