Taxing cooking gas rolls back gains in the energy sector

Kenya plays a leading role in Africa in fighting climate change by embracing renewable power sources be it wind, hydro, solar or geothermal. This is largely informed by increasing change in the energy sector where consumers, both at household and industrial levels, are conscious of climate change as well as the quality of energy they use.

Kenya’s international commitment under the Paris Agreement to lower carbon emissions by 32 percent by 2030, gives us a sense of urgency to shift to the forms of energy with low emissions. Use of traditional sources will not only increase carbon emissions but also aggravate deforestation and threaten Kenya’s ambitions to achieve 10 percent forest cover by next year.

Favourable government policies have also played a big role especially when it comes to fiscal interventions. A case in point is tax exemptions on solar, clean cooking stove products and cooking gas (liquefied petroleum gas).

In 2016, Kenya scrapped Value Added Tax (VAT) on cooking gas with the aim of encouraging more Kenyans to use LPG as a source of energy. The prices of LPG remained relatively affordable and consumption shot up resulting to improved health, educational and environmental outcomes.

Removal of VAT on LPG was one of the most successful environmental fiscal policies that has stimulated innovation and investment in the energy sector. Some of the effects of the policy is that use of LPG hit 320,000 tonnes in 2020. In 2012 for example, there were nine LPG filling plants in Kenya compared to about 105 plants today.

LPG is a fossil fuel whose net impact on climate change in settings where solid biomass fuel is the main alternative is neutral or beneficial. LPG use protects forests from being depleted for charcoal and firewood production and hence contributing to preserving the environment and capturing CO2 emissions. In addition, LPG combustion releases very low levels of short-lived climate pollutants (i.e. black-carbon and methane) in comparison to inefficient solid fuel stoves.

A 2020 report by the Kenya National Bureau of Statistics (KNBS) indicated that over a three-year period leading to 2019, use of LPG almost doubled from 151,700 tonnes to 312,000 tones. The 40 percent increase between 2018 and 2019 is an indicator of the effectiveness of the change in policy on LPG.

Reintroduction of VAT on cooking gas this financial year, therefore, poses a threat not only to livelihoods, but also to health, the environment and the energy sector. The move ignores internalisation of external costs of pollution and natural resource use at the same time reducing research and development in the sub-sector. In a country where over 70 percent of the population depend on wood and charcoal as sources of energy, reintroduction of VAT on LPG resulting to increased prices for consumers will lead to a natural fallback on wood, charcoal and kerosene because these are more affordable and accessible even in smaller quantities. The situation is compounded by a ravaging Covid-19 pandemic, which has depressed incomes for most households.

The International Energy Agency (IEA) and the World Health Organisation (WHO) have consistently recommended LPG as a solution to tackling household energy-related pollution.

LPG also has the potential to pull communities out of poverty as it improves the standards of living as well as creation on jobs. As a clean energy source, cooking gas had gained traction not only because of its potential for low emissions but also on account of being generally clean and decent. It lights instantaneously, burns cleanly, is odourless and it keeps people’s kitchens relatively clean in comparison to wood or kerosene. This is beneficial to one’s health as more common respiratory ailments are linked to the kind of energy used at the household level.

LPG is undoubtedly one of the few available and clean cooking options that can achieve significant scale and it is the fastest proven scalable solution presently available. To achieve global recommendations for rapid transition to clean cooking energy in accordance to SDG 7 and to reduce household air pollution, LPG is an essential step in the short-medium term on the way to even cleaner renewable energy for cooking (e.g. solar PV/renewable grid electricity), which is currently a long way from achieving sufficient scale especially when it comes to rural and peri urban areas.

The idea of re-introducing VAT should be reconsidered as it will reverse all the gains achieved in the clean cooking sector. Instead of increasing taxes, the government needs to take the lead in providing solutions to deliver clean energy that is affordable and attracts investments.

Edward Mungai is CEO, Kenya Climate Innovation Center and 2016 Eisenhower Fellow

• The High Court has dismissed a suit filed by minority owner of Bluebird Aviation who accused his partners of siphoning more than $1 billion (Sh108 billion) from the airline through tax evasion, fraud and money laundering.
• Justice Alfred Mabeya brought to an end the five-year court battle pitting Adan Abdi Yussuf against three other owners of the 29-year-old airline.
• The judgment came after the Director of Criminal Investigations (DCI) cleared three shareholders and executives of Bluebird — Hussein Farah, Unshur Mohamed and Mohamed Abdikadir — from financial malpractices after a nine-month investigation.

The High Court has dismissed a suit filed by minority owner of Bluebird Aviation who accused his partners of siphoning more than $1 billion (Sh108 billion) from the airline through tax evasion, fraud and money laundering.

Justice Alfred Mabeya brought to an end the five-year court battle pitting Adan Abdi Yussuf against three other owners of the 29-year-old airline.

The judgment came after the Director of Criminal Investigations (DCI) cleared three shareholders and executives of Bluebird — Hussein Farah, Unshur Mohamed and Mohamed Abdikadir — from financial malpractices after a nine-month investigation.

The investigation followed a criminal complaint from Mr Yussuf against his fellow shareholders, accusing them of fraudulently channelling massive funds out of the company as part of a money laundering scheme.

Justice Mabeya dismissed Mr Yusuf’s allegations, saying he failed to prove claims of fraudulent accounting, tax evasion, fraud and money laundering.

“In the present case, all that the plaintiff did was to make sweeping allegations without any backing by way of evidence. He only stated that he had carried out investigations and made discovery of the allegations he made,” said the judge.

“The documents that were produced were not authenticated to prove any of the allegations made against the defendants.”

