The recent news that the Kenya Power & Lighting Company (KPLC) had obtained a loan form the World Bank to invest in infrastructure is great news indeed. One then hopes that the company would sweat its new capital investments and with this increased productivity, lower electricity prices considerably.
For some time, the focus of KPLC has been to maximize sales margins at very low outputs. This has been a quick and relatively easy thing to do, but it is not sustainable. In fact, this practice has negatively impacted on the country’s economic ability to support its fledging manufacturing sectors and the economy as a whole with its ripple effect of driving consumer inflation through the roof. A key driver for economic development hinges on reliable, adequate and affordable power supply to drive economic activity.
A company management’s legitimate purpose is to maximize the value of the firm (VOF) That value is derived fundamentally from productivity- not short term gains. Improving productivity and allocating capital and resources efficiently and effectively are by no means an easy feat, but it is the only way to create value for the long term and reduce business risk for the firm. The benefits come through to the consumer in more competitive pricing, and for a company like KPLC which is the only provider of such a vital commodity, it is not just a business imperative but a public responsibility as well.
The issue of companies overcharging has been going on in Kenya for quite some time now. Is price regulation needed by the state? Sectors such as the ICT (Information, Communication and Technology), banking and the petroleum industry have relied on an aggressive cost- plus pricing as a strategy to recoup their investments quicker. This not only hampers demand of certain key services but also encourages waste in the system and props up a complacent management that does very little to creatively increase the value of the firms thereby putting their businesses and entire economy at risk.
The prolonged drought Kenya experienced weakened the economy and created a huge appetite for price-over-recovery by KPLC. The company was guaranteed huge profits from consumer subsidy despite its low productivity base. This move is not sustainable for it masks the company’s inefficiencies and encourages waste. Low productivity coupled with an aging infrastructure have been detrimental to the economy. With good rains and new capital injection into KPLC, we have a lot to look forward to.
By Alice Makochieng, B.Com (Hons), M.Com
Adjunct Lecturer- in Strategic Management, School of Business
United States International university- Africa