How government is killing parastatals softly

For a moment, let us forget about the failure by Electricity Supply Corporation of Malawi (Escom) to meet customers’ demand for electricity due to insufficient generation capacity by its suppliers, the independent power producers (IPPs).

Instead, we should dwell on the lamentations of Escom chief executive officer Kamkwamba Kumwenda over the prevailing electricity tariffs in the country.

This week, he said Escom has been operating at a loss, now cumulatively pegged at K112 billion, since the dismantling of Escom’s monopoly in the energy sector.

Courtesy of the Power Sector Reform Project, Escom was, thus, split into two, leading to the birth of the Electricity Generation Company (Egenco) in 2018. The reforms targeted to attract private sector participation in electricity generation.

In the run up to the changes, it was submitted that a monopolistic electricity utility entity as Escom was at the time not conducive to creating an enabling environment for technology or business innovation, customer-oriented culture, power sector growth, economic efficiency as well as alignment of government’s and utility’s objectives.

Ever since the power market restructuring rolled out, it has not been a smooth ride for Escom. First, it literally fought with Egenco over billing issues and more recently a fierce conflict has ensued with Power Market Limited (PML), the single-buyer created by the reforms. PML is the story for another day.

Under the new arrangement, Escom is restricted to transmission and distribution of electricity to consumers. The generation business is the domain of Egenco which is predominantly doing hydro and other IPPs mostly generating through solar and small-scale hydro projects.

In his lamentation, Kumwenda said Escom buys electricity from IPPs at K140 per kilowatt hour (kWh) and sells the same to end-users or consumers at K104 per kWh, representing a loss of K36 per kWh.

“Escom is dying. The choice is ours, either we close Escom or increase tariffs,” he cried.

The situation is not peculiar to Escom. Most State-owned enterprises are in a similar predicament where they do not operate as businesses, but social service providers or indeed charities.

Here what comes to mind is the Agricultural Development and Marketing Corporation (Admarc), the State produce trader that was once a giant, but is now perpetually on a life-support machine, surviving on bail outs.

The parastatals face an awkward situation to balance social and commercial functions. In the case of Escom, it has to ensure increased access to electricity, including to rural areas while at the same time expected to make a profit and pay a dividend to the shareholder, the Malawi Government.

But then, it is the same shareholder throwing spanners in its works, as it were, by “imposing” prices that hardly make business sense.

Admarc was slaughtered in a similar manner. Its functions were split into commercial and social. The shareholder, the Malawi Government, was to pay for the loss-making markets to ensure a majority are not exploited by unscrupulous private traders. But the pledge has rarely been fulfilled.

It is a fact that pricing is tricky business, but what experts agree is that the price customers are willing to pay for a product or service has very little to do with the seller’s cost, but rather how much they value a particular product or service.

Given the pricing and business models among State-owned enterprises, which I am sure is influenced by political convenience or expediency, the Malawi Government Annual Economic Report will continue reporting about the poor performance of parastatals.

For years, reasons for the underperformance of most parastatals have been varied. But political interference from the State is one of the major contributors to the poor performance that has left most of the “sick babies” perennially on life-support machines.

To turn parastatals into profit-making entities that pay dividends, it is time best practices in corporate governance were embraced. It does not make sense for parastatals to be making losses in sectors they are monopolies.

Many governments are not known to be good entrepreneurs. This was one of the reasons private sector-based or led economic policy frameworks have been prescribed as keys to economic success. But at the pace things are going, the State-owned enterprises will continue to die a slow, painful death.