Privatisation of Energy is like a sufuria on my head

Generally, if you have lived in Kenya at any time in the past 25 years, then you are aware that the GoK has probably the worst imaginable record as far as management of any kind (and of anything) is concerned. We appoint our houseboys to lucrative parastatal jobs, and regularly use any revenues accrued from these parastatals to buy socks for our children who are enrolled in “proper” schools abroad. Any losses are simply written off, or offset by printing more money. Needless to say that our energy and communications sectors are among the worst hit by this cancer, that had reached the highest stages during Moi’s latter years in power. As a response to this, we have a new found fanaticism for privatization, which in my opinion, is intellectual poverty of the highest degree. Don’t get me wrong, privatization is great, but as America showed us over the last few years, the free market can be extremely brutal and unforgiving.  
 
In very pedestrian terms, economics theory is based on relationships between production and the market and a curious idea they call “scarcity.” “Factors of production” are those things that are necessary to produce goods and services, which are then, in a manner of speaking, taken to the market. Energy, land, people, infrastructure etc can loosely be described as factors of production, at least here, when we discuss economics to do with sufurias. It therefore goes without saying, that improper management of the factors of production, will lead to a poor economy. Historically, all the factors of production have been deemed to have equal value, but in the fast paced 21st century, and in the light of evidence to suggest dwindling oil reserves and global warming, energy is firmly at the top of the pile.
When Kibaki took over in 2003, he moved swiftly to reform our energy sector through a document called the Sessional Paper No. 4, of 2004, whose main aim was “to lay the policy framework upon which cost-effective, affordable, adequate and quality energy services, will be made available to the domestic economy, on a sustainable basis over a period 2004-2023”. Later in 2006, and as a result of the 2004 policy paper, the Energy Act of 2006 was passed by parliament. That was when the rain started beating us.
First, we created a body called the Energy Regulatory Commission, whose mandate is to regulate the production, distribution and sale of electricity and petroleum. They are also supposed to protect consumers by ensuring that prices are “just and reasonable.” The act goes on to define “just and reasonable” as prices that:
·         Maintain the financial integrity of the company involved
·         Attract capital to that company
·         Allow the company to operate efficiently and
·         Fully compensates the investors of the company
There is nothing in there about “just and reasonable” also being about the prices that
·         are commensurate to the goods and services provided or
·         are competitive enough to respond to market dynamics.

But that is not the only problem. The ERC makes money for its upkeep by “charging levies on sales of electricity and petroleum”. This in my view presents a conflict of interest. How can you effectively regulate the industry that feeds you? It is very likely that the levies set by the ERC are determined by the ERC’s financial needs more than anything. The ERC are actually a cost to us the consumer. This is why the oil marketers ALWAYS blame the GoK for price increases.
Then, off course, we privatized KENGEN and KPLC, which was the twist of the dagger in our backs. These companies, which have virtual monopolies, are now controlled by private shareholders whose only concern is to achieve maximum returns on investment.  They operate without competition, which is the only natural quality control and consumer protection system that the free market offers. So, is anyone surprised that KPLC did that ad in December, and sold shares when there was a blackout at my house?  I mean, think about it, what’s more important, customer satisfaction or shareholder satisfaction? Consider the fact that the customer has no alternative while the shareholder, now that KPLC is listed at the NSE, can take his money elsewhere. No shareholder, no KPLC. In short, KPLC is now fully focused on making shareholders happy and not delivery of power as we would like to think.
The petroleum section is worse. We have one refinery and one distributor. Then we have a silly system where every year we give out a tender to import crude oil to one of our oil marketers, who then sells to the refinery, and then buys the refined oil on the other side! This mean that the importer sells to the refinery at a profit; then the refinery sells to the marketers at a profit (or maybe break even); and then the oil marketer sells to you and I at a further profit. Now add tax. In a panic, the GoK, then suggested that they create the National Oil Company whose job is to control prices by offering competition to the other oil companies. That idea that has failed miserably, because the NOCK operates in the same market as the others, and so low revenues and small profit margins would make it unsustainable. I mean, why make 10 bob when your neighbor is making 100 bob and you are selling the same stuff? As a result the average difference between NOCK prices and others is 2 bob.
So, in summary, we have effectively turned the most important factor of production of the 21st century into a product that is subject to that idea of “scarcity” and is captive to the laws of supply and demand. But that’s not all. We have also turned over control of the most important product in our economy to a bunch of capitalist pigs who are looking for quick returns on investment (ROI). Generally when you are in biashara and you realize that your ROI is not great, you do what they call “diversification;” Which would mean that you add products to your portfolio that perform better.
All this means that, hypothetically speaking, one day KENGEN, KPLC, KPC could hold an AGM and make a resolution to stop dealing in energy and to venture into fast food. Then what? The shareholders of my sufuria may pass a resolution that I wear it as a hat.

