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Opinions of Tuesday, 24 April 2007

Columnist: Amoako-Tuffour, Joe

The Energy Crisis: Public Distress and ...

..Problem Solving: I

The 2006-07 energy crisis has taken most Ghanaians by surprise. It should not. We have been here before; in 1983, in 1994 and in 1997-98 with increasing severity. The troubling rationing system, the slowdown in industrial activity, the job and income losses, and the disruptions in social life were telling reminders of a development planning gone wrong. What is truly surprising and troubling in each of these episodes is the gap between the magnitude of the crisis and the smallness of the politics we have.

To some observers two things are clear from the press conferences and posturing in recent weeks. Many of those doing the talking appear to have been trained as professionals who place a high premium on winning arguments, rather than solving problems. And a good number are as flexible with facts as they are with their church or mosque going habits. One thing is certain: winning the arguments cannot be the answer to the problem. What is needed is an urgent assembly of problem solvers, charged with a clear mandate within a time frame to outline the most efficient pathways to tackle the crisis. In this 2 part contribution, first, I provide a background and a child’s guide to power sector reform in Ghana. In the second part, I look at the role of politicians and bureaucrats and then offer some ideas to inform public debate

The Causes of the Crisis

There are several causes to the crisis; some more credible than others. The plausible factors include the trends in climate change, the advancing Sahara, the complacency in policy-making, and the chronic avoidance of tough decisions in the energy sector even when national security is at stake.

The signs of power crisis have been on the wall for the past two decades. The intensity of the harmattan winds that blow from the Sahara towards the Gulf of Guinea has been on the rise. The accompanying sandstorms are progressively severe, quickened by continued deforestation. It is hard to miss the frequent poor visibility during the dry season as a result of sandstorms that now can be felt along the coast. There is more evidence. The gradual southward migration of Fulani herdsmen in search of pasture and water and their increasing conflicts with food crop farmers tells half the story. These ominous trends have affected vegetation, livestock, wildlife and agriculture, and have gradually increased the vulnerabilities of a hydro-dependent economy.

The Costs

Power shortages in the past have coincided with periods of generally slow economic growth for reasons that were not directly related to drought. Even then, the costs were substantial, marked by a slow-down in business activity and job losses. Households suffered from damaged appliances through power surges, food poisoning and the inconvenience of noisy and polluting generators.

What makes the costs of the 2007 crisis potentially more severe than in past is that the price of light crude oil has nearly doubled since the 1990, doubling the input cost of thermal generated electricity. In addition, the challenges of growth and poverty reduction are now linked with the predictable supply of energy. The advances in the application of computer technology for information storage and retrieval in the public sector, in hospitals, in schools, in manufacturing and in the financial sector have accelerated in the past decade more than ever before. In the financial sector, substantial investments in technological innovations in the delivery of financial services and in the use of instant teller machines all depend on reliable supply of energy. For both financial and manufacturing firms, predictable supply of energy is now essential for communication and for making decisions on the level of capital investments to undertake. Then there is the irreparable damage to hospital equipments, to food and medicine that must be stored under certain temperature, and to the accuracy and reliability of electronically stored information.

Governments’ Response

In broad outline, the economic history of Ghana’s power sector is filled with crisis management, administrative hand wriggling, and inertia. Reforming and restructuring the power sector has since the late 1980s remained exactly what the industry has become - a power struggle.

Following the drought in 1982-83, numerous solicited and unsolicited advice was that Ghana restructures the power sector in order to prevent future catastrophe. The road to reform has been slow since. In fact, government dragged its heels and reforms stalled when hydro slowly recovered in the mid to late 80s. It will take another drought in 1993 before government was moved to act. Meanwhile, according to a study published by the Ministry of Energy and Mines in 1996, the domestic demand for electricity rose steadily by about 11 percent per year between 1985 and 1993, and 15 percent between 1993 and 1995. Against this background and with World Bank prompting, the government established the Power Sector Reform Committee (PRSC) in September 1994. Significantly, it took nearly three years for the PRSC to submit its summary report to government in April 1997.

