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“Privatizing FEA: If it ain’t broke, don’t fix it” (FT 29/10/2016)

29/10/2016

“Privatizing FEA: If it ain’t broke, don’t fix it” (FT 29/10/2016)

A citizens’ group (Pacific Dialogue), led by social activist Jone Dakuvula, has rightly raised concerns about the Bainimarama Government’s intentions to sell off shares in the public enterprise (PE) Fiji Electricity Authority (FEA).

Why does the Government wish to privatize FEA?

Scattered statements claim that the hope is for greater efficiency, development of the capital market, and spreading ownership amongst Fiji citizens and investors with financial capacity and proven investment record (Fijian Holdings Limited has expressed interest).

Some of these claims are a bit empty, like spreading ownership:  a state owned enterprise is already owned by ALL the citizens of the country and selling shares to FHL to private investors will be reducing public ownership; and developing the capital market is not a good reason at all for privatizing a natural monopoly already in government hands.

The only acceptable reason may be to increase efficiency (I discuss that below).

But the public should ask

(a) why FEA is a public enterprise in the first place;

(b) if FEA is currently inefficient;

(c) what will be the implications for electricity consumers to have a “natural monopoly” like FEA partly in private hands; and

(d) what are the implications for taxpayers in the long run, if risk events occur such as prolonged droughts or oil price rises.

[Note: a “natural monopoly” exists where competition is simply not feasible.]

Why is FEA a public enterprise?

Once upon a time, the Ratu Mara Government decided (quite wisely in hindsight) to borrow heavily and build the Monosavu Dam so as to reduce our dependence on oil generators.

The Big Three Chiefs “acquired” the Monosavu land (for which they later forked out a huge sum via  a canny law firm- worth a  PhD thesis).

The government forcibly and very cheaply (via a 3% loan) acquired the electricity generating assets of Suva City Council because the demand from Suva consumers (both residential and industrial) was essential for the financial success of the Monosavu Dam (another PhD thesis).

FEA was required to provide electricity not just urban areas (easy and cost effective) but also to rural and distant areas with few consumers.

In other words, FEA has also been required to fulfil government’s development and social objectives which inevitably has reduced its profits, often with electricity rates constrained by the Commerce Commission (to reduce the cost of living or supply cheap electricity for industrial users).

Government still does not pay FEA for the full cost of providing services for governments’ social objectives.

In effect some electricity consumers cross subsidize others who receive electricity services at prices well below cost.

Recently, Government also insisted that low income consumers of electricity should be subsidized, implying more administrative headaches and lower profits for FEA.

So is FEA inefficient?

Sometimes, public enterprises ought to be privatized because they are grossly inefficient and commercially unprofitable, and doing things which the private sector can well do in a competitive and more efficient way.

The public enterprise CEOs and Boards may be political appointees with little commercial skills; the managers may practice nepotism; they may hire excessively to reduced their own work-loads; or they may fail to reduce staff because redundancies are politically difficult.

I suspect these arguments do not apply to FEA.

While the average rate of return to FEA may be low over the long term, this is understandable given that FEA has not been allowed by Commerce Commission to operate under purely commercial terms and set realistic prices.

But some low returns have also been due to abnormally low rainfalls (because of the El Nino and La Nina effect)  OR abnormally high oil prices (both beyond the control of FEA managers) OR being required by Commerce Commission to pay a high price to other electricity generators (such as Tropik Woods and FSC-  why indeed?).

Nevertheless, over the last five years FEA has made excellent profits (more than a hundred million, with $40 million for 2013 and 2015), because of a significant decline in oil prices, and because the Commerce Commission allowed generous price increases since 2012, based on proactive and shrewd submissions by FEA.

FEA is being by a capable and astute CEO (Hasmukh Patel), overseen by an equally capable Board (Chairman Nizam ud Dean and good private sector board members).

Indeed, given that FEA staff have been given large bonuses for the last three years, the public is entitled to conclude that the FEA Board has been quite happy with the staff performance and efficiency.

[Author’s note: While I have many times pointed out that the horrible deterioration in the quality of annual reports of government departments and public enterprises (becoming glossier but emptier), students ought to read the FEA Annual Reports which are quality reports indeed.]

If there is a need for new strategic directions, surely this can be easily solved by a small consultancy funded by ADB or World Bank: you do not need partial privatization.

No one in the Bainimarama Government has informed the Fiji public what exactly are the FEA inefficiencies which they hope to “cure” by partial privatization.

Remember the old adage:  “if it ain’t broke, don’t fix it”.

But there is a bad reason

It has been clear from at least three annual budget statements that the Bainimarama Government is wanting to sell off  shares in public enterprises (including the FEA) purely in order to raise revenues so that they can reduce Government’s Net Deficit and Public Debt.

I have previously pointed out (Fiji Times, 29 November 2014 “The good the bad and the ugly in the 2015 Budget”) that this is not sensible reasoning- like selling the cows to solve a profitability problem for a dairy farm.

While IMF, World Bank and ADB are usually accused of being neoliberal supporters of privatization, even one IMF Deputy Managing Director (Min Zhu) has pointed out that asset sales do not fix the underlying problems of high fiscal deficits and public debt (Fiji Times, 15 October 2015).

We should note that privatizing shares in a natural monopoly may also hurt electricity consumers (residential and industrial) through higher electricity prices to generate sufficient profits for private investors.

Taxpayers would still need to fork out subsidies if FEA is required by government to continue to satisfy social or development objectives (as they will).

Worse still, should the Monosavu rainfall catchment areas be hit in the future by drought or if oil prices shoot up again, then tax-payers would still be required to subsidize FEA and the private investors.

There appears to be no good reason to sell off FEA shares to private profit making investors: if it ain’t broke, don’t fix it.

If the public does not demand answers from government today (as Pacific Dialogue is advocating), electricity consumers and taxpayers can expect to pay for their silence years later, as they have done on many other similar public policy decisions.

 

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