Mr Yussuf, who claims to own 25 percent of the charter airline, argued that more $1 billion (about Sh108 billion) has been stolen and put in offshore accounts and investments in Western capitals after being transported physically out of the country without declaration. He said the three directors were using the airport passes granted for restricted areas in airports to move the billions.

The DCI dismissed the secret movement of cash at the airports, arguing its investigation and probe by Kenya Airports Authority (KAA) found no evidence of money laundering.

The Financial Reporting Centre through the DCI said it failed to detect breaches while tracking the flow of cash in and outside Blue Bird Aviation.

Mr Yussuf claimed that his partners were stashing proceeds from the airline in international banks under Amazon International FZE. But Justice Mabeya said his partners had sufficiently showed that their relationship with Amazon was purely commercial.

“That the plaintiff had failed to demonstrate the directorship or shareholding of the defendants at Amazon or that they had stolen money from the Company and deposited the same at Amazon’s accounts,” he said.

“No faithful director exercising independent judgment would take any of the said measures, none of which are beneficial to the Company. In fact, all the steps taken by the plaintiff were contrary to the success of the Company. They were meant to sound a death knell on the company,” he added.

Billionaire businessman Peter Munga in 2016 pocketed Sh135.7 million worth of dividends from Britam #ticker:BRIT shares he did not own, an inquiry report shows.

The tycoon inked a secret deal with top officials of Mauritius government giving up the rights to earn dividends on the shares before Mr Munga acquired the stock.

The insurance firm declared a dividend of Sh0.3 per share for the year ended December 2015.

The book closure date — the day when the company’s share registrar determined who would be eligible for the dividends — was June 9, 2016.

Mr Munga through his investment vehicle Plum LLP signed an agreement to buy 452.5 million Britam shares from the government of Mauritius a day later on June 10, 2016.

This meant that the island nation qualified for the dividend, which was paid soon after the Nairobi Securities Exchange-listed firm held its annual general meeting on June 24, 2016.

But Mauritius officials agreed to certain clauses in the agreement with Mr Munga that saw the island nation surrender its right to the dividend, marking one of the lopsided arrangements that triggered an investigation in Port Louis.

Mauritius was to receive the dividend through the National Property Fund Limited (NPFL), which was created to manage the Britam shares that were part of assets seized from its citizen Dawood Rawat, whose Sh71 billion ponzi scheme exploded in 2015.

The loss of the accrued dividend is among the major issues that were investigated by the commission of inquiry besides the sale of the Britam shares to Mr Munga for Sh7.1 billion in disregard of higher offers of Sh11 billion each from South Africa’s MMI Holdings and Barclays Bank (now Absa Group).

This left the government of Mauritius with a Sh3.9 billion loss, prompting an inquiry that Kenyan officials were reportedly reluctant to support.

“As per these clauses, the NPFL would never be entitled to the 2015 dividend. This is not usual or good practice,” the inquiry report says.

“The commissioner therefore considers that NPFL had been unfairly deprived of an amount of approximately R43 million [Sh135.7 million] representing dividend calculated on the basis of Sh0.30 yield per share for the year ending 2015 in view of the fact that the completion date referred to at clause 6.2 of the special purchase agreement is well after the June 10, 2015.”

Britam’s 2016 accounts confirm that the dividend of Sh0.3 per share declared for the year ended December 2015 was paid in full amounting to an aggregate of Sh581.5 million.

The dividend Mr Munga earned on his new shares raised his total dividend income from Britam that year to Sh234.5 million.

His other direct and indirect stakes in the insurer – including his interest in investment vehicles Equity Holdings Limited and Filimbi Limited — raked in Sh98.7 million.

The commission of inquiry says it was shocked that NPFL conservators and Mauritian officials did not push back against the overly generous terms Mr Munga was demanding, including the dividend forfeiture.

“This is not usual or good practice. The commission notes with utmost concern that such clauses do not seem to have been questioned by the NPFL or even the special administrator,” the report says.

“It is also not clear whether this special purchase agreement (SPA) had been duly vetted by the legal advisers of the NPFL.”

The Munga deal ran against the standard practice in sale of major stakes in companies. Sellers typically retain the right to receive the dividends declared close to the transaction date.

Alternatively, the dividend declared or anticipated is incorporated into the purchase price.

This means that the buyers pay an additional amount equivalent to the dividend to the sellers and will recoup the same later through actual dividend distribution on their newly acquired shares.

This, for instance, is what happened when Equity Group acquired a controlling 66.53 percent in DRC’s Banque Commerciale Du Congo last year.

The bank paid a total of $105 million (Sh11.4 billion), equivalent to $167.9 (Sh18,242) per share.

This included an amount of $2.6 million (Sh289 million) or $4.2 (Sh462) per share that the sellers were anticipating in the form of dividend.

“The agreement specifies that Equity will pay a cash consideration … for the 625,354 ordinary shares of BCDC to be purchased inclusive of dividends declared after 1st January 2020 in respect of the financial year ended 31st December 2019,” Equity said in a circular ahead of the conclusion of the deal.

Mr Munga’s large purchase discount and dividend takeover are some of the most generous terms a Kenyan acquirer has ever extracted in international transactions that have been made public.

The commission of inquiry, however, made scathing remarks on Mauritian officials’ apparent conflict of interest, sloppiness and unethical practices.

“The Mauritian side got it wrong altogether. Mr Peter Munga was a business tycoon and all the Mauritian professionals involved put together were no match for him singly alone,” the commission said.

“He was able to dictate both time and terms, price and party. That the Mauritians enjoyed the trip Mr Peter Munga gave them is evident from the public statements made on it in Mauritius and in Kenya.”

The former Minister of Financial Services, Good Governance and Institutional Reforms Roshi Bhadain was criticised heavily for helping the Kenyan businessman close the lopsided deal in secret.