Comments

  1. Like your analysis of what the rest of us are either too lazy or ignorant to notice. Great stuff. Now to do something about it

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  2. Insightful...And powerful closing remark! Keep up Dan!

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  3. Very informative! Thats some great writing...

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  4. The article raises a number of very valid points. However I wish to make the following clarifications as pertains electricity
    1. NONE of the energy companies operating under the ambit of Ministry of Energy. This includes KENGEN, KPLC, GDC, R...EA and KETRACO. With the exception of KENGEN and KPLC(in which GoK owns 51% of the shares), the rest are fully owned by GoK.
    2. ERC like all regulators in Kenya (and to the best of my abilities even in the west (eg ETSI) can only sustain themselves from the industry they regulate. Its either from the taxes or tariffs in the sector
    3. The assertion that KPLC and KENGEN can alter their MOA and AOA to the effect of change of core business is erroneous, malicious and demeaning to the Kenyan People. I dont think a responsible elected government can allow that (since GoK is the major shareholder) unless you mean Kenyans are capable of electing such a government
    4. KPLC is involved in several projects to expand and reinforce the electrical network in Nairobi. Secondly The construction of Thika Rd has had an adverse effect on the power sector because six of the major power lines originate from the hydro-stations and follow thika rd to nairobi. Dan I have asked you to bear with us on this matter
    When you mention cost you almost make me laugh because the cost is so subsidized any businessman would cry(The person in North Kenya, West Kenya and other far flung pays the same for 1kwh as the guy at Embu right at the hydro-stations)
    5. The Ministry of Energy through its parent companies plans to by 2020 double penetration from the current 25% to 50% by 2013 and 100% by 2013. The issues today is whether jaded activism will allow it. Our wind projects are stuck because certain disgruntled elements have demanded further EIAs, same with new projects in West Kenya
    6. The issue of ROI does not investment does not arise since the principal source of funds is GoK/Donor Funds and Kenyans through long term bonds
    7. The entry of private shareholders has greatly improved management since the board and management has been enriched. We have board members who do not owe loyalty to politicians but to equity firms and pension funds and hence will stand up against theft and fraud.
    8. KPLC is involved in efforts to start a transformer manufacturing plant and has made positive strides towards reducing reliance on thermal(expensive) power through system control. GDC has identified and will exploit sources such as geo-thermal and coal. KETRACO is now doing 440KV lines which will solve the problems you have outlined

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  5. Brilliant post Gachanja! Ahsante for taking the time. Next week let's do a post on KPLC specifically.

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  6. Interesting piece. Thanks for taking out some of the ignorance form my mind. I do agree with Gachanja on most of the points apart from a few

    1. Kenyans are likely (and have proven so in the past) to elect an irresponsible government. (Just look at what we have now)
    2. As long as the board owes its allegiance to equity funds and Pension schemes, point "6" is untrue as these funds go into the invest seeking ROI. Thus the pricing arguements between KPLC and KenGen last year

    Otherwise nice piece

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  7. Hello there,

    Could you please help me get the exact privatization dates of these companies; Kenya Airways, Kenya Power & Lighting Co (KPLC), Kengen, Rivatex?

    Thank you.

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