But who benefits most from subsidies to UMEME?
A cabinet sitting on Wednesday Jan. 11 discussed increasing
electricity tariffs by 40 percent. Cabinet should remove these subsidies
altogether because they are not economically sustainable and benefit
the rich at the expense of poor citizens. Over the last five years,
government has paid Shs 2.0 trillion in these subsidies. This is enough
money to build a 300 MW hydro electricity dam at Karuma.
If government removed subsidies and allowed the price everyone pays
for electricity to reflect its actual cost, the bill for big businesses
will increase by 420 percent while that of households and small
businesses will increase by 260 percent. This would save our economy
from a huge fiscal drain. However, the resultant political protests are
likely to make the government fear this good policy. It is feared that
this announcement of a 40 percent increase alone will cause mass
protests in Kampala and other towns; and cause big businesses to begin
lobbying for keeping the tariff low.
Now, only 12 percent of Ugandans are hooked unto the national grid.
The other 88 percent rely on kerosene for lighting and firewood for
cooking. So what gives this tiny minority veritable political weight? It
is because they are the most educated and therefore the most articulate
sections of our society with access to mass media, civil society
organisations and political parties. Although a tiny minority, this
control over the democratic process gives elites veritable political
weight. We shall return to this later in this article; but first the
facts.
This financial year, the government of Uganda will pay Shs 560 billion in electricity subsidies. This is the 5th
largest expenditure on the budget after education, roads, health and
defence. Given that this financial year’s budget is Shs 10 trillion,
these subsidies will take 5.6 percent of it. Uganda’s total tax revenue
for 2011/12 is expected to be Shs 7.0 trillion. Therefore, electricity
subsidies will take 8.0 percent of that.
Kerosene and firewood that benefit 88 percent of Ugandans (who
include the poorest and most vulnerable people in our society and who
actually need help) are not subsidised by the state. On the contrary,
until July 2011 there was a tax on kerosene worth Shs 200 per litre. Yet
there was little public demand to remove the tax on kerosene; the
suggestion came as part of the East African Community initiative.
Electricity subsidies benefit a small minority composed largely (not
entirely) of elites living in urban areas – the very people who can
actually afford electricity.
According to national electricity distributor, Umeme, there are
450,000 connections to the grid in Uganda. Of these, 2,000 are large and
medium scale enterprises; 90,000 small businesses and 350,000 are
“domestic” i.e. household consumers. Now, 60 percent of total
electricity is consumed by these 2,000 large industrial organisations
and medium scale enterprises. Only 40 percent is consumed by small
businesses and as “domestic.” These small scale businesses employ the
vast majority of Ugandans.
Mathematically, of the Shs 560 billion spent on electricity
subsidies, Shs 336 billion is paid by government of Uganda for these
large industrial organisations and medium scale enterprises. These
companies pay only Shs 60 billion from their pockets. Government pays
about Shs 90 billion as electricity subsidies for small businesses; they
pay for themselves 34.65 billion. This also applies for domestic
consumers. Therefore, the biggest beneficiaries of these subsidies are a
tiny group of corporate barons.
Within the category of “domestic consumers”, most electricity is
consumed by the rich who have refrigerators, televisions, freezers plus
security and garden lighting. Indeed, of the 360,000 connections
categorised as “domestic”, only 100,000 pay less than Shs 25,000 per
month. To be able to spend only this amount requires someone to consume
about 75 units of electricity per month i.e. using about two to three
bulbs only.
Indeed, given that the electricity grid is absent in most of Uganda,
the poor don’t have access to it. Even where they have access, the
initial installation costs of Shs 200,000 are too prohibitive.
Therefore, it means that government pays subsidies for 260,000 Ugandans
largely drawn from the middle and upper classes. These are people with a
minimum per capita income of US$ 5,000 per year. In power purchasing
parity terms, it amounts to US$ 12,000. At that level of income, the
person is well off even by international standards. This is the category
of households that Uganda government subsidises under the pretext of
“helping the poor.”
Most debate in the mass media claims that electricity subsidies are meant to help the poor cope with this expensive yet necessary service.
Yet the evidence above suggests that the biggest beneficiaries are
large industrial organisations and middle and upper income households,
not the poor. Most of these are multinational companies that make
billions of shillings in profit per year which they repatriate to their
shareholders abroad. Ugandans need a fair electricity regime where
everyone meets the costs of what they consume at the actual price.
In fact, the big industrial organisations that consume most of the
electricity subsidy are the ones who can afford to either accommodate it
on their Profit and Loss (P&L) account or simply to pass it on to
the consumer through the prices they charge for their goods and
services. Take the example of Century Bottling Company (CBC), the
producers of Coca Cola. Every year, they sell 16 million crates of soda
(384 million bottles) in Uganda. Electricity costs them about Shs 2.0
billion per year.
