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ECG Privatisation: Privatising for who? The experience of Australia, UK

23 September 2016 | Feature Article

The financial, managerial and technical challenges facing the Electricity Company of Ghana (ECG) have galvanised the apostles of privatisation, anti-state ownership of business and the neoliberal-free market capitalists to strongly advocate for ECG to be privatised.

Their argument is that selling ECG will make it more efficient, financially resilient and economically prosperous. ECG when privatised they argue, will bring huge benefits to Ghana in the form of security of power supply.

In other words power supply will be reliable and the current system of power cuts, blackouts and power rationing will be a thing of the past because privatisation will bring in additional capital, investments and technical and managerial talents.

In the long term prices will be stable or even fall and consumers will be happy. Taxes to government will increase and more jobs in the energy sector will be created. For the government of Ghana, money raised through the sale of ECG will enable it to increase expenditure, cut taxes or repay the nation’s debt.

At the same time privatising ECG will enable the government to access the $500 million Millennium Challenge Compact Funds promised by the US government.

But these are all illusions. In the first wave of privatisation that took place in Ghana in the 1990s, Ghanaians were told that the companies and individuals buying state owned companies would transform them into thriving enterprises providing Ghanaians with endless job opportunities and thus turning Ghana into a prosperous nation.

What they did not tell Ghanaians was that the IMF, the World Bank, the British and the U.S. governments through USAID were behind the push for Ghana to sell its assets as a condition for more loans. In other words these actors used Ghana’s poor financial situation to demand the dismantling of the state and its assets.

There is strong evidence that Mr. Jerry Rawlings and the PNDC resisted pressure to sell state owned-companies. But the IMF, the World Bank, the Ronald Reagan and Margaret Thatcher administrations piled on the pressure using several tactics.

A message from the White House to USAID representatives instructed that they should make sure Ghana sold everything.

Needing cash and unable to raise it at home, the National Democratic Congress party which replaced the PNDC went on a selling spree selling both performing and non-performing companies alike. By 1999 almost 70 percent of state owned assets had been sold. While majority of the state-owned companies sold went to Ghanaians, most of the high valued ones were sold to foreigners. As Prof Antoinette Handley of University of Toronto observed in 2007: “Of 212 divestitures, 169 were sold to locals. This may look like a high figure, but the firms sold to locals were overwhelmingly the smallest, least valuable firms and, in terms of value, may have comprised only ten percent of the total” [1].

One of the sectors of the economy which saw rapid privatisation was the mining sector. The most valuable company in the mining industry was the Ashanti Goldfields Company. For decades the company was controlled by the British firm Lonrho with Ghana having little to no shares at all. Lonrho needed to extend its leases in the 1960s and so it agreed to grant the Ghanaian government 20 percent share in the company to allow the leases to be renewed. When Acheampong’s military government took over power in 1972, it realised how Ghana had been shortchanged. How could Ghana which owned the gold be having only 20 percent shares while a foreign firm controlled everything? the leaders asked. Therefore, Acheampong seized another 35 percent for Ghana, bringing Ghana’s total shares to 55 percent.

However, in 1994 the Rawlings led-NDC government privatised AGC by selling 39.8 percent of its shares. Ghana received more than $454 million from the sale of AGC. What happened to that money is a story for another day. However, Ghana subsequently became a minority shareholder with only 15.2 percent shares in AGC when the NPP replaced the NDC in 2001. Ghana Consolidated Diamonds Limited and other mining firms were also sold.

How did the privatisation of AGC and the mining sector benefit Ghana and how will privatisation of ECG benefit the country? Several reports by the World Bank, United Nations, and Bank of Ghana have revealed that the privatisation of the mining sector has been detrimental to the economy and the welfare of the people of Ghana particularly the communities and farmers in the mining areas. According to the United Nations Conference on Trade and Development (UNCTAD), in 2003 for example, mineral exports from Ghana generated $893.6 million but Ghana got only $46.7 million or just 5% while the companies took the remaining 95% or 846.9 million [2]. Similarly, The UK based The Economist magazine reported that: “Gold accounted for 40% of [Ghana’s] exports in 2008, with a value of $2.2 billion. But the government received only $116m in taxes and royalties from mining firms” [3].

In 2003, the World Bank (the chief advocate of privatisation in Ghana) acknowledged that Ghana has not benefited from mining activities in terms of revenue, employment, infrastructure development and environmental sustainability and urged Ghana’s leaders to take steps to reverse the trend but nothing happened. Using very diplomatic words the World Bank wrote that:

“It is unclear what gold mining true benefits are to Ghana. Large scale mining by foreign companies has high import content and produces only modest amounts of net foreign exchange for Ghana after accounting for all its outflows. Similarly, its corporate tax payments are low due to various fiscal incentives necessary to attract and retain foreign investors. Employment creation is also modest given the highly capital intensive nature of modern surface mining techniques. Local communities affected by large scale mining have seen little benefits to date in the form of improved infrastructure or services provision because much of the rents from mining are used to finance recurrent, not capital expenditure. A broader cost-benefit analysis of large-scale mining that factors in social and environmental costs and includes consultations with the affected communities needs to be undertaken before granting future production licences” [4].

