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.

If this is not crazy public policy, then I don’t know what to call it.

The 88 per cent of Ugandans who use kerosene and firewood for energy do not enjoy the benefits of this subsidy because the cost of this source of energy is not subsidised by the state.

On the contrary, until July 2011, there was a tax on kerosene worth Ush200 per litre (0.8 US cents), or 8.7 per cent on the price.

There was little public demand to remove it; the suggestion came as part of the East African Community initiative.

So energy subsidies benefit a small minority composed largely if not entirely of elites living in urban areas — the very people who can actually afford to pay the full market price for electricity.

According to Umeme, the national electricity distribution company, there are 450,000 connections to the grid in Uganda.

Of these, 2,000 are large and medium-scale enterprises; 90,000 are small businesses and 350,000 are “domestic” or household consumption.

Now, 60 per cent of total electricity is consumed by these 2,000 large industrial organisations and medium scale enterprises.

Only 40 per cent is consumed by small businesses and as “domestic.”

These small-scale businesses employ the vast majority of Ugandans.

Mathematically, of the Ush560 billion ($226 million) spent on electricity subsidies, Ush336 billion ($137 million) is paid by the government of Uganda for these large industrial organisations and medium scale enterprises. These companies pay only Ush60 billion ($24 million) from their pockets.

The government pays about Ush90 billion ($36 million) as electricity subsidies for small businesses; Ush34.65 billion ($14 million) they pay for themselves.

This also applies to domestic consumers. Therefore, the biggest beneficiaries of these subsidies are a tiny group of corporate barons.

Within the category of “domestic consumers,” most electricity is consumed by the rich who have refrigerators, televisions, freezers plus security and garden lighting. Indeed, of the 360,000 connections categorised as “domestic,” only 100,000 pay less than Ush25,000 ($10) per month.

To be able to spend this much requires someone to consume about 75 units of electricity per month, i.e. using about two to three bulbs in the house only.

Indeed, given that the electricity grid is absent in most of Uganda, the poor don’t have access to electricity.

And even where they have access, the initial installation costs of Ush200,000 ($80) are too prohibitive.

Therefore, it means that the government pays subsidies to 260,000 Ugandans largely drawn from the middle and upper classes.

These are people with a minimum per capita income of $5,000 per year.

In power purchasing parity, it amounts to $12,000. At that level of income, the person is well off even by international standards.

This is the category of households that the Uganda government subsidises under the pretext of “helping the poor.”

Most debate in the mass media claims that electricity subsidies are meant to help the poor cope with this expensive yet necessary service.

Yet the evidence above suggests that the biggest beneficiaries are large industrial organisations and middle and upper income households, not the poor.

Most of these are multinational companies that make billions of shillings in profit per year, which they repatriate, to their shareholders abroad. Ugandans need a fair electricity regime where everyone meets the costs of what they consume at the actual price.

In fact, the big industrial organisations that consume most of the electricity subsidy are the ones who can afford to either accommodate it on their profit and loss (P&L) account or simply pass it on to the consumer through the prices they charge for their goods and services.

Take the example of Century Bottling Company CBC, the producers of Coca Cola in Uganda. Every year, they sell 16 million crates of soda or 384 million bottles — over one million bottles every day.

Electricity costs them about Ush170 million ($68,000) per month, Ush2billion ($809,700) per year.

This means that for every bottle of soda they sell, electricity costs them only Ush5.2. In 2011, CBC made Ush24 billion ($9.7 million) in profits.

How do these statistics impact on the business? Assuming CBC were made to pay the actual price of electricity i.e. Ush1,000 ($40 US cents) instead of Ush180 ($7 US cents) per unit. Its electricity bill would jump from Ush170 million ($68,000) to Ush714 million ($289,000) per month — that is, from Ush2 billion ($809,700) to Ush8.4 billion ($3.4 million) per year.

If they decided to absorb this shock on their P&L, this would reduce their profits from Ush24 billion ($9.7 million) to Ush16 billion ($6.4 million), that is, they would remain profitable.

Yet Century Bottling can actually transfer the entire cost of the electricity tariff onto the price of sodas.

Here, the cost would be Ush8.4 billion ($ 3.4 million) divided by the 384 million bottles they sell per year, equal to Ush22 per bottle.

