utility reform Africa
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Over the course of the last 12 months the World Bank and African Development Bank each released a report which focusses on the issue of utility reform and asked the question: Is it time to reconsider?

Revisiting Reforms in the Power Sector in Africa and Rethinking Power Sector Reform in the Developing World consider whether the current model for reform is fit for purpose.

In the 1990s, in efforts to address challenges within the African power sector, attract private investment and improve operations, widespread reforms were suggested and introduced by multinational finance institutions to stimulate financial stability within the region’s power utilities.

This article was originally published in Smart Energy International Issue 3-2020. Read the full digimag  or subscribe to receive a print copy here.

These reforms, often referred to as ‘Washington Consensus reforms’ included:

  • Commercialising electricity utilities and corporatising their management
  • Restructuring monopolies into separate generation, transmission, and distribution services
  • Creating independent regulation and adopting cost-refl ective electricity tariffs
  • Opening the sector to private sector participation
  • Introducing competition through largescale procurements, and eventually full competition for retail customers.

The result, thirty years down the line, is a mix of partial reform in some countries or a hybrid of reform and state-control. In very few countries were the changes as successful as initially anticipated.

THE RESULT THIRTY YEARS DOWN THE LINE IS A MIX OF PARTIAL REFORM IN SOME COUNTRIES OR A HYBRID OF REFORM AND STATECONTROL. IN VERY FEW COUNTRIES WERE THE CHANGES AS SUCCESSFUL AS INITIALLY ANTICIPATED.

Riccardo Puliti, global director, energy and extractive industries and regional director, infrastructure (Africa), The World Bank, says: “The various reform approaches based on the 1990s model alone will not be suffi cient to deliver on global energy objectives. We also need complementary, targeted policies to reach the 840 million people who live without access to electricity today and to rapidly increase the share of clean energy in the global energy mix.”

An examination of the reforms undertaken highlighted three key takeaways, as follows: Context dependence. The political and economic context of the host country is an essential frame for any reform efforts.

“The 1990s reform model was most successful in countries that had reached certain minimum conditions of power sector development and offered a supportive political environment,” according to the authors of Rethinking Power Sector Reform, Vivien Foster and Anshul Rana.

“When these same reforms were adopted in more challenging environments, the risk of policy reversal was high, while successful outcomes were by no means guaranteed. The 1990s approach to power sector reform is more compatible with political systems that are based on a market-oriented ideology and contestable power structures.”

In other words, relatively high levels of electrification, good operational and financial data and an already well-functioning framework of tariff regulation.

Outcome orientation

Reform efforts should be tailored toward achieving specifi c outcomes, and not be dependent on following a “predetermined process.” As objectives have expanded to include social and environmental goals, it is now clear that the original set of reforms will not deliver on these objectives and should be complemented with more targeted measures.

Pluralism

An interesting discovery by the World Bank team was that “among the best-performing power sectors in the developing world are some that decisively implemented the 1990s reform model and others that retained a dominant and competent state-owned utility, guided by strong policy objectives. … This evidence makes a case for greater pluralism of approaches going forward.”

Other findings included a realisation that:

  • The private sector has made an essential contribution to expanding power generation capacity in the developing world.
  • Wholesale power markets helped improve efficiency in the minority of countries that were ready for them.
  • Good corporate practices, particularly for human resources and financial discipline, were associated with better utility performance.
  • Regulatory frameworks have been widely adopted, but implementation has often fallen far short of design.
  • Cost recovery has proved remarkably difficult to achieve and sustain; the limited progress made owes more to efficiency improvements than to tariff hikes.
  • The outcomes of power sector reform were heavily influenced by the starting conditions in each country.

As the ultimate aim is still to ensure financial stability and ensure good governance, aligned and updated to accommodate changing goals and modern approaches, the following have been suggested:

  • The design of power sector reforms should be informed by the enabling conditions of each country aimed at achieving better sector outcomes.
  • The design of power sector reform and regulation needs to acknowledge the political realities of each country.
  • Greater emphasis should be placed on building institutional capacity.
  • Unbundling is not the aim in itself; it should be undertaken primarily to facilitate deeper reforms.
  • Greater efforts should be made to strengthen the corporate governance and managerial practices of state-owned utilities.
  • Private sector participation in distribution should be considered only when enabling conditions are met.