The suffering and agony of farmers and local communities affected by large scale surface mining and who have seen little benefits of mining to date was captured in a study by a Ghanaian scholar Jasper Ayelazuno in 2011. One female farmer from Dumasi in the Western Region told him:

“There is one important thing for us as peasant women in this village that I must mention. We are not educated to get a different job so we depend solely on our land. When we go to the forest, we can fetch firewood free for our own energy needs and to sell for income. But what has the Ghanaian state done? It has given all our land to the white man to mine for gold; and not to do underground mining but surface mining, destroying all our arable lands. In the midst of all this, I cannot say the state of Ghana is good to me or responsive to me. On top of that, the Ghanaian state has given the white man the authority to do whatever they want to us: I have my own land and I cannot have access to it; my water sources (the streams) have been polluted, etc. Up till date, the Ghanaian state has not come to our aid, either to check these mining activities or to provide us with potable water since the mines have polluted our water sources. For me, there is nothing that the Ghanaian state can do for me to view it as a responsive state; so both the past and present government have not helped us” [5].

Since the days of privatisation, more than 50,000 farmers have been displaced by the mining companies who continue to refuse to pay satisfactory compensation to the farmers. While a cocoa farmer could earn $25 a year from a single cocoa tree, mining companies only pay about $8 per tree when they cut the cocoa trees for their mining operations. The economic life of a cocoa tree is between 40 and 50 years [6]. This means most cocoa farmers lose between $1000 and $1250 per a cocoa tree. If this is multiplied by 50 or 100 cocoa trees the financial loss to a farmer could be between $50,000 and $125,000. This injustice is allowed to happen to cocoa farmers because of the mining companies’ closeness to Ghana’s elites. These facts and realities are hardly acknowledged by the torch-bearers of ECG privatisation.

The privatisation of ECG will not be different from what is happening in the mining sector, in fact its impact on Ghana may be far more severe because of electricity’s strategic role in the economy. ECG is a strategic asset, meaning it constitutes a vital part of Ghana’s economy and hence its security. For instance, a private company distributing electricity could decide to sabotage the economy by failing to distribute power to critical sectors of the economy.

One of the reasons why there are constant fuel shortages in Nigeria is due to the fact that import of petroleum products is controlled by few private companies and individuals who sometimes hold the country to ransom by failing to import and distribute fuel. They sometimes create artificial shortage to force prices up just to increase their profit margins. It is this energy and economic security fears which has led Prime Minister Theresa May of UK to kick against China’s involvement of the Hinkely Point C nuclear power project.

From the perspective of the Ghanaian state, the ultimate aim of electricity privatisation is to give consumers lower prices, promote efficiency and reliability, and drive better investment decisions.

But the experience of Australia, United Kingdom and the United States which have implemented electricity privatisation tells the opposite story. In the United Kingdom, the privatisation of electricity has resulted in six big private energy companies dominating the sector including British Gas, Npower, Scottish Power, E.ON, EDF Energy, and Scottish Power and Scottish and Southern Energy (SSE).

The profit-making motive of these companies has led to unusually high prices of energy in the UK. According to Prof Benjamin Sovacool of Vermont University, USA, "from 2004 to 2012 domestic electricity prices increased by more than 75 percent [an increase of more than 9 percent a year] and gas prices increased by 122 percent with gas prices increasing 15 percent from 2011 to 2012". According to the UK's Department of Energy and Climate Change "For several years prices have been the most influential factor in the movements in fuel poverty. Prices have risen at a rate well above that of income". This high energy prices has made electricity unaffordable for many companies, households and families leading to massive rise of households living in fuel poverty. Any time energy prices increase by 1%, more than 40,000 households become fuel poor. As a result, the number of households living in fuel poverty in all of UK has been rising steeply. It rose from more than 2 million in 2003 to more than 3 million in 2007 to more than 5 million in 2009. In fact, in 2009 about 18 percent of all households lived in fuel poverty and it has been estimated that as of 2015 more than 25 percent of households were living in fuel poverty [7].

Thus a combination of low household incomes,extremely high energy prices and high penalties for nonpayment of energy bills has made it difficult to contain the escalating rise in fuel poverty and its socioeconomic implications for millions of households. In fact, thousands of people die of fuel poverty every year especially during the cold winter and hot summer months. Between 2012 and 2013 over 31,000 died [8] while in 2014 over 15,000 people died [9]. Some families have to choose between food and heating and lighting their homes. Despite the presence of well-developed consumer advocacy groups and media campaigns, energy is the second most important factor after housing rent that takes away a large chunk of people’s income. Some families spend more than 10 percent of their monthly income on energy.

In Australia where some states have privatised electricity, Prof John Quiggin, an Economist at University of Queensland who spent 20 years analysing electricity privatisation in Australia points out that in states in Australia where electricity is privatised, "Privatisation has produced no benefits to consumers, but has resulted in large financial losses to the public".

