When policies do more harm than good: Unpacking the impact of regulatory changes in the face of EABL’s profit  decline

  • 2 Feb 2024
  • 2 Mins Read
  • 〜 by Kennedy Osore

The release of East African Breweries Limited’s (EABL) half-year results has sparked debate on the adverse impacts of regulatory and policy changes on the business environment. EABL’s profit after tax declined by 22 per cent to Kshs 6.8 billion, a downturn attributed to macroeconomic-driven cost inflation and rising finance costs. The significant rise in finance costs is primarily associated with the stringent requirement to remit excise duty within 24 hours, resulting in administrative burdens and impacting working capital, leading to the need for short-term loans.

In the intricate web of economic governance, Adam Smith’s timeless insights from “The Wealth of Nations” underscore the interplay between regulatory policies and the economic performance of businesses. Smith’s canons of taxation, equity, certainty, convenience, and economy become especially relevant in the context of recent demands on alcohol manufacturers.

However, the swift implementation of regulatory changes, such as the demand for alcohol manufacturers to remit excise duty within 24 hours, has revealed financial implications for businesses, exemplified by EABL’s reliance on short-term loans. Stakeholder input from alcohol manufacturers suggested that the move, purportedly aimed at preventing illicit alcohol trade, would ironically promote it. The absence of consultations with stakeholders and the lack of public participation in formulating the excise tax remittance requirement within the Finance Act 2023 further heightened industry concerns.

Excise duty, being a consumption tax, necessitates charging at the point of consumption, involving a value chain comprising distributors and outlets before reaching the end consumer. The requirement to remit excise duty in advance before actualising a sale demands a major shift in the industry’s operational framework.

The lack of public participation and failure to seek industry players’ views prior to formulating the 24-hour remittance requirement has been a significant point of contention. The alcohol industry, like others, requires a comprehensive understanding of the challenges and changes to their operational methods. An imperative call is made for a thorough regulatory impact assessment before the implementation of such far-reaching regulatory changes.

The clash between regulatory mandates and economic realities echoes Smith’s advocacy for market efficiency. The financial strain experienced by businesses, compelled to adapt rapidly to a short remittance period, signals the dangers of abrupt policy shifts, necessitating a thorough examination of their implications.

Implementing the new requirement has forced EABL to reassess its cash flow management practices. Operating with an extensive distribution network of over 250,000 distributors, the company relies on a credit basis, with payments typically received within 30 to 45 days. To meet the stringent tax remittance deadlines, EABL has resorted to short-term loans from commercial banks to promptly pay the revenue authority.

In the spirit of Smith’s advocacy for collaboration, the case highlights the importance of engaging businesses as stakeholders in the regulatory process. Informed policy development, achieved through collaborative efforts, aligns with the vision of an economically efficient society envisioned by “The Wealth of Nations.”

As we confront the multifaceted challenges posed by regulatory changes, Adam Smith’s insights serve as a guiding beacon. The demand for alcohol manufacturers to remit excise duty within 24 hours becomes not just a case study but a call to action for policymakers to heed the wisdom embedded in “The Wealth of Nations.” Prior regulatory/policy impact analysis emerges as an imperative to navigate the interdependence between regulatory frameworks and economic well-being, fostering a more harmonious and sustainable economic landscape.