Uganda’s energy experts back move to cut subsidies amid tariff wars

Senior economists and ruling party legislators have backed a Uganda government decision to phase out power subsidies.

Even as manufacturers and opposition politicians criticised a decision that saw electricity tariffs rise, the economists at a forum organized by Makerere University’s Economic Policy and Research Centre, argued that diverting money away from power subsidies and channeling it towards development of additional generation capacity would benefit more citizens and support the provision of social services particularly; education, health and road infrastructure better.

Arguing that it was not equitable for government to subsidise a service that benefits only 10 per cent of Uganda’s 33 milion people that have access to the grid, PPA Energy Consultants CEO Neil Pinto said government was “taking a bold decision to do away with subsidies.”

It is estimated that close to UShs1.5 trillion ($0.62billion) has been spent on electricity subsidies since 2006.

This is in contrast to slow development in generation capacity from renewable capacity with the 250MW Bujagali hydropower station being the only significant development during the period.

Ruling party legislators, passing resolutions at a party retreat where among other things they signed away a one off car allowance of Ushs 100 million ($42,000) that would set back the taxpayer $13 million, also supported the subsisdies.

The Uganda Manufacturers Association cautioned  that the tariff increase that came into force on January 15 and is expected to rise further as the sector is progressively weaned off subsidies, would increase the cost of doing business and negatively impact Uganda’s competitiveness in the region.

“The unilateral decision by Electricty Regulatory Authority to hike the cost of power in an environment that is already uncompetitive as indeed confirmedby the World Bank and other reputable public and private agencies; is tantamount to an indirect decision of condemning Uganda,” UMA Chairman Kaddu Kiberu told The EastAfrican.

Government argues that it had ran out of options after the UShs417billion ($175Million) it had budgeted for subsidies this financial year was exhausted in November 2011 on the back of a depreciating shilling, spiraling inflation and higher international prices for crude.

International crude prices rose from $60- $70 per barrel at the beginning of 2010 to about $100 - $110 per barrel at the end of 2011.

“The money freed from the subsidies will be used to finance the implementation of other critical government projects including the development of cheaper electricity sources like  the construction of the 660MW Karuma Hydropower project that commences this year,” Energy Minister Irene Muloni said on January 12.

Uganda’s Private Sector Foundation Executive Director, Gideon Badagawa said the decision is welcome though will increase the costs of factors of production.

“It is wise decision for the government to channel the funds into the transmission of electricity than subsidising.

Our only worry is that it is being implemented at the wrong time when the costs of doing business are already high,” Mr Badagawa said.

Norway’s Energy Counselor, Katrin Lervik, said Uganda needed to implement the new tariffs since the country needs faster reforms in the electricity sector.