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The East African : Nov 10th 2014
The EastAfrican 44 REVENUE COLLECTION BUSINESS NOVEMBER 8-14,2014 Legal ≥efo≥ms needed fo≥ gas explo≥ation CHARITY WAMBUI MAINA Special Correspondent UNLIKE EXPLORATION for crude oil, natural gas development is yet to take off in Kenya due to the omission of gas terms in the product sharing agreements issued by the Ministry of Energy to companies. While the country is working on agreements and legislation on exploration, production and monetisation of natural gas, it is worth noting that natural gas development is more complex than crude oil production, and exploring companies have to contend with unique characteristics. The price of crude oil is quoted internationally whereas that of natural gas is normally reached after prolonged negotiations between a producer and the user. In contrast to oil, gas is New buildings that have been constructed in Kigali’s central business district. Kigali is believed to have one the most effective tax systems but, sadly, revenues from property taxes are meagre. Photo: File P≥ope≥ty tax is an unexplo≥ed gold mine in sub-Saha≥an Af≥ica K igali is a charming city. Skyscrapers are rising by the day and most visi- tors will be impressed by its cleanliness, order and efficiency. It is one the fastest growing cities in Africa, with a highly visible residential and commercial real estate boom. The influx of international agencies and aid workers after the 1994 genocide created soaring demand for rental properties. Until recently, it was common to find a large house in Kigali rented out at $3,000-$4,000 per month. Being the capital of Rwan- da and with a population of almost one million people, one would therefore expect Kigali to raise a lot of revenue from property taxes. Measly taxes Kigali is believed to have one the most effective tax systems in the region, but, sadly, property taxes in Rwanda are meagre. Some neighbouring countries collect 30-40 per cent while developed countries collect 80 per cent of their revenues from property tax. Property tax is believed to be the number one unexploited potential source of public revenue globally, leaving a COMMENTARY ZILPER C. AUDI “Existence of untaxed propert development creates incentive to invest in high-end property. largely untapped source of funding for regional governments. The existence of untaxed property developments (often accompanied by untaxed rental incomes), creates strong informal incentives to invest in high-end property. Many cities across the con- tinent are booming today, with construction driving growth and international investment in property rising. For instance, there is a sense in Rwanda now of a substantial oversupply of luxury residential properties. But this development is happening in the absence of effective property taxation. This is not only a missed opportunity but has potentially far-reaching development consequences for the continent. Meanwhile, countries in sub-Saharan Africa face enormous challenges in raising the revenues needed to build schools, hospitals and other institutions that can propel development. There also exist African states that are highly dependent on aid and that urgently need to find new revenue streams. It is therefore important to explore options to improve domestic resource mobilisation, and apart from VAT and income tax, property taxation seems a viable option that is full of potential. What are property taxes? Property tax is a tax on the market value of a privately owned property, including land, cars and business inventory. The tax is calculated on the value of the house or building. The rate of the tax is usu- ally determined based on the nature of the property, its location and use. For instance, property based in the city centre and used for commercial purposes will attract more tax than property used for residential purposes. This tax in most cases is also usually very low. Keeping registers updated Despite its viability, how- ever, the collection of property taxes in many African countries has been hampered by huge technical challenges. In most countries, there barely exist street names and house numbers. This is often compounded by difficulties in keeping property registers updated and a lack of professional property valuers. The large property own- ers are usually influential people who, in most cases, have vested interests and the power to lobby to ensure that they do not pay taxes on their property. Exploring these issues further and thereby highlighting the drawback of not having a decent property tax regime could help to reform tax systems in many African countries to raise the muchneeded revenues for public services and development projects. Zilper Christine Audi is re- search uptake and communications manager at the International Centre for Tax and Development (ICTD). A gas pipe in Tanzania. exploration for natural gas development is yet to take off in Kenya due to the omission of gas terms in PSAs. Picture: File almost exclusively transported by pipelines, which means a high fixed investment for transport and distribution that cannot be changed easily, if at all. Oil can also be marketed at any place and any time, but gas is limited to specific places and periods of consumption. Gas can also substitute for oil or coal in many but not all cases; and can almost always be substituted by other products. Commission of projects So, investors have to fac- tor in some risks in the development of natural gas, such as non-completion and commission of gas projects and the possibility of the project failing to earn the expected return on investment due to lack of supply or markets. There is also the foreign exchange risk, where users are billed in domestic currency that has to be converted into international currency to repay financing. There is also the risk that a project may not earn an acceptable rate of return due to price controls or requirements to extend service to uneconomic points of receipt or delivery. Thus, with an emerging natural gas sector, Kenya needs to make various amendments to its policies and laws to make its development attractive to international investors and financiers. A national gas market policy should create incentives for the building of infrastructure. An assessment of environmental and safety issues will also have a positive effect on the production of gas, which is ecologically attractive. Balance of payments It is important to con- sider the main source of fuel supply for the country. Thus, for Kenya, natural gas may replace imported oil and lead to profitable investments that improve on the balance of payments. A penalty for flaring — the burning of gas during oil production — would also be justified in promoting gas infrastructure that would make marketing of gas more attractive. Kenya’s draft Energy Bill 2014 has put a restriction on flaring of gas. With a favourable gas policy and legislation, natural gas development will take off. Charity Wambui Maina is a legal manager and company secretary in an oil marketing company.
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