Old Pipeline Holding Uganda Economy at stand still

UGANDA: For the last one week, Uganda experienced a biting fuel shortage leading to significant increases in prices of petroleum products and threatened to cripple the economy of the landlocked country. The shortage has been blamed on supply hiccups on the Kenyan petroleum supply system and a new system of clearing cargo imported into the region. Some major towns are reported to have been low on fuel supplies, resulting in panic buying among motorists. Prices increased by between KSh6 and KSh10 a litre, to retail at USh3,800 (KSh135), up from USh3 600 (KSh128).

Retail prices of petroleum products in Uganda are determined by the market, which is unlike the situation in Kenya, where prices are capped. It is not the first time the country is experiencing fuel supply shocks and as in past cases, Kenya’s petroleum supply system is partly to blame for the shortages experienced in Uganda. A new system of clearing petroleum products, where marketers importing fuel to Uganda through Mombasa are required to clear the products under the Single Customs Territory, is partly contributed to the shortage.

Oil marketers that have operations in Kenya and Uganda said the shortage was due to supply constraints on the Mombasa-Nairobi-Eldoret pipeline used to move products destined for Uganda. Marketers usually pick up the products at Eldoret and move them by road to Uganda. The shortage happened at a time when the country was hosting senior government officials from the regions – including heads of state from Rwanda and Kenya. In the just concluded EAC meeting, the Heads of States sanctioned the procurement process for Engineering, Procurement and Construction (EPC) of the Eldoret-Kampala Pipeline.

The pipeline is expected to reach Kigali eventually. At the same time, Kenya Pipeline Company (KPC) is expected to start construction of a new line running from Mombasa to Nairobi to replace the 40-year-old line. Known as Line 1, the archaic pipeline has in the past been blamed for supply hiccups both in Kenya and Uganda. It has over time proved unreliable and seen oil companies shift their preference to use of tankers to transport fuel, which is costly, damaging to the roads and a risk to populations in areas along the transport routes. KPC on Friday started a search process for a financier of the line, expected to cost up to Sh43 billion ($500 million). KPC has recently procured the services of Chinese firm Shengli Engineering that will oversee the construction that is set for completion in 2016.

Despite the urgency with which the country needs an upgrade, the proposed pipeline that will run parallel to the current line has been dogged by delays. KPC has in numerous instances cancelled tender processes to procure the services of consultants for the design and construction of the line. “The pipeline will be of bigger size resulting in increased revenue that translates to increased contribution to the exchequer by KPC and the Oil marketing companies. It will solve the problem of product outages within the country and for export markets,” explained KPC in its tender documents.

“The project is to be financed through KPC internally generated funds and an external borrowing. The loan limit shall be between $400 million and $500 million.” Other than the Kenyan Pipeline, oil marketers in the region are still grappling with the new modalities of clearing their cargo. Kenyan and Ugandan revenue authorities early this month said oil marketing companies importing fuel to Uganda through Kenya would be required to clear cargo under the Single Customs Territory (SCT) and  under the new system, all cargo will be cleared in Mombasa as opposed in the past where cargo clearance and payment of taxes was done at the entry border points. Other than petroleum products, other products that would be subjected to the new method in its initial phases included wheat and clinker.

Under the new regime, the companies would have to pay duty for products destined for Uganda to the country’s tax collection agency, the Uganda Revenue Authority. See Also: Charles Tanui named Kenya Pipeline Company MD “KRA wishes to notify oil marketing companies and clearing agencies that effective February 3, oil products destined for Uganda shall not be cleared under the transit regime,” said KRA in a February 1 notice. “All such products will be cleared under the SCT after payment of taxes to Uganda Revenue Authority (URA) through their Customs ASYCUDA System.”

The SCT is expected to quicken the process of clearing of goods and seal loopholes in revenue collection. It is also expected to reduce instances of fuel dumping where rogue businesses have in the past diverted to the Kenyan market petroleum products meant for export to neighbouring countries. However, as things stand, the new approach is faced with teething troubles that is largely blamed on the biting shortage that the country’s neighbours are facing as far as supplies is concerned.

The Mombasa-Nairobi pipeline has been in operation for over 35 years and requires frequent rehabilitation to maintain its integrity and is not economically sustainable. Replacement of the pipeline is intended to ensure reliable and efficient transportation of petroleum products in the region.