Electricity cost going up 40%

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.