Electricity privatisation has consistently failed from London to Lagos. So why are we still doing it?

By: Alex Scrivener
Date: 26 May 2016

Finally, after a year of campaigning against the DFID-funded privatisation of Nigeria’s energy, there is the glimmer of a breakthrough in the form of two high-level Parliamentary inquiries that scrutinise this work.

One inquiry is looking into DFID’s work in Nigeria as a whole, while the other looks at the departments increasing use of contractors, such as consultancy company Adam Smith International (ASI) who have implemented Nigeria’s energy privatisation on behalf of DFID. With these important inquiries underway we are hopeful that some light will start to be shed on the failed model of energy privatisation that the UK is exporting with its aid budget.

Although these inquiries, launched by The Parliamentary Committee on International Development, are very welcome, more action is of course needed to ensure that UK taxpayers’ money stops going towards promoting failed privatisation policies. That’s why we are delivering our petition to the UK government today to demand an end to this failed policy.

We must keep reminding our decision makers that electricity privatisation has been a disaster almost everywhere it’s been tried. Here in the UK, it has led to higher tariffs and huge subsidies for the Big Six energy companies while millions suffer in fuel poverty. But it’s also been a disaster in many countries in the global south. We’ve had a look at some examples of where it’s been tried before across the global south. And the results weren’t pretty:

Nigeria
UK aid money has been used to pay ASI to implement the privatisation of Nigeria’s electricity system.

After it became clear that privatisation would be going ahead, tariffs immediately started soaring. The three main tariffs rose by between 47% and 197% in real terms in the period between 2011 and 2015. Privatisation also led to 14,000 workers losing their jobs permanently.

ASI claim that a new lower R1 ‘lifeline’ tariff has helped mitigate the impact of the hikes. But the truth is that the R1 tariff only applies to 0.5% of Nigeria’s population. The reality is that privatisation has been an expensive mistake, a mistake paid for by the people of the UK.

Uganda
Like Nigeria, Uganda’s experience with privatisation should serve as a warning to anyone who thinks that the private sector is somehow innately more ‘efficient’ than the alternatives.

As soon as the country’s electricity utility was privatised in 2004, Umeme, the company that took over, started hiking prices. Tariffs immediately rose by 24% and then by a further 34% two years later. By 2014, Ugandans were paying some of the highest electricity tariffs in sub-Saharan Africa at 19 cents per kilowatt (the regional average is just 13 cents). At one point, it was reported that Ugandans were paying more for a kilowatt hour of electricity than any other country in the world bar Sweden.

This happened despite Umeme getting a 60% subsidy to top up its tariff revenues. It has also extracted a dubious “compensation” payment of £550,000 from the government for lost profits. Ironically, privatisation, which is supposed to bring entrepreneurial spirit and efficiency to public services, meant that the electricity distribution system became completely dependent on the public purse to function in Uganda. Some subsidies were later scrapped but that led to further rate hikes. The government can’t renationalise the network, as the contract states it would be liable to pay huge amounts in compensation (the figure stood at $576 million in 2011).

And all of this wasted money and tariff hikes have not helped increase energy access. Indeed, less than 15% of Uganda’s 38 million strong population has access to electricity. This is despite the country having huge potential for solar, geothermal, wind and micro-hydro energy.

Umeme has just 793,544 customers, which although a small improvement over the previous state of affairs, this is a poor performance considering the huge subsidies the company received.

Philippines
The average income for those who have jobs in the Philippines is around $215 a month. The elderly and the unemployed live on far less. Despite this, electricity bills are amongst the highest in Asia. In fact, the price of a kilowatt hour of electricity is higher in Manila than it is in Paris, Washington DC or Brussels, at around 11p.

Privatisation really took off in 2001 when the Electric Power Industry Reform Act (EPIRA) was passed in the face of widespread opposition from trade unions and consumer organisations.

EPIRA introduced a set of private monopolies controlled by powerful families and business tycoons with political connections. By 2011, the majority of the generation capacity of the entire country was in the hands of just three large companies: San Miguel Corporation (SMC), Aboitiz, and Lopez. All three are owned by rich oligarchic family dynasties. For example, SMC is headed by a member of the Cojuangco dynasty, which includes the current president of the Philippines.

The effect of this oligarchic takeover of the sector on electricity bills was huge. In the ten years following the adoption of EPIRA, tariffs soared by 112% in Manila.

At one point it was even claimed that the consumer energy price in the Philippines was the highest in the world.

Nicaragua
Privatisation in Nicaragua was such a disaster that it led to widespread protests and a series of violent standoffs between protesters and the police.

Both generation and distribution were privatised, leading to failures in both areas. Through installed capacity did rise in the years after privatisation, this was due to the construction of new power stations. The existing infrastructure that had been sold off performed very badly. For example, one of the companies involved in generation, Geosa, went from generating 718GWh in 1998, to generating just 451GWh in 2005, a fall of over a third.

Blackouts in the country increased, with some power cuts lasting nearly 12 hours. As a result, many small businesses had to close. In some instances, there were such shortages that people were unable to access water due to there not being enough energy to work the water pumps.

At the same time, tariffs soared. In the first five years of privatisation, Nicaraguans saw their electricity prices increase by 50 per cent. In 2013, in what has been described as a “cut and run”, the company that had taken over electricity distribution, Union Fenosa, fled Nicaragua in the face of widespread protests, disregarding their contractual obligation to provide electricity until 2030.

Since then, the Nicaraguan state has begun investing more in renewable energy. Indeed, in March 2015, it was reported that 52 per cent of Nicaragua’s power now comes from renewable energy sources and that by 2020, Nicaragua hopes to produce 90 per cent of its energy from renewable sources.