Blog Archive

Monday, April 18, 2011

Kenya - Fuel Sector Solutions

It is a sign of the times that I, a citizen blogger/tweeter, am responding to a Tweet by Kenya's Deputy Prime Minister & Finance Minister, Mr Uhuru Kenyatta (@UKenyatta). I doubt he (or his staff) would have responded to my letters!

He does not know me but he [or his handlers] have responded to some of my Tweets & that has encouraged me to write another blog post. This does not mean I support his political views but he has done OK, in my book, as far as Kenya's economy is concerned. I was an idealist when I was younger but have grown pragmatic as concerns the rate of (good) change in how Kenya does business. Let's be clear, Kenya has very far to go before meaningful comparisons to Singapore can be objectively made.

Of course, this is a basic outline of what Kenya can do but I hope its a start when riots in some far-flung country don't affect me as much. Nevertheless, Kenya is not an island in the global environment.

[BTW, President Paul Kagame of Rwanda (@paulkagame) is on Twitter too & has personally replied to me. ;-) ]

Kenya's Fuel (Petroleum) Crisis(es)

Volatility of Prices - Kenyans are being disingenuous in apportioning blame when Kenya experiences huge variances in fuel prices. The volatility of oil prices can be blamed on lots of factors but Oil (crude) is heavily traded on the global market & Kenya has no petroleum deposits to speak of to fll back on. Hopefully, we strike some hydrocarbon deposits, soon.

1) Kenya [as a country] enters into Derivatives that 'set' a base price. Not a cheap option since Derivatives cost Premiums/Payments [aka Money]. The gain/loss from derivatives can be used to 'stabilize' the price. Of course, as KQ knows, they can also hurt when prices fall.
  • Derivatives require Premiums or Cash Payments/Receipts depending on the type, strike price, etc. Lots of options. Lots of calculations. Lots of sharks.
  • Hedging is complex & generally works better if you are a Seller of the Product e.g. if Angola knows how much oil it can produce, it can sell it 'forward' through Derivatives or Forwards so it knows how much it will earn in a fiscal period.
2) Bilateral agreements that allow lifting of Crude at discounts to Market or Fixed Prices. Helps Kenya but there is a price to pay as well since Bilateral Agreements always involve Quid Pro Quos.
  • What can Kenya offer the Middle East countries? Support at the UN, no matter what? Food security? What? [In essence, very little]
  • Kenya may enter into untenable agreements which will bite back when the chips are down. I remain wary of these bilateral agreements. Iran offered Kenya a deal but the conditions might be onerous.
  • That said, there is Southern Sudan. Kenya can promise (& deliver) a refinery &/or pipeline to SS to move oil 'south' thus reducing SS dependence on the North. In exchange, there is a commercial 'payment' in oil e.g. Kenya moves 100 barrels to Lamu in exchange for 5 barrels.
  • Uganda plans to build a refinery but needs to 'sell' its refined products. How about a long-term agreement with them?
Huge Import Bill [& need for forex] for fuel. Not an easy one to tackle since Kenya imports 100% of its petroleum requirements.

1) Reduce the use of Oil/Capita. Not easy as we 'expand' our economy. Nevertheless, improving the roads, cutting down on 'poor' driving habits e.g. matatu-style driving will save Kenya a huge percentage of WASTED fuel.
  • Traffic is horrendous in Nairobi (other urban centers too) partly due to a poor road network. Well, improve it by building more roads. We need them as the country expands. Nevertheless, this costs money & therein lies the rub. Are Kenyans ready for 'efficient' toll roads?
  • Public Transport - This is critical. Look at New York or London where buses & trains are the primary mode of transport. I do not mean matatus but I mean decent & reliable BUSES & a train system. Singapore & Bangkok have relatively new (& efficient) Urban Rail Systems. Let's look to India [Dehli Metro] & South Africa [Gautrain] as examples of what can be done in the 3rd World & African scenarios.
  • Devolution - The private sector is already devolving out of the CBD. Financial Institutions' HQs have moved to Upper Hill but banks have branches & ATMs everywhere else. It is time for GoK to do its part. Move 'out' of CBD to an efficient purpose built 'city' served by rail, airport & roads. Also devolve functions as well as continue going online.
  • Singapore contemplated moving government functions OUT of the city centre to enable 'release' of prime property to private entities & reduce traffic into the city for government services. Add new & better designed buildings for efficiency.
2) Bio-fuels - Forget the naysayers. There are lots of advantages to UNSUBSIDIZED bio-fuels. Let us choose those that make sense. Some will work, others will fail. Let's not be afraid of failures as long as the process is transparent & we learn from it.
  • Ethanol - Kenya can dramatically increase ethanol production by using sugarcane waste/baggasse as feedstock. Mumias is putting in an ethanol plant. What is required is a minimum payment that encourages Mumias/Sugar Firms to install the conversion plants & provides an incentive for continued production. We need to return to ethanol blending or UNTAXED 85-100% ethanol fuel.
  • Bio-fuels can also be produced by using other feedstock including certain fast-growing grasses. I am not saying we use 'food' crops for bio-fuels but marginal lands for dedicated bio-fuel crops.
  • Many researchers in the USA are working on bio-fuels from algae, switchgrass, etc. We need to do the same. What can we grow in our semi-arid areas (with limited water requirements) that can be used to produce Bio-Fuels?
Increasing Consumption of Imported Fuels


1) Population Control - Why do folks think Kenya can keep on feeding more folks? We need to improve QUALITY of life. I say max of 3 kids. Any more then off to the sterilization table. I am NOT advocating China-style policies.
  • We can increase per capita energy use without increasing our total import fuel bill. There is always a minimum requirement per kid/person. So more people means more fuel is required to maintain the standard of living.
Taxes on Fuel


