Uganda’s $200m electricity subsidy gravy train

On January 11, the Uganda Cabinet agreed to increase electricity tariffs. If it had removed all electricity subsidies, which amount to $202 million annually, prices would have gone up by over 300 per cent on average.

In the end, it increased the tariffs by 40 per cent, suggesting that many rounds of price hikes will come in the near future.

Since 2005, the Uganda government, according to the Vision newspaper has paid out nearly $500 million in such subsidies.

I have been arguing that the government should remove these subsidies altogether. Although the cost of a unit of electricity is Ush1,000 (40 US cents), big and medium scale businesses pay only 18 per cent of this price — Ush180 (7 US cents).

The government tops up the balance with Ush820 (30 US cents) — 82 per cent of the price. Meanwhile, domestic households and small businesses pay Ush385 (15 US cents) per unit of electricity, or 38.5 per cent of the price, and the government pays Ush615 (24 US cents) for them, or 61.5 per cent.

If the government allowed the price everyone pays for electricity to reflect its actual cost, the bill for big businesses would increase by 420 per cent while that of households and small businesses would increase by 260 per cent.

It is very likely that this announcement of a 40 per cent increase alone will cause mass protests in Kampala and other towns; and cause big businesses to begin lobbying for keeping the tariff low.

If the government scrapped the subsidies altogether, the economic returns would save the Uganda economy a huge fiscal drain. However, the resultant political protests are likely to make the government retreat from pushing this sensible policy.

If emotions are cast aside, there are more reasons why the Uganda power subsidy is nonsensical.

Today, only 12 per cent of Ugandans are hooked into the national grid. The other 88 per cent rely on kerosene for lighting and firewood for cooking. So what gives this tiny minority such political weight?

We shall return to this later in this article but first the facts.

Today, the government of Uganda spends Ush560 billion ($202 million) per year subsidising electricity.

This is the fifth largest expenditure in the budget after education, roads, health and defence.

This financial year’s budget is Ush10 trillion ($4.4 billion).

So electricity subsidies consume 5.6 per cent of it. Uganda’s total tax revenue for 2011/12 is expected to be Ush7.0 trillion ($2.8 billion). Therefore, electricity subsidies take 8.0 per cent of that.