The Public Utilities Regulatory Commission’s (PURC) decision to increase electricity tariffs by 27.15% and 21.55% for water may turn out as a decision that can enable small and medium business enterprises to lead the COVID-era economic recovery efforts.
The increase failed to meet expectations of the two major utility companies, the Electricity Company of Ghana (ECG) and Ghana Water Company Limited [GWCL]), as they had demanded an increase of 148% and 334% respectively. The ECG proposed that its tariffs should go up by 148% for 2022, with 7.6% average adjustments between 2023 and 2026. The ECG based its demand for high increase on the gap between actual cost-recovery tariffs and the PURC-approved tariffs, as well as the cost of completed projects.
Strong case
The GWCL also made a strong case that the average tariff per cubic metre in 2019 was US$1.27, which was reduced to US$1.13. The reduction led to a massive loss of revenue due to the high cost of water treatment and distribution. Without doubt, the drop in revenue affected the GWCL’s ability to undertake repairs and replacements of old and obsolete equipment and pipelines. In fairness to the ECG and GWCL, current tariffs for both residential and industrial consumers should have been higher; however, the two companies’ inability to effectively manage distribution and loss recovery is to blame for their financial difficulties over the years.
Both ECG and GWCL have been grappling with illegal connections, which constitute a large chunk of lost revenue. ECG management is aware that illegal tapping of power and tampering with meters is a malpractice facilitated by some of its staff and contractors. GWCL, on the other hand, has persistently failed to provide meters for customers who have applied for them – leaving such customers with no option than to do illegal water-tapping.
What’s worse is that burst pipes are left to gush out water for days, if not weeks. Arguably, two things account for the current poor financial state of the ECG and GWCL. Firstly, the Ghanaian attitude of not taking proper care of public goods. Secondly, the practice of public servants subcontracting services to their private companies or cronies and then diverting revenue into their private accounts. These instances explain why consumers continue to make illegal/abusive use of electricity and water.
Recently, ECG’s management commenced action to arrest and prosecute all illegal connectors, and possibly retrieve revenue from people and companies that are using power for free. It remains to be seen whether this latest action will yield any fruit, since this is not the first time such an initiative has been launched. My doubt is hinged on the fact that some of the most prominent people and companies in Ghana are those using power illegally, and – because of political power and influence – any attempt to hold them accountable for evading payment of utility tariffs often ends up on the rocks. Unless the ECG and GWCL can stop the illegal connections to their supplies, they cannot justify the high tariff increase they are demanding. That said, because energy and water are the lifeblood of domestic and industrial activities, it is prudent to have policy directions on how they should be managed and financed.
Propping-up SMEs
GIZ has indicated in a recent report that in South of Sahara Africa and some other parts of the world, the COVID-19 pandemic has produced one of the largest-ever systemic shocks to businesses and economic systems. Consequently, the World Health Organisation (WHO) described COVID-19 as a global pandemic. The pandemic compelled countries to lock-down their countries, with severe economic and social consequences. Several reports and surveys have indicated that the lockdown had negative effects on Small and Medium Enterprises (SMEs). The GIZ report indicates that in 2020 over 90% of MSMEs in SSA experienced significant profit losses due to reduced sales, value chain disruption and indebtedness, among many other risks.
According to GIZ, the COVID-19 pandemic presented one of the largest systemic shocks to the Ghanaian economy in recent history. As a result, MSMEs have not only been forced to endure more cumulative and sustained shocks but have also been pressured to rapidly develop strategies to cope, and adapt to different ways of doing operations. Therefore, in a COVID-era response, the sustainability of SMEs should guide policy formulation. A key strategy SMEs are expected to adopt is digitalisation. The GIZ report notes that the ability of MSMEs to digitalise their business has become a determinant for their agility and survival in a ‘new normal’ economy amid COVID-19. Digitalisation is therefore important: not only in terms of recovery for firms, but also their adapation and ability to build back better following the event of a shock, such as a pandemic.
Relevance to economic recovery
It can be discerned from the above assertions that the relevance of SMEs to the health of any financial system cannot be exaggerated. There have been numerous studies, in both advanced and emerging countries, about the central role SMEs play in every economy. For instance, SMEs perform well by providing job and apprenticeship opportunities for the youth. When well-organised, SMEs often provide huge revenue opportunities for governments; hence the reason this sector has been branded as a panacea for economic growth.
