Letters & Opinion

Privatization & Competition – We’re Being Driven Down The Wrong Road

By David Prescod

By David Prescod

THIS discussion is in four parts, and broadly examines the experience of water utility privatization in some of the Caribbean countries and in St. Lucia in the context of the failures of these attempts, and the World Bank’s role in these failures. It details the experience of St. Lucia in the context of the Bank’s attempts to achieve privatization, and looks at the outcome of those efforts for St. Lucia.

With the recent announcement by government that competition is to be introduced to LUCELEC and that new legislation and regulation is envisaged, this discussion also questions whether the mistakes made then are not being repeated now.

We begin with a look at LUCELEC, and draw on Jamaica’s experience with renewable energy•.

LUCELEC – Do we need to dismantle it?

LUCELEC is a publicly traded company, with 45.56% of its shares owned by Government, the Castries City Council and the National Insurance Corporation. For what reason are we proposing competition for a company which we own practically half of? While we might all agree that electricity prices in St. Lucia and in the region are higher than we would like, shouldn’t we first be asking to see the studies which demonstrate how this strategy of competition is going to be beneficial to us, and ultimately lead to lower prices, instead of discussing the fine points of legislation and regulation for LUCELEC?

The Caribbean Development Bank, in its 2014 booklet “Public Private Partnerships in the Caribbean – Building on Early Lessons”, provides a snapshot, for 2012, of domestic electricity prices to consumers at the minimum level of consumption. Amongst the fifteen member countries compared, only three have prices lower than St. Lucia – Belize, which has a mix of hydro, biomass and power imported from Mexico; Suriname, which relies on hydro for 95% of its production, and Trinidad & Tobago where prices are heavily subsidised. Electricity rates in St. Lucia were lower than those in Jamaica, The Bahamas, Barbados, St. Vincent, Grenada, Dominica, and those of the smaller territories contained in the snapshot.

In St. Lucia, according to Lucelec’s 2014 annual report, 68% of the company’s operating cost is due to the cost of fuel, with a further 12% due to depreciation of its equipment and amortisation of loans. With 80% of cost accounted for, and with LUCELEC already having the lowest rate among comparable Caribbean islands, it is not likely that significant reductions in the price of electricity can be achieved by further gains in efficiency by LUCELEC, and so a focus on the high cost of fuel is understandable. And while there is every reason to believe that renewable energy is the future of electricity generation, we must however ensure that in introducing renewables we do not destabilize an existing utility that can easily withstand financial scrutiny.

In looking at renewables, we may be guided by the CDB report noted above which also includes a case study on renewable energy in Jamaica. This case study, in examining the development of wind energy in Jamaica from 2000 to 2010, following earlier studies on its viability, cites as the programme’s success the demonstration of the operational viability of wind power in Jamaica. It however gives no indication of how that success translated into lower consumer prices.

Similarly, reporting on the 2013 Renewable Energy Auction in Jamaica, the case study indicates that the bids from the preferred bidders would provide bulk energy at much lower prices than the current cost of production from Jamaica’s diesel plants, but again provides no indication of how this would affect consumer prices.

While it is known however that the existing diesel plants in Jamaica are old and inefficient, that case study provides no comparison of the cost of energy produced by the new renewable energy schemes with that from new diesel generating plants. The true benefit of renewables cannot therefore be quantified. And in describing the benefits of the renewable energy programme in Jamaica, the CDB case study points only to Jamaica being on track to meet its renewable energy goals, as percentages of total power produced. That and the opportunity to lower Jamaica’s fuel import bill. There is no mention of the likely impact of these potential benefits on domestic consumer prices.

A 2013 study on the cost of electricity in Jamaica conducted by CaPRI, the Caribbean Policy Research Institute of UWI, however concludes that one of the main structural factors influencing the cost of electricity in Jamaica is the relatively low generating capacity of both traditional and renewable energy producers, resulting in their facing diseconomies of scale in generation. The study adds that it is these diseconomies of scale, coupled with high fuel costs, which result in the high cost of producing electricity in Jamaica. Size matters. And even with the additional burden of a high rate of theft of electricity, Jamaica still manages to set a price of electricity for its lowest level of domestic consumers which is below that of Barbados. St. Lucia’s rate is below that of both Barbados and Jamaica.

In the current absence of any indication of how the proposed competition for Lucelec will be of benefit to consumers, we seem to be rushing headlong into the design of legislation and regulatory regimes in anticipation of the promised benefits. We have done this before with WASCO, with less than stellar results, and this discussion therefore questions whether a focus on financial modelling, or financial engineering, at the expense of the technical realities will not continue to be to our detriment.

In the case of WASCO, with the World Bank promoting the privatization of the utility on the basis that participation by the private sector was inherently beneficial to consumers, we will see that multiple attempts over the last 20 years at designing a suitable model for the Caribbean have all ended with the same result. Failure. While these failures come with costs, some of which are discussed, we however continue to be encouraged by the Bank that this is the correct approach. To repeat an un-attributed quote from a commentator describing the current Jamaica economic experience:

“We keep repeating our mistakes with great diligence, with never a thought to a sustainable future”.

We’re being driven down the wrong road. Hopefully, by examining WASCO’s experience, this discussion may stimulate further debate on the issue and so chart a different course. It starts with a brief look at the experience of the US car manufacturing industry in Part 2.

*All documents referenced are in the public domain and are available on the internet.

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