HomeIndustry SectorsFinance and PolicyGhana urged to stop water and power subsidies

Ghana urged to stop water and power subsidies

21 February 2013 – Subsidising water and power for political gain is crippling utility providers and letting down Ghanaian consumers, says the Centre for Policy Analysis (CEPA) in Ghana."It is time to end the political game over subsidies," the research body says.

The three power utility companies, Volta River Authority (VRA), Ghana Grid Company (GRIDCo), Electricity Company of Ghana (ECG) and the Ghana Water Company Limited (GWCL), have been explaining the reasons for problems with their services including why the country has been hit with shortages of electricity and water. This has reignited the debate on subsidies Ghanaweb reports.

All three service providers have cited the under-pricing of water and electricity among the causes of their woes. In 2012, the government announced subsidies worth US$94 million for water and electricity, a move that effectively shelved a quarterly automatic tariff-adjustment formula that had been introduced by the Public Utilities Regulatory Commission (PURC) in 2011. An extra US$272 million was earmarked for petroleum subsidies, with the final bill twice the allocation.

VRA says non-cost-reflective tariffs weaken its finances and are a disincentive for the fresh investment needed to boost power generation. The situation would probably have been better if the government fully reimbursed the VRA and other service providers for the low tariffs, but that is not always the case.

Debts owed by the government to VRA have hit US$267 million, according to its chief executive, Kweku Andoh Awotwi. Government ministries, departments and agencies also owe US$121 million, while ECG and aluminium smelter Valco owe US$142 million and US$44 million respectively bringing total public-sector indebtedness to it to nearly US$577 million.

The power producer currently spends US$50million every 20 days to import its crude oil requirements, which has become necessary after a deep-sea pipeline accident curtailed natural gas supply from Nigeria.

Executive director of CEPA Joseph Abbey says, "The country needs to go back to the drawing board," on the issue of subsidies. "VRA is telling us that it has not been paid for the subsidies. So it’s not just a question of the cost, though that is important, but also what we’re doing to the providers of the service.We can’t afford to have the VRA making losses when it is owned by the government.”

The arguments against subsidies, especially when they are universal rather than targeted, have always been clear enough; they are costly, and tend to make spending inefficient. They also encourage inefficient use of the subsidised commodity, and leave massive debts on the balance sheets of state-owned monopolies.

Four years ago, the Tema Oil Refinery (TOR) skirted the edges of bankruptcy after the government failed for years to refund losses the refinery had soaked up from under-pricing of petroleum products. Ultimately, the taxpayer was made to pick up TOR’s bills following the government’s conversion of the debts held by its creditors into interest-earning bonds.

Still, the petroleum subsidies did not go away with the refinery’s debts: between 2009 and 2012 the government spent US$788 million on them. The fuels are now under-priced by as much as 30% for petrol and diesel, 72% for kerosene and 88% for the premix fuel used in the fishing industry. The National Petroleum Authority (NPA) projects that the subsidies, if they are sustained at current levels, will cost US$1.26 billion this year.

President Mahama will be mulling the removal of the expensive energy subsidies, which contributed to the widening of the fiscal deficit in 2012. The subsidies are likely to be at least partially withdrawn to help trim the deficit, which climbed to 7.3% of GDP in the first three quarters of 2012.