Who benefits from electricity subsidies?

Three weeks ago, the Government decided to increase electricity tariffs by 40%. A week after the announcement, Parliament passed a resolution suspending the increases. According to parliamentarians, high electricity tariffs will harm the poor. There are 358,000 households on the national electricity grid today. If we assume that every household in Uganda has eight people, there are 2.9 million people on the grid. Given that Uganda’s estimated population is 34 million people today, that is 8.5% of the population using electricity from the national grid.
More still, power lines are absent in most of the country. Rural electrification has not yet covered even 20% of the settled land area. Therefore, most electricity is limited to urban areas. The vast majority of Ugandans, even those who can afford it, do not have access to the grid. Given that initial installation costs are sh200,000 per household, most poor people in close proximity to the grid cannot afford to connect electricity to their homes. Why then should Parliament be fighting to retain subsidies used only by a minority of rich citizens?
This financial year, the government of Uganda will pay sh560b subsidising electricity. This is the 5th largest expenditure on the budget after education, roads, health and defence. This financial year’s budget is sh10 trillion. So electricity subsidies consume 5.6% of it. Uganda’s total tax revenue for 2011/12 is expected to be sh6.0 trillion. Therefore, electricity subsidies take 9.2% of that.
Now, 92% of Ugandans who are not on the grid rely on kerosene for lighting and firewood for cooking. These two are not subsidised even though they are the sources of energy for the majority of Ugandans especially the poor. On the contrary, until July 2011 there was a tax on kerosene worth sh200 per litre. There was little public demand to remove it; the suggestion came as part of the East African Community initiative. So energy subsidies benefit a small minority composed largely (not entirely) of elites living in urban areas – the very people who can actually afford electricity.
Here is how the subsidy works. Although the cost of a unit of electricity is sh1,000, big and medium scale businesses pay only 18% of this price i.e. sh180. Government tops up the balance with sh820 (82% of the price). Meanwhile, domestic (households) and small businesses pay sh385 per unit of electricity (38.5% of the price) and government pays sh615 for them (61.5%). If government removed subsidies so that the price everyone pays for electricity reflect its actual cost, the bill for big businesses will increase by 420% while that of households and small businesses will increase by 260%.
Government has been reluctant to remove subsidies because it is likely to ignite mass protests in Kampala and other towns. Yet if it removed them, it would save the economy from a huge fiscal drain. So, what was the reason behind these subsidies and what has kept them going for five years? Of course stupidity in government is one reason. However, as I shall explain later in this article, the tiny minority of upper and middle income Ugandans in alliance with big business possess veritable political weight? This has allowed them to leverage access to power to allocate themselves privileges at the expense of the masses.
According to 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 358,000 are “domestic” i.e. household consumption. Now, 60% of the total electricity is consumed by these 2,000 large industrial organisations and medium scale enterprises. Only 40% is consumed by small businesses and as “domestic.” These small scale businesses employ the vast majority of Ugandans constitute.
Mathematically, of the sh560b spent on electricity subsidies, sh430b is paid by government of Uganda for these large industrial organisations and medium scale enterprises. According to Umeme, there are only 100,000 households who pay less than sh25,000 in electricity per month. We can assume these are the poorest section of electricity consumers since sh25,000 is equivalent to consumption of about 60 units per month. For these families, government pays sh39b per year in subsidies – less than 10% of what big businesses get. 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. The other 258,000 electricity consumers are largely drawn from the middle and upper classes. Bluntly, government pays 60% of electricity Karim Hirji, Sudir Ruparelia, James Mulwana, Gordon Wavamuno, etc use at their homes – their stereos, freezers, garden and swimming pool lights, fridges, washing machines, plasma screens, saunas, steam baths, massage chairs etc in the name of helping the poor.
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 – above one million bottles per day. Electricity costs them about sh170m per month, sh2.0 billion per year. This means for every bottle of soda they sell, electricity costs them only sh5.2. In 2011, CBC made sh24b in profit.
How do these statistics impact on the business? Assuming CBC was made to pay the actual price of electricity i.e. sh1,000 instead of sh180 per unit. Its electricity bill would jump from sh170m to sh714m per month i.e. from sh2.0b to sh8.4b per year. If they decided to absorb this shock on their P&L, this would reduce their profits from sh24b to sh18b i.e. they would remain profitable. Yet Century Bottling Company can actually transfer the entire cost of the electricity tariff unto the price of soda. Here, the cost would be sh8.4b divided by the 384 million bottles they sell per year i.e. sh22 per bottle.
Now how many people would stop drinking coke because its price went up by sh22? In fact Coke can increase the price of soda by sh50 and still suffer insignificant decline in the demand for their product. Consumers who do not want to pay this price cannot die. There are many substitutes especially for the poor who can drink banana juice.
