Why the government refused to cut taxes on petrol, diesel

By agatha atuhaire

Politicians and government officials are making huge profits

Whereas all Ugandans had their eyes on the budget hoping it would include a reduction in taxes on fuel, the new Finance Minister Maria Kiwanuka announced only repealed the excise duty on Kerosene.

It was a bold decision.

Deloitte East Africa’s annual pre-budget survey, conducted in Kenya, Tanzania and Uganda to ascertain the business communities expectations found that Ugandans wanted taxes reduced as a result of the current high food and fuel prices and expected revenues from the oil and gas industry. Up to 91 percent of respondents said tax on petrol, diesel, kerosene and paraffin should be reduced. Even the out-going World Bank Country Director, John Murray McIntire, in May advised the government to cut taxes on fuel.

President Yoweri Museveni has consistently defended his government’s refusal to cut the taxes on fuel in spite of high fuel and food prices that have sparked riots in which several protesters demanding tax cuts have been killed and hundreds injured.

The Independent has seen a classified document based on figures from the Uganda Bureau of Statistics and the World Bank that appear to show the calculations behind the government’s move. Apparently, the government has concluded that although the public clamour has been on high taxes, the actual culprit for the high fuel pump prices are the profiteering schemes of petrol companies.

As a result of this, The Independent has learnt, the government might introduce stringent restrictions of fuel dealers and insist on the fuel reserve requirement.

The government currently charges taxes Shs850 per litre of petrol and Shs 530 per litre for diesel. The tax has been Shs 200 per litre for kerosene. At current prices average price of Shs 3,600 for petrol in Kampala and Shs 3,200 for diesel, the taxes are just 23% and 16% of their pump prices. According to the document, a reduction in taxes will not necessarily bring a reduction in pump prices.

According to the secret document, minus adversely affecting the budgetary framework, there is no guarantee that tax reduction will transmit into lower prices.” The government hopes to collect at least 10% of its revenue in the 2011/12 FY from excise duty on fuel.

The secret report also dismisses claims by oil dealers and some government bureaucrats that the main causes of high fuel costs are external and global in nature.

Instead it shows that whereas international petroleum product prices have been rising over the past 5 years, the direct effects on Uganda’s inflation of rising oil prices in the international market were minimal. The most recent rise in international oil prices occurred in 2008 when prices touched the US$ 134 per barrel mark with crude oil prices rising 54 percent annually but only 36 percent of this was transmitted into Uganda’s domestic retail prices.

In contrast, the report says, while international petroleum product prices have only risen by 15.6 percent only so far during FY2010/11, the rise in international oil prices have been transmitted almost fully into the domestic pump prices.

The analysts who wrote the report say that the past rise in international prices did not affect domestic pump prices in Uganda partly because of the exchange rate given that the price of imports depends significantly on the trend of the shilling versus the US dollar.  They predicted that even if the international price had not changed, price of petroleum products, like any other imported goods, would have increased given the depreciation of the shilling from an average of Shs 2,029 per US dollar in 2009/10 to Shs 2400 per US$ by mid-April 2011.

Acknowledged the impact on fuel prices of a depreciated Uganda shilling but insisted that within neighbouring countries, distance from the sea notwithstanding, Ugandan prices were comparable. She said in Rwanda, Kenya and Tanzania, fuel prices for petrol are equivalent to Shs 3,860, Shs 3,190, and Shs 3,300, respectively.

In the past, international oil price shocks were not transmitted fully into domestic retail prices partly because the shilling was either appreciating or depreciated more modestly against the dollar unlike the situation now when the shilling drastically depreciated against the dollar.

According to the analysts, the existence of price restrictions and different incentives schemes along the supply chain suggesting, the domestic prices of fuel “can move due to selfish rather than market forces”.

They argue that unlike a retailer within, for instance, a company-owned-dealer-operated arrangement who may have little leeway in adjusting the pump price when international prices change, a retailer under a dealer-operated-dealer owned arrangement has the flexibility of adjusting prices.

