The CEB-IPP contracts should be challenged

Editorial

Sugar Industry and IPPs

By M.K. 

At one time, sugar was the predominant economic activity of Mauritius. In the circumstances, it was normal that sugar received our prime attention in view of its overriding socio-economic implications. In the 1980s, the economy started diversifying: textiles and tourism started gaining ground. In the 1990s, EPZ exports exceeded by far sugar export earnings. A decade later, sugar became third only after EPZ and tourism in terms of export earnings, and it has gone tumbling down ever. Today even though sugar production remains one of the major activities of Mauritius, its economic weight in terms of earnings, and still less in terms of employment, has steadily declined compared to other sectors that have emerged.

Common sense dictates that if new sectors of economic activity are going to contribute an ever-larger share in terms of national production and employment generation, it is those sectors that deserve to be given a further fillip. Or, to put it differently, if new offshoots are to be generated from a sector that no longer plays the key role it has played for centuries, those offshoots should receive financial resources, subsidies, benefits, privileges, whatsoever, provided they become the springboard for greater economic mobility of the various members of the population than has been the case with so many years of protection of the sugar sector alone.

Accordingly, if energy production is to be privileged at guaranteed prices at the expense of consumers, all stakeholders should participate in the project in a better-balanced model of overall economic development. This unfortunately has not been the case. What has happened instead is the distress caused by the Independent Power Producers (IPPs) and their cast iron contracts with the Central Electricity Board (CEB). That’s indeed a pain that has been coming back since the CEB-IPPs contracts had been signed by previous governments and some of which have apparently been renewed by the current one.

It bears repeating that it was in the mid-1990s that experts of the World Bank and the IMF recommended that the CEB, which had for most of its existence been both the producer and distributor of electrical energy in the country, should give up its role as producer of electricity to the big sugar producers (which had then started diversifying into real estate and energy production), and to restrict itself to being its distribution and marketing agency. That recommendation was adopted by the government, possibly because the CEB could not then afford the huge capital outlays necessary to step up its production capacity, but it resulted in the CEB losing its key role in the production of electricity. Up to 60% of the electricity the CEB distributes to the public comes today from the four independent power producers (IPPs) of the sugar producers.

According to contracts signed between the IPPs and the CEB, the latter has to buy up all the electricity produced by the IPPs in the first place and only then make good any residual shortage in the demand through its own production. This means that the CEB has to install spare capacity (thermal and hydro-electric) and keep it aside so as activate it to make good any shortfalls in supply from the IPPs. But if IPPs are increasing their supply, the CEB should cut down its own production to take up the IPP supply, no matter if its own installed capacity has to remain idle.

The contracts between the CEB and the IPPs also provides that any fluctuations in cost due to higher cost of inputs (including coal), any external or internal price inflation, changes in freight rates, any adverse effect of exchange rate changes on the cost of production of the IPPs, any taxes will be factored into the price of electricity charged by the IPPs. In other words, the IPPs are passing on all risks to the CEB and, by extension, to the public. As we have highlighted a number of times before, the Illovo “mari deal” pales in comparison with the risk free rate of return the sugar producers ensured for themselves – and that during the mandates, initially and subsequently, of accommodating governments.

The contracts between the CEB and the IPPs, which thus operate as a quasi-collective monopoly, speak for themselves in this regard. Under existing arrangements, the public sector has no say in the price at which electricity is delivered by the IPPs to the CEB. Attempts by the government to bring the IPPs to review the price charged and other conditionalities in their contracts with the CEB have failed despite the recourse to an independent foreign mediator. Moreover attempts to bring in other competitors in this market have met with all manner of restrictive market practices and misinformation.

This IPP pain will keep coming back until and unless the government, present or future, decides to take the bull by the horns, as amply demonstrated by the current one when it came to call off the15-year Betamax-STC contract for the supply of petroleum products. It has come back, this week, during the parliamentary debates in the context of the PNQ of the Leader of the Opposition on the IPPs. According to a letter (excerpts of which have been published by l’express) addressed to the Government by Omnicane, Terra and Alteo, these latter sugar companies having an interest in energy production, would have refused to contribute Rs 300 million to the Consolidated Fund, set up by the CEB and meant to support the small sugar planters community, already hard-pressed by falling sugar prices and which have led to thousands abandoning sugarcane cultivation.

The Government’s request for a greater participation of the IPPs to support the small planters comes in the wake of the increase in trash energy, which is produced by cane straw. It would appear that the CEB has decided to increase the rate payable to Alteo from the earlier Rs 3.09 to Rs 4.45 KWh, for a period of three years. This decision is not to the liking of the small planters community. For good reasons too – , for during the same sitting of the National Assembly, Agriculture Minister Mahen Seeruttun has conceded for the first time ever, it would seem, by a Minister of Agriculture that the bagasse price paid to small planters is derisory. We assume that he must have been officially authorised to make this statement. In which case the government must now not relent and push with greater determination to protect the small planters.

This paper has been steadfast from its very inception in drawing attention to the plight of the small planters, and in fact was instrumental in canvassing the government to set up the Balogh Commission. Its recommendations brought about, among others, an improvement in the living conditions of the small planters, whose associations have in recent years joined in the debate especially in the wake of falling sugar prices.

Several articles have appeared in this paper analysing in detail all the issues pertaining thereto, and have drawn attention repeatedly to the injustice resulting from the asymmetry in price allocation as well as to the lack of transparency about the negotiations. What is certain is that the IPPs armed themselves with competent technical and legal experts in the field of energy contracts to negotiate. The least the government should do is to act similarly to defend the cause of small planters. Government went all the way to recruit the best in defending the Chagos cause. Why shouldn’t it do the same for the small planter community with a view to ensuring justice and equity as this too is a matter of national interest? If push comes to shove, as happened in the case of Betamax, then similarly the CEB-IPP contracts should be challenged.


* Published in print edition on 21 June 2019

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