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- Feb 11, 2007
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New power tariff looms in International Monetary Fund bid
By Costantine Sebastian
THE CITIZEN
Electricity consumers should expect another substantial power tariff increase before the end of the year following a raft of recommendations to bail out the cash-strapped public utility firm, Tanesco.
Both the Government and donors have recommended that the power tariff be increased to help balance Tanesco's serious cash shortfalls, which it's feared, may each Sh50 billion this year.
Tanesco's current financial woes are a result of the refusal by Ewura to grant its request for a 40 per cent tariff increase.
This has hit the company hard, leading to serious cash flow woes.
Early this year, Ewura granted a slightly more than 20 per cent tariff increase, which has failed to turn around Tanesco's fortunes.
According to official and donor sources, in order to check the ballooning deficit, a tariff increase is inevitable.
They, however, have also noted that curbing the rampant thefts in Tanesco could also ease the company's financial woes.
But in response, some university lecturers and members of the business community yesterday cautioned that any increase in the current tariff would adversely affect ordinary citizens and hamper efforts to ease the effects of the escalating cost of living.
''The cost of living will soar to new heights, destabilising the Government's own efforts to mitigate the rising cost of living,'' said Dr Honest Ngowi, a senior lecturer at Mzumbe University.
The tariff increase would ''also impact on the environment as more and more Tanzanians will shift to charcoal as an alternative energy source''.
In the 2008/2009 Budget, the Government removed Value Added Tax on burning gel for domestic use to reduce the cost and encourage its usage as ''alternative to kerosene, which is expensive, and charcoal which leads to deforestation''.
It also scrapped VAT on Compressed Natural Gas (CNG) and CNG cylinders to promote its usage instead of kerosene.
''With an increase in power tariffs, all these efforts will be meaningless,'' said Prof Humphrey Moshi, a research fellow at the University of Dar es Salaam's Economic Research Bureau.
He said that production costs would rise, forcing manufactures to pass on the burden to the consumers.
Mr Hussein Kamote, director of policy and research at the Confederation of Tanzania Industries, said: ''It's true that Tanesco needs money, but it should not be obtained at the expense of other development activities.
Things will get worse if that is done.''
According to Prof Moshi, the current rates are already too high and unaffordable to most Tanzanians, noting that higher tariffs would worsen the situation.
Dr Ngowi said the solution to Tanesco's problems was reducing connection fees.
Currently, only about 10 per cent of Tanzanians have access to electricity.
Dr Ngowi challenged Tanesco to increase its number of customer in order to collect more money to run its operations.
''If Tanesco reduces connection charges, many and many Tanzanians will be interested in getting connected.
If that happens Tanesco will have more people to collect money from,� he said.
In a recent country report, the International Monetary Fund (IMF) suggests that another increase in power charges is required to help balance the utility firm's financial books.
According to the IMF, the measures are pivotal in attaining the utility firm's $1.2 billion financial recovery plan (FRP) that seeks to put it on a sound financial footing.
In a report to the IMF last month, the Government wrote: ''The financial situation of Tanesco remains vulnerable, in part because of the non-materialisation of a number of key cost-reducing measures in its FRP, including the buy-out of the Independent Power (T) Limited (IPTL).''
Other shortcomings include the conversion of the IPTL plant from oil use to gas consumption to generate electricity, and the refinancing of the expansion of Songas.
The Government also said in its report that negotiations with IPTL's main creditors were underway, a sign that the Malaysian investors may have given in as they had been reluctant to sell the profitable plant.
The IMF called for steps to enhance the power firm's financial muscle, especially by initiating cost-cutting measures.
''Tanesco will continue to experience operational cash shortfalls, which could reach Sh50 billion in 2008,'' the IMF, which is instrumental in the country's fiscal and monetary policy formulation said in the June report.
According to the report, the current tariff increment that averaged 21.7 per cent, though substantial, is not enough to spur Tanesco's financial recovery and operational needs.
The new charges were approved by the Electricity and Water Utilities Authority (Ewura) early this year and came into effect in February against the backdrop of a serious power crisis that had engulfed the country since 2006.
According to the IMF, that increase fell ''short of the cost recovery level requested''.
During the acute power supply shortage of 2006, emergency power operators had to be licensed to save the economy from collapse.
But rogue entrepreneurs and some corrupt politicians took advantage of the crisis to make quick money.
Ewura's refusal to approve Tanesco's 40 per cent tariff increase was mainly due to the utility's inability to come up with a comprehensive cost of service study.
Reliable government sources told The Citizen that the regulator was willing to consider another Tanesco request this year ''but on very strict conditions''.
These include completion of a cost of service study, and measures to reduce losses, notably through theft.
''Tanesco is currently reviewing its financial situation in view of Ewura's ruling, and could be in a position to submit later this year another application to reach cost recovery on operational basis,'' the Government says in its report.
The Government will ensure that Tanesco implements the cost-cutting measures demanded by Ewura without adversely affecting its service delivery.
The FRP for Tanesco, which was drawn up by the Government and its key donors, covers the period 2006/07 - 2009/10.
It seeks to expand generation capacity, lower costs and increase its customer base.
The measures to attain these goals, include doubling available generation capacity, buyout of IPTL, its conversion to domestic natural gas and connecting mining companies to the national grid.
Under FRP, Tanesco was to finance its projected short-term operational deficits through tariff increases, initially at six per cent from January last year.
This would be followed by five per cent increments every six months.
The cash shortfalls were also expected to be offset by a government-guaranteed commercial bank loan of up to Sh250 billion.
This was expected to enable the firm to ''start generating operational surpluses from next year compared to a deficit of about Sh130 billion in 2006''.
