Subsidizing water and power for political gain is cripping utility providers and letting down Ghanaian consumers, says the Centre for Policy Analysis (CEPA).

"It is time to end the political game over subsidies," the research body told BF&T, as water and power rationing continues across the country.

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

All three service providers have cited the under-pricing of water and electricity among the causes of their woes. Last year, the government announced subsidies worth GH¢179.7 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 GH¢518million was earmarked for petroleum subsidies, with the final bill twice the allocation.

The 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 GH¢509million, according to its chief executive, Kweku Andoh Awotwi. Government ministries, departments and agencies also owe GH¢230million, while ECG and aluminium smelter VALCO owe GH¢270million and GH¢77million respectively - bringing total public-sector indebtedness to nearly GH¢1.1billion.

Samuel Kwesi Fletcher, Head of Corporate Communications for VRA, said: "public-sector arrears and delays in honouring government promissory notes for oil purchases have worsened the authority’s financial situation."

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.

With more than a third of the population lacking access to treated water, a top official of GWCL told B&FT that the company has “not invested adequately” in infrastructure because the price of water has been “suppressed” by the government.

Meanwhile, as the demand for water grows, even those with a pipe connection at home are not assured of a constant flow of water because of rationing.

"The challenges are deep-seated and thrive on the disconnect between the economic reality and the politics," the top official said. "It therefore requires bold decisions by the government to overhaul the sector."

Executive Director of CEPA Dr. Joseph Abbey said: "The country needs to go back to the drawing board," on the issue of subsidies. "VRA is telling us that they have 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," he said.

"We can’t afford to have the VRA making losses when it is owned by the government," he added.

The arguments against subsidies, especially when they are universal rather than targetted, 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 2009-2012 the government lavished GH¢1.5billion on them. The fuels are now under-priced by as much as 30 percent for petrol and diesel, 72 percent for kerosene and 88 percent 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 GH¢2.4billion 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 -- as he prepares to unveil his first budget in late February or March. The subsidies are likely to be at least partially withdrawn to help trim the deficit, which climbed to 7.3 percent of GDP in the first three quarters of 2012.

“When we introduce a policy, we need to implement it fully in order to weigh the costs and the benefits; then if there is the need to make modifications, we can properly do so,” Dr. Abbey said, criticising the government’s lack of resolution on the issue.

But subsidies will not be done away with completely, because the poorest and most vulnerable populations need to be protected, Minister of Finance Seth Terkper said on January 24. The government has a “lifeline” subsidy for people who consume electricity below a certain level, and this will be maintained, he said.