The first 220 megawatts (MW) of the Takoradi Thermal Power Station (TTPS) was commissioned in December 1997, more than a decade after the 1983 drought. An additional 330 MW was commissioned in 2000. From 1999 through to 2002 hydro generation represented about 75 percent of the overall supply for Ghana. With persistent drought, government was expected to engage independent producers to provide emergency power in 1999 and also in 2000. Even then, according to a World Bank study completed in 2004, the full 330 MW of the Takoradi thermal commissioned in 2000 has consistently generated below capacity because of design defects and logistical problems.

Soft and Hard Reforms in the Power Sector

The major problems are with pricing, the functional structure of the industry, the under-supply and supply mix, and the growing demand. The World Bank has historically played a dominant role in this sector and has been instrumental in the reform process. Between 1961 and 1995 the World Bank conducted 8 lending operations aimed at reforming the power sector. Critics have argued that while the need for reform is not in doubt, it is the template of the reform that has itself become part of the power struggle, no pun intended. Also part of the struggle is the longstanding contractual obligation to VALCO ? a commitment that subordinates the long-term public interest. It is a commitment that is no longer defensible once you begin to think, as we should, outside the box of the old development paradigm. The mid-1990s saw a spate of soft reforms as a condition for further World Bank assistance. These reforms included the establishment in 1997 of (a) the Public Utilities Regulatory Commission, PURC (Act 538) to oversee tariff setting and pricing, and (b) the Energy Commission, EC (Act 541) to oversee the regulatory environment.

That was all well and good. But what was done is dwarfed by what was left undone. The lack of independent funding for PURC meant that it could not operate true to the letter of the law at arm’s length from day-to-day politics. But the PURC, however handicapped, has since been up and guiding tariff setting. In contrast, the EC has been slow to get off the ground. Established in 1997, officers of the EC confirmed, as of June 2005, that the framework of carrying out the primary mandate of licensing and regulating the mode of operations of independent producers was yet to be in place. The hard reforms also remained untouched. These have to do first with the break-up of Volta River Authority (VRA), the state monopoly in charge of generation, overall transmission and distribution to industrial users. The second has to do with reform of the Electricity Corporation of Ghana (ECG) which does the distribution to all other end users.

The break-up of VRA involves moving to a competitive environment in power generation and to a near monopoly in transmission to be run by two separate entities. The problems seem intractable at two levels first with VRA and second with ECG for no excellent reasons of state, especially when national security is at stake.

Clearly, the unbundling transmission from generation means curtailing the scope of managerial oversight of VRA. It means a redistribution of power to make decisions, particularly with respect to investment, employment, purchasing and planning. There is a case to be made for VRA to want to operate both hydro and thermal in order to maintain diversified sources of generation. But this decision in power generation should not be tangled with the need to separate production from transmission for the future development of the industry. The oft-repeated argument that unbundling may not be feasible, or desirable, or may have no positive effect in attracting independent producers into the industry may be simply a red-herring to obstruct the pace of needed reforms. VRA’s supply business- where it connects directly to industrial customers – should be made to feel the bite of competition. The argument that it is difficult to revalue the assets of VRA in order to separate the books is itself an indictment of the accounting practices, of how the books may have been kept, and therefore the need for better management and greater transparency. It may well be that there are prospective investors waiting to invest in Ghana but only if the appropriate institutional and industry structure is in place. It is most unfortunate that successive governments have not been bold and forward looking enough to call off what, to some observers, may be just a self-serving bluff of some bureaucrats. What about ECG? The major problems with ECG range from the poor systems maintenance culture, lack of tariff compliance, poor revenue collection, high incidence of inside and outside theft, low compliance in enforcement of user rules, non-complaint customers, and poor management practices. The level of ECG’s distribution losses of about 27% between 1999 and 2001 is rated as one of the worst in the world. The attempt to transform management structure and practices in the late 1990s failed largely because of non-cooperation. Also intractable is the inability or seeming unwillingness of ECG management to keep the books properly in order to identify rural needs. This is needed in order to design appropriate pricing mechanisms for all category of users. This lack of appropriate pricing has affected the ability of government to target subsidies effectively to those who need it most.

The future of both VRA and ECG requires (a) a paradigm shift in the private-public sector partnership in development and (b) an attitudinal change in public sector management. There must be an increasing realization that the feet dragging has compromised public safety.

Joe Amoako-Tuffour (jtuffour@stfx.ca) teaches economics at St. Francis Xavier University, Canada.

Views expressed by the author(s) do not necessarily reflect those of GhanaHomePage.