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April 9, 2010 | News

The case against higher utility tariffs

As the government drops hints of an impending hike in utility tariffs (by as much as 100.0% in the case of electricity), it is only proper that we evaluate the relationship between past tariff hikes and the quality of service delivery afterwards. We may then decide whether the impending hikes are worth the additional sacrifices of Ghanaians or they are just the latest visit to the well with a leaky bucket.

The evidence seems to point overwhelmingly to the latter, hence the reason for consumers to oppose the proposed hikes until the government and the utility companies put their houses in order.

As far back as June 2001, in a letter the IMF, the Government of Ghana said the following about the utilities situation in Ghana : “In order to halt the ongoing losses at TOR, the government raised ex-refinery gasoline prices by an average 91 percent in February 2001, with immediate effect.

In April, the Public Utilities Regulatory Commission (PURC) allowed the Electricity Company of Ghana (ECG) to raise the retail price of electricity by 96 percent and Volta River Authority (VRA) to raise its wholesale electricity price by 100 percent. The Ghana Water Company (GWCL) was authorized to raise water prices by 95 percent. These increases took effect May 1, 2001….Despite the increase in the tariffs for electricity and water, these utility rates still remain at about 65 percent of full cost recovery levels….”

In a subsequent memorandum to the Fund in 2003, the government reported: “On March 1, 2003, a second round of price increases (12 percent each for electricity and water) came into effect, following which the Electricity Company of Ghana and the Ghana Water Company Limited should be able to cover their costs.

Thereafter, the rates of cost recovery will be maintained through the implementation of the established automatic adjustment formulas. The Volta River Authority (VRA) will continue to incur losses as a result of the preferential tariffs granted to a large aluminum company. This problem is currently the subject of international arbitration, and a durable solution must await the conclusion of that process. However, the government will develop a plan by September 30, 2003, for managing the interim financial burden on VRA”.

Raising tariffs
In 2004, the government appeared to have recognised the futility of just raising tariffs to deal with the inherently structural problems of the utilities and proposed, in yet another memorandum to the IMF dated June 15, 2004, the kinds of institutional reforms it should have embarked on years earlier. The details of the proposals are insightful enough to warrant an extensive quotation below:

“We have also embarked on a program to reduce costs, trim losses, and improve the efficiency of other major public utility companies: the Volta River Authority (VRA), the Electricity Company of Ghana (ECG), and the Ghana Water Company Limited (GWCL). As a first step in this process, we have audited all the cross-debts of these companies to each other and to the government of Ghana that were outstanding as of December 31, 2003.

These debts will be settled and cleared by end-June 2004, together with liabilities associated with on-lending from the government, making transparent the true cash flow position of the companies, and permitting the establishment of realistic and monitorable financial performance plans. By the same date, each company will be required to present such plans for review and subsequent monitoring by the Ministry of Finance and Economic Planning.

We expect the companies to achieve tangible improvements in financial performance during 2004, based on efficiency measures already underway, including:

At Volta River Authority: to reduce expenses, VRA will secure fuel through competitive tender and search for new sources of financing to reduce capital costs. VRA is also seeking additional financing to convert a simple cycle turbine to a combined cycle plant, so as to increase efficiency and further reduce generation costs.

At Electricity Company of Ghana : to stem commercial losses (non-payment), the company is stepping up efforts to collect arrears, making payment easier (opening more cash collection points), and disconnecting non-paying customers.

At Ghana Water Company Limited: the ratio of metered customers (both commercial and domestic) will be raised from the current level of below 50 percent; prepayment metering will be expanded; non-paying customers will be disconnected; house-to-house collections will be halted, to reduce fraud and theft; the number of collection points will be increased, to encourage payment; and internal cost control systems will be enhanced.

To support these efforts, full cost recovery will be ensured in electricity and water pricing through implementation of the formulas for automatic adjustment of these tariffs. The tariff rates applicable for the quarter beginning May 1, 2004 were established in April. Given a further improvement in the hydro-thermal generation mix, no increase in electricity tariffs was required. Water tariffs were raised by 15 percent to full cost recovery levels, in line with the formula, and the Ghana Water Company Limited has confirmed that the new tariffs are being charged to customers with effect from April 1, 2004.

The Public Utilities Regulatory Commission will continue to be responsible for approving tariff adjustments based on the formulas, and the government will refrain from intervening to prevent prompt implementation of such adjustments by the utility companies.

It is clear from the foregoing that while the series of tariff hikes since 2001 did in fact bring the utilities to “full cost recovery levels”, the quality of service of the period declined substantially, leading eventually to the energy crisis of August 2006, which aggravated a lingering crisis in the water sector. We have since been suffering from the twin crisis of electricity and water shortages without any relief in sight.

According to the Ghana Statistical Service's latest Economic Survey, between 2001 and 2005, total energy generation from all sources declined by 13.0%, this despite the successive increases in tariffs ostensibly to “recover cost” and thus be able to offer better services.

