“I Walk Slowly But I Don’t Walk Backward”: Implications Of Exempting The Liberia Electricity Corporation From Customs Duty On Fuel
By: Presley K. Wesseh, Jr.
On April 8, 2013, the Government of the Republic of Liberia in the interest of national reconstruction and development, issued ‘Executive Order No. 51’ granting 100% customs duty waiver on all fuel and lubricants for the use of the Liberia Electricity Corporation (LEC), the Liberia Broadcasting System (LBS), the National Transit Authority (NTA), schools, clinics and hospitals that are deemed by the Ministry of Finance to be inadequately covered by Government’s budgetary appropriations or subsidies.
Indeed, removal of customs duty on fuel to minimize operating costs, provide public transportation and information, generate electricity, etc., can present opportunities especially in the context of the Government’s drive for rapid growth and economic recovery. In what follows, attention is directed exclusively to the utility LEC and the implication of customs duty exemption on fuel.
By legislation, the responsibility of LEC extends to the generation, transmission, distribution and sale of electricity. The electricity grid of LEC, which had a total installed capacity of 191 megawatts (MW) of power by 1989, currently generates only 22.6 MW of diesel power, of which about 16 MW are effectively available. Less than 1% of the population has access to public electricity (11000 customers as of August 2012). This should be compared with approximately 13% in 1989(35000 customers). Given the extremely high cost associated with diesel production particularly due to high imported fuel cost, the generation cost of LEC has been estimated at US$0.32/kWh compared with average generation costs in Africa of US $0.18/kWh (Ref. World Bank, 2011;EU, 2012). Consequently, Liberia has one of the highest public electricity tariffs in the world despite Government’s subsidies ($0.52/kWh as of October 2012).
There is no doubt that the extent to which LEC will be successful in extending affordable services to the majority of the population will in part depend on the Government’s ability to provide the utility with sufficient capital as well as favorable support schemes like the customs duty exemption under ‘Executive Order No. 51’. It is therefore expected that LEC will maintain the electricity tariffs at current levels (since LEC current is more stable and less expensive than own generation from private diesel generators or other private sources), but use any savings from costs minimization to increase the number of connections to the grid. This should not be taken for granted especially when current electricity demand is estimated to range from 11 to 25 MW and grow steadily by 3.4% annually until 2020 (Ref. World Bank, 2011). According to a scientific research published in a leading energy journal, there is a direct causality from energy consumption to economic growth in Liberia. This implies that increasing the number of grid connections to meet electricity demand targets would pose a positive bearing on the country’s outlook for economic recovery and full employment (Ref. Presley K. Wesseh, Jr., Babette Zoumara.Causal independence between energy consumption and economic growth in Liberia: Evidence from a non-parametric bootstrapped causality test. Energy Policy 50 (2012) 518 – 527). Nevertheless, LEC will have to ensure that savings associated with the customs duty waiver are meaningful, sustained and not eroded. This could be done in two ways: First, the utility could consider reforming its payment structure by making ‘prepay’ a must for residential customers since this is where default in payment is more likely to occur. Second, LEC must ensure distribution efficiency and transparency in orderto avoid high power losses and illegally tapping into the power grid. These actions if not taken could defeat the purpose of ‘Executive Order No. 51’.
At this point, one must not forget that the electricity or power sector of Liberia now suffers the most devastating infrastructural gap coming at the hands of the civil wars.
In the author’s opinion, it is squarely in this sector that Liberia’s battle for economic recovery and long-term development will be won or lost. This assertion should be realistic since the energy sector serves as a driving force for nearly all socio-economic activities and cuts across agriculture, industry and service. Against this backdrop, ‘Executive Order No. 51’ albeit not sufficient for the long-run sustainable development of Liberia’s power sector, is a step in the right direction capable of yielding positive short-run results. Hence, one may say “I walk slowly but I certainly don’t walk backward”. Notwithstanding, the Government will need to take a more delicate balancing act as Liberia moves towards a sustainable developmental model based on upgraded value chains and energy-efficient business.
In the author’s professional opinion, success will depend on the Government’s ability to diversify Liberia’s energy mix and attract large scale private investment and financial flows into the energy sector. The Government has done a great job in collaborating with donor partners like European Commission, the World Bank, the US Government as well as the Government of Norway to outline actions in various projects in the electricity sector during the period 2012 – 2020.For the most part however, experience has shown that donors support does not create a sustainable business model for the continuous delivery of services once funding ends. Against this understanding, the Government will have to augment donors support by endeavoring to create a more favorable environment for private investment into the energy sector.
To help achieve the above, the author has elected to put forward the following suggestions: First, the Government might want to consider introducing the so-called feed-in tariffs mechanism. This policy would guarantee potential investors or suppliers of renewable energy a price that lies above the market price, implying an implicit subsidy on renewable energy. More than 60 countries worldwide now use feed-in tariffs. Second, the Government should improve customs procedures and make the process faster by reducing the formalities. This would increase trade freedom thus opening the market. Third, more work is still needed to be done in ensuring transparency and improving the level of administrative infrastructure. Finally, the Government through the Central Bank could consider lowering the interest rate. Such action would reduce the cost of credit and increase access to financing.