Why is it hard for state-owned enterprises to be profitable? Briefing on Burundi's REGIDESO!
RegionWeek Newsletter Vol III, Issue #131 | Wednesday, October 14, 2020
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Dear RegionWeek Reader,
This Wednesday, Burundi Prime Minister CPG Alain Guillaume held a meeting with the Minister of Hydraulics, Energy and Mines, and the managers of REGIDESO (Régie de Production et de Distribution d'Eau et d'Electricité) the public company in charge of commercialization of Water and Electricity in Burundi.
The core preoccupation of the Prime Minister was to know why the Burundi government can’t get dividends from Regideso anymore when the main mission of REGIDESO was to commercialize water and electricity. It was also an opportunity to analyze the challenges that haunt this company and to find solutions.
Minister Alain Guillaume Bunyoni asked REGIDESO staff to change the mentality, to work in transparency, and in all honesty. Among the challenges mentioned by REGIDESO managing team during the meeting are the non-consumption of 30% water and 18% electricity, and 70% of the staff lacks expected performance.
In today’s Newsletter let us explore why state-owned enterprises such as REGIDESO struggle to be profitable, but first, let us examine key facts about REGIDESO and the energy-water sector in Burundi.
Electricity in Burundi
The main institutions in the electricity sector are the Ministry of Energy and Mines , Régie de Production et de Distribution d'Eau et d'Electricité (REGIDESO) and the Rural Electrification Agency of Burundi (ABER).
REGIDESO was created on June 22, 1962, by legislative ordinance 053/113. It is a socio-commercial enterprise. Before independence, the service of production and distribution of water and electricity was provided by the "Water and electricity distribution authority of the Belgian Congo of Rwanda-Urundi.
The electrification rate in Burundi is estimated at 15% in 2020. From nearly 70,000 customers served in 2012, REGIDESO has now over 150,000 clients across the country. Households with electricity access represent 83.9% of the total number of subscribers but account for 41.9% of the energy billed. For their part, companies with access to Medium Voltage consume 40% of the energy billed while they represent only 0.4% of the number of subscribers.
Compared to the African average of 150 kWh / year on electricity consumption within households, Burundi is far behind with consumption of only 23 kWh /year/household.
The AfDB report estimates that Burundi's generation capacity should reach around 600 MW by 2030. Today Regideso produces barely 30 MW.
Water distribution in Burundi
A study carried out in 2009 shows that Burundi has, outside the urban centers, 53,850 water points of which 19,690, or 37% of undeveloped sources. 88% of water subscribers are households that consume 60% of the water billed by REGIDESO. Subscribers in the "Trade and Industry" sector represent only 7% of the total workforce but consume 20% of the water production billed. This means that business development will lead to a more than proportional increase in the demand for water in years to come.
The population's rate of access to water has increased from around 50 percent in 2008 to 60 percent in 2012. This means that one million more people now have access to safe drinking water. However, it was forecasted that Burundi will not be able to meet its national target of supplying three-quarters of its population by 2025.
So why State-owned enterprises struggle to be profitable?
State-owned enterprises (SOE) in Africa play a vital role in their respective economies managing natural resources, energy, transportation, and telecommunications – but they often rely heavily on regular capital injections from their governments and struggle to be profitable from their equity.
One of the reasons is that politicians cause state-owned enterprises to employ excess labor inputs. Furthermore, those recruited are chosen to perform the desired tasks based on political connections rather than based on merit, which is assumed to lower the productivity of SOEs.
In the REGIDESO case, according to a report by the Burundi Parliament’s Governance Commission, since 2007 the number of permanent staff increased by about 8.4% yearly, the wage bill increased by 70.0% over four years. In a period of five years, the staff of REGIDESO increased by 180 units, including 98 units for the year 2007 alone. This corresponds to recruitment, beyond replacement departures, 36 new units per year.
Government firms have statistically significantly higher average labor-to-sales and labor-to-assets ratio than private firms do, implying that they are more labor-intensive than their counterparts in the private sector.
REGIDESO had a bills collection rate of 34% and losses of about 17.65% for 2017, while unmet electricity demand is still estimated at 36%. The considerable gap between electricity supply and demand has inevitably resulted in selective power cuts for customers, particularly in July, August, November and December. - Report
Experts also note that SOEs are also more dependent on debt and financial support from outside sources rather than equity. Hence, public enterprises are less efficient than private firms, at least in terms of profitability.
It was estimated that in Burundi the water and sanitation sector will benefit from mobilizable financing for its activities, which increased from USD 51 million in 2012 to USD 71 million in 2015 and to USD 86 million in 2020.
Although REGIDESO's financial performance has improved after tariff increases in recent years, its operational efficiency still remains inadequate. The cumulative increases in electricity tariffs in 2011 and 2012 were about 69 percent and raised the average tariff to about the equivalent of US$0.11 per kWh in 2013.
This level is below the system's long-run marginal cost of US$0.14 per kWh but higher than REGIDESO's average cost of supply and revenue requirement in 2012 that was estimated at US$0.10 per kWh. However, the effective tariff (i.e., revenue collected per kWh) is lower at US$0.09 per kWh due to large technical and commercial losses (a result of a combination of the poor condition of the distribution system, metering, billing, and non-payment issues).
As The Park Place Economist Journal notes, regardless of whether a firm is state-owned or privately owned, efficiency can be achieved as long as the firm operates in a competitive market, gives full autonomy to the management to make crucial decisions based on market signals, and provides performance-based compensation. In reality, the above conditions are rarely met within Burundi SOEs, and when the criteria are fulfilled, they are not sustainable in the long run because the responsibility to achieve social objectives creates an inefficient use of resources.
Thanks for reading
Fabrice Iranzi, RegionWeek.com
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