Wednesday, April 25, 2007

The Ugly Side of Kengen Subsidies

The recently announced electricity subsidies are politically right but economically wrong. They are directed at appeasing Kengen shareholders but will surely hurt the electricity sub-sector, as well as halting economic growth. They also equate to wealth transfers from the tax-paying-mwananchi to the fast rising investment class; this might affect the war on poverty.

Minister Kimunya said that the first Kshs 1.3 billion is “compensation for losses caused by regulator’s refusal for Kengen to increase power tariffs.” But that’s not a credible reason, considering that the government will get the lion's share of the subsidy. Check this out: the state owns 70% of Kengen, which would translate to KShs 910 million or 70% of the subsidy. The other 300,000 shareholders will share 390 million.

Bottomline: As Kengen shareholders (including GoK) ‘fatten’ their CDS accounts with subsidies, 33 million Kenyans will have to deal with poor roads, inadequate schools and hospitals, insecurity, and many other problems that could be solved with Kimunya’s 1.3 billion give-away. Subsidies will not solve electricity problems in the country, they’ll only postpone a major disaster in Kenya's energy sector.

3 comments:

Nathan said...

Simon,

It's always a pleasure to read your blogs. Your "bottomline" feature is a pleasant sight at the end of your economic commentaries. As you know, clarity usually is not a trademark of economic literature. So, here's thanks for your work in clarifying economics! I hope all is well. P.S. - This is an aside, but I am curious what you thought of the movie, The Last King of Scotland, if you have already seen it.

Kenyanomics said...

Thanks Nathan, you just booked a place at Kenyanomics ' "Shout Outs" section (please blame Ben on this). I recently watched the "Last King of Scotland" with Beau and two other guys. Will drop you an email.

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