The only adverse effect that government has realised is the absence of reserves. According to the experts, while the collection of taxes on fuel at the border eased compliance, it removed the automatic reserve mechanism which existed in form of stocks in the bonded warehouses as retailers now operate with just the minimum supplies. The result of this has been observed in the market where any minor disruption in supply immediately spills over into fuel shortages and price hikes.

As a result, The Independent has learnt, the government is likely to start strictly enforcing the existing law that requires each dealer to keep a minimum of 10 days stock. The law has not been enforced and that is why Uganda’s storage capacity reduced drastically from 2008 when the country had a storage capacity of 20 days.

Oil dealers react

According to the experts, “a sustainable solution on high petroleum prices should center on addressing the factors that are responsible for these persistent margins”. It is reported that between the oil companies and retailers, the industry margins seem to be increasing over this period from approximately 10 percent to about 40 percent at the current price.

Oil dealers, however, dismiss these claims and say that it is unfortunate that a government which is well informed of the oil situation can be persuaded by such arguments. They insist that domestic fuel prices are high because the supply chain of getting oil into the country is derailing, risky, costly.

Shell Uganda Chairman, Ivan Kyayonka told The Independent that it is the international high prices and costs of shipping that have made it worse for Uganda which is landlocked country.

Kobil Uganda Marketing and Operations Manager Peter Ochieng said claims that oil companies are pushing the price up to make huge profits “mislead” people about something as sensitive as fuel prices.

“We have not made any mark up,” he said, “in fact our profits have reduced greatly because we try as much as possible not to put the prices where Ugandans will completely fail to meet them.”

The Executive Director of the Uganda Consumer Protection Association, Sam Watasa, who is heavily involved in analysis of the oil sector, backed the oil companies.

“These people have to ship fuel from their suppliers to Mombasa where they have to pay insurance fees due to problems of piracy, from Mombasa to Nairobi and from Nairobi to Uganda by trucks which is also risky, costly and time consuming,” Watasa said.

A study on petroleum markets in sub-Saharan Africa seems to agree with the retailers that oil movement and supply makes Uganda’s situation more complicated than other countries. But the study suggests that a critical challenge for Uganda in managing the level and movement of petroleum prices has to do with the inefficiency of the industry.

It indicates that the contribution of the industry component of oil supply chain to the total price was 50% higher in Uganda in 2008 than any other country including her landlocked peers and says that this is greatly due to supply disruptions.

The study has also shown that weak regulation in this fully liberalized market has made the industry less efficient.

“With Uganda having about 60 oil companies, four of which carry 70 percent of the market, while the market leader took half this share,” the document says, “inadequate regulatory capacity has increased the incentives for non-standard practices to make profits, hence affecting the level and rate of change of petroleum prices as well as the quality of the petroleum products on the market”.

This is why the government will, in the next months, attempt to intervene to regulate and control fuel prices to strengthen enforcement in a market of too many oil participants. The governments of Rwanda and Kenya, faced with similar challenges, have intervened to set a maximum price for fuel since retailers seem to be passing price increase at the international level fully to the consumer, while their profit margins are preserved or increased.

But Shell Uganda’s Ivan Kyayonka told The Independent that the government will be making a grave mistake if it decides to put maximum price for fuel because it will only mean that oil companies are going to be pushed out of the market.

“This might lead to what happened in Amin’s regime when oil dealers were forced to leave the market and there was no supply at all,” Kyayonka said.

Peter Ochieng of Kobil says anyone suggesting the oil companies are making high profits should go through the records at the Uganda Revenue Authority to confirm.

“I think the government is reasonable enough to first reduce taxes on fuel before it determines the price at which we are going to sell our products but if it sets an insensible price tag, they will not expect us to stay in a business from which we don’t gain,” he said.

Uganda consumer protection associations’ Watasa warned that any wrong intervention by the government could complicate the situation and leading to complete scarcity because oil dealers cannot stay in business if they are not benefitting.

“The government might create a whole new set of problems by setting an unrealistic maximum fuel price that might compel oil dealers to completely shut their businesses because no business person would allow operating in losses,” he said.

When contacted, the new Minister of State for Energy and Mineral development Simon D’ujang said his ministry is not in any position to know or talk about the issue.

