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General News of Monday, 26 January 2004

Source: Public Agenda

EDITORIAL: Government Cornerd

In reaction to our exposure of its agreement with the IMF to ensure that petrol and utility prices are increased, government last week announced that there would be no price increases this year, effectively boxing itself into a corner.

Having declared that there would be no price increases, it would now be very difficult for the government to go back on its word especially in an election year.

It is also likely that plans to introduce the National Health Insurance Levy, which is a 2.5 per cent increase in VAT, would be dropped for similar reasons. The decision not to adjust prices of utilities as agreed on with the IMF is certainly going to place government in a difficult situation with donors who are likely going to hold back the disbursement of some funds.

Also, government is likely to have problems sealing the $60million hole in this year’s budget, which is expected to come from donor assistance. Up to 60 percent of Ghana's development budget is donor funded.

Public institutions especially the Electricity Company of Ghana (ECG), which are relying on donor inflows to improve their operations, should not expect much. The World Bank had tied its agreement to give ECG some money to government ensuring that the utility companies recover their costs.

According to paragraph 24 of the IMF Executive Summary in its report on Ghana, Country Report No. 03/395 dated December 2003 posted on the Fund’s website,

    Delays in adjusting administered prices for petroleum and utilities have continued to undermine the operations of the major public enterprises in 2003. The government had undertaken to allow these adjustments to be made automatically on the basis of the established cost recovery pricing formulas…The staff noted that the government’s interventions to block the required adjustments during the second half of 2003 not only entailed substantial fiscal costs but also undermined the credibility of the pricing regime. This in turn, put at risk their plans to attract private sector involvement in (and World Bank support for) a major investment program in the electricity sector.”
Paragraph 46 of the Executive Summary warned;
    “Successful implementation of the program (that is the Fund’s program with Ghana) over the coming year (that is 2004) will depend on two factors above all. First, it will be crucial to avoid further quasi-fiscal losses in the state-owned energy and utility companies by adjusting petroleum, electricity and water prices promptly to maintain full cost recovery. Such losses would only risk undermining execution of the 2004 budget and diverting resources from GPRS programs, but could also jeopardize the (Ghanaian) authorities’ plans to bring new investment into the energy sector….”
Government in fixing the current prices of petroleum products in March 2003, used an exchange rate of ?8,800 to one US dollar and US$32 per barrel for crude oil. Given that the dollar had gone past this figure and crude oil prices have gone up too, petrol prices should have gone up from last August if the automatic adjustment formula had been allowed to operate.

Government in defending its position that it has no intention to increase the prices of petrol, water nor electricity this year, said the crude oil price was $US32 per barrel. It also claimed, rainfall was good so the country would be using more of hydro electricity, which is cheaper. Ghanaians therefore should rather expect reduction in tariffs.

Government’s statement that it has no intention of increasing petroleum or utility prices this year, smacks of interference in and undermines the work of the Public Utilities Regulatory Commission (PURC) and the National Petroleum Tender Board (NPTB), two independent bodies tasked, among other things, to guarantee the viability of the utility companies and the Tema Oil Refinery respectively by ensuring that they recover their costs of operation.

The statement also places the two institutions, in an awkward position since they are likely to have difficulties announcing any price increases during the year.

The NPTB and the PURC have established cost recovery pricing formulas and are mandated to make quarterly price adjustments according to the formulas without further approval from government ministries. The NPTB however submits its report to the Ministry of Energy.

The PURC is chaired by Kwame Pianim, an economic consultant, while former vice chancellor of the University of Ghana, Professor Ivan Addae Mensah, chairs the NPTB.

Professor Addae Mensah would not comment on the government statement when contacted on telephone on Wednesday. The board had a mandate and has been fulfilling just that, he said. Asked whether the government statement meant the board effectively has no work to do this year, the former vice chancellor said so far as he was concerned the board has not been dissolved. “We are supposed to ensure full cost recovery,” he said.

The board unlike the PURC did not announce any price changes last year. Attempts to contact the PURC were not successful.

Notwithstanding the independence of the two institutions, the final decision on whether prices would change or not is with government, which has shown that it will intervene to stop any price adjustments when it is not politically expedient.

Government sources and IMF staff estimates on the breakdown of planned subsidy to public institutions for this year, show there would be no subsidy for TOR, ECG and GWCL. However, sixty billion cedis would be used to subsidise lifeline consumers, and VRA would receive ?260 billion, up from ?90 billion last year. Given that there is no planned subsidy for the year, failure to automatically adjust prices would result in these institutions incurring loses. The question then is how does government plug the hole.

Highly placed sources in the energy and finance and economic planning ministries confirm that some funds from the TOR debt recovery levy were used to plug the revenue gaps which occurred during the latter part of 2003 as a result of TOR’s under recovery.

Parliament last year approved a Debt Recovery levy of ?560 on every ?? . The Finance Minister in his budget said, “The proceeds from the levy will be placed in a Sinking Fund and used to repay the accumulated debt of TOR incurred from selling petroleum products below cost in the past.”

It is not clear whether government could divert debt recovery funds to offset new debts being incurred by TOR.

One thing is clear though, if crude oil prices go up beyond the $40 mark, government will certainly increase prices.

Other factors, which are working to the government's advantage is that gold and cocoa are doing well, and expected to even do better this year. Explain how?

If the popular Ghanaian adage that “when a blind man says he is going to throw a stone at you, he probably has his foot on one (stone) or is holding one” is anything to go by, then government probably knows why it is saying that there would be no price increases. Having oversight of the purse certainly means government has a way of ensuring that the prices do go up. Remember the NDC in 2000?