Sh34bn gone in 15 months? Audit unveils fuel subsidy scandal

Fuel pump

A Fuel attendant holding a fuel pump at the filling station along Kimathi Street.

Photo credit:  Jeff Angote | Nation Media Group

Individuals in former President Uhuru Kenyatta’s regime face investigations after it emerged that the government may have lost Sh34 billion within 15 months before the August 9, 2022 General Election under the fuel pump prices stabilisation programme.

The possible loss, which has been exposed by Auditor-General Nancy Gathungu in a special audit report to Parliament, includes Sh554.72 million overpaid to 11 oil marketing companies (OMCs).

The Sh34 billion, according to fiscal analysts at the Parliamentary Budget Office (PBO), is enough to construct 3,400 boreholes complete with all the fittings, or build 6,800 fully equipped laboratories in secondary schools, or 17,000 classrooms.

The amount was meant to stabilise fuel prices to cushion Kenyans against price hikes driven by fluctuation in global oil prices but may have ended up in the pockets of a few individuals.

The special audit covered the period April 1, 2021 to June 30, 2022 and has flagged various avenues through which the public funds may have been stolen either by commission or omission by government officers.

They include irregular utilisation of Sh22.68 billion from the Petroleum Development Levy Fund (PDLF), overpayment of OMCs and irregular advance sales prices stabilisation compensation of Sh5.32 billion. Also flagged are irregular demurrage charges Sh3.2 billion passed to the consumers through high pump prices and Sh2.21 billion in irregular administrative costs.

The special audit puts the National Treasury Cabinet Secretary at the time on the spot over the Sh22.68 billion from the PDLF. The PDLF Act of 1991 requires the fund’s monies be used in the development of facilities for the distribution or testing of oil products. The law which came into force on July 15, 2020, further provides that the cash shall also be used for stabilising the local petroleum pump prices in instances of spikes occasioned by high landed costs above a threshold determined by the Energy and Petroleum Regulatory Authority (Epra).

The audit found that of the Sh49.68 billion disbursed by Treasury from the PDLF between July 2020 and June 2020, Sh18.14 was transferred to the State Department for Infrastructure to fund various road projects in violation of the law. The projects were undertaken Kenya National Highways Authority (Sh531.78 million), Kenya Rural Roads Authority (Sh17.16 billion) and Kenya Urban Roads Authority (Sh373 million). Some Sh75 million went to the ministry for operations. Another Sh4.54 billion was transferred out of the PDLF to the Ministry of Energy to “finance various projects not related to petroleum”.

“Utilisation of the PDLF to fund road construction projects and transfers to the Ministry of Energy was in violation of the PDLF Act, the Petroleum Development Levy Order of 2020 and the PFM (Public Finance Management) Act,” the audit report states.

It also notes that the Sh5.32 billion in irregular advance sales price stabilisation compensation was against the PFM Act, with the responsibility on the then Principal Secretary in charge of the Energy ministry and Director-General of Epra.

The document shows that the money was paid during the months of April, May and June 2022 as stabilisation for advance sales of local volumes. But there was no legal framework for advance payment and that “there is no evidence of recovery of this advance”.

“There is no documented compensation mechanism in place to ascertain the specific components of petroleum products that should be stabilised and the respective amounts to be paid to the OMCs,” the report states.

The report further notes that the OMCs were allowed to determine the compensation framework that was used “and they could vary the conditions without legal standing or fuel pump prices”. “The stabilisation was not anchored on any law, directive or circular and the committee formed to develop the stabilisation mechanism was never gazetted, formalised or legalised.”

During the audit, the Ministry of Petroleum told the auditors that the advance sales were compensated at the price differential between effective pump prices for the period and that of the preceding period for volumes sold between the 10th day of previous pricing cycle and the 10th day of the next pricing cycle. This was to cushion the marketers who had already sold the volumes since the increase in prices in the next cycle, from the 15th to 14th of every month, since they would have no mechanism of recovering the difference.

However, the document notes that review of the advance sales compensation revealed that the entire local volumes imported between April and June were already compensated in full and any change in prices would not have justified additional compensation.

The Sh2.21 billion in irregular administrative costs for stabilisation of pump prices was against Regulation 4 of the Energy (Petroleum Pricing) Regulations of 2010, putting the Petroleum and Mining PS and DG Epra, at the time, on the spot. The amount was paid as administration costs from the April-May-August 2021 and June 2021-July 2022 pricing.

During the meeting of April 15, 2021, between the Ministry of Petroleum, Epra and the OMCs, “it was resolved that cargo importers would charge administrative fee of Sh0.50 per litre to cater for disbursement, documentation and processing of stabilisation funds received from the ministry”. The amount was to be factored in the petroleum pump prices from July 2021.

“The rationale of including the stabilisation administration costs in the pump price build up was not justified considering that the actual charges commercial banks charge for funds transfer. Further, the OMCs have current accounts for settling amounts owing to each other when it is their turn to import,” the special audit notes.

The Ministry of Petroleum and Mining received Sh79.8 billion for the period April 2021 to June 30, 2022. The OMCs were compensated to help in price stabilization for the 5,820,790.41 cubic meters of the imported petroleum. However, outrun reports containing verified volumes by independent surveyors indicated an unexplained variance of 23,147.06 cubic meters. The OMCs that were overpaid include Mt Rong Lin Wan, Kencor, Asharami Synergy, E3 Energy, Mt Al Bateen Vtti, Texas Energy and Gulf Energy. Others are Mt Al Bateen Kosf, Mt Avanti andGalana.

Of the Sh3.2 billion in irregular demurrage charges, Sh37.32 million did not meet the criteria set out in the Transport and Storage Agreement (for recovery through the pump as the vessels offloaded within the provided three days.

The audit established from the minutes of the demurrage committee that the main causes of the charges included scheduling inefficiencies, ullage constraints at Kenya Pipeline Company receiving facilities and change of vessel arrival dates by importers.