Electricity tariffs to rise by 40%

More suffering awaits Malawians as the country’s sole electricity provider, Escom, will soon increase power tariffs by 40 percent, the fourth time the State-owned utility company has adjusted the cost of electricity since May 2012.

This means from May 2012, the cost of electricity will have gone up by 124 percent cumulatively, having risen by 84 percent by May 2013.

But as people’s salaries stagnate while some companies are still regaining their footing following the battering they received from the crippling fuel, power and forex shortages, the road ahead for many is bumpy.

Meanwhile, after a brief respite for Malawians on account of tobacco proceeds and donor aid flows that have helped buoy the economy, the cost of living has picked up momentum again, requiring a minimum of K102 461 (about $256) for a family of six to survive in a month, against a minimum wage of under K10 000 (about $25).

Escom director of generations Evans Msiska, the bearer of the message of doom, told Nation on Sunday on Wednesday that the adjustment will help Escom to recoup the cost of producing and distributing electricity.

Msiska’s announcement is in keeping with the doctrine of free market reforms the Joyce Banda administration began implementing in 2012, marked by liberalised utility prices that reflect the cost of producing and distributing the product.

The impending tariff adjustment comes against the background of the rolling out on Friday of the massive $350.7 million [about K126 billion] Millennium Challenge Corporation (MCC) Power Sector Revitalisation Project that many hoped would improve efficiency at Escom and reduce constant power cuts that analysts say have helped derail economic development.

“Supplying power is an expensive venture and Escom needs to fully recover its costs. The tariffs will continue changing to fully recover the costs,” said Msiska, in delivering a message that tells only a partial story.

Cost of Escom inefficiencies

The costs the power guru is talking about include massive inefficiencies that Escom incurs in producing and distributing electricity. This means to a large extent, tariff rises are one way Escom forces Malawians to bear the cost of its incompetence.

Because it is a monopoly, the implication is that Escom has some immunity from the punishment it would suffer from consumers in a competitive market.

Conservative figures show that Escom loses between 20 percent and 30 percent of the electricity it produces because of poor transmission processes. The company passes this cost to the consumer in the form of tariff adjustments.

Unfortunately for Malawians, because of Escom’s hegemonic position, entry barriers in the energy market are so forbidding that it is inconceivable that a viable player will enter the fray in the foreseeable future.

Political interference and patronage have also added to Escom’s inefficiency. The parastatal has in the past wasted its meagre resources to support parties in power at the expense of fulfilling its mandate by investing such money in new power projects and improving existing generation, transmission and distribution systems.

There are several incidences on record in which the parastatal would fuel its trucks to ferry supporters of ruling political groupings.

Just a few weeks ago, the corporation—which is struggling to remain solvent—courted trouble by donating K35 million to President Joyce Banda’s safe motherhood pet programme that is increasingly looking like a political vehicle at a time the company says it does not have enough funds to ease power outages.

Political appointees

Government’s appointment of politically connected chief executives and board of directors who have no idea about running a business is also blamed for worsening the company’s inefficiencies, which are then passed on to consumers as “costs of producing and distributing electricity.”

Many players hope that the coming of the MCC will help end the management by patronage at Escom and bring efficiency to the moribund company.

The MCC energy sector programme seeks to address such inefficiencies and breathe new life into the sector to improve the availability, reliability and quality of power supply.

It is no easy task, given the entrenched inefficiencies, wastefulness and other structural problems that have sapped the life out of the power monopoly.

The first visible impact of the MCC programme will be the 40 percent tariff rise because this is one of the major items under the project.

MCC resident country director Oliver Pierson told Nation on Sunday last Friday that the governments of Malawi and United States of America (USA) agreed before the project rolled out that Malawi must define a timeline for phased implementation of full cost-recovery tariffs to be completed by the end of the project in 2018.

“A full cost-recovery tariff is important for Malawi’s economic growth as it will allow Escom to gain enough revenue to cover their costs, including the maintenance and expansion of Malawi’s electricity infrastructure,” he said.

But Pierson said any tariff increases introduced when the Malawi Energy Regulatory Authority (Mera) adopts the next four-year electricity base tariff in early 2014 will not come as a result of MCC requirement.

He said beyond 2014 tariff adjustments will be based on a comprehensive Mera-led review and consultation process under the Electricity Act of 2004.

“…and will be an important first step towards a fully cost-reflective tariff that will eventually cover Escom’s working and investment capital needs and better meet electricity demand in Malawi. The recent tariff adjustments Escom has made have been a result of the Automatic Tariff Adjustment Formula, which factors in inflation and exchange rate issues, but have not led to a fully cost-reflective tariff yet,” said Pieterson.

That is for officials.

Paying through the nose

For ordinary Malawians whose incomes continue to be assailed by the rising cost of living, more pain and gnashing of teeth lie ahead.

According to the Centre for Social Concern, based on the May 2013 Basic Needs Basket, the average electricity bill for a person living in Lilongwe is K6 144 per month, while in Zomba it is K2 956.

For somebody living in Blantyre, the average is K2 849 while for Mzuzu it is K1 363. Add 40 percent to these figures, and you know what it all means.

So if in April 2012 you were paying K3 000 a month in electricity bills, by May 2013 the figure had shot to K5 520. With the 40 percent rise, you will be paying K7 720. With power tariffs rising by around 124 percent over the past 16 months, salaries have jumped by just 50 percent, leaving households with little to sustain a decent living standard.

But Escom management argues that Malawians are better off with expensive electricity than no power at all, a view that is not fully shared by energy regulator, Mera, which also disputes that electricity charges will rise soon.

Mera acting chief executive officer Eunice Potani said in an interview last week: “Mera approves electricity price adjustments to ensure that the company is able to continue to provide the much needed service while at the same time ensuring that necessary safeguards are put in place to protect the consumers.”

Meanwhile, Escom’s Msiska also said as the MCC programme comes into force, not all projects that were planned will be implemented due to cost factors.

For example, he said, a major power plant designed to be erected at Ngumbe in Blantyre and a 400 KV line to supply the Centre and North were scrapped.

He said the money under the project was not enough to implement all the projects envisaged because budgeting for the project was done in 2009 and prices of most of the materials have since increased.

“For the period of the compact, we would need more money than the $350.7 million they are giving us. Upon agreement with the MCC and Ministry of Finance, we dropped some of the projects,” he said.

On his part, MCC’s Pierson said the compact was signed in April 2011 with a budget of $350.7 million before it was placed on operational hold in July 2011 and suspended in April 2012.

“After the compact was reinstated in June 2012, MCC reviewed all compact activities to assess the impact of the two-year delay on planned investments and determined that due to the delay, 10 percent cost increases had arisen across infrastructure portfolio stemming from inflation and commodity and equipment price increases,” he said.