I am willing to admit this mathematics may be hard on large manufacturing industrial organisations like Hima and Tororo Cement. For example, Hima pays sh1.8b per month in electricity i.e. sh22b per year. Hima produces 17 million bags of cement per year. Transferred to every bag of cement, this amounts to sh1,300 per bag today. If Hima were to pay the full price of electricity, its annual bill would jump to sh92.4b – 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 sh4,000 per bag.
Currently, Hima cement gets to Kampala at sh27,000 per bag while Bamburi from Kenya gets to Kampala at sh28,000 per bag. If Hima were to increase its cement by sh4,000, it would become uncompetitive. The policy questions for Uganda then are: Could these electricity subsidies be sustaining particular inefficiencies at Hima? Are there other efficiencies Hima can create that can make it more competitive other than electricity subsidies? Does Uganda need to sustain an uncompetitive industry at all? Will the country recover the costs of the subsidy through the tariff when Bujagali comes on line? What is the policy to achieve this?
For now, industrial organisations such as Hima, Roofings, Tororo, Steel Rolling and Casements are the exception not the rule in the electricity tariff subsidy. Most of the beneficiaries of the subsidies do not need or deserve them. Take the example of MTN: In 2010, it made sh240b profit. Its total electricity bill is sh4.6b per year. This means that the Government paid sh15.6b of MTN’s electricity bill. If MTN paid the actual price of electricity, its bill would jump to sh19.2b. If they billed this to their P&L, it would reduce their profits from sh240b to sh226b – a small amount in the wider scheme of things.
In fact because MTN sells 400m minutes of airtime per month, the cost of the subsidised tariff on airtime would be one shilling only. If they paid the actual price, the cost of airtime would raise sh4.2 only per minute. The same applies to Stanbic Bank. Its total electricity bill per month is sh70m (sh840m per year). This means that the Government pays for them sh300m per month (sh3.6b per year). If Stanbic paid the actual electricity tariff and transferred it to its P&L, its profits would decline from sh150b (early estimates for 2011) to sh146b. Surely, Stanbic can afford that reduction in its profit.
If sh560b this financial year paid in subsidies was used to improve our road infrastructure in Kampala and major highways, the productivity gains resulting from this would increase economic growth by anything between one to two percentage points. This would increase the competitiveness of these companies.
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 tariff. For example, over the last few years, Uganda has paid sh2.0 trillion in these subsidies – enough to resurface 1,500 kilometres of tarmac roads in a country collapsing under the weight of potholes. Assuming it costs sh50m to build a classroom, the subsidies would have built 50,000 classrooms for our students who study under mango trees. The same money would have trained 50,000 doctors or 300,000 nurses.
Some argue that even if this money was saved from subsidies, it would not be used to deliver the aforementioned public goods and services given rampant corruption in the country. Here, we need to establish the actual price of graft in the country. Current estimates show that every year, sh500b is stolen from the budget – that is actually a theft rate of 5% in a budget of sh10 trillion. I want to quadruple the theft rate and assume that 20% of the budget ends up in the pockets of thieves. This would mean that out of sh560b that pays for subsidies, only sh112b would be stolen. Even then under this worst case scenario of corruption, at least sh450b would remain to serve the public good.
The question therefore is why has this country been entangled in this policy disaster? The answer is 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 democracy as Uganda does today when its per capita income or structure of society was where our country is today. More still, our country enjoys a vibrant civic life – we have a vigilant media, active civil society and strong opposition political parties. On the face of it, therefore, Uganda’s democracy should produce public policies that favour the majority of its poor citizens.
Over the years, it has increasingly become clear to me that the institutional architecture of democracy as we have inherited it from the western world is (to use a cliché I hate) necessary but not sufficient to provide voice to the vast majority of our citizens. For example, we have seen above that although the electricity subsidies are presented in popular media as benefiting the poor who cannot afford a higher tariff, they actually benefit rich corporate barons and the middle and upper classes of our society.
In a 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 elite largely in urban areas. The 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 mass 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.
When then does popular debate by civil society, opposition parties and the mass media defend these subsidies? Here is a clear case of self interest; the actors in all these platforms and are the same people who benefit from these subsidies. They use these platforms to promote their interests although they do so in the name of defending the poor. Therefore, the difference between those in government (who created these subsidies) and those in opposition to it (who defend them) is only in form, not substance i.e. one is in power, the other outside of it.
If the sh430b going to large corporations was going to support the rural poor, one would say the democratic process is working – even though I would still urge government against subsidising consumption. The current subsidies are neither just nor fair and they are neither economically viable nor financially sustainable. Do away with them.