1) Taxes - Taxation of fuel in Kenya needs to be harmonized for efficiency & to prevent adulteration not for populism.
  • Kenya's government needs to be more efficient but the taxes are here to stay. They should be reasonable so as to make smuggling & adulteration insignificant.
  • Taxing kerosene at low rates to shield Wanjiku leads to adulteration of diesel. The chemical & physical characteristics of diesel & kerosene allow 'mixing' to the detriment of users of diesel. As for Wanjiku, she needs to understand (4) helps lower her bills.
  • Diesel is 'dirtier' than petrol but has enjoyed popularity since it was taxed at a lower rate than petrol. There are other reasons diesel is preferred for certain applications like 'safari' vans, etc.
  • GoK needs to shift to 'green' vehicles as a matter of public policy. This gives a boost to local bio-fuels. Ethanol-only cars can fill up at any fuel station obviating the need to manage VAT/refund paperwork for GoK or exempt organizations.
2) Revenue - GoK still needs revenues but these can be recovered from indirect taxes (vs tax on biofuels) on fuel stations, wages, land rates, income taxes, etc i.e. other economic activities generated by bio-fuel production.
  • What of adulteration of petrol/diesel using biofuels? Well, currently biofuels are pricier than 'petroleum' [if no taxes are applied] & this will somewhat help.
  • Enforce laws against adulteration. Heavy fines & jail terms. Easier said than done in our current system of goverment & judiciary.
  • Taxes are here to stay but can we increase the production & use of LOCAL fuels that encourage other economic activities?


iCon said...

I can only hope this gets read by the right people. A solid salute has to be given to Kagame and other politicians for consciously directly interacting with regional residents on an intellectual level. I seriously doubt that UK is behind his account but I've been wrong before; I used to think Pluto was a planet just to find out it's a large rock.

Anyhoo.enough cannot be said about the severity of the fuel crisis that's bubbling in the urban areas of our fair country. Entirely too many rallies are being orchestrated for the peace to prevail.This is the time for our leaders to actually lead and stop trying to make themselves money and actually...ehm...doing their jobs perhaps?

Put it this way, if we go broke, who're going to rob?

Frustrated Citizen with Little or No Faith in anything Governmental

Kahonge said...

Indeed, we need to do what we can to stabilize the effects of Geopolitics on Kenya n consumers and I believe going green can help in a very big way :-)

Phoenix Chi said...

Well said, balanced and sober.

louis said...

dont get / dont agree with your point about devolution in regards to nairobi. i believe its more efficient to have a compact city than a spread out city - think LA vs New York. and public transit works better in compact cities. matter of fact we should be encouraging developers to convert downtown int residential condo vs developing the outskirts athi river and ongata rongai.

i like the hedging idea, sound like the most practical short term.

coldtusker said...

@louis - I will make my point clearer in the blog post. What I meant was devolved services i.e. instead of a single point of service we can 'devolve' these to multiple locations to reduce the need to travel to 'CBD' especially for GoK services.

Johnson said...

I have one thing to say
Nb. Y(output) is sustainably changed in the long term. A rise in M (monetary stimulus) or V will lead to P going up rather than Y

Johnson said...

Further, the price of anything that is imported in KES is also subject the the price in USD. Further, the price of anything in USD is also subject to the amount of USD circulating. In Ben Bernanke's time, too much of dollar printing has been going on and this has killed the value of the dollar and prices of all assets in dollars have been going up (Actually, Hosni Mubarak has Ben Bernanke to thank for making life especially difficult for him.)
Things are so bad that the dollar is not considered a safe haven any more. People would rather hold commodities or stocks (thus adding increased demand on commodities pushing prices up further).
Back to the KES... Ndung'u did his own round of stimulus. So you expect both devalued USDs and KESs. But for Kenya it was especially worse because the shilling fell from KES 80.00/USD to KES 85.00/USD. So, consequently, everything was much more expensive for the Kenyan than the American.
The perverse thing is that the monetary authorities knew that they were importing inflation but kept arguing that it was good for the exporter. They also hoped that it would spur exports (But this calculation has been exposed as very very very poor economics owing to the nature of our imports) and their importance to the Kenyan economy.

Matrixster said...

Well, I totally agree with the idea of devolution. It has worked in many places in Africa and beyond. Nairobi needs to have some of the functions taken to Nakuru and Mombasa.

As for fewer children, with your number set at 3, I do not concur. What is this based on? It did not work in India/China in the 70/80s. People fertility is just one of those factors that is self regulating. And I do not believe a larger family is necessarily a constraint on the economy. If anything, these are way less wasteful than many small families. Which amounts to the same thing.

As for bio fuels, I believe it will face the same challenges hybrid vehicles are facing. You save on the energy consumed by the car, but in the process you spend a lot more to produce it. Bio fuels can only be a supplement, not an alternative. Someone actually thinks owing to rapidly depleting oil wells, nuclear is the future. We wait to see. And maybe innovate around it.

As far as crude oil is concerned, it is largely out of reach for many Kenyans now because of inefficiencies and pigly cartels. If we do not have very stringent controls, even if we found our own oil (let alone Sudan) it will not be cheaper. Nigeria is a good example. Governance is the major dealer maker/breaker in this whole fuel melee.

Wainaina said...

The time we will have guys like you as Cabinet Secretaries..that is when we will be like Singapore..people ready to think and ACT outside the box..But that cannot happen when we have mediocre top leadership

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