HomeRegional NewsAfricaThe Big Question | Unbundling of state-owned utilities

The Big Question | Unbundling of state-owned utilities

Electricity supply in Africa has for decades been consistently provided by state-owned electricity enterprises. This market landscape is changing as the global shift towards unbundling and privatisation takes hold. In recent years, Nigeria and Uganda took bold steps in adopting this global trend to unbundle the energy market and South Africa is currently debating the topic.

This article first appeared in ESI-Africa Edition 1, 2019. You can read the magazine’s articles here or subscribe here to receive a print copy.

The Big Question we asked the experts is: What are the challenges and best models to implement successful unbundling of state-owned utilities?

Prof Roula Inglesi-Lotz, Department of Economics, University of Pretoria, South Africa – responds

In South Africa, Eskom has been an engine of development – or aspires to be. However, in the latest decade, the name has serious connotations of mismanagement, corruption, and failure (let alone its links with the state capture scandal).

Due to all these, the government had to intervene multiple times to financially “bail out” the entity – not an easy task during current constrained economic conditions.

Recently, the energy sector in South Africa has shown, once more, its fragile nature as well as its strong and decisive role in the economic growth and development, with another (smaller?) wave of load shedding at the end of 2018, due to capacity issues.

The Institute for Race Relations argued in a 2016 report that the only “alternative to privatisation is continued poor governance, crony capitalism, [and] never-ending rises in costs to both taxpayers and consumers” (Smith & Osborne, 2018). It is risky, if not dangerous, to assume ‘privatisation’ is a panacea for all problems or an easy way forward – such a procedure requires properly established and efficiently functioning economic and political institutions. Bhattacharyya (1995) argues that the challenges of the energy sector are so complicated that privatisation and deregulation cannot solve all of them.

Sound and successful reform of the energy sector might include privatising all or parts of Eskom but not only that.

A combination of reforms, well-designed and appropriate for the specific case of South Africa, can ensure success and improvement of the energy status quo in the country.

Kessides (2012) provides a historical analysis of energy sector restructuring internationally since the 1980s, and proposes a model for the organisational restructuring of the industry:

1) “Corporatisation and commercialisation to transform state-owned utilities into separate legal entities and restore financial discipline.

2) Enactment of requisite legislation to provide a legal mandate for restructuring and creation of regulatory agencies with adequate information, capacity and statutory authority.

3) Vertical and horizontal restructuring to separate potentially competitive generation and retail activities from the natural monopoly segments of transmission and distribution and thus facilitate competitive entry and mitigate market power.

4) Establishment of regulatory rules to promote efficient access to the transmission network and provide signals for the efficiency location of generation facilities.

5) Privatisation to restore financial discipline, provide incentives for cost efficiency and insulate the operating entities from damaging political interference.

6) Independent Power Producers (IPP) to facilitate investment in generation even in the absence of comprehensive sectoral reform.

7) Designation of an independent system operator to direct the safe, reliable, and economic operation of the interconnected electric system, determine the order of dispatch, and make arrangements for the expansion and enhancement of the transmission system.

8) Unbundling of retail tariffs to separate prices for competitive retail supply activities from the regulated network (transmission and distribution) charges.

9) Creation of markets and trading arrangements for voluntary energy and ancillary services.”

All in all, I would agree with rethinking and reforming South Africa’s energy sector – not as a rushed response to current problems but in a methodical, organised and sober manner.

Such a reform would be necessary as the global energy scene is rapidly changing and new solutions to (new?) problems are proposed daily. Energy policy makers would have to take into consideration, among others, the rising concerns of climate change, the expanding role of small players in the supply, and the role of digital technologies in the future of energy (IEA, 2017).

Samuel Kwesi Ewuah Oguah, energy specialist, World Bank Group, US – responds

Private sector participation has not been a resounding success across sub-Saharan Africa (SSA), but it has amply demonstrated its ability to attract private capital in a sector craving investment that cannot be matched through public funding. Privatisation is often proposed as a means to improve efficiency and quality of service with the ultimate aim of driving down the cost of delivery but is often met with apprehension by many given the perceived implications regarding the cost of service to consumers, jobs and, consequently, personal lives.

In my opinion, both sides are right: privatising utilities can be a good move to improve efficiency, improve service quality and reduce costs but it is not a remedy for fixing a non-performing electricity sector. A quick look around though shows mixed results. In fact, analysis of the World Bank’s Doing Business database shows little correlation between ownership structures and operational efficiency. This is hardly conclusive evidence, but we know that the success or failure of privatising utilities needs to be assessed within the broader context of policies along the power supply chain. Certain elements determine the success of a utility, be it private or public, two of which are key:

1) ability to recover costs through tariffs, and

2) operational efficiency grounded in sound system planning. Both of these hamper investments in the sector in SSA.

While the latter is within the control of the utility, the former, which is also arguably the more important, is beyond their direct control. And on this, only 19 countries in sub-Saharan Africa cover operating costs through tariffs and many lose more than $0.25 per kWh sold. This is clearly a challenge: first in attracting investors and secondly in running a successful utility.

Two countries come to mind when we speak of privatised utilities in SSA: Nigeria and Uganda, with Uganda being the first to unbundle and offer concessions for distribution. Perhaps by virtue of this pioneering role in the early 2000s, some success has been observed through improved collections, investment, and connections in Uganda. Similarly, if we look at concessions, as has been tried in Côte d’Ivoire, the results have not yielded significant investment.

However, if we shift focus to Independent Power Producers (IPPs), we see a much more positive story that only needs to grow. IPPs have performed relatively well within these weak regulatory environments, investing over $11.12 billion for an installed capacity of 6.8GW across 18 countries in SSA (Eberhard 2017) without considering South Africa. While this is a small share of capacity, it shows that it is possible to attract private investments across SSA. This is important because the volume of investment requirements is significant and cannot be met by public-sector financing alone.

We are also seeing the ability of the private sector to reduce prices in the recent (and not so recent) solar auctions in Senegal and Zambia where offered prices came in at $.05 per kWh and $.06/kWh respectively. To me, this is yet another positive signal for a stronger role for the private sector.

Given the political difficulty of sweeping reforms and grid-wide interventions (such as indefinite privatisation and concessions), I see the ‘IPP type’ models where an investor is given the rights and obligations associated with discrete investments to work better. It is yet to be demonstrated beyond power generation in SSA but this approach has been quite effective in transmission as well in countries like Peru, Chile and Brazil and could work in SSA. But of course, work on improving utility performance and governance will need to continue to record impactful results. ESI

This article first appeared in ESI-Africa Edition 1, 2019. You can read the magazine’s articles here or subscribe here to receive a print copy.