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 21^st 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 21^st 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.

(Sources; http://www.erc.go.ke/erc/regulatory_instruments/?ContentID=14, Wikipedia)