Justus Ondari And Oliver Mathenge
31 October 2008
Nairobi — Kenyans will now pay less for electricity after the Government took the first step in addressing runaway costs that have rendered industry unprofitable and affected many households.
Acting Finance Minister John Michuki said he expected the cost of electricity to fall by at least 35 per cent from Friday.
He was implementing a directive by President Kibaki early last month to explore the possibility of reducing tax on electricity as a way of reducing the overall cost of power.
Mr Michuki reduced taxes on energy and industrial fuels by four per cent, while terming the prices of petroleum products "unacceptably high".
Mr Michuki said the energy and industrial fuels tax reductions would cut the cost of thermal power generation, supply and consumption in the country by up to 35 per cent.
The high prices have been pushed upwards by the high cost of diesel and gas, key ingredients in the thermal generation of gas, and which trickles down to the consumer.
This mode of generation has lately become integral to the country's overall supply due to the inability of cheaper hydro-electric power plants to meet spiralling national demand.
High global oil prices and drought have given new prominence to thermal generation. For instance, while the normal level is 30 per cent of national electricity supply, it had climbed to 40 per cent in September.
"As a Government that cares and listens to its citizens, we once again want to assure Kenyans at large that following the President's directive, my ministry has taken the first bold step to ease the burden of high energy costs on households and businesses," he said.
Value Added Tax on electricity is now down to 12 per cent from 16 per cent.
The measures, which would go a long way in placating the manufacturers, also saw VAT on industrial fuel oil, heavy fuel oil and residual fuel oils, mostly used in power generation and manufacturing, also go down by a similar margin.
"We expect all those who use oil inputs in the production process to reflect the reduction in the prices of their goods and services," the minister, with a special gazette notice released early in the day effecting the changes, told a press conference at his Treasury office.
The reduction in VAT would enable domestic consumers of between 201 and 1,500 units to save about Sh1,000 per month in power bills while their counterparts who utilise above 1,500 units to save about Sh4,300 per month.
Industry players welcomed the move to lower taxes on electricity, with the Kenya National Alliance of Jua Kali Associations saying that the move would go a long way in helping to ease the burden of production.
The group's chief executive, Mr Richard Muteti, said high costs of power had caused a 35 per cent drop in production.
He added that close to 25 per cent of the jua kali work force had been laid off due to the high energy cost.
"With this new announcement, we will find ways of helping units that have closed down in order to increase production and employment in the sector," he said.
Manufactures, who have lately been using every opportunity to remind the Government of the possibility of divesting from the country due to the high cost of power, are likely to be the major beneficiaries of the tax cuts.
Besides benefiting from a reduction in both the cost of fuel and electricity, medium enterprises are expected to save about Sh120,000 a month on their power bills; while their large counterparts could shave off about Sh4.8 million per month.
"This will, in turn, promote business competitiveness and reduce the burden on households," he said.
Petroleum industry
And the consumers could be in for an early Christmas because Mr Michuki said his Energy counterpart Kiraitu Murungi would be announcing further changes next week, this time targeting the petroleum industry.
This confirms Mr Murungi's announcement on Wednesday that discussions between his ministry and Treasury over the tax cuts are almost complete.
"At the end of next week we will be announcing a major reduction in the cost of energy in the country," Mr Murungi had promised.
Although welcoming the reduction in electricity costs, the Kenya Association of Manufacturers (KAM) and the Kenya National Alliance of Jua Kali Associations, expressed concern that the move would mainly benefit domestic consumers.
And they have also urged the Government to consider more cost cuts.
"Our preliminary analysis shows that this will mainly benefit domestic consumers," said KAM Chief Executive Betty Maina.
She noted that manufacturers expected minimal cost reduction on fuel used for power generation but on the overall, the measure will have no major impact on industry because VAT is an input-output tax which does not alter cost of production.
Mr Muteti said the sector expected even more reduction in the cost of energy, which he noted was key in reducing the cost of doing business in the country.
He said that the cost of business operations in the country was too high, resulting in low output from the various sectors of the economy.
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