Other studies have shown that in Ghana the SME sector is the main structure of businesse, accounting for close to 92% of enterprises in the economy. Besides, in 2018 it was projected that SMEs contributed an estimated 70% to Ghana’s Gross Domestic Product (GDP) – which translated to about 90% of operational businesses. The sector is also said to provide close to 85% of jobs in Ghana. Despite the immense contribution of the SME sector to the Ghanaian economy, it is confronted with problems which hinder its development … with COVID-19 pandemic as the most recent case.
Special tariff
In this regard, the PURC may have made a prudent decision by segregating micro, small and medium-scale businesses – such hairdressing saloons, barbering shops, tailoring shops, carpentry shops, mechanic and welder shops, restaurants and cold-stores among others – for special tariffs. According to the PURC, this special tariff was assigned to small businesses because of the critical role they play in the country’s economic and social development.
I agree with the PURC’s position on helping the small-scale businesses with tariff subsidies, because their survival has positive implications for jobs and household income. My stance is in sharp contrast with that of the African Centre for Energy Policy (ACEP), which argues that PURC yielded to consumer pressure rather than considering the factors which would make the energy sector efficient. While the efficiency argument is convincing, providing incentives for small businesses to rebound is equally prudent. In fact, the collective contributions of all micro, small and medium-size business across the country will make for an inclusive gross domestic product (GDP).
A UNDP report on the impact of COVID-19 on jobs and livelihoods indicates that as much as 46.1 percent of businesses reported reduced wages for 25.7 percent of the total workforce, translating into wage reductions for an estimated 770,124 workers. An additional 35.9 percent of business establishments reduced the hours worked for 23.2 percent of the total workforce (an estimated 695,209 workers).
The report indicates that the accommodation and food sectors attracted the highest revenue drop and reduction in hours of work. Thus, the COVID-19 pandemic has evidently highlighted fragilities in the MSME ecosystem of Ghana – which if not addressed now can only worsen in the future. A key challenge is that Ghanaian MSMEs are ill-equipped and inadequately supported to better manage risks. Other challenges hindering growth of the sector include limited understanding of business risks, informality, low digitalisation, low institutional trust, low awareness, and difficulties in accessing funds. The sector is further plagued by insufficient finance, deficient marketing expertise, competition from overseas firms, and lack of innovation among others.
Structure of the economy
The Ghanaian economy is traditionally divided into three sectors: namely the agricultural sector, service sector, and industrial sector. With a growth rate of 24.3 percent of GDP in 2016, the manufacturing sector is still second among the five industrial subsectors of Ghana. About 9% of Ghana’s GDP consists of the manufacturing sector, which has created over 250,000 jobs for the citizenry over the last decade. The number of registered enterprises is said to be around 25,000, and more than 80% of them are SMEs.
The manufacturing sector encompasses numerous subsectors, such as the food processing industry, agro-processing, among others. The food processing industry is one of the most important and supplied the basic needs of people during the pandemic’s emergency period. Sadly, the sector was one of the vulnerable industries that was worst-hit by the pandemic. Many infected COVID-19 cases were found in the food processing factories around the world because of infected materials, bad working environment and so on.
This brings uncertainty to the Ghanaian food processing industry, which has been struggling in recent years. Though the sector is relatively easy to enter, it also has a high exit rate – since it is mostly made up of micro- and small-scale enterprises which operate with little capital, engage in low-cost better-quality food processing, and use simple tools. Thus, the steady decline of growth for some Ghanaian SMEs should be of serious concern to Ghana’s economic management team.
Policies
The UNDP survey indicates that policies are needed to support small firms both in the short and in the medium term. In the medium and longer term, efforts should be concentrated on (a) re-establishing channels that were adversely affected during the pandemic and (b) helping firms adjust to the new ways of doing things by improving their capabilities to boost productivity. In this regard the PURC’s specific tariffs in favour of small businesses is a step in the right direction. In the medium to long term government should speed up effective plans to enroll small businesses in the informal into the tax net. It is only then ECG and GWCL can benefit from high tariffs from the sector.
References
GIZ. 2021. Ghanaian MSME resilience in the face of COVID-19.
UNDP. 2020. How COVID-19 is affecting firms in Ghana.
