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Occasional  Paper 5: Power Sector Reform in Africa- Proceedings of a Regional policy Seminar

Edited by

Mr. Stephen Karekezi, Mr. John Kimani and Ms. Jennifer Wangeci

Executive Summary

The Regional Policy Seminar on Power Sector Reform convened under the auspices of the African Energy Policy Research Network (AFREPREN/FWD) brought together participants from Ethiopia, Ghana, Kenya, Tanzania, Uganda, United Kingdom and Zimbabwe. The participants were drawn from Government, utilities, regulatory agencies, universities, research institutions, NGOs, consulting agencies, and an international development bank.  One of the main objectives of the Seminar was to review the current status of power sector reform in Africa and examine the impact of the reforms on three key challenges facing electricity namely; technical/financial performance, expanded electrification, and local participation.

Evidence suggests that by the year 2000 a sizeable group of countries had taken several steps in the reform process, with considerable private sector involvement, both in IPPs and in divested assets.  In a number of African countries, the advent of IPPs has certainly improved the availability of power by boosting national installed capacity. In addition, in certain countries, changes ushered in by new management teams (usually under some form of contract management arrangement) have resulted in some positive changes, notably with respect to debt collection levels.

According to the paper presented by Robert Bacon, “The State of Power Sector Reform In Sub-Saharan Africa”, the major gains in the near future may come from steps, which introduce the profit motive, rather than those designed to produce competition.  As more countries take further steps in the reform process it will become increasingly important for governments to monitor the impact of the reforms in order to ensure that they are working well, and that consumers capture the dividends of reform.

Excessive emphasis is placed on increased generation when a significant proportion of problems facing many African utilities pertains to transmission and distribution.  Consequently, a strong case can be made that any future reform measures should primarily focus on addressing the challenges that still face the transmission and distribution of electricity in the region. 

Local Participation

The challenge with local participation is that it invokes the involvement of the politically connected rent-seeking class that has been largely responsible for poor performance of the state owned power utilities.  The challenge that future reform measures face is how to promote local participation without handing over significant chunks of the electricity to the same rent seeking class that has been responsible for running down the power sector.  There are a number of options that can be examined.  The first would be to consider the involvement of the robust local agro-processing concerns notably the sugar industry.  Cogeneration is widely used in the sugar industry.  Consequently, the requisite technical expertise is available for effective participation in the electricity sector.  Mauritius provides an encouraging model that could be emulated.  Close to 30% of the country’s electricity requirements are met by electricity generated by the sugar industry.

The process of unbundling the distribution end of the electricity industry could be re-examined to assess whether it may be possible to encourage sub-contracting of local investors in the management of small distribution areas. For example, the winning bid for the distribution license of the major city could be required to sub-contract to local investors the management of small distribution areas. The local sub-contractors may then eventually grow in confidence, technical expertise and financial clout and, at a later stage, bid for larger distribution licenses.

Local stock exchange should, also, be an option for consideration. A number of sub-Saharan African countries possess vibrant local stock exchanges that could be used to float significant portions of the electricity industry thus involving local investors.

A local organization in Tanzania, Urambo Electric Consumer's Co-operative (UECCO) was formed to manage the operation of a decentralised diesel grid in the township of Urambo in central Tanzania. UECCO charges around US$0.45/kWh which is almost fifteen times the national utility’s rate, but connections in Urambo are on the increase. This pilot scheme offers a possible way forward for a rural electrification programme previously crippled by escalating costs.

Expanded Electrification

With the exception of South Africa, Ghana and to a lesser extent, Zimbabwe, the majority of sub-Saharan African countries continue to register woefully low levels of national electrification. In most countries, rural electrification levels are in single digit levels and urban electrification levels still well below 50%. For lower income groups, access to electricity is a dream that is unlikely to be realized in the near future.

Power sector analysts argue that future reform measures should aggressively address the expanded electrification challenge.  For example, the establishment of dedicated electrification agencies with the mandate of providing electricity to the urban and rural poor through the most appropriate least cost options could yield better results than current arrangements.  In addition, existing electrification levies on tariffs could be channelled to dedicated electrification agencies to minimize the potential for diversion of funds.  Another important measure that could result in rapid progress is to ensure that current electrification funds also target the urban poor as well as the rural poor.  On a per dollar basis, it can be argued that returns on projects aimed at electrifying the urban poor would be significantly higher than returns on rural electrification projects.

Other important reform measures could include the incorporation of electrification targets as pre-requisites for the purchase of current distribution and transmission assets.  For example, the purchase of attractive city distribution assets can be linked to the electrification of low-income urban settlements as well as selected rural areas.  This will ensure that private investors are simply not cherry picking by purchasing the most profitable portions of the electricity industry and leaving the unprofitable portion (such as rural electrification) to the state.

Utilities should be requested to maintain separate monitoring systems, include separate financial accounts, for Rural Electrification (RE) systems, so that real costs, and monetary implications can be identified and analysed and appropriate financing mechanism be provided in the regulatory framework.  A separate utility for rural electrification may be formed and be financed either by taxing current urban consumers or other appropriate and sustainable means of financing.

Technical/Financial Performance

Since quality of service is a function of tariff level, regulatory regimes should carefully define a smooth tariff transition path to correspond to achievable quality of service standards.  The service standards should be tied to future tariff increases. The most practical method applied is to incorporate an incentive mechanism in the tariff adjustment methodology.  Another way of using regulatory mechanisms to force utility management to be innovative and adopt cost reduction practices is by employing operational benchmarks.  The mechanism works on the principle that if the utility management performs better than the regulatory benchmark, the utility keeps the surplus as a bonus.  

A practical way to reduce the number of uncollected bills is the use of prepayment meters. These, however, are expensive.  If the end-user tariff is properly designed, the initial cost of investment can be recovered through a fixed customer charge. This can be implemented through a two-part tariff comprising of an energy and a fixed customer charge or through a three-part tariff made up of energy, capacity and a fixed customer charge.   A second approach to recovering cost is through the energy charge.  Utilities, however, should be careful in defining the energy consumption threshold that will enable the payback period to fall within the economic life of the meter.  In Ghana, for instance, the period is approximately 20 years.

The subsequent sections of this publication contain the background to the Seminar as well as papers presented at the Seminar.  The paper prepared by the AFREPREN/FWD Secretariat acts as an introduction to the power sector in Africa.  An overview on the state of power sector reform in sub-Saharan Africa is presented followed by country papers from Ghana, Tanzania and Zimbabwe highlighting the key steps that have been taken in power sector reform and proposing recommendations that could improve the technical/financial performance, electrification and local participation in the power sector in Africa.


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