How to collect interest on power connection charges
The Sunday Nation
Nairobi,
12 June 2011
Judging from the response I got from readers after last week’s article about the cost of connecting to the national power grid, it is clear that many people are totally disgusted by the current method of charging for the connection. The bottom line question is: How can KPLC sell the equipment to you and then claim that it still owns the installation? As James Akweri put it; “That's like a cab driver asking you to buy the taxi, driving you to wherever and charging you for the ride, then gleefully driving off with the car to charge other customers for use of your car!”
Surely, if no one at KPLC has ever been bothered by this mode of operation, then the problem is much bigger than we imagine. Nevertheless, let me continue with the suggestion I made last week.
My idea was that the first customer can meet the initial cost of the equipment and later get refunds as other people get connected on the same power line. However, doing this means that the first customer is giving an interest free loan to those who come in later. And given the huge amounts involved, the process can take several years.
For that reason, it is only fair that interest is added when calculating the refund amount. But what rate should be used? Well, we should use the average commercial rate which currently stands at about 15 per cent per year. This comes to 1.25 per cent per month. Furthermore, this interest should be calculated on a compounded basis, the same way that a bank would do it.
Now suppose that after the first customer pays the Sh750,000 initial cost, the second one comes in after six months. The interest charge after one month is Sh9,375. This brings the total cost to Sh759,375.
The interest charge for the second month is calculated on this new amount (Sh759,375) and it comes to Sh9,492. The total is now Sh768,867. Continuing in this manner, the cost at the end of six months comes to Sh808,037. That is, the interest portion is Sh58,037.
So how much should the second customer pay? It’s simple really: half of the initial equipment cost plus the interest. That is, Sh375,000 + Sh58,037 = Sh433,037.
Suppose further, that the third customer gets connected after another six months. The Sh750,000 will earn another Sh58,037 interest in that period. But now, the “loan” is financed by two people – the first and second customers.
Therefore, the third customer pays Sh250,000 cost of equipment plus the Sh58,037 interest. This comes to Sh308,037 and it is divided equally between the first two people, that is, Sh154,018.50 each. This method continues until the full capacity of the equipment is reached.
Now this method opens up a new idea: can’t a bank finance the initial installation and then collect the interest and principal sums from the customers as they get connected? Well, that’s a story for another day.
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