Electricity tariff hike: Simple solution to complex challenges?

Saturday, 01 January 2011 09:55

By Honest Ngowi
Regulator Ewura approved the Tanesco request to hike electricity tariff by 18.5 per cent from
January 2011. Tanesco’s original requests were to hike the utility’s tariff by 34.6 per cent in
2011, by 13.8 per cent in 2012 and by 13.9 per cent in 2013! Ewura has approved the 18.5 per
cent for 2011 to start with.

Among the key reasons for the Tanesco requests is its high operational cost. Hiked prices are not
good for consumers, Tanesco itself and indeed for the national economy. There is a need to
discuss whether the price hike is the appropriate solution for the complex challenges encountered
by Tanesco.

Below are the author’s perspectives on some challenges faced by Tanesco and whether price hike
is the appropriate solution.

1.    Public monopoly status as a problem

Among the core sources of the problems and challenges facing Tanesco is its duo status first as a
public enterprise and second as a monopolist. When the two characteristics are combined it
becomes even more of a complex situation. As a public enterprise Tanesco lacks the dynamism,
vibrancy, innovativeness, autonomy and competitiveness needed for high performance in the
market place. As a state owned enterprise in the market place, it has to save and please two
masters – the state and the market. This is a tricky balancing act.

As a monopolist Tanesco has no incentive to become competitive in terms of price, quality and
timely delivery. Consumers wanting the utility supplied by this monopolist have no alternative
supplier. Solution to the combined evils of public ownership and monopolistic characteristics
cannot be tariff hike. The appropriate solution lies in letting go and kissing goodbye the state
ownership and control as well as the monopolistic status of Tanesco.

2.    Inability to enjoy economies of scale

Large as it is and with a customer base of about 15 per cent only of the country population, the
overhead costs for Tanesco should be very high. It denies itself of an opportunity to increase its
customer base which would shoulder its colossal costs. Entry into Tanesco ‘net’ is prohibited by
huge charges involved in getting hooked to this utility. Instead of hiking tariff, it would be more
strategic for Tanesco to reduce substantially the entry costs its customers pay in form of paying
for poles, wires, meters and other equipment.

It would also be more strategically correct to reduce the tariff thereby luring more customers that
would make Tanesco’s enjoyment of economies of scale possible. Tanesco needs to think of
long-, medium and short-term options. With the request to hike tariff by 13.9 per cent come 2013
one misses the medium and even long term solutions by Tanesco.

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3. High operational costs
Giant as it is, Tanesco is likely to be confronted by colossal operational costs. These include such
fixed costs as salaries, incentives, administrative costs, insurance and contractual payments for
some of its suppliers even when not using their inputs. Operational costs in inflation-ridden
economy will always increase with time.
If this is to be ‘solved’ by increasing electricity tariff as signalled in the Tanesco requests to hike
tariff up to 2013 (at least), consumers will always suffer. Therefore sustainable and appropriate
solution lies in containing these costs not in hiking tariff. Brains and think tanks to identify and
advice on how to reduce such costs are available in the market.

4.Operational inefficiencies
Due to a number of inefficiencies, Tanesco is likely to be facing a number of technical and
commercial losses. Reasons include power leakages, inefficient collection of billed consumption,
use of labour intensive billing system in form of meter readers and much more. The uncollected
revenues in form of long outstanding debts/bad debts can be solved by proper revenue collection
including mechanization in form of the pre-paid LUKU system.

Inefficiencies in form of frequent power cuts and rationing due to problems on the factor-inputs
supply side should not be solved by tariff hikes. Issues like shortage of water in dams and gas
supply as well as technical problems of machinery due to breakdowns and long servicing cannot
be fixed by tariff hikes either. Solutions to operational inefficiencies lie home in instalment of
operationally efficient systems and procedures.
 

5. Political interference
Public enterprises tend to be confronted by political interference of various kinds and magnitudes.
The needed decision-making and operational autonomy to save the market tends to be wanting.
Captains of such enterprises tend to find their hands tied. There tends to be too many cooks in the
kitchen of such enterprises therefore the soup gets spoiled.

The dog finds itself being called from so many directions – including government and the market
- that it gets confused. Tanesco as a public enterprise is not likely to be an exception to this rather
unfortunate state of affairs. Solution to this lies in having political hands off the decision making
and operations of Tanesco not in perpetual hiking of tariffs.
Way forward

Of late Tanesco has been highly discussed and criticized. Such free inputs for improvement of the
seemingly sleeping giant is among the best Christmas and New Year gifts for the company and
the government that owns it. Taking the inputs positively and working on them in order to emerge
stronger and taller from the current situation is among the best ways forward.

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