By Costantine Sebastian
THE CITIZEN
Electricity consumers should expect another substantial power tariff increase before the end of the year following a raft of recommendations to bail out the cash-strapped public utility firm, Tanesco.
Both the Government and donors have recommended that the power tariff be increased to help balance Tanesco's serious cash shortfalls, which it's feared, may each Sh50 billion this year.
Tanesco's current financial woes are a result of the refusal by Ewura to grant its request for a 40 per cent tariff increase.
This has hit the company hard, leading to serious cash flow woes.
Early this year, Ewura granted a slightly more than 20 per cent tariff increase, which has failed to turn around Tanesco's fortunes.
According to official and donor sources, in order to check the ballooning deficit, a tariff increase is inevitable.
They, however, have also noted that curbing the rampant thefts in Tanesco could also ease the company's financial woes.
But in response, some university lecturers and members of the business community yesterday cautioned that any increase in the current tariff would adversely affect ordinary citizens and hamper efforts to ease the effects of the escalating cost of living.
''The cost of living will soar to new heights, destabilising the Government's own efforts to mitigate the rising cost of living,'' said Dr Honest Ngowi, a senior lecturer at Mzumbe University.
The tariff increase would ''also impact on the environment as more and more Tanzanians will shift to charcoal as an alternative energy source''.
In the 2008/2009 Budget, the Government removed Value Added Tax on burning gel for domestic use to reduce the cost and encourage its usage as ''alternative to kerosene, which is expensive, and charcoal which leads to deforestation''.
It also scrapped VAT on Compressed Natural Gas (CNG) and CNG cylinders to promote its usage instead of kerosene.
''With an increase in power tariffs, all these efforts will be meaningless,'' said Prof Humphrey Moshi, a research fellow at the University of Dar es Salaam's Economic Research Bureau.
He said that production costs would rise, forcing manufactures to pass on the burden to the consumers.
Mr Hussein Kamote, director of policy and research at the Confederation of Tanzania Industries, said: ''It's true that Tanesco needs money, but it should not be obtained at the expense of other development activities.
Things will get worse if that is done.''
According to Prof Moshi, the current rates are already too high and unaffordable to most Tanzanians, noting that higher tariffs would worsen the situation.
Dr Ngowi said the solution to Tanesco's problems was reducing connection fees.
Currently, only about 10 per cent of Tanzanians have access to electricity.
Dr Ngowi challenged Tanesco to increase its number of customer in order to collect more money to run its operations.
''If Tanesco reduces connection charges, many and many Tanzanians will be interested in getting connected.
If that happens Tanesco will have more people to collect money from,� he said.
In a recent country report, the International Monetary Fund (IMF) suggests that another increase in power charges is required to help balance the utility firm's financial books.
According to the IMF, the measures are pivotal in attaining the utility firm's $1.2 billion financial recovery plan (FRP) that seeks to put it on a sound financial footing.
In a report to the IMF last month, the Government wrote: ''The financial situation of Tanesco remains vulnerable, in part because of the non-materialisation of a number of key cost-reducing measures in its FRP, including the buy-out of the Independent Power (T) Limited (IPTL).''
Other shortcomings include the conversion of the IPTL plant from oil use to gas consumption to generate electricity, and the refinancing of the expansion of Songas.
The Government also said in its report that negotiations with IPTL's main creditors were underway, a sign that the Malaysian investors may have given in as they had been reluctant to sell the profitable plant.
The IMF called for steps to enhance the power firm's financial muscle, especially by initiating cost-cutting measures.
''Tanesco will continue to experience operational cash shortfalls, which could reach Sh50 billion in 2008,'' the IMF, which is instrumental in the country's fiscal and monetary policy formulation said in the June report.
According to the report, the current tariff increment that averaged 21.7 per cent, though substantial, is not enough to spur Tanesco's financial recovery and operational needs.
The new charges were approved by the Electricity and Water Utilities Authority (Ewura) early this year and came into effect in February against the backdrop of a serious power crisis that had engulfed the country since 2006.
According to the IMF, that increase fell ''short of the cost recovery level requested''.
During the acute power supply shortage of 2006, emergency power operators had to be licensed to save the economy from collapse.
But rogue entrepreneurs and some corrupt politicians took advantage of the crisis to make quick money.
Ewura's refusal to approve Tanesco's 40 per cent tariff increase was mainly due to the utility's inability to come up with a comprehensive cost of service study.
Reliable government sources told The Citizen that the regulator was willing to consider another Tanesco request this year ''but on very strict conditions''.
These include completion of a cost of service study, and measures to reduce losses, notably through theft.
''Tanesco is currently reviewing its financial situation in view of Ewura's ruling, and could be in a position to submit later this year another application to reach cost recovery on operational basis,'' the Government says in its report.
The Government will ensure that Tanesco implements the cost-cutting measures demanded by Ewura without adversely affecting its service delivery.
The FRP for Tanesco, which was drawn up by the Government and its key donors, covers the period 2006/07 - 2009/10.
It seeks to expand generation capacity, lower costs and increase its customer base.
The measures to attain these goals, include doubling available generation capacity, buyout of IPTL, its conversion to domestic natural gas and connecting mining companies to the national grid.
Under FRP, Tanesco was to finance its projected short-term operational deficits through tariff increases, initially at six per cent from January last year.
This would be followed by five per cent increments every six months.
The cash shortfalls were also expected to be offset by a government-guaranteed commercial bank loan of up to Sh250 billion.
This was expected to enable the firm to ''start generating operational surpluses from next year compared to a deficit of about Sh130 billion in 2006''.
