The COVID-19 pandemic has brought about unprecedented economic distress both globally and in Kenya. Governments are burdened with the difficult task of working to reduce the impact on its citizens while trying to sustain economies and ensuring its recovery once all the measures have taken effect and life can resume to normal. The difficulties in implementing these measures are clear and the Kenyan government’s efforts to cushion its citizens and businesses are a welcome relief to the nation.
As a result of the COVID- 19 impact, in the past few weeks the manufacturing, transportation, tourism and horticultural sectors have been the most affected with reduced production and subsequently lower employment numbers. Nevertheless, the government’s efforts in promoting and supporting manufacturers in Kenya to produce critical materials during this period is commendable and a clear indication of the country’s manufacturing capability that is a huge electricity demand driver.
While ESAK lauds and welcomes some of the measures taken by the Government as announced by His Excellency the President, to check the spread of the COVID-19 pandemic and cushion its effect on the economy, ESAK notes with deep concern that the proposed Tax Amendment Bill 2020 goes beyond the COVID-19 interventions announced and introduces changes to tax incentives that directly impact the electricity sector, especially upcoming renewable energy projects. It has been noted that most tax incentives previously afforded to power generators and equipment manufacturers have moved from exempt to a 14% VAT tax rate.
Kenya has in the past been resolutely committed to an energy transition strategy based on the development of the electricity sector through attractive regulatory frameworks and policies. The frameworks have attracted investments in the electricity sector which offer economic growth by creating stable jobs in different segments, diversification of the electricity sector with sources that offer the advantage of being rapidly deployable, cheap, environmentally sustainable and providing quick, affordable and clean energy to consumers. ESAK believes that the removal of exemptions that drive the growth of the electricity sector will not only affect this sector but in turn have a ripple effect on the cost of electricity that would affect the country’s efforts to increase manufacturing capability and in the long run, the end consumer, who is the most vulnerable.
The new tax rates and effects of the proposed bill include: -
1. Taxable supplies for the construction of power generating plants to supply electricity to the national grid, specialized equipment for the development and generation of solar and wind energy, including deep cycle batteries which use or store solar power, and inputs or raw materials supplied to solar equipment manufacturers for manufacture of solar equipment.
2. The Bill also proposes a reduction of investment deduction (currently claimed at a rate of 100% or 150%) to 50% on capital costs incurred in the construction of a power generating plant, with 25% deductions applied on a reducing balance on the residual value annually after establishment.
3. The Bill also proposes the withdrawal of the exemption from compensating tax for power producers and an increase of withholding tax on dividends to non-resident shareholders from 10% to 15%.
ESAK as an association that represents the interests of the electricity sector, would like to bring to the Government’s attention the knock-on effects of introducing such amendments in the short, medium and long term.
1. The amendments will result in additional capital expenditure on capital goods and supplies thus leading to an increase in the electricity tariff.
2. The burden of an increase in electricity tariffs will ultimately be transferred to the retail customers, thus countering the original intentions of the Bill as a counter COVID-19 measure.
3. Efforts to support industries and manufacturers will be dampened by the proposed tax measures. We have seen during this period that manufacturers have stepped up to assist with increased production of essential goods. It is dumbfounding that the bill removes a rebate on electricity for manufacturers and effectively increases the cost of production.
4. Increase in production costs by industries and manufacturers will be transferred to the cost of goods thereby affecting the citizens of Kenya. This will prove counterproductive to the intended support during this COVID- 19 period.
5. Power generation projects in different phases of development also stand to be adversely affected by the proposed amendments, if approved by Parliament, and some may be deemed unfeasible. This in turn will affect the energy planning initiatives developed over the years which if not done accordingly could cause an electricity demand and supply issue in the future resulting in under-supply and power rationing which has been experienced by Kenya before and is being experienced currently by other African countries.
6. ESAK also opines that the removal of the incentives under Special Operating Framework Arrangements (SOFA) are being suggested too soon after their adoption, thus challenging the certainty of laws and having wider implications on Public Private Partnerships and official aid funded projects.
7. Change in Tax provisions in the contracts will imply that state compensates investors if such measures are implemented. This burden will ultimately be borne by taxpayers further straining household budgets.
8. The country’s competitiveness as an investment destination will be drastically affected as these proposed measures will deem the Kenyan market to be unattractive. Stunted growth in electricity capacity, and thus economy and reduced job creation will likely be some of the effects of reduced investments in the country in the long term.
While the core measures as announced by HE the president are aimed at cushioning majority of Kenyans, we ask that the Government does not seize this unfortunate situation to wipe out the gains that have been achieved over the years in the electricity sector. We call on the government to respond to the concerns of the electricity sector, on the negative effects of the proposed amendments and reconsider these proposals in order to ensure that investments in electricity projects can enable it to achieve its targets on universal electricity.
The electricity sector stands in solidarity with the people of Kenya in these trying times and will work towards continued supply of electricity on and off the grid.