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LPG CONSUMPTION IN KENYA – IS THERE A CASE FOR SUBSIDY?

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The annual LPG consumption in Kenya stood at 148,800 MT according the report published by PIEA in the third quarter of 2016. Even more promising is the fact that LPG consumption has increased about 59% between 2003 and 2016 according to reports available in the Petroleum Industry subsector in Kenya. Despite this rapid growth, LPG Consumption in Kenya still compares poorly with world statistics at 95.5Ktoe against a world average of 1434Ktoe and 384Ktoe in low income economies (Ministry of energy report-MOE). This consumption has however been rising at a steady pace. At an average growth of 14% annually (PIEA 2016) it is projected that the country will have 70% LPG penetration by the year 2030. However, this growth has mainly been concentrated in urban and peri-urban areas of Kenya.

In other countries in Africa, LPG adoption and usage has been gaining ground at a much faster pace compared to Kenya. In Senegal for instance, 86% of the population uses LPG as their main source of energy. The consumption is equally high in Botswana at 71%. Kenya has a dismal 23.4% urban LPG consumption and a much lower figure of only 1.8% in rural areas. (Dalberg report of 2013).

It is against this background that the government of Kenya made an announcement to start an LPG subsidy program that targeted the low-income population especially in rural Kenya in October 2016. The total subsidy was reported to be upwards of 50% of cost on both accessories and the gas. This begs the question of whether there is a strong case to go the route of subsidy or simply sit back and allow market forces to regulate the market without the government’s long arm influencing the price.

It is worth noting that countries with high LPG consumption especially in rural areas like Senegal and Ghana have benefited from strong policy intervention by the government including direct subsidy. Others like South Africa have passed strong legislation that promote an environment that eases access and distribution. Such policy frameworks as capping prices of LPG and enforcing unified valves on cylinders to promote usage has been an integral part to promote faster adaptation and acceptance of LPG in rural economies. It is therefore fair to say that the hand of the government, at least at the legislative and policy level, have guided the market for better results.

The global focus on LPG is largely underpinned by the fact that LPG is the most efficient source of energy after electricity. Kenya signed the KYOTO protocol of 2010, which among other areas sought to promote modern energy usage to reduce pollution and more importantly, save the environment and promote health benefits. The use of biomass as the main energy in the Kenyan economy especially in the rural setting is over 80% on average. This unsustainable practice is a major health risk to the population and should be reversed immediately.

Kenya’s LPG per-capita consumption lags behind countries in Africa at 3.65 Kg in rural and 9.87 in urban areas compared to Senegal which is at 75Kg according to MOE reports. Even with an annual growth of 14% of LPG consumption, a lot more needs to be done to catch up with the rest of the word in promoting LPG. These statistics could change with the coming in of the government subsidy planned for later this year in Kenya.

A strong case for Subsidy to promote LPG usage in rural Kenya

The energy sector contributes 20% of tax revenue and makes up 4% of the GDP according to Kenyan budget estimates of 2016. It is therefore urgent and important that such a crucial sector is supported fully to realize its potential especially in the rural areas. LPG development as a source of energy is a major part of this initiative.

The annual demand for energy in Kenya is rising. Last year for instance, it was estimated that the country’s annual energy demand grew about 15%. This requires diversified energy sources to support a growing economy and ensure sustainability.

It is estimated that over 97 percent of Kenya’s nine million households rely on traditional sources of cooking energy (Dalberg, 2013). It is important to note that many households practice energy stacking, supplementing modern energy such as LPG with alternative sources of fuel such as wood, charcoal and kerosene. A deliberate effort has to be made to guide a household’s hands to choose more efficient, more economical energy sources, LPG therefore should be at the forefront of this energy ladder.

In Kenya, and especially to the majority of the rural households living on less than a dollar a day, the initial cost of cylinder and accessories at an average of 400 dollars is unaffordable. It is not only expensive for the people at the bottom of the pyramid, it is unreachable competing with food and shelter at that basic level. The gap is a yawning chasm and households would rather choose food over efficient fuel. This is the gap that the government perhaps hopes to bridge to aid in the upfront purchase of the cylinder, gas and accessories, through subsidy. Once their appetite is whetted and economic and health benefits are explained, the populace can make informed choices progressing into the future.

Two years ago Kenya had only 34 LPG marketing companies covering a landmass of 581,309 square kilometers. This has changed dramatically with new entrants over the last year and now Kenya has over 70 LPG marketing companies. These companies are nonetheless concentrated in the urban areas where the market is fully developed, the distribution infrastructure smooth and the attendant risk of LPG marketing low. What I mean by this is that, in the urban markets the distribution infrastructure already exists and therefore most marketers move in almost assured of making profits as the risk of failure are minimal. With a proper marketing plan, they are assured of good returns on their investments. In the rural setting on the other hand, there are many unknowns, the risk is high and few companies dare to risk as the returns are shaky. The profits on the LPG business in these urban settings are by any standards high and therefore attract many players. This has enabled urban folks access to LPG conveniently, it is therefore no wonder the consumption growth has been high.

In the rural areas on the other hand, people are left to their own devices as far as LPG is concerned. The market is untapped, and underdeveloped.  Distribution costs are prohibitively high. A well-structured subsidy can develop a rural distribution system that ensures ease of access. This can speed up the adaptation rate of non-users to users, awaken latent demand and create a platform for fair prices that the rural population may find affordable in subsequent refills once they have the hardware. In the long run the market will in time develop and attract companies that go into developed markets purely for profits. Current market imperfection shall even-out and pockets which currently seem worthless will turn profitable in time. 

In part, low LPG usage has been blamed on low awareness of LPG safety and user education. In the past, accidents involving use of LPG have made the population skeptical on how safe this source of energy is. The government as a matter of necessity would have to roll out a comprehensive LPG correct usage guide and run a safety awareness campaign that would allay any fears around the use of LPG. The education should mainly target the rural population where literacy is still relatively low and fear of adoption based on perception and absence of hard facts is prevalent. Such an activity that borders on CSR (corporate social responsibility) is perhaps better undertaken by the government in my opinion. In the long-term when the market is informed and developed, and facts become readily available that aid consumers to make accurate decision about LPG, all the players in the market are likely to benefit.

In any event, the subsidy program should take a multi sectorial approach involving the private sector in the supply chain and the non-governmental players and other agencies to promote usage including the world LPG organizations. In this way the project has a high chance of success. The ownership of the local community through women groups, and youth groups that are widespread at the bottom of the pyramid, especially in the rural communities should be involved at the research, planning, evaluation and implementation level. The local administration and other networks have a stake in this too. This has proven success of such similar initiatives in other parts of Africa where the government has employed subsidy with remarkable success like in the Senegal case.

Last but not least, strong policy and legislative components should be inculcated in the subsidy plan. It is envisaged that the government will support this subsidy plan with policy framework that will ensure sustainability once the consumers are enrolled into the program and start usage. Furthermore, there should be a plan to have an elaborate infrastructure development of the Kenyan LPG Cylinder Exchange Pool in the far-flung areas that ensure that consumers can refill or exchange old cylinders with filled cylinders for sustainability. Any program of this nature succeeds well if the users are assured of where they shall refill and even get replacement of the accessories when required.

[LPG BUSINESS REVIEW]


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