utility reform
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In the space of a year, the World Bank and African Development Bank each released a report on the issue of utility reform and asked the question – is it time to reconsider it?

This article first appeared in ESI Africa Issue 2-2020.
Read the full digimag here or subscribe to receive a print copy here.

The reports, Revisiting Reforms in the Power Sector in Africa and Rethinking Power Sector Reform in the Developing World, respectively 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.

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-reflective electricity tariffs,
• Opening the sector to private sector participation, and
• Introducing competition through large-scale procurements, and eventually full competition for retail customers.

Today, the result 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.

An examination of the reforms highlighted three key takeaways, namely that reform strategies are:

1. Context dependent. 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 Reforms, 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.

2. Outcome oriented. Reform efforts should be tailored toward achieving specific 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.

3. Pluralist. 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.”

Adapting to current tactics

As the ultimate aim is still to ensure financial stability and 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 and oriented primarily toward achieving better sector outcomes.

• The design of power sector reform needs to be thoroughly grounded in the political realities of each country.

• Greater emphasis should be placed on building institutional capacity for power sector planning and associated implementation.

• Generation plants should be procured through a transparent and competitive process, with as much contractual flexibility as the context allows.

• Unbundling should not be the highest priority where more fundamental financial and governance challenges persist; it should be undertaken primarily to facilitate deeper reforms.

• Wholesale power markets remain a viable option for countries that have put in place all the foundational measures; others may derive more significant benefit from regional trade.

• Greater efforts should be made to strengthen the corporate

• The regulatory framework needs to be adapted to reflect the institutional context and to accommodate emerging technological trends.

• Private sector participation in distribution should be considered only when enabling conditions are met.

• Delivering on the twenty-first-century agenda of universal access and decarbonisation calls for additional reform measures targeted explicitly at these objectives.

Some elements remain steadfast

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

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,” say the authors behind the Revisiting Reforms in the Power Sector in Africa report. Discussions among political stakeholders and “managing vested interests” will see an immediate benefit for governance.

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 which is impervious to 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. This is closely followed by the need for regulators to be independent and able to operate financially separate from politics. “Building the regulator’s financial and operational capacity helps ensure a smooth transition to cost-reflective tariffs, if balanced with social equity priorities,” according to Revisiting Reforms in the Power Sector in Africa. “Regulatory bodies’ dependence on the political process and government has hampered the success of reforms in other situations, like Cameroon, Guinea, and Zambia.”

Revenue: 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 widely undertaken, but tariffs were not cost-reflective. The authors report [2] 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.”

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]

Generation: Power generation planning needs to be built on a least-cost and dynamic plan. Regular updates of Master Plans are necessary to ensure they are still aligned with cost and demand data and that these are aligned to the needs and timing for new generation. In this regard, energy efficiency investment remains one of the least-cost ways to meet demand.

To support the least-cost generation process, competitive procurement is vital. “Competitive tenders have allowed prices for generation projects to fall dramatically in recent years, especially, for example, in the case of renewable sources of electricity. Established data shows that competitive tenders and auctions deliver lower prices than feed-in tariffs or unsolicited, directly negotiated projects.” [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. ESI

References:
1. Foster, Vivien, and Anshul Rana. 2020. Rethinking Power Sector Reform in the Developing World. 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.

Utility reform is a strategic topic at the 20th edition of African Utility Week & POWERGEN Africa.