A Review of the Nigerian Energy Industry

‘Reducing energy loses by 10% would save ECG $85m’

Installing cables in Accra03 July 2013, Accra – The Electricity Company of Ghana, ECG, would save $85 million per year if it is able to reduce energy loses by 10%. This is disclosed by the World Bank’s latest report which is the possession of the Business Chronicle.

The report, entitled ‘Emerging Economic Growth in Ghana; Making the Power and Petroleum sectors rise to the challenge’, stated: ECG’s distribution losses are very high; they were 27% in the second quarter of 2012. ECG has to pay for lost energy it buys from Volta River Authority, VRA, but does not earn any revenue on it”.

The report, which is scheduled to be launched on Tuesday (today), however, noted that all is not lost, as other middle-income countries have successfully cut their distribution losses.

The actions needed to reduce ECG’s loses have already been specified in technical studies, ECG must now implement them, it added.

First, the government must improve the ECG’s technical and commercial performance. ECG is one of Ghana’s most important state-owned enterprises, with over 1.8 million customers, 5600 staff and sales of about $800 million annually.

Unfortunately, ECG has an over-extended, unreliable distribution network, whose failures imposes burdensome costs on the economy and discourages foreign investment, the report noted.

It was quick to note: “ECG plans to invest $190 million on average per year for 2012-15 to upgrade and expand its network. However, ECG cannot raise the necessary funds, because it is currently struggling financially.

“ECG realized a small loss in 2011 and a significantly higher loss in 2012 ($44 million), and estimates an even higher loss in 2013 (S$60 million). ECG’s cash flow difficulties are even worse, as a significant portion of its revenue is uncollected.”

The World Bank Country Director for Ghana, Yusupha Crookes, who wrote the report’s foreword added: “ECG does not control some of the conditions responsible for its poor financial performance. The Ghanaian Cedis depreciation has increased the costs of various obligations that are denominated in US dollars.”

Furthermore, it explained that ECG has great difficulty with collecting revenues from the Government and public-sector organizations, which owed ECG a net amount of GH¢ 222 million at the end of 2012.

The Government must make these payments expeditiously, and modify the current payment mechanism to institute direct payment of electricity bills by as many state agencies as possible, the report urged.

On tariffs, the World Bank report indicated: “ECG’s tariffs are too low because the Public Utilities Regulatory Commission, PURC, has not adjusted tariffs in line with inflation and Cedi depreciation since 2011.

PURC set up an automatic quarterly tariff adjustment mechanism in 2011, but suspended it in 2012. Without this needed adjustment, ECG’s revenues cannot rise as its unit costs rise”.

It, therefore, advised that PURC raise tariffs quickly and continue to do so periodically as a normal part of its functioning, adding “PURC and the Government should better explain to the public how tariff increases are determined and why they are necessary”.

The report also urged ECG as a matter of urgency to intensify its efforts to collect bills from private customers and cut service for nonpayment after concerted attempts at collection.

As of mid-2012, private customers owed ECG about GH¢ 205 million in overdue bills. As another example of poor financial judgment, ECG has used costly short-term foreign exchange-denominated suppliers’ credits to finance purchase of equipment without competitive tendering and adequate regard to value for money, it stressed.

ECG should refinance these loans via cheaper, longer-term financing and cease using this funding instrument for its capital expenditure programme.

ECG needs to control its operational costs, which in recent years have risen in excess of local inflation rates. ECG has excessive inventory costs because its stock levels are high due to uncoordinated procurements, the World Bank advised.

Touching on the implementation of the ECG organizational changes, the report noted that: “ECG is a large, top-heavy, over-centralized organization, with significant weaknesses in its management, corporate governance, and institutional culture that call for a profound change.”

It continued: “A company the size and importance of ECG should be led by a first-rate Board of Directors and staffed with high-caliber managers.

“The Government should raise the caliber of the ECG Board by appointing highly experienced and respected managerial and professional members, with a clear mandate to improve service delivery and operational efficiency.

“In a break from historical practice, a new, top-flight Board should also be held accountable by Government for performance improvements in ECG”.

The report emphasized: “In line with the Power sector Reform Agenda, ECG should implement a management improvement programme to raise its operational performance to an acceptable level. It should set up a strategic business unit in the Ashanti Region that would have an arms-length relationship with ECG headquarters and would be supported by a world-class distribution utility, whose services ECG’s lenders are ready to fund”.
* Masahudu Ankiilu Kunateh, The Chronicle

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