Kufuor gallons
The water situation is no better. The yellow “Kufuor gallons” have now become a ubiquitous feature of virtually every home in the country, rich or poor. A study conducted by researchers at the KNUST in 2006 found that the Ghana Water Company lost 49.0% of the water it produced either to theft or waste. The comparable figure for 2004 and 2005 were 56.0% and 45.0%, respectively. Last week, an NGO, Water Aid, reported that the water situation in certain parts of Accra was so serious that residents had resorted to sea water for bathing and washing their dishes.

The relationship between utility tariffs and service quality has always been a chicken and egg one: Which comes first – better services followed by higher tariffs, or higher tariffs with the hope that things might improve? In the 1990s, the government decided to put quality first; helped the utilities to borrow large sums of money internationally to upgrade their equipment and improve service as a prerequisite for raising tariffs..

On the basis of this logic, the government guaranteed US$110.7 million in international loans for the Ghana Water Company and US$143.1 million for the Electricity Company of Ghana (along with a whopping US$203.6 million for the now-decrepit Ghana Railways Corporation). In 2000, a government appointed consultant who reviewed these loans (including US$21.9 million for the Omnibus Service Authority) concluded that the companies “do not have the ability to service their obligations”.

No reasons were given and no one has since been held accountable. The consumer has been left holding the bag.

No rational consumer would refuse to pay more for a product if they can be assured that that product would be available in the desired quantities when needed. We complain about higher petroleum prices, but we still buy the petrol because it is always available. The same cannot be said of the utilities. It is clear that the problem with our utilities is not money – whether handed to them by government or extracted from a captive clientele. The problem is mis-management. Like an old and inefficient engine for which no amount of oil is ever enough, the utilities, in their present mismanaged state will continue to guzzle ever higher tariffs without living up to their end of the bargain; someone must pay for such a charade.

Telecommunications
Privatisation is often mentioned as the way out of this morass, but as the telecommunications industry amply shows, while privatisation and its associated competition may in fact increase consumers' choices, increased choices does not automatically translate into better service. That would require an effective, efficient and responsive state regulatory framework which we currently lack. The PURC, like its sister organisation, the National Communications Authority (NCA) in charge of the phone companies, is ineffectual in policing the utilities.

Besides the internal inconsistencies in the government's case for increasing tariffs, there is also the paradox of higher tariffs and lower revenue that will result as consumers, tired of being stiffed by the utilities, resort to illegal connections, often with the connivance of the employees of the utilities companies, to avoid paying the higher tariffs.

To be fair to the public, let the government do the following before contemplating any tariff increases:

1. Publish the audited accounts of all the utilities, along with evidence of the clearance of their debts, as reported in the memo to the IMF on June 15, 2004.

2. Publish the “realistic and monitorable financial performance plans” of the utilities contained in that memo, along with a status report.

3. Provide evidence of the “tangible improvements in financial performance” and the “efficiency measures” that the government said were “already underway” as outlined in the quoted portions above of that memo.

With respect to VRA, it is important for the public to know that the Authority's problems have less to do with “unrealistic” tariffs than inappropriate administrative and/or political decisions. In that case, those who made those decisions must be made to pay the price, not the public.

In paragraph 442 of the 2006 supplementary budget, the minister of finance reported the following: Mr. Speaker, 2005 witnessed the re-opening of operations in VALCO. While the economic benefits are tremendous (evidenced for example by the higher than projected increases in output in the electricity sub-sector), there were also some associated costs which Government is committed to compensate VRA for.

Subject to reconciliation of data between VRA and Government, an amount of between ¢274.4 billion [about US$30 million] and ¢320.1 billion [US$35 million] is earmarked to be allocated to the Ministry of Finance and Economic planning to be used as compensation to VRA for the difference in costs of generation and sale of power to VALC.

The minister's VALCO statement must be situated within the context of a letter, dated June 2, 2006 and since published in some newspapers, that VRA sent to the Ministry of Finance. In the said letter, the VRA noted that “the additional cost of supply to VALCO would be spread evenly over all consumers.” The Authority reported a total “under-recovery from VALCO” of US$53.52 million for 2005 and 2006 as well as “under-recovery of additional burden imposed by VALCO on the Bulk Supply Tariff” of US$95.4 million, for a total under-recovery burden caused by VALCO of US148.92 million over two years.

The minister's relief offer to VALCO, therefore, seems but a palliative, at best, with the difference being the cost that is unfairly passed on to consumers, when in fact those responsible for the VALCO fiasco must be made to pay. The time to do the right thing is now. Over to you, PURC!

Author's note: This article was written originally in October 2007, after which the energy situation appeared to have worsened, as shown in the following excerpt from the government's annual progress report (2008) of the poverty reduction strategy: “Transmission losses of electricity deteriorated in 2008 from 3.36% recorded in 2007 to about 3.46% in 2008, while the distribution losses from ECG increased from 23.96% in 2007 to 24.24% in 2008 in the face of increases in per capita electricity consumption from 3.36% in 2007 to 3.46% in 2008.” Significantly, the report was silent on numerous cases of fraud and mismanagement against ECG dating back to the early 2000s.

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