About me.

Andrew M. Mwenda is the founding Managing Editor of The Independent, Uganda’s premier current affairs newsmagazine. One of Foreign Policy magazine 's top 100 Global Thinkers, TED Speaker and Foreign aid Critic

Thursday, August 23, 2012

Electricity cost going up 40%

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.

Although the actual cost of a unit of electricity in Uganda is Shs 1,000, big and medium scale businesses pay only 18 percent of this price i.e. Shs 180 per unit. The government tops up the balance with Shs 820 (82 percent of the price). Meanwhile, domestic consumers (households) and small businesses pay Shs 385 per unit of electricity (38.5 percent of the price) and government pays Shs 615 for them (61.5 percent).

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.

No comments: