Africa Energy: Donors support tariff hike in Malawi

Three of the country’s development partners—United States of America, Germany and the World Bank—have backed proposals to increase electricity tariffs, saying Malawi has the lowest charges in sub-Sahara African region which burdens the utility company.

Writing in The Nation of September 14 2018 in a co-authored opinion piece, Ambassadors Virginia Palmer (US) and Jurgen Borsch (Germany) and World Bank country manager Greg Toulmin argued that Malawi’s prevailing power crisis is partly a result of the Electricity Supply Corporation of Malawi (Escom) being overburdened because it sells electricity for less than it costs to produce the same.

The trio said Malawi needs to take the painful way to implement cost-reflective tariffs which would in turn improve the situation on the ground.

They said no amount of effort, including interconnection project with neighbouring Zambia and Mozambique, will provide the desired results apart from raising the tariffs.

Reads in part their case: “Today, Escom customers pay one of the lowest average electricity tariffs in sub-Saharan Africa at K58 per kilowatt hour. The cost of maintaining these artificially low electricity tariffs is staggering; the government will need to find over K50 billion a year, in subsidies, if current tariffs remain in place.

“For too many years, Malawi’s electricity sector was under-funded because the price of electricity failed to reflect the cost of sustaining and expanding the electricity infrastructure. Since 2014, the average price of electricity has increased by 37 percent. These increases may look substantial, but they are not enough to restore Escom’s finances. As a result, Escom has been struggling to connect new customers, and Malawi’s electrification rate is one of the lowest in the world.”

Available data shows that less than 11 percent of the Malawi population has access to electricity. But the few connected to the national grid endure long hours of blackouts, a development which threatens the economy and individual livelihood.

Reacting to the donors’ position, economist Henry Kachaje agreed with the diplomats that it is a fact that Escom cannot improve service delivery if it generates electricity at a higher cost than it charges for it.

But he said the cost-reflective tariffs can only work where internal systems at Escom are strengthened to avoid abuse of resources.

Said Kachaje: “It must be appreciated that Escom is riddled with far too many misprocurement scandals and financial mismanagement to give confidence to the consumers that any increase in tariffs would result in improved service delivery. The starting point, therefore, is to clean up the mess at Escom. Let there be decisive and resolute actions taken to restore the integrity of the institution before talking about tariff increases as a solution.”

Business and economics journalist Kingsley Jassi said while Escom is rocked with inefficiencies, an increase in tariffs is more appropriate to boost the financial capacity of the utility company.

He said calls to put Escom’s house in order are justifiable, but can be dealt with separately, and should not be used as an excuse to stop the raise in tariffs.

The donors’ call for tariff hike is backed by a recent Cost of Service Report prepared by Economic Consulting Associates (EC) Limited contracted by the Millennium Challenge Account-Malawi (MCA-Malawi) and on behalf of Escom and the Electricity Generation Company (Egenco).

The report sought to develop a Cost of Service and Tariff Study and support Escom and Egenco in the submission of a tariff application to the Malawi Energy Regulatory Authority (Mera) ahead of the implementation of a new four-year tariff to run from July 2018 to June 2022. The report seeks to promote cost-reflective tariffs for improved service delivery.

But in a telephone interview last Friday, Consumers Association of Malawi (Cama) executive director John Kapito expressed doubt if increased tariffs will improve the situation saying government has over the years adjusted the electricity price yet customers have not benefited.

Escom is currently seeking to borrow K30 billion from commercial banks to finance its K55 billion deficit after Treasury rebuffed its bailout request.

Escom board chairperson Thom Mpinganjira said the overall objective behind the move to borrow is for the good of the country.

He said: “If we are to not to borrow from banks now, then Escom will have to shut down.”

But Parliament’s Budget and Finance Committee, Consumers Association of Malawi (Cama) and Malawi Economic Justice Network (Mejn) objected to Escom’s planned commercial borrowing while the Institute for Chartered Accountants in Malawi (Icam) backed the plan, saying it is critical to rescue Escom from going under.

Escom chief executive officer Allexon Chiwaya told the Budget and Finance Committee of Parliament on Tuesday that Escom expects to repay the K30 billion it seeks to borrow from commercial banks over a period of five years at the rate of K800 million per month.

Basic calculations show that at the rate of K800 million per month, over a period of five years or 60 months, Escom will have paid the banks an equivalent of K48 billion.

In the financial year ending June 30 2018, Escom made an K8 billion loss after making a K6 billion profit in the 2016/17 fiscal year.source: The Nation