In an article “Fiscal problems demand clever leadership” published in the Tribune on July 6th the Nassau Institute discussed the devaluation of the U.S. dollar and the Cuban peso. Devaluation affects economic welfare and occurs when a country's cost structure makes it non-competitive in international trade and the country does not have the financial reserves to defend the existing exchange rate.
The article argued that the Bahamas is a high cost producer of tourist services. It pointed out that one thing that can be done to improve the situation without a devaluation is eliminating the laws and regulations that buttress the present electricity monopoly of the Bahamas Electricity Corporation.
A knowledgeable businessman responded to this article by e-mail. While conceding that it was a good article and free enterprise was desirable, he contended that the comments on ending the electricity monopoly were “grossly over simplified.”
The electricity monopoly.
He stated that –
“It is not quick and easy to make the conversion from a backup electrical utility to an independent power producer. As an example, one major hotel is completely independent of BEC for power. They have grandfathered an agreement reach many years ago when the hotel was first built. Their equipment and systems are far different that most standby installations used by the other businesses. Another major resort has about 30 separate engine installations for standby and could not economically meet all their power needs on a continuous, long-term full time basis.”
This criticism has its greatest validity in the short run.
If the electricity monopoly is ended, the number of power users who can reduce their electricity costs by immediately generating all or a portion of their power themselves is limited. But for them it could be an important cost savings.
In the longer run it is a different story.
Let’s look at the facts first. Commercial users pay the Bahamas Electricity Corporation about 16-19 cents per kilowatt hour of electricity used. This compares with 6-8 cents in Florida for a comparable user. Our knowledgeable businessman believes that a well managed private power producer in the Bahamas could produce power at 9-10 cents a kilowatt hour, approximately half that charged by BEC.
In a freer market, alternatives increase as sellers and buyers integrate new market facts into their operations.
For instance, a group of electricity users could band together to form an “electricity producers cooperative” to achieve the cost savings described above. Also there is at least one big continuous user of electricity who employs a higher cost technology simply to avoid the even higher costs of using and being dependent on BEC. In this case the options and/or choices available in a freer market could induce that user to change its technology and that could occur with the next expansion. But such developments could only occur if the Government adopts a free market orientated policy toward electrical power generation.
In addition, the ending of the electricity monopoly would be a clear signal to investors and international lending agencies that the Government is changing its policy direction from direct market intervention to one that harnesses free market forces to the advantage of key industries and Bahamians as a whole. This is a case of actions speaking louder than words.
Vaclav Havel’s “natural economy”.
Contrary to popular belief free markets can function efficiently only with an “activist” government that encourages competition in addition to protecting property rights, providing a low-cost judicial process to settle contract disputes and protecting the individual and his property against thievery. Essentially the government provides sellers and buyers with a positive environment for conducting business that both reduces the cost of transacting business and guarantees the freedom to transact it. (Refer to John McMillan, Reinventing the Bazaar, Norton, 2002)
The Government should take to heart the words of Vaclav Havel, the courageous Czech dissident, playwright and Prime Minister.
“Though my heart may be left of center, I have always known that the only economic system that works is a market economy. This is the only natural economy, the only kind that makes sense, the only one that leads to prosperity, because it is the only one that reflects the nature of life itself. The essence of life is infinitely and mysteriously multiform, and therefore it cannot be contained or planned for, in its fullness and variability, by any central intelligence.” (Summer Meditations, New York, Knopf, 1992, p. 62)
The Nassau Institute
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July 18, 2002