Newly-approved electricity and water tariffs do not suffice to cover the large investment needs of the utilities, says the Public Utilities Regulatory Commission (PURC).

On Wednesday, the PURC announced that electricity tariffs will increase as much as 78.9 percent, while the rates for water will rise by 52 percent from next month. The commission said the actual increase should have been 150 percent, but it beat down the utilities’ requests due to concerns of stakeholders, including labour unions and the employers’ association.

“The commission has agreed to stagger the tariff increase over a period using the Automatic Adjustment Formula. This is also in consonance with suggestions by key stakeholders during extensive consultations on the matter,” said the PURC in a statement signed by its chairman, Emmanuel Annan.

By reducing the magnitude of tariff rises, however, the PURC has left the utilities without sufficient revenues to narrow a wide investment gap in the sector. The funding gap at the Electricity Company of Ghana (ECG) is US$170million per annum, and the Volta River Authority (VRA) needs to invest US$200million annually to meet electricity demand, which is rising at around 10 percent every year.

“Tariffs alone cannot raise the needed capital for the utilities to operate efficiently and effectively. In this regard, the commission is urging government to continue sourcing funds to supplement the tariff income and enable the service providers to maintain, replace, repair equipment -- and add on the needed investments that will bring about the required improvements in the sector,” said the regulator.

Samuel Fletcher, VRA’s Head of Corporate Communications, told the B&FT the utilities’ investment deficit “is a lingering issue that has to be discussed.” With tariffs frozen since the last quarter of 2011, higher fuel costs and problems with natural gas supply from Nigeria led to a chain of losses at the VRA and ECG. These service providers in turn relied on heavy subsidies from government to keep their operations running; but the subsidies were not always received promptly, and by the end of 2012 government owed VRA, ECG and the Northern Electricity Distribution Company (NEDCo) a total amount of GH¢421million.

The International Monetary Fund (IMF) has been urging government to end energy subsidies to improve the financial health of the utilities and bolster government’s attempts to cut the large budget deficit of 11.8 percent of GDP.

In February, the government withdrew the subsidy on fuel -- which cost GH¢1.5billion (US$750million) between 2009 and 12, but delayed the increase in utility prices because that involves a legally-mandated consultation process with different interest groups.

The PURC said the electricity tariff increase will be lower for the poorest consumers, who will continue to benefit from the so-called lifeline tariff. Households that consume up to 50 KWh per month or incur bills up to GH¢4.75 will see a jump of 65 percent in their tariffs.

Ghana’s economic growth is set to slow down this year after the shortage of electricity, which occurred from the third quarter of last year to the first half of the year, held back the pace of economic activity. Growth is projected to be 7.4 percent this year, down from 7.9 percent in 2012.

Last week, the Bank of Ghana (BoG) kept its benchmark interest rate unchanged at 16 percent because of fears that the rise in utility tariffs will stoke inflation, which fell to 11.5 percent last month but remains outside the central bank’s upper target of 11 percent.