Enough with your principles, they condemn millions to live in poverty
The return of the Poverty Tax. Now it’s good??
We are in 2017 and there are still 1.3 billion people living without electricity worldwide. It is Power:On’s mission to end this insane crisis.
But before we go and fix it, it’s important to understand why so many people are left in the dark.
We all know how we get electricity. There are electric plants that generate electricity and an electric grid that delivers it to us. In developed countries, the grid is everywhere. This is a totally different story in a number of developing countries. In Benin, the overall electrification rate is only 31%, with a big difference between urban and rural areas. In the cities, 58% of the people have electricity whereas in rural areas this rate plumets to only 6%!
The main explanation for this is dumb economics. Providing electricity to poor and remote communities is more expensive than it is to the middle class living in big cities:
- Remote areas are difficult to reach — and therefore expensively connected to the national electricity grid. According to the World Bank, it can cost up to $22,000 per kilometer to extend the grid in certain regions. In some cases, it is merely impossible: in Indonesia, for instance, about 90 million people, scattered across diverse islands, live without access to electricity. A single grid cannot supply them all.
It is also less profitable:
- Poor communities living in isolated areas do not consume much energy. Provided they could pay upfront for a connection to the grid (which often costs $100 to $300), each household may be able to afford several light bulbs, a mobile phone and a radio, but not much more in the short term. This is typically what I observe in Igbérè, even though we chose to connect everybody for free. Only a few richer households and professionals can afford a fridge, a TV, a mill right off the bat.
I’m not even talking about the fact that there are not enough electric plants to generate the electricity the country would need in the first place. This is an issue, of course, but not the most important one. The issue is that electricity prices are fixed at a national level by the State. The original goal is laudable: it is to guarantee equality of service on the national territory. But as a result, the national electricity producer loses money every time they try to reach the poor! Considering these national electric companies are already in very bad financial shape, we can understand why they have not been very effective in extending the grid to remote villages.
This situation is insane! Grand principles of equal treatment for all are actually condemning millions of people to live in darkness and suffer the consequences!
So what is the solution? Should electricity be sold at a higher price in isolated areas? Is this the only way for energy producers to be able to reach the poor in a sustainable way? What if we let the market rules apply?
This sounds weird, but did you know this is exactly how microfinance has managed to give the opportunity to billions of people across the globe to access the banking system from which they were previously excluded? Its inventor, Muhammad Yunus, even got the Nobel Peace Prize.
Let me explain. The cost of microfinance is much higher than traditional bank loans for the non-poor: the interest rates applied to microcredit often range from 20% to more than 100% according to countries. You would never accept these rates! However they are absolutely necessary for microfinance institutions to be profitable and sustainable, because the amounts they lend in nominal value are very low.
Let’s take a(n overly?) simple example. You are a bank, and you need 20 just to cover your operational expenses.
If you lend a total of 1000, you only need to earn 20 on that loan. Which is 2%. A 2% interest rate is ok.
But if you lend only 100 as a microfinance institution, you still need to earn 20. This makes sense: you are basically doing the same job as a bank. Except the interest rate is now 20% :(
In the end, even if some remain skeptical towards microfinance, applying a poverty penalty to banking services has actually proven beneficial. So if liberalizing the market in the energy sector could allow billions of people to access electricity, why shouldn’t it be done?
This sounds shocking because we consider electricity as a public utility. As such, a democratic and egalitarian State should guarantee that every citizen can access it under the same conditions. In some cases, the market has to be controlled: making the poor pay a higher price for their electricity than the non-poor would be unfair.
I strongly disagree. I believe in this case, the status quo is the most unfair alternative. It is comfortable to have principles when you work in a big city office, with the A/C running full blast, cooling the room to a perfect 18°C while it’s 40°C outside. You have the feeling of being a humanist, guaranteeing fairness and equality for all citizens. But you are willingly ignoring the fact that at the same time, only a few hundred miles from you, thousands and thousands of people are already paying more than you for energy. God forbid it would be grid electricity! That would be unethical! But as long as it is energy from toxic fuels, killing millions in silence, you’re good, your hands are clean.
This is bullshit and we all know it. The good news is this opinion is more and more shared by African leaders. In its latest report, the African Progress Panel lead by Kofi Annan (another Nobel Peace Prize winner) strongly advocates for regulatory measures to allow the private sector to implement effective and sustainable solutions to bring electricity to the poor. These measures include setting cost-reflecting tariffs for rural electrification projects implemented in areas the national grid can’t reach.
It will take time for these propositions to translate into real laws and regulations, but a number of African countries have already taken steps in the right direction. In East Africa, Tanzania and Kenya are way ahead. Western African States are also showing positive signs. In Benin, the process in underway. It’s very good to finally see a strong political will pushing for electricity access, and I’m glad to share what we’ve learnt with Power:On.
The fairness question still remains, though. A poverty penalty will be applied to the poorest so they can access electricity. They will save money because electricity will be cheaper than what they pay now for batteries, candles, gasoline and kerosene lamps. But still.
The way to address it is welfare and redistribution, which is the State’s responsibility. It is kind of a long shot to expect the State to either cover some of the investment and/or operational costs of the companies bringing electricity to the remotest villages, or to directly provide some kind of benefit to the villagers themselves (after all, basic income is trendy at the moment). Many of them are often reluctant — or sometimes genuinely incapable — to subsidize such programs.
But they should keep this in mind: money invested in electricity is also money invested in health policy, education, family planning… and will yield a return in taxes on wealth generated in the future. The impact analysis of public policies and the Social Return on Investment (SROI) are rather complex topics and I will not discuss them further in this post. But simply consider this example: ten year ago in France, 1 Euro invested in work integration enterprises actually yielded 4 Euros. € 2.1 were paid back to the State (taxes) and € 1.9 that would otherwise have been devoted to assistance programs were saved. I am not aware on any study that would give similar figures for electrification programs in developing countries — and if you do please tell me in the comments. But I am sure that the financial argument would be very efficient on governments!
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