Treasury right to end this gainless experiment

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BY TABITHA KARANJA

While presenting the budget for fiscal year 2006/2007 Kenya National Budget, the then Finance Minister Amos Kimunya announced a measure that would significantly alter the character and operations of Kenya’s alcoholic beverages industry.

In his speech, the Minister took an unprecedented step of zero rating Senator unmalted beer, an EABL product. In his defence of the measure, the Minister gave the following rationale;

First, it would introduce a cost effective brand to cater for the low end market that was plagued by myriad unlicensed and illicit products that operated outside the taxation bracket and were responsible for numerous health problems including deaths.

Second, the zero rating of Senator will increase tax revenues to the exchequer. This, in his opinion, would happen through a simple two-step process. The zero rated product would convert more drinkers in the middle low and low end markets to the formal drinking market. This would then improve the returns for the manufacturers and benefit the tax man through increased collection.

On paper, this sounded well intentioned and progressive. The reality was not.

Strangely, within the same budget, the Minister introduced a higher tax for products that already existed within this lower market. Keroche who controlled 40 percent of the lower end were hard hit as their products including the popular Fortified Wines were slapped with a 100pc tax hike forcing product priced at Sh75 to Sh165! In one stroke, two competitors within the same market are subjected to different tax conditions. Keroche and other players’ products prices shoot up, become overpriced and out of reach for the intended market. Their competition products are zero-rated.

Simply put, Hon Kimunya’s decision, other than achieve the stated aims, resulted in the reverse.

The first effect was the discarding of the principle of fair competition. The zero rating of taxation a product produced by a private enterprise, and a multinational at that, gave undue advantage to the producer. Increasing tax for the local manufacturers within the same market would end up killing competition within that sector. It also amounted to government endorsement and backing for a product whose proceeds and profits would end up at a private enterprise and its shareholders.

One would be forgiven for cynically thinking this was another hidden way that our government policies favoured a connected company over its competition.

The second effect spawned off the first one. The rationale for the decision was less than candid. Kenyans knew that several licensed players, approved and taxed by the government were operating within the fast growing middle lower and low end market. Their products were creating a huge impact because they offered choice, competitive prices. Keroche was the market leader in this market. They had ten products, among them spirits, fortified wines, alcopops. The discriminatory tax regime collapsed several of its low end alternatives.

In reality, this Budget had laid the ground for the destruction of indigenous Kenyan alcohol manufacturers through higher punitive taxes. In well documented and “loud” protests, Keroche had to appeal to the courts and parliament to argue against what was obviously a state sanctioned assault against local alcohol manufacturers for the benefit of a single player.

Another major effect of this seven year old zero-rating regime was the exact opposite of the proposed benefit – revenue for the exchequer. The anticipated revenues simply did not materialize.

A 12 month post survey after the Kimunya Budget proposal was adopted brought with it sobering news. The zero rated “state supported drink” was cannibalizing taxpaying standard and premium drinks. The returns to the manufacturer were growing (due to the no tax policy), but ironically, KRA’s collections from the same player were dwindling!

This was in addition to the fact that the doubled taxation on Keroche’s and other players’ products meant fewer sales and fewer taxes. Again, the losers were indigenous manufacturers and obviously Treasury.

The 1997 liberalization of the alcohol market could have helped redress the situation. The nimble footed, new players procured modern technology, employed lean work forces, cut distribution costs, employed new advertising methods, and made their prices competitive.

Instead of being supported, a conspiracy between some government officials and old players was hatched to undermine them. This was done through punitive taxes and media campaigns to paint negatively indigenous, non multinational alcohol manufacturers. Ironically, while these dirty games targeted clean, respectable, Kenyan owned businesses, they were in reality killing home grown solution and proper alternatives. Any pretence for a level playing ground within the industry was thrown out of the window.

In the meantime, the stealth illicit brew monster was left to grow, and fill the gap between those who could afford bottled alternatives and those who aspired to, but couldn’t.

Instead of addressing the problem, a scheme was hatched to provide a quick fix – provision of a drink that would “take over” the lower end market supported by a government tax incentive.

Till today, no one has provided robust empirical proof that the zero-rating achieved the promised success in public health. No one crosschecked the misguided assumption that all low end consumers would embrace a specific genre of a drink. No one bothered to examine the effects of this lop sided, discriminatory decision on the reduced taxes dozens of players who had built credible, popular alternatives would remit to KRA. Both ways, KRA was losing.

This was bad policy decision. It was unworkable. It broke every sensible principle of doing business in a competitive, fair, and free market environment. Additionally, as we now know, it has deprived the tax man huge amounts of revenue.

This failed experiment, should not be repeated. The Treasury is right to terminate it.

I would suggest two answers to this situation

1. Government should create an environment that emphasizes free and fair business competition in word, deed and spirit. The government cannot encourage schemes in which the state weighs in to support a single player. In every other industry, competition has produced alternatives through innovation. This has a price effect.
2. We need more players, more cost effective products that will cater for every segment of the populace – rich and poor. If we don’t act now, Kenya will lose the war against illicit brews. Biased taxation, zero rating and over taxation will destroy the industry.

(Tabitha Karanja is the CEO of Keroche Breweries)

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  • KIBII

    I SALUTE YOU TABITHA

  • Honest Kenyan

    Excellent piece madam. Excellent!

  • Francis Muturi

    Excellent Tabitha.The difference between your economics and Treasury economics is theirs is through assumptions and you are practical.The guys in Treasury have never done any business.The biggest challenge is they will ignore your advice to please the “bigger player” instead of opening for more production.If we want our GDP to grow we must sleep,talk,and eat more Production,production,production.That is why when this big players want to invest in Kenya,you will find their first stop in Kenya is statehouse.Asking for protectionist.Ideally to reduce competition.

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