Why the country and its president are fighting the wrong
enemy on electricity tariffs
A large cross section of Ugandan elites is angry, very
angry. It thinks the price (tariff) it buys electricity at is too high. So it
has been looking for a villain to blame and has identified Umeme, the private
utility licensed to distribute electricity. President Yoweri Museveni, who many
Ugandans accuse of owning the company, has also joined the anti-Umeme
coalition. Last year his villain was Bujagali Electricity Limited (BEL), the
largest hydro electricity generator in Jinja. So the villain is a moving target
and this explains why the debate on causes of high electricity tariffs is a
toxic combination of high emotion and little knowledge.
The villain in the electricity tariff is not a person
(Museveni’s critics would want to blame him, he likes to blame civil servants
who negotiated the licenses). Neither is it a company (Umeme or BEL who have
recently become the punching bags). It is our government policy on pricing
electricity consumption. Our government, based on advice by World Bank and IMF,
decided that it does not have enough money to invest in generation and
distribution of electricity. It sought private investors into the sector.
Private investors were reluctant to invest in Uganda’s
electricity sector because our country’s risk profile was high, the market
uncertain. These fears were not unfounded but delving into them now will divert
us. So for today let us say that they demanded government guarantees three
things: a fixed rate of Return on Investment (ROI), bears the foreign exchange
risk and agrees to bulk-purchase all the electricity generated and bulk-supply
all electricity needed for distribution.
In a normal market, an investor identifies an opportunity,
raises capital and takes the necessary risk to turn into a profitable
investment. If she produces a product consumers do not like or produces more
than what the market can take, she suffers the consequences of her decision.
The electricity sector has many structural circumstances that make it
impossible for private capital holders to venture into it without the
aforementioned government guarantees.
Hence, for those who produce electricity, government signs a
Power Purchase Agreement guaranteeing to buy all the installed electricity
capacity at a fixed price over say, 30 years. If water levels in Lake Victoria
fall and the dam at Bujagali produces only 100MW government guaranteed to pay
BEL for the entire 250MW installed capacity. This is the infamous “hydraulic
clause” we fought ferociously in the late 1990s and succeeded at foiling AES
Nile Power from developing Bujagali dam. It delayed the investment for 10 years
with heavy costs in blackouts that still haunt my conscience. Now I
appreciate the necessity of certain provisions that sound obnoxious to the
uninitiated.
If wires collapse and all the electricity cannot be
transmitted and/or distributed, government still pays BEL for a full 250MW. The
same applies to Umeme. If consumers demand less electricity than BEL is
producing, government guarantees to pay the company for 250MW. The same applies
to Umeme. To an ordinary mind these guarantees sound an unfair bargain. But
they are the unavoidable and necessary cost a poor country with a high-risk
profile pays to attract private investors into its electricity sector.
Private investment comes with other costs. First, it borrows
expensively compared to government; the high interest on their loans is
transferred to the consumer through the tariff. For example, most of the
private generation facilities are just coming on board. The investors are still
servicing these high interest loans and are also doing accelerated
depreciation, which is all billed to high tariff.
Secondly, private investors demand a high ROI in countries
with a high-risk profile. In our case, it is 20% for Umeme and 19% for BEL.
Third, investors raise capital in dollars but electricity in Uganda is sold in
shillings. So the foreign exchange risk for the depreciation of the shilling is
born by the consumer through the tariff. All these costs are a result of
government policy, not private companies that generate and/or distribute power.
This path of using private investment to generate and
distribute electricity has paid off for Uganda. It has lowered the country’s
risk profile and attracted private capital into our generation and distribution
market. However, it has also led to high tariffs that stifle investment in
manufacturing and inflict untold damage on the environment as people cut trees
to burn charcoal for cooking. The blunder is to threaten such investors the way
Museveni recently did with Umeme. It raises the country’s risk profile making
it expensive to attract private capital from debt and equity markets.
How does Uganda price electricity without increasing her
risk profile? Government has already returned to building and operating dams
beginning with Isimba and Karuma. Yet we need massive investment in
transmission and distribution to evacuate and supply the 800MW of electricity
coming on the grid at the end of this year. That requires investment of $800m
in transmission and another $1.5 billion in distribution. Does government have
this money? Recently the central bank was complaining that our debt is about to
reach the proverbial 50% of GDP.
There is a second risk: if Karuma and Isimba power is not
consumed (because we haven’t invested in distribution or don’t have buyers)
government pays. So the choice in getting cheaper electricity is between a
government subsidy or a high tariff or a combination of both. Government will
be driven by politics to prefer subsidies to a high tariff. Once you begin
subsidies, they are difficult to remove. But either way the final cost is born
by the taxpayer/consumer.
The real challenge of Uganda is one of policy attitude
towards electricity. Our government can look at electricity as a service like any
other such as air travel, telecommunications, data, etc. and price it using
market mechanisms. Here it would let the tariff reflect the cost of investment
and a risk adjusted rate of ROI. This decision will discourage manufacturing
and inflict damage on the environment.
However, government can look at electricity as a public good
or service like roads, recognizing it has powerful implications on
manufacturing growth and environmental sustainability. Thus it can use taxes
and borrowed funds to build dams, transmission and distribution lines and
connect everyone to the grid. There would be no direct financial ROI.
Government would bear the interest and depreciation costs, so the tariff would
only reflect operational costs of running the system. Ethiopia is doing this
and China did it. As the South Africans would say, we can also “did it”.
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amwenda@independent.co.ug
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