Ideas & Debate

Realising smart fiscal policy to support electricity for all

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Kenya Power workers repair a power supply line. FILE PHOTO | NMG

Summary

  • The Government of Kenya has been under growing pressure to increase its tax revenues over the past few years.
  • The Covid-19 pandemic exacerbated what was already a challenge for the Treasury.

The Government of Kenya has been under growing pressure to increase its tax revenues over the past few years. The Covid-19 pandemic exacerbated what was already a challenge for the Treasury.

In 2020, the government adopted several fiscal measures aimed at increasing tax revenues, many of which were quite unprecedented such as the minimum tax and, in our case, the removal of existing value-added tax (VAT) exemptions on renewable energy technologies including solar, wind and clean cooking technologies.

The global community first under the Millennium Development Goals, and now the Sustainable Development Goals recognised the imperative to ensure that social and economic gains reached every community and household, with access to modern energy identified as its core foundation.

Kenya’s commitment in this regard realised through an enabling policy environment is commendable.

In 2018, the Energy ministry launched the Kenya National Electrification Strategy, with the goal of all Kenyans achieving access to electricity by 2022.

The strategy envisioned that this would be delivered through both the public and private sectors and that affordability was going to be a key constraint.

The gains realised through the private sector off-grid solar industry and the broader renewable energy sector in the country that has brought electricity to millions of Kenyans living beyond the national grid are self-evident.

This is demonstrated through the 2019 National Housing and Population Census, which shows nearly a quarter of Kenyans rely on off-grid solar solutions for their energy access today, a validation of all the previous efforts for Kenyans to access electricity through these solutions.

However, as the Treasury has sought to increase government revenue, the predominant storyline has focused on the responsibility and the need for all to pay taxes to support government expenditure.

While true, this presents an incomplete and misleading picture.

All governments need to raise revenues to both, pay their bills and more importantly provide for the delivery of services and other public investments for the future (development).

What happens when the government cannot directly deliver an essential service that is in the national or public interest to see delivered?

This is a question that Kenya has wrestled with, in ensuring certain services of public interest were broadly available such as education, healthcare and more recently, access to electricity.

A country’s fiscal policy should be aligned not only towards the realisation of meeting government expenditure but also enabling the availability and delivery of essential services of public and national interest and to support future economic growth.

In 2020, the renewable energy sector under the auspices of the Kenya Renewable Energy Association submitted to the government that the introduction of VAT on the sector would undermine the government’s targets for energy access, climate change and other development objectives while hurting the country’s attractiveness for investment.

The newly released fiscal and economic impact analysis on taxation of Stand Alone Solar Solutions undertaken by the Kenya Renewable Energy Association and GOGLA in collaboration with the Energy ministry, clearly demonstrates that Kenya will not meet the universal access to electricity by 2022 due to a factor of both the increase in taxes and Covid-19.

The report further shows that, while the VAT exemptions for SAS products would result in a net cost to the Treasury of around $3 million per year, it would generate more than $40 million in annual benefits.

Beyond this are a broader set of benefits that would be foregone by the country with increased taxation.

The total number of households reached would fall by 470,000 by 2025. This limited customer base reach would also come at the cost of 2,500 jobs in the supply chain, $2 million in income taxes and corporation tax contributions, and economic activity worth at least $40 million per year for households.

Kenya would also lose more than 20,000 metric tonnes of carbon dioxide emissions, which could be avoided by switching to solar.

The evidence points to significant benefits for our economy both from access to electricity standpoint, as well as the resulting growth of our economy if the VAT exemption and import duty exemptions were reinstated.

As we look towards the 2021 Budget, we hope that the Treasury will reconsider the 2020 budget decision and reinstate these exemptions.

We as a country should remain committed to leaving no one behind, and to ensuring electricity access for all.

A key policy action to support this is to reinstate VAT and import duty exemptions on renewable energy products.

All Kenyans deserve to live decent and dignified lives and electricity is a key component of their quality of life.