In 2011, CBC made Shs 24 billion in profit. How do these statistics
impact on the business? Assuming CBC was made to pay the actual
price of electricity i.e. Shs 1,000 instead of Shs 180 per unit. Its
electricity bill would jump from Shs 2.0 billion to Shs 8.4 billion per
year. If they decided to absorb this shock on their P&L, this would
reduce their profits from Shs 24 billion to Shs 16 billion i.e. they
would remain profitable. Yet Century Bottling can actually transfer the
entire cost of the electricity tariff unto the price of sodas. Here, the
cost would be Shs 8.4 billion divided by the 384m bottles they sell per
year i.e. Shs 22 per bottle.
Now how many people would stop drinking coke because its price went
up by Shs 22? In fact Coke can increase the price of soda by Shs 50 and
still suffer insignificant decline in the demand for their product.
Consumers who don’t want to pay this price cannot die. There are many
substitutes especially for the poor who can drink banana juice, tonto.
This mathematics is hard on large manufacturing companies like Hima
and Tororo Cement. For example, Hima pays Shs 22 billion per year for
electricity. It produced 17 million bags of cement last year and
projects to make a profit of about Shs 45 billion in 2011. If Hima were
to pay the full price of electricity, its annual bill would jump to Shs
92.4 billion – enough to wipe out their profits two times over.
The only way Hima can accommodate the actual tariff is to transfer it to every bag of cement – which would be Shs 4,000 per bag. However,
this would make their cement uncompetitive as cement from Kenya arrives
in Kampala at Shs 28,000 per bag. If any subsidies are to remain
therefore, they should be specific to those industries where the cost of
energy can be demonstrated to be injurious to the survival of the
business.
Yet such industrial organisations as Hima and Tororo Cement are the
exception not the rule in the electricity tariff subsidy. Take the
example of MTN: In 2010, it made Shs 240 billion in profit. Its total
electricity bill is Shs 4.6 billion per year. This means that government
paid Shs 15.6 billion of MTN’s electricity bill. If MTN paid the actual
price of electricity, its bill would jump to Shs 19.2 billion. If they
billed this to their P&L, it would reduce their profits from Shs 240
billion to Shs 226 billion – a small amount in the wider scheme of
things.
Given that MTN sells 400 million minutes of airtime per month, the
cost of the subsidised tariff on airtime is less than one shilling. If
they paid the actual price, the cost of airtime would raise to Shs 12
per minute. Given that all other telecom companies would suffer a
similar cost, the effect would be minimal to their business. In fact the
challenge for companies like MTN is not the rake off their profits but
their rate of return on capital. Estimates show that in 2010, MTN’s rate
of return on capital was above 50 percent, one of the highest in the
world.
Look at Stanbic Bank. Its total electricity bill is Shs 840m per
year. This means that government pays for them Shs 3.6 billion. If
Stanbic paid the actual electricity tariff and transferred it to its
P&L, its profits would decline from Shs 72 billion to Shs 68.4
billion. Surely, Stanbic can afford that reduction in its profit. The
same would apply to Standard Chartered Bank which pays Shs 552m per year
and government pays for them Shs 1.8 billion. With Shs 90 billion in
profits in 2010, Stanchat’s profits would only fall to Shs 88.2 billion –
a minor amount.
Opportunity cost
Clearly therefore, claims that increased electricity costs make our
large scale enterprises uncompetitive are misleading. Secondly, even if
they were true, there are better ways to increase their competitiveness –
like reducing taxes, improving infrastructure and producing cheaper
hydro electricity. In fact the Shs 2.0 trillion the government has spent
on electricity subsidies over the last five years would have built a
300 MW hydro electricity dam at Karuma and thereby solved the problem.
The critical argument about these subsidies is their opportunity cost
i.e. the value of the alternative public goods and services that would
otherwise have been delivered had the country made everyone pay the
actual price of the electricity. It is would have been enough to
resurface 1,500 kilometres of tarmac roads in the country and Kampala
city that are collapsing under the weight of potholes. In fact, such
better roads would have reduced the cost of transport on these
companies.
Assuming it costs Shs 50 million to build a classroom, the subsidies
would have built 50,000 of them for our students who study under mango
trees. The same money would have built Health Centre Ones in every
village or trained 40,000 doctors or 160,000 nurses. All these
alternative investments have a rate of return far above what the country
is getting from the electricity subsidies.
Government is throwing away money largely at households and companies
that do not need or deserve it. Ironically, this money is being
transferred from paying for public goods and services that would benefit
the poorest sections of our society but would also benefit the very
companies and rich households who are currently enjoying these
subsidies. Instead of an equitable use of this money, government is
throwing it at rich companies and individuals alone. The question is
why has this country been entangled in this wrongheaded policy? The
answer is politics.