“Issues that have what to do with money, taxes and prices are handled by the ministry of Finance, I don’t know whether that is true or not but the ministry of finance should know the problem and the measures being taken,” he said.

But the new Minister for Energy and Mineral Development, Irene Muloni said since she is not yet into office, she would not know what the government has proposed but is optimistic there will be a solution soon.

She however doubts the applicability of price regulation if it is proposed by government saying it is difficult to control prices in a liberalised economy.

“We have to look at immediate but at the same time reasonable answers to make sure that we rescue Ugandans without necessarily frustrating the investors,” she said.

“I want to work with my team on ensuring that the reserves in Jinja are filled and to establish alternative sources and routes other than the available congested ones as we implement the permanent solution to oil problems which is exploiting and developing our own oil,” she said.

Kenneth Mugambe the Commissioner Budget Policy and Evaluation in the ministry of Finance says he has neither heard about the accusation that oil dealers are the main cause of sky rocketing oil prices nor that the government intends to regulate them.

“I have not heard anything to that effect but if it has been conclusively discovered that regulating oil dealers will normalize the situation, then it will be a relief to everyone and that is something we will be able to find out soon,” Mugambe said.

He added though that he doubts the soaring fuel prices have anything to do with the dealers’ mark up because this situation has not been experienced only in Uganda apart from the fact that Uganda’s situation has been a bit worse than elsewhere.

The continuous rise in fuel prices has greatly contributed to the soaring inflation in Uganda which has increased to 16% by the beginning of June up from 14% in May.

The President, in his state of the Nation address on June 7, said the government is already refurbishing the National Fuel Reserves in Jinja. The announcement signaled a major reversal in the fuel sector management. The Permanent Secretary in the Ministry of energy, Kabagambe Kalisa, has in the past told The Independent that focusing on government-maintained reserves was abandoned when Uganda discovered oil. The government’s plan, as outlined in detail in the National Budget Framework Paper FY 2011/12 – 2015/16, the ministry of Energy is to revamp, restock, and operate the 30 million litre Jinja reserves in a Public-Private Partnership arrangement. The Jinja reserves are to be integrated into the Uganda Oil Pipeline System.

These plans are not new. In the past they have failed to be implemented amidst allegations of corruption. In the past, Museveni dismissed calls for the government to establish fuel reserves, claiming that such a decision would unnecessarily tie up public monies.

He recommended that the private sector manage oil reserves. But when on January 10,2008, the Cabinet approved setting up a US $26m (Shs 49 billion) project to restock Jinja reserves, the project ran into trouble after it was fraudulently handed to Ishta Kutesa, daughter of Foreign Affairs Minister Sam Kutesa, and her husband Albert Muganga, with support from then Energy Minister Daudi Migereko. The move was opposed by the big oil companies like Shell and Total who claimed they were in a better position to manage the reserves.

At the time, the issue was completed because the contract to manage the reserves had, in fact, already been awarded to Tamoil, an entity with several mysterious personas and links to the embattled Libyan regime of Col. Muamar Gadaffi. It is an open secret that many politicians and top government officials are involved in the fuel business and stand to benefit from high domestic pump prices. They are, therefore, unlikely to push for policies that reduce their cut.

Already, similar complications appear to be popping up in the new effort. Under the headline “Ghost firm gets key fuel contract” the Daily Monitor newspaper reported on June 6 that a hithertounknown company has been awarded the second highest quota to import oil from Kenya and controls at least in part, fuel prices in Uganda. The mysterious company, Black Gold Ltd, has no known depot or service stations in Uganda, according to The Monitor.

The story said that in a May 9, letter to outgoing Energy minister Hilary Onek, KenolKobil’s Group Managing Director

Jacob Segman asked: “Why should [a] non-existing oil company get an allocation of 2,697 metric tonnes while the major oil companies in Uganda and especially Kobil Uganda is allocated only 37 per cent of what Black Gold Limited was allocated? “The above case is an example of how things can go wrong leading to dry-outs in the stations owned by the major investors in Kenya and Uganda as well as in Rwanda and Burundi.”