CHEAP POWER IS GOOD BUT ….

In The New Vision recently PhD Candidate Jessica Kersey, while noting the achievements made in the electricity sector since the 1999 reforms, however pointed out that higher tariffs in the sector had put electricity usage out of the reach of many in society.

First a recap. Previously there was Uganda Electricity Board (UEB) which did everything from generation to transmission and eventually distribution of power.  The unbundling and privatization of UEB was based on the fact that more investment, to the tune of billions of dollars, was required to raise the sector to a meaningful level of generation and distribution. Money the government did not have.

"The unbundling of electricity giant was to make it easier to attract investment and foster specialization and hopefully more efficiency up and down the value chain....

About $5b (sh18.5trillion) has been invested in the sector since 2000 with the building of Bujagali, Isimba and Karuma dams counting for more than $3b between them. Umeme has since the beginning of its concessioning 2005 invested about a billion dollars in the grid.

While more could have been done this aim of attracting more investment into the sector has come through. The investment means more people have access to power to day than at the beginning of the century.

As an indicator Umeme has seen account numbers grow from 294,000 to just over two million today. The nay sayers would say that is just a factor of momentum, that anybody would have built up those numbers any way. If that was true then account numbers would have grown to about 1.5 million to reflect the fivefold growth in the economy, but instead has grown almost seven-fold during the same period.

Kersey is right in saying that power tariffs have risen three times during the period, a commercially attractive tariff was required to attract investors to the sector.

But the tariff also continues to be out of reach of many because economies of scale have not quite kicked in. Funding for these projects continues to be expensive, partly because we don’t have much local savings to underwrite these major projects and foreign funding remains pricey because in terms of price we are not a prime lending client. Which is related to the first.

Relatedly, if we are to bring the price down government has to be more involved in the sector and hence the taking back of our power generation capacity into the public sector.  But to do this and learning from the UEB experience government has to make those entities that are being vested I with the running of the sector, viable in their own right, if only because government subsidy of the sector is not a sustainable proposition.

"As a rationale for taking back the sector, government has argued that the private players are asking for too high returns on investment pushing up the end tariff. Given this argument one can see that government intends to have its companies not require a return on investment at worst or allow them a very thin margin at best. That would be the mistake that would send us back to the dark ages of UEB...

The last thing that the government wants and the economy needs, is power companies that have to wait for government budgets to finance development or god forbid, come up with payroll.

If government’s current cash crunch is anything to go by, where priorities are shifting by the day, one can expect that if government inflows are the lifeblood of any of these enterprises, they will be dead on arrival.

As consumers and as an economy, we don’t need the power sector to be reliant on government for its day-to-day survival.

The example of National Water & Sewerage Corporation (NWSC) can provide some useful learnings both for and against the reinstatement of public entities to run the power sector.

NWSC has a tariff that is affordable – thankfully ware is all around, but high enough to support the massive investments they have to make. Their viability is such that NWSC can go to the market to borrow money on the strength of its own balance sheet. However, government also guarantees its loans as a way to keep the tariff low and ensure it fulfills its mission to supply water to all.

But government is hampering NWSC smooth operations going by the billions of shillings they owe and seem to see no urgency in clearing their bills.

The same model (apart from the bad debtor part) must be adopted for the new entities that will takeover from the private players. First off government needs to properly capitalize them. Then government needs to allow them a reasonable level of return, not as high as the private players, but enough they can finance their own developments. And also in the light of the huge investments that still need to be made in the sector, government should guarantee the loans and external financing as a way too to keep the tariff low.

The sector’s planners should not see a low a tariff as an end, but as a means to an end, the end being the widespread, sustainable use of power in the economy.

Affordable power is desirable, even critical for our development ambitions, but government should not pander to populists who want power tariffs brought down even if it is at the cost of the long-term viability of the sector.