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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 fromJanuary 2011. Tanescos original requests were to hike the utilitys tariff by 34.6 per cent in2011, 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 notgood 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 encounteredby Tanesco.

Below are the authors perspectives on some challenges faced by Tanesco and whether price hike

is the appropriate solution.

1. Public monopoly status as a problemAmong the core sources of the problems and challenges facing Tanesco is its duo status first as apublic 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 twomasters 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 alternativesupplier. 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 stateownership and control as well as the monopolistic status of Tanesco.

2. Inability to enjoy economies of scaleLarge 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 itscustomer 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 payingfor poles, wires, meters and other equipment.

It would also be more strategically correct to reduce the tariff thereby luring more customers thatwould make Tanescos 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 2013one misses the medium and even long term solutions by Tanesco.

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3. High operational costsGiant 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 forsome 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 appropriatesolution 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 inefficienciesDue 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-inputssupply 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 cannotbe 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 andmagnitudes. The needed decision-making and operational autonomy to save the market tends tobe 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 makingand 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 ofthe 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 toemerge stronger and taller from the current situation is among the best ways forward.