Electricity cost going up 40%

By Andrew M. Mwenda

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.