Now, how many people would stop drinking coke because its price went up by less than Ush22 ($1 cent)? In fact, Coke can increase the price per bottle by Ush50 (2 US cents) and still suffer only an insignificant decline in the demand for their product. Consumers who don’t want to pay this price won’t die.

There are many substitutes, especially for the poor, who can drink banana juice.

I am willing to admit this mathematics may be hard on large manufacturing industrial organisations like Hima and Tororo Cement. For example, Hima pays Ush1.8 billion ($728,000) per month in electricity, or Ush22 billion ($8.9 million) per year. Hima produces 17 million bags of cement per year.

Transferred to every bag of cement, this amounts to Ush1,300 (52 US cents) per bag today.

If Hima were to pay the full price of electricity, its annual bill would jump to Ush92.4 billion ($37.4 million) — enough to wipe out their profits three times over.

The only way Hima can accommodate the actual tariff is to transfer it to every bag of cement — which would be Ush4,000 ($1.61) per bag.

Yet such industrial organisations as Hima and Tororo are the exception, not the rule in the electricity tariff subsidy. Take the example of MTN: In 2010, it made Ush240 billion ($97 million) in profit. Its total electricity bill per month is Ush380 million ($153,800)  or Ush4.6 billion ($1.8 million) per year.

This means that the government paid Ush15.6 billion ($6.3 million) of MTN’s electricity bill. If MTN paid the actual price of electricity, its bill would jump to Ush19.2 billion ($7.7 million).

If they billed this to their P&L, it would reduce their profits from Ush240 billion ($97 million) to Ush226 billion ($91 million) — a small amount in the wider scheme of things.

In fact, because MTN sells 400 million minutes of airtime per month, the cost of the subsidised tariff on airtime would be one shilling only. If they paid the actual price, the cost of airtime would rise less than Ush12 ($1 cent) per minute. Given that all other telecom companies would suffer a similar cost, the effect on their business would be minimal.

Let me also use Stanbic Bank. Its total electricity bill per month is Ush70m ($28,300) or Ush840 million ($340,000) per year.

This means that the government pays for them Ush300 million ($121,000) per month or Ush3.6 billion ($1.45 million) per year.

If Stanbic paid the actual electricity tariff and transferred it to its P&L, its profits would decline from Ush90 billion ($36 million) to Ush86.4 billion ($34.9 million). Surely, Stanbic can afford that reduction in its profit.

The same would apply to Standard Chartered Bank which pays Ush46 million ($18,600) in electricity per month or Ush552 million ($223,000) per year while the government pays for them Ush147m per month ($59,000) or Ush1.8 billion ($714,000) per year. With Ush70 billion ($28.3 million) in profits in 2010, Stanchart’s profits would only fall to Ush68.2 billion ($27 million).

Clearly therefore, claims that increased electricity costs make our large-scale enterprises uncompetitive are misleading.

Secondly, even if they were true, there are better ways to increase their competitiveness — like reducing certain taxes.

Indeed, if Ush560 billion ($226 million) per year paid in subsidies were used to improve our road infrastructure in Kampala and major highways, the productivity gains resulting from this would increase economic growth by anything between one and two percentage points. This would certainly increase the competitiveness of these companies.

The critical argument about these subsidies is their opportunity cost — the value of the alternative public goods and services that would otherwise have been delivered had the country made everyone pay the actual price of the electricity tariff.

For example, over the past few years, Uganda has paid Ush2.0 trillion ($809 million) in these subsidies — enough to resurface 1,500 kilometres of tarmac roads in a country collapsing under the weight of potholes.

Assuming it costs about Ush50 million ($20,000) to build a classroom, the subsidies would have build 50,000 classrooms for our students who study under mango trees.

The same money would have trained 50,000 doctors or 300,000 nurses.

All these alternative investments have a rate of return far above what the country is getting from the electricity subsidies.

The government is throwing money largely at households and companies that neither need nor deserve it. Ironically, this money is being transferred from paying for public goods and services that would benefit the poorest sections of our society but would also benefit the very companies and rich households who are currently enjoying these subsidies. The question is: Why is Uganda entangled in this wrongheaded policy?

The answer is politics.

It would be wrong to argue that this distortion is a result of the authoritarian character of the government of Uganda.

Indeed, going by many objective criteria like level of education, per capita income, the ratio of rural to urban population etc, Uganda punches above its weight in democratic practice.

No Western country enjoyed the level of democracy Uganda does today when its per capita income or structure of society were where the country’s is today.