Adapted elements of ‘standard model’ reforms are still relevant for boosting sector performance.

Governance

Improving governance is vital for attracting investment and provides an enabling environment for reform and development efforts. Good governance is the enabler of “credible policy, improving regulatory capacity, increasing transparency in competitive bidding for IPPs, and enforcing resource, generation and distribution contracts,” says the authors behind the Revisiting Reforms in the Power Sector in Africa report.

Regulation

By enabling regulators to enforce contracts and consistent licensing rules, private sector participation will be encouraged. This, however, requires regulatory decisions to be made in a transparent, rules-based manner, uninfluenced by political interference. Regulations need to be somewhat defined and applied with particular consideration of social welfare and equity concerns and the impact on regulated entities. By way of example: Light-handed regulatory requirements have helped mini-grid industries flourish in Zimbabwe, Tanzania, and further afield.

Tariffs

Tariffs must be predictable and cost-reflective (as well as enforceable) in order to attract investment. This was an issue in Nigeria where sectoral reforms were implemented, but tariffs were not cost reflective. The authors report that “the technical, commercial and collection losses reported are higher than before privatisation, due to poor maintenance of the transmission network and unwillingness of customers to pay electricity tariffs. Introducing metering regulations that ensure adequate roll-out of meters to electricity consumers will reduce widespread illegal connection and electricity theft, which will in turn improve reliability, operational efficiency and financial viability of the utility.”[2]

Private sector participation

Widely recognised as being vital for sectoral development, private sector participation must be encouraged within a clear legal and regulatory framework. At the same time, the contracts, concessions, and investments with the private sector must be undertaken only with a “respected, mature” regulatory body in place. “Strategic, timely sequencing of reform interventions is key in this regard.”[2]

Incentives

Incentives are crucial to ensuring improved performance. Performance contracts “between shareholders and utility boards and between boards and management should include rewards and penalties linked to performance”[2] but cannot take place without significant capacity building. Investment in new technology and systems will further support the strengthening of core utility functions.

Conclusion

While the progress initially expected from the reform process has not been fully realised, there is a lot that has been successful.

Independent regulators and cost-reflective tariffs are being increasingly adopted, and private sector participation is becoming far more common.

Investment by independent power producers has increased, and private concessions including in the transmission and distribution sectors have been seen.

Innovation in power technology is driving change within energy markets, and energy production, digitalisation, smart information and communication are becoming ubiquitous.

Coupled with lower prices for renewable and distributed energy, it is likely we will also see transformation within the actual physical structure of the grid.

Vital to the future of Africa’s power sector is the need to be flexible in response to uncertainty, facilitate the growth of centralised and decentralised energy resources and ensure sector structures facilitate the minimisation of conflicts of interest.

Reform priorities and programmes should be undertaken with a clear understanding of the political economy dynamics and knowledge of stakeholders’ needs to allow durable, effective, and equitable reform.

Puliti perhaps says it best: “Reform approaches should be tailored to achieve desired policy outcomes.” He also believes that “multiple institutional pathways to achieve the desired outcomes must be possible. There is no one-size-fits-all framework, and the particular needs and challenges of low-income and fragile environments deserve special consideration.”[1] SEI

References:
[1] Foster, Vivien, and Anshul Rana. 2020. Rethinking Power Sector Reform in the Developing World.
[2] Sustainable Infrastructure Series. Washington, DC: World Bank. doi:10.1596/978 -1-4648-1442-6. License: Creative Commons Attribution CC BY 3.0 IGO 2 Eberhard, Anton, and Gabrielle Dyson, Olakunle Alao, Catrina Godinho and others. Revisiting Reforms in the Power Sector in Africa. Final Report prepared for the African Development Bank and Association of Power Utilities of Africa, 15 March 2019.