Privatisation has resulted in dramatic rise in electricity prices as well as serious customer dissatisfaction and complaints. He observed that “Privatisation, corporatisation and the creation of competitive electricity markets were supposed to give consumers lower prices and more choice, promote efficiency and reliability, and drive better investment decisions for new generation and improved transmission and distribution networks. [Instead] prices have risen dramatically. A secure low-cost supply has been replaced with a bewildering array of offers, all at costs inflated by a huge expansion in marketing” [10].

His findings which is contained in a report titled “Electricity Privatisation in Australia: A Record Failure” include the following:

"Prices— have reversed their declining trend, and are highest in privatised States. Since the NEM [National Energy Market] was introduced, prices from 2005 have risen sharply.

"Quality — customer dissatisfaction has risen markedly since the NEM, profoundly for privatised States, where complaints to the relevant energy ombudsmen have grown from 500 per year to over 50,000’. ‘Reliability— has declined across a wide range of measures in Victoria [state], notwithstanding increased “physical audits” and expensive financial “market incentive” programs.

"Efficient investment — has not occurred, as the pricing mechanisms have not delivered coherent signals for optimal investment.’ ‘Efficient operation— resources have been diverted away from operational functions to management and marketing, resulting in higher costs and poorer service…The NEM and privatisation have reduced real labour productivity, as employment and training of tradespeople have been gutted and the numbers of less productive managerial and sales staff have exploded."

Consumers bear the cost of private owners’ debts— ‘In privatised States, customers’ bills include the cost of almost 10% per annum interest on the corporate owners’ debt on the electricity assets. This compares to government borrowing costs of closer to 3%. The NEM has mimicked these exorbitant borrowing costs to all customers.’ Private owners are receiving unjustifiably high rates of return based on the low investment risk — ‘The high rates of return to private owners for the low investment risk is unjustifiable and irresponsible. The private owners of price-regulated distribution assets have outperformed almost all investment classes, by making post-tax real rates of returns close to 10% annually since 2006.’

The examples from Australia and United Kingdom indicate that privatising ECG could deepen socio-economic inequality because affordability rather than access and needs will be the rule. Private companies, who will put profit-making above everything else, will use price increase as a strategy to make huge profits. They will expect Ghanaians to bear the cost of their investment through price hikes. Not all consumers in Ghana will be able to afford the huge price hikes. Electricity could even become a luxury commodity allowing those with the means to buy to live, leaving those without the means to live without it, with serious socio-economic consequences for them and their families. As Ghana seeks the best way to produce and distribute electricity, policymakers must know that privatisation is not always the answer and in Ghana’s case will be unbeneficial.

Notes
[1] Handley, A. (2007) ‘Business, Government, and the Privatisation of the Ashanti Goldfields Company in Ghana’ Canadian Journal of African Studies, 41:1, 1-37 (see pp 8 and 12)

[2] UNCTAD (2003) ‘Economic Development of Africa: Rethinking the Role of Foreign Direct Investment’ http://unctad.org/en/Docs/gdsafrica20051_en.pdf (see page 50)

[3] The Economist (2010) ‘Carats and sticks: mining in Ghana’ The Economist, 3 April 2010.

[4] World Bank (2003) ‘An assessment of the performance of Mining in Ghana’; http://lnweb90.worldbank.org/oed/oeddoclib.nsf/docunidviewforjavasearch/a89aedb05623fd6085256e37005cd815/$file/ppar_26197.pdf (see page 23)

[5] Ayelazuno, J (2011) ‘Continuous primitive accumulation in Ghana: the real-life stories of dispossessed peasants in three mining communities, Review of African Political Economy, 38:130, 537-550’ (see pp. 544-5),

[6] Tickner, V. (2008) ‘Africa: International Food Price Rises & Volatility’, Review of African Political Economy, 35:117, 508-514 (see page 4)

[7] Sovacool, B.K. (2013) 'Energy and Ethics: Justice and the global energy challenge'

[8] The Telegraph (2013) ‘Energy row erupts as winter deaths spiral 29 per cent to four year high of 31,000’ http://www.telegraph.co.uk/news/health/elder/10474966/Energy-row-erupts-as-winter-deaths-spiral-29-per-cent-to-four-year-high-of-31000.html

[9] The Independent (2015) ‘Fuel poverty killed 15,000 people last winter’ 30 April 2015 http://www.independent.co.uk/news/uk/home-news/fuel-poverty-killed-15000-people-last-winter-10217215.html

[10] Quiggin, J. (2014) ‘Electricity privatisation in Australia: A record of failure’ 20 February, 2014

Disclaimer: "The views/contents expressed in this article are the sole responsibility of the author(s) and do not neccessarily reflect those of Modern Ghana. Modern Ghana will not be responsible or liable for any inaccurate or incorrect statements contained in this article." © Lord Aikins Adusei

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