Moreover, the country enjoys a largely vibrant civic life — a vigilant media, activist civil society and strong opposition political parties. On the face of it, therefore, Uganda’s democracy should produce public policies that favour the majority, not the minority.

Over the years, it has become increasingly clear that the institutional architecture of democracy as Uganda and other East African countries inherited it from the Western world is necessary but not sufficient to provide a voice to the vast majority of our citizens.

For example, although the electricity subsidies are presented in popular media as benefiting the poor who cannot afford a higher tariff, they actually benefit rich corporate barons and the middle and upper classes of our society.

How can 12 per cent of Ugandans on the grid take 5.6 per cent of the budget and 7.5 per cent of total revenues as the poor go hungry?
The answer lies in our inherited institutional architecture of democracy. In the conventional understanding of democracy, citizens exercise their voice through civil society organisations, the mass media and political parties.

However, the people who dominate these platforms for democratic expression in Uganda and most nations of Africa are a tiny minority of Western educated elites, largely residing in urban areas.

Yet the vast majority of citizens are semi-educated, rural poor who hardly participate in these platforms.

Instead, they participate in civic life through their tribes/clans, perhaps their churches and mosques and through their local councils if they work at all.

All too often, none of these platforms promotes much public policy debate. Instead, they are vehicles for dealing largely but not entirely with cultural and religious issues and — in the case of local councils – handling local disputes over land, even between wives and husbands.

Because they are educated, urban elites are the most articulate and vocal sections of our society.

They have access to the mass media, to civil society organisations and to political parties. They can use these platforms to mobilise and organise to defend and promote their interests. And they can rally donors to support their cause. Also because they are urbanised, they are the best positioned to mobilise for any cause and they can use modern technology to reach everyone.

And because they live at the centre of power – like the capital city Kampala – they can easily paralyse the government through street protests.

Therefore, democracy really is not about the popular will per se. It is about the will of that section of Ugandans that has the capacity to place its demands on the national political agenda and do so effectively. It is not their numbers that gives them a politically weighted majority. It is their access to modern methods of social mobilisation. In the process, the elites have rigged the democratic process to create minority privileges at the expense of the many – and that is why you have electricity subsidies.

How about the corporate barons who take the lion’s share of electricity subsidies? These are the moneyed interests that finance elections and can fix an appointment with the president, his ministers, Members of Parliament and other influential decision makers.

They advertise in media to get favourable coverage for their interests. They do not use open political forums to advance their cause. They lobby behind closed doors. Money gives them access, which gives them influence over public policy.

But how come debate on public policy does not highlight these distortions?

The vast majority of Uganda’s elite — the term chattering classes is better — lack a solid middle-class culture. Being first-generation graduates from the village and its attendant peasantry background, we lack the discipline to investigate or research public policy.

We take positions on public policy largely on emotions, bias or prejudice. Most debate on public policy in Uganda is about scoring political points, not shedding light on the issues.

Of course, there is self-interest as well. For example, the chattering classes who dominate the media, NGOs and parties are also beneficiaries of the subsidies on electricity. However, their take on this subsidy is small. Assuming someone pays Ush100,000 ($40) in electricity bills per month, it means the government pays for them Ush160,000 ($64) or Ush1.9 million ($777) a year.

Uganda’s chattering classes are avoiding this extra amount at the price of allowing corporate barons to get away with billions from the taxpayer.
Uganda’s chattering classes are as corrupt as the government officials they are wont to criticise.

For instance, in exchange for a bribe of $ 200,000 on a road project, a public official in Uganda will let a foreign contractor inflate the price by over $10 million and even turn a blind eye when the contractor does not construct the right quality of road.

This is what has made corruption in Uganda corrosive. It is also the same logic that underpins electricity subsidies.

If the Ush336 billion ($136 million) going to large corporations were going to support the rural poor, one could say the democratic process is working. If the government has made this fatal error, we would expect to hear the opposition defend the interests of the rural poor — the majority. Instead, the opposition also supports these subsidies that benefit a few.

It is little wonder that 42 per cent of voters boycotted the election last year.

The political process does not represent the interests of the vast majority of our people.

The Cabinet thus cannot marshal the courage to overcome the self-interest of its members and end these ridiculous subsidies. In reducing the subsidy by only 40 per cent, it was also being self-serving.  

Andrew Mwenda is the strategy and editorial director of the Independent magazine of Kampala. E-mail: [email protected]