BPC - Buy Paraffin and Candles?

| Wednesday May 8, 2013 00:00

It must be extraordinarily difficult to be in the shoes of Jacob Raleru, the CEO of the Botswana Power Corporation or BPC (not so affectionately dubbed ' Buy Paraffin and Candles' by the nation's long suffering and intermittent electricity users).  As I sat in my hot box sweating without electricity, I like so many people in Gaborone, had unkind thoughts about those who were stopping me from working. But the important question is not whose fault this is but what economic lessons there are for Botswana from its dependence on South African imports.

It is perhaps worth framing the issue a little differently. How did a nation like Botswana, which has 2/3 of Africa's coal, with an enormous inferred resource of some 212 billion tonnes end up sitting in the dark? The simple answer is that Gaborone is no different from Lagos or Baghdad which both sit on a sea of oil and like Gaborone, also sit in the dark. Depending on what one believes, it is either God or nature that makes coal and oil, but it is men that generate electricity and it is the decisions of men that explain our darkness. To understand Botswana's situation one needs to go back to decisions about electricity supply that were made by presidents Sir Seretse Khama and Ketumile Masire. At the time of the apartheid regime, the South African government pursued a 'two-legged' policy of economic development. One leg was cheap electricity and the other was cheap labour which itself was a result of apartheid. It was a very successful formula, which assured the prosperity of the white minority in South Africa for many decades. In order to assure both adequate and cheap electricity the apartheid government ran Eskom as a utility with the clear instruction from government to provide electricity cheaply at no profit. Eskom's managers behaved like all managers with such a commercial mandate and proceeded to use whatever surpluses that they generated not to make profits but to expand their generating capacity to assure a huge excess supply for the government, business and the country as a whole. In the process the South Africans created one of the world's biggest utilities and by the end of apartheid had far more capacity than it could possibly use.

In the 1980's this huge excess supply of electricity in the hands of Eskom also became a weapon in the hands of the apartheid regime. If the apartheid regime could offer some of its excess supply of electricity to its neighbors including all the SACU countries and Zimbabwe at really cheap prices then if any of these countries really annoyed Pretoria they could simply turn off the lights. They offered electricity to all of the neighboring SACU states at prices that were so low that there was no way that none could possibly justify an investment in domestic electricity generation. President Masire, in his autobiography wrote about the Selebi-Pikwe project:'We were being pressed by the World Bank and the project's partners to purchase power from the South African governments' utility Eskom ... we saw the Sashe project as an opportunity both to mine our coal resources at Morupule and to develop BPC [Botswana Power Corporation] .... What was more important, we did not want to put ourselves further at risk with the apartheid government in South Africa. They withheld rail cars for our beef when we did something that displeased them, such as receiving high profile political refugees. What would happen if they decided to shut off the electricity to the mine and smelter at Selebi-Phikwe, or to the capital Gaborone?'

For many years until Nelson Mandela was released from prison in 1990 the Botswana government attempted to cap the country's dependence on South African electricity imports. But as the political risk of becoming dependent on South African supply receded, as the democratic elections approached in 1994 the Botswana government lifted the cap on the amount that BPC could import. We became very quickly 80% dependent on electricity imports from South Africa. For BPC this was a financial dream - it allowed the company to import cheap electricity and distribute it with a mark-up to Botswana customers. It is hard to imagine today but BPC was until just a few years ago 'the jewel in the crown' of the government's public assets. It accumulated considerable financial surpluses based on an easy and simple business model of largely distributing South African electricity. 

The timing of Botswana's decision to become fully dependent on South Africa could not have been much worse because the new democratic government in South Africa wanted to provide electricity to the many millions of its black citizens who had been denied access under apartheid. Moreover, the government of South Africa, pressed for funding for its massive expansion in housing and education, provided no funding for Eskom to expand its capacity. It also wanted to keep that electricity cheap to further stimulate industry and to assure that its citizens could afford power. For years real electricity prices fell in South Africa. Only in the last five years has the South African regulator NERSA allowed them to soar.

In 1998 the South African government issued a White Paper in which it said quite clearly that by 2007-8 it would no longer have excess electricity capacity. They were spot on and even with all the warnings Thabo Mbeki, did nothing to avert the power shortages which started to hamstring South Africa's economy and its neighbours including Botswana in 2007/8 and have continued since. Eskom told BPC quite clearly at the beginning of the century that the gig was up, and that the five years supply deal from 2008-2012 would be the end of Eskom supply. This final five-year deal ended five weeks ago and while Eskom will continue to supply until Morupule B is finished it is largely non-contractual which means they can pull plug on Botswana whenever they need it. The decision to build Morupule B should have been taken in 1998 but it was not. The country, its citizens and business including BPC, were in a comfortable arrangement for all concerned with relatively cheap electricity for Botswana, high profits for BPC and no need for government to invest P10 billion in a power plant when people needed education and health expenditure. Moreover, as long as SA was supplying us with very cheap subsidised electricity which international banker would fund a new power station even if Botswana wanted it? Power shortages were something for the future, like the problem of what Botswana will do when the diamonds run out. Someone else can worry about the future, but the future very quickly becomes the present and reliable electricity, like good health, only really matters when it fails.

What are the consequences of the delay in BPC moving from its old business model of being a distributor of South African power to being a local power generator? According to the World Bank the financing subsidy to BPC was worth approximately P650-P800 million a year in 2008/9 and 2009/10 (and compares to actual revenues over just over P1 billion a year). BPC has not yet raised its tariffs fully to cover the massive increases in the ever-increasing cost of imported South African and locally generated diesel power. But the subsidies that government is providing are not a reflection of what the consumer will have to pay. These subsidies are so high only because we are generating a substantial portion of our electricity from the most expensive source, diesel. Once the Morupule B facility is finished, hopefully in June 2013, then the subsidy will be much less because coal is much cheaper than diesel. But unless BPC fixes the old Morupule A facility and starts construction of yet another 300MW power plant quickly then our problems will only return in a few years.

So as Botswana sits in the dark we can be comforted by the fact that we are in the process of finally dismantling an old apartheid era commercial arrangement. It is of course cold comfort  and only a pity that Botswana did not dismantle this system  15 years ago. The main economic lesson is that there is reason enough to be dependent upon South Africa for products we cannot possibly produce here competitively but where we actually had an abundance of coal as well as potentially cheap capital as was the case in the 1990's Botswana should have ended its dependence then rather than face the economic chaos caused by South Africa terminating supply. Sometimes the cheapest short term commercial answer proves very economically expensive in the long term and delaying the building of important infrastructure just retards the country in the longer term.

*These are the views of Professor Grynberg and not necessarily those of the Botswana Institute for Development Policy Analysis.