A new electrical pricing regime for homes, business and government bodies in Phnom Penh and five provinces is to be instituted as of next month and promises to raise consumer power costs in some cases by over 50 percent.
Analysts said the proposed price hikes may tarnish the business environment and depress already thin profit margins in the country’s emerging private sector, which is already hobbled by comparatively high utility costs and poor infrastructure.
For houses in Phnom Penh and Kandal province that use less than 50 kilowatt-hours per month, electricity will be charged at 610 riel, or about $0.15, per kilowatt-hour, up 56 percent from the current price of 390 riel, the Ministry of Industry, Mines and Energy said in a statement yesterday.
Those that use more than 50 kilowatt-hours will pay about $0.18, or 720 riel, up 18 percent from the current amount of 610 riel.
Businesses will also see an increase in prices of about 120 riel per kilowatt-hour for small businesses and about 80 riel for the largest companies. However the ministry did not provide criteria for distinguishing the different sizes of business.
The new prices were partly the result of the end of a long-standing policy of subsidizing valued-added tax payments on the price of electricity, a cost that the government is now passing on to the consumer.
“The economy and finance policy committee of the government has discussed and agreed to charge VAT at 10 percent on imported electricity and fuel,” said Ith Praing, secretary of state of the Ministry of Industry, Mines and Energy while speaking at a round-table event in Phnom Penh yesterday.
Electricity in populous Kompong Cham province–where production costs are notoriously high–will remain unchanged at 940 riel, or $0.235, per kilowatt-hour for households and state-owned premises, according to a draft on electricity prices for 2010 released by the Electricity Authority of Cambodia yesterday.
Under the new price scheme, the price of electricity in Preah Sihanouk province will stay the same at 720 riel, though state-owned buildings will have to pay 820 riel per kilowatt-hour. In Takeo province, where electricity costs 920 riel per kilowatt-hour, businesses will also be billed in accordance to their energy usage, though households are not mentioned, according to the authority’s draft, which did not elaborate. In Kompong Speu province, households will continue to be charged 720 riel per kilowatt-hour. State-owned buildings and foreigners, however, will be charged 820 riel, up from 780 riel.
The government has been subsidizing VAT charges on electricity for the last five years in order to assist businesses, Mr Praing told the round table discussion on the power price hikes.
“In 2008 the government spent $27 million in subsidies to keep selling electricity at a low price in Phnom Penh city, Kandal and Kompong Speu provinces,” Mr Praing said.
He added that stark rises in international oil prices, particularly throughout 2008 when crude oil hit $147 per barrel in July that year, had greatly increased production costs for electricity companies operating in Cambodia.
According to the statement released by the Ministry of Industry, Mines and Energy, embassies, foreign residents and state institutions will all have to pay 820 riel per kilowatt-hour, up from 780 riel.
Analysts say that part of the reason for the hike in electricity prices is down to the government’s need for additional tax revenues after increased spending during the global financial crisis.
The government is under pressure to generate more revenues, especially after large increases in spending during the course of the global economic crisis, said Bretton Sciaroni, chairman of the International Business Club.
In September, the International Monetary Fund said that higher government spending as a means to stimulate the economy during the financial crisis meant the country’s budget deficit would climb to 6.75 percent of GDP in 2009 from around 2.75 percent in 2008.
Mr Sciaroni said it was, therefore, quite normal for the government to look for news ways to replenish revenues.
Analysts however say that a hike in electricity prices would be detrimental to the fledgling business environment in Cambodia, which has already been cited by the UN Development Program last year as being one of the region’s least competitive due to high utility costs among other expenses.
“Any increase in electricity would obviously have most impact on businesses in manufacturing where electricity costs are a large component of total costs,” said Gordon Peters, a senior consultant for Emerging Markets Consulting, a consultancy and investment firm working in the private and development sectors, adding that proposed hydropower projects and additional electricity supply from Vietnam would hopefully bring prices down sometime in the future.
“Any time you have a raise in any of your major costs, businesses will feel the pinch,” Mr Peters said, adding that there are other ways for the government to increase revenue apart from increasing the cost of key utilities, which could hurt business.
“If I was looking for money knowing that my tax revenue is down, I would be looking for ways to expand business activities in order to increase their tax revenues,” he said.
Mr Sciaroni agreed that high power prices are not good for business.
“The fact that prices will be going up is not good news for the economy,” he said. “The ability to attract foreign investors and for local interest to do well is predicated on getting the costs of doing business here reduced,” he said.
With Cambodia’s main sectors–garments and construction–currently waning as a consequence of the global economic downturn, the amount the government receives in tax revenues has been heavily reduced, which is making it far harder to balance the books.
“I understand the government needs to increase revenues. But [raising electricity prices] doesn’t encourage investment in Cambodia,” Mr Sciaroni said.
Despite the concerns, Keo Ratanak, director of the state-owned power utility Electricite du Cambodge, said an additional 200 megawatts of electrical capacity, which is in the process of being made available to Cambodia from Vietnam, would help reduce prices though he didn’t give a timeline for that reduction.
“EDC used to predict that the price of electricity will decrease by importing electricity from Vietnam. But so far we have received only 100 megawatts,” he said. “We have resisted asking Vietnam for the total amount for six months but they say they are lacking in electricity as well.”
Chou Kim Leng, undersecretary of state at the Finance Ministry, said the government had subsidized VAT payments on electricity amounting to about $38 million between 1999 and 2006. Between 2007 and 2009, government VAT subsidies amounted to about $36 million, he said.
Ty Norin, a director at the Electricity Authority of Cambodia, said that after this round of increases there would be no more changes to electricity prices if production costs remain stable.
“We will start calculating on the amount of electricity used from next month, but the invoice will arrive in early March,” he said.