Ghana’s search for Umeme

Ghana is considering reform in the energy sector, with Umeme in mind

 

How this West African country is looking to the success Uganda has just destroyed to solve its electricity crisis

THE LAST WORD | Andrew M. Mwenda | I am in Accra, Ghana, and this country is trying to reform its energy sector. To be specific, they are looking for an investor to take over their electricity distribution network. They want to break it into five regions and concession it out. The aim here is to avoid the creation of a monopoly. Therefore, each region will be given a different electricity distribution concessionaire. And guess which example they are looking at? Umeme, the company that Uganda just destroyed. It’s incredible how oblivious to our own successes our government is. But let me first provide a background.

Ghana has a serious economic problem, which has led them to think of privatizing the distribution network. The country went on a borrowing spree between 2016 and 2022 and went bankrupt in 2022. It declared a moratorium on its public debt, i.e., that it was unable to pay its creditors. Anyone who held government bonds was forced to accept a 55% haircut. If you held a bond worth Shs 10 billion (the currency here is called cedi), the government promised to pay back Shs 4.5 billion only. To make matters worse for its creditors, the government froze all payments—for a while.

The disaster did not end there. To pay for its other public expenditure obligations, the government printed money. This caused an inflationary spiral, which peaked at 55% that year. Based on our example above, the value of your remaining and unpaid Shs 4.5 billion fell (in purchasing power terms) to Shs 2.2 billion. The value of the local currency fell from 9 cedis to the dollar to 17. Foreign bondholders therefore suffered badly. If you got paid in cedis and exchanged it for dollars, you lost more than half the value.

The only people who did not lose are bilateral and multilateral creditors, i.e., governments and multinational financial institutions. Ghana went back into an IMF program with stringent demands for fiscal prudence. Its leg room for borrowing was severely restricted by the IMF, which now began to give it interest-free loans to repay some of its creditors. For ordinary Ghanaians, their life’s savings were practically wiped out by a stroke of a pen. It is this anger that contributed to a large degree to the defeat of the NPP presidential candidate by John Mahama, the new president.

The Mahama government therefore inherited a very bad economy. The government is trying to reform itself to resolve this crisis. One of the biggest fiscal problems in Ghana is electricity subsidies. These cost the taxpayer US$ 2.1 billion per year. This figure was recorded in January when the new president was sworn in. Given that Ghana has since enjoyed an appreciating currency (the cedi has appreciated from 17 cedis to the dollar to 11 today), the dollar value of these subsidies must have come down.

Nonetheless, using the January numbers, it means that Ghana could, every year, afford to build one Karuma Dam (with an installed capacity of 600MW) and Isimba Dam (with an installed capacity of 180MW) plus their transmission lines from savings on the electricity subsidies alone. How did this poor country with a GDP of $76 billion at the time (and because of currency appreciation it has now gone to $88 billion) get to such absurdity? It is very possible that this is because of democratic politics.

Ghanian leaders must compete for votes to come to office. Presidential elections here are very close, often to a margin of 51:49 percent. Every vote counts since the difference between presidential candidates, just like in neighboring Kenya, is often around 200,000 votes. Presidential candidates therefore make many spending promises that the country cannot afford. This is coupled with reluctance to not impose new taxes, incentives to remove old ones, and reluctance to rigorously collect taxes (lest they alienate voters). It is this toxic combination that leads to fiscal disaster.

This brings us back to Uganda. President Yoweri Museveni carried out most of the most controversial reforms before our country entered the tight grip of electoral competition. As democratic competition has deepened, so has grown the reluctance for serious reform. This is how Umeme came about in the early 2000s. The government removed electricity subsidies and ensured that the country had a cost-reflective tariff. Uganda is the only country in Africa where the tariff covers both the cost of investment and operational expenses and makes a good profit at the end.

Ghana has read the story of how Umeme transformed a moribund and loss-making distribution network with 38% technical and commercial losses into an efficient and profitable outfit. Remember that in 2001, when the Ugandan government invited companies to express interest in our electricity distribution network, six companies responded. When they came to do due diligence, all of them walked away without the courtesy of informing the government of their disinterest—except one company, CDC, a British government parastatal.

I have written this story many times, so I will not repeat myself here. So unattractive was Uganda’s electricity distribution business that the first investors turned out to be two government parastatals—CDC and Eskom of South Africa—who formed a consortium to spread the risk. In 2008, Umeme tried to borrow money, and no bank in the world was willing to lend to them. The only loans they could raise were from IFC and were guaranteed by the World Bank. (READ Dark days ahead for Uganda)

Yet by 2013, when Umeme listed on the stock market, its shares were oversubscribed by 157%. When they did the second listing, they were oversubscribed by 400%. The biggest equity firms in the world, with a combined financial chest of $1.5 trillion worth of investment funds under management, were bidding to buy shares in Umeme. This meant that if Uganda needed to invest a billion dollars in the distribution network, it would not have had to borrow. Umeme would just go on the stock market and raise equity.

That is the intangible value that the government of Uganda destroyed on a whim. In fact, Ghana would not have gone shopping on the market if Umeme still existed. The key decision makers here were ready to fly to Uganda to ask Umeme to come set up shop in Ghana. Now they are now looking for the old owners of Umeme to come do the same magic in this country. With the company destroyed, most of its intangible assets, such as institutional cohesion and memory, concentrated skills, and organizational forms, are gone. Talk of shooting ourselves in the feet all the time