Electricity politics
It would be wrong to argue that this distortion is a result of the
authoritarian character of the government of Uganda. Indeed, going by
many objective criteria (like level of education, per capita income, the
ratio of rural to urban population etc), Uganda punches above its
weight in democratic practice. No western country enjoyed a level of
democratic expression as Uganda does today when its per capita income or
structure of society was the same. More still, our country enjoys a
vibrant civic life – we have a vigilant media, activist civil society
and strong opposition political parties. On the face of it therefore,
Uganda’s democracy should produce public policies that favour the
majority, not the minority.
However, the institutional architecture of democracy as we have
inherited it from the western world is (to use a cliché) necessary but
not sufficient to provide voice to the vast majority of our citizens. We
have seen above that although the electricity subsidies are presented
in popular media as benefiting the poor who cannot afford a higher
tariff. Yet they benefit rich corporate barons and the middle and upper
classes of our society. How can 12 percent of Ugandans on the grid take
5.6 percent of the budget (and 7.5 percent of total revenues) as the
poor go hungry?
The answer lies in our inherited institutional architecture of
democracy. In our conventional understanding of democracy, citizens
exercise voice through civil society organisations, the mass media and
political parties. However, the people who dominate these platforms for
democratic expression in Uganda (and most nations of Africa) are a tiny
minority of western educated elites largely in urban areas.
Yet the vast majority of our citizens are semi-educated, rural poor
who hardly participate in these platforms. Instead, they participate in
civic life through their tribes/clans, perhaps their churches and
mosques and through their local councils if they work at all. All too
often, none of these platforms promotes much public policy debate.
Instead, they are vehicles for dealing largely (but not entirely) with
cultural and religious issues and – in the case of local councils –
handling local disputes.
Because they are educated, urban elites are the most articulate and
vocal sections of our society. And they have access to the mass media,
to civil society organisations and to political parties. They can use
these platforms to mobilise and organise to defend and promote their
interests. And they can rally donors to unwittingly support their cause.
Also because they are urbanised, they are the best positioned to
mobilise for any cause and they can use modern technology to reach
everyone. And because they live at the centre of power – like the
capital city Kampala – they can easily paralyse government through
street protests.
Therefore, democracy really is not about the popular will per se. It
is about the will of that section of Ugandans that has the capacity to
place its demands on the national political agenda and do so
effectively. It is not their numbers that gives them a politically
weighted majority. It is their access to modern methods of social
mobilisation. In the process, the elites have rigged the democratic
process to create minority privileges at the expense of the many – and
that is why we have electricity subsidies.
How about the corporate barons who take the lion’s share of
electricity subsidies? These are the moneyed interests that finance
elections and can fix an appointment with the president, his ministers,
members of parliament and other influential decision makers. They
advertise in media to get favourable coverage for their interests. They
do not use open political forums to advance their cause. They lobby
behind doors. Money gives them access which gives them influence over
public policy.
But how come debate on public policy does not highlight these
distortions? The vast majority of Uganda’s elite (the term chattering
class is better) lack a solid middle class culture. Being first
generation graduates from the village and its attendant peasantry
background, we lack the discipline to investigate or research public
policy. We take positions on public policy largely on emotions and
ignorance backed by a sufficient doze of bias or prejudice. Most debate
on public policy in Uganda is about scoring political points, not
shading light on the issues.
Of course there is self interest as well. For example, the chattering
classes who dominate the media, NGOs and parties are also beneficiaries
of the subsidies on electricity. However, their take on this subsidy is
small. Assuming anyone pays Shs 100,000 in electricity bills per month,
it means government pays for them Shs 160,000 (Shs 1.9m a year).
Uganda’s chattering classes are avoiding this extra amount at the price
of allowing corporate barons to get away with billions from the
taxpayer.
Uganda’s chattering class is as corrupt as the government officials
it is wont to criticise. For instance, in exchange for a bribe of US$
200,000 on a road project, a public official in Uganda will let a
foreign contractor inflate the price by over US$ 10 million and even
turn a blind eye when the contractor does not construct the right
quality of road. This is what has made corruption in Uganda corrosive.
It is also the same logic that underpins electricity subsidies.
If the Shs 336 billion going to large corporations was going to
support the rural poor, one would say the democratic process is working.
If the government has made this fatal error, we would expect to hear
the opposition defend the interests of the rural poor – the majority.
Instead, the opposition also supports these subsidies that benefit a
few. It is no wonder that 42 percent of voters boycotted the election
last year. The political process does not represent the interests of the
vast majority of our people. It represents the interests of a few
elites in urban areas.
Cabinet should marshal the courage and also overcome the self
interest of its members and end these ridiculous subsidies. Let us
watch.
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