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Restructuring and Privatization of the Power Sector in Africa



Stephen Karekezi & Donella Mutiso

Power sector institutions in Africa are characterised by inability to provide adequate levels of electricity services to the majority of the region’s population especially to the rural poor.  In Uganda and Tanzania, only about 6.6% and 7% respectively of the total population has access to electricity.  In the Democratic Republic of Congo (formerly Zaire), only 5% of the population benefits from electricity supply.  Provision of electricity is largely confined to the privileged urban middle and upper income groups.  For instance, in Botswana 20% of the urban population has access to electricity, compared to 3% in the rural areas.  Most African utilities routinely record unsatisfactory technical and financial performance which compares poorly with their counterparts in other developing countries in Latin America and South East Asia.  Poor technical and financial performance is a common characteristic in almost all African utilities irrespective of the management team that is in charge.  This is an indication of institutional deficiencies rather than only the more conventional problems of inadequate technical expertise and poor management. 

Traditionally, public power utilities in Africa are monopolies.  There is a debate about how far this can account for the deniable under-performance in the delivery of energy services, compounded by the substantial financial losses notched up by public power utilities.  It also appears that the highly centralised electricity industry constitutes an important barrier to the growth of more successful, cost effective and sustainable decentralised power sector institutions. 

The structural nature of the problems facing the power sector in Africa is now a priority issue for Governments, bilateral donor agencies and multilateral development banks and efforts to either implement or contemplate fundamental and far-reaching reforms of the power sector are now underway in most SSA countries through the now ubiquitous Structural Adjustment Programs (SAPs).  The process of structural adjustments involves among others, economic liberization that calls for freeing the market from state control and divestiture pf public ownership in areas where the private sector is said to have a comparative advantage.  This is expected to lead to restructuring and privatization of the power sector which will require substantial inflows of private capital, professional and skilled manpower as well as technology (a perquisite for the success of this process).  The private sector is expected to mobilize those resources from domestic and foreign sources.  

While Africa’s energy sector has performed well below the standards of other less developed continents such as Asia and Latin America, the continent posses enormous untapped energy potential.  For instance, Africa has substantial hydropower potential but it is estimated that less than 4% has been harnessed.  Africa has an estimated proven geothermal potential of 9,000 MW and only approximately 45 MW has been exploited.  Africa has a great deal of untapped energy which if adequately tapped or exploited could help meet the growing energy demand as well as improve Africa’s economic growth rate. 

The study is an initial effort to undertake an institutional assessment of the power sector focussing on Africa, with country examples drawn from the entire continent. In discussing the reform options, the study examines the two most popular options, namely: structural change and privatization.  The two terms are often used interchangeably but this study defines structural changes as distinctively different from privatization.  Structural change is used to refer to the process of unpackaging vertically integrated utilities into separate generation, transmission and distribution companies or conversely unpackaging national utilities into smaller district or provincial utilities.  Privatization, on the other hand, involves the transfer of ownership or control from the public to the private sector.  In many cases, structural change and privatization options are undertaken concurrently but for reasons of conceptual clarity, this report keeps the discussion on the two reform paths distinctly separate. 

Because of unlimited experience with power sector reform in Africa, this study uses case examples of countries outside the African region that have gone through structural changes and privatization of the electricity sector.  The report discusses the various ongoing or proposed power sector restructuring and privatization options, such as commercialisation, contract management, vertical and horizontal separation of the key activities in the power sector of countries from various parts of the world.  For new investments in the electricity sector, the study discusses the institutional implications of various schemes for private sector participation namely; Build-Own-Operate (BOO), Build-Operate-Transfer (BOT) and Build-Lease-Transfer (BLT). 

To help in organizing the report and address the challenge of drawing continent wide trends amidst the wide diversity of found in the African continent, countries in Africa have been classified into the following five categories related to their energy resource endowment; and, socio-economic stability: 

  1. Energy resource-rich and stable economies (ERS)

  2. Energy resource and unstable economies (ERU)

  3. Modest energy resource and stable economies (EMS)

  4. Modest energy resource and rapidly reforming economies (EMR)

  5. Modest energy resource and unstable economies (EMU)

The energy resource-rich economies (ERS) together generate about four fifths of the region’s electricity.  These countries rely heavily on petroleum or coal based thermal electricity as the most economically viable option.  This is partly because their geographic location does not favour them with significant hydropower resources.  Instead most of them have considerable oil or coal reserves.  Gabon for instance is one of the wealthiest countries in sub-Saharan Africa, due its rich oil reserves and its per capita consumption is one of the highest in the region (Financial Times, Apr 1997: 16)

The energy resource-rich and unstable economies (ERU) are well endowed with energy resources, but have been unable to exploit their resources due to unstable political conditions.  In the case of the Democratic Republic of Congo for example, the country has by far the regions largest hydropower potential which stands at about 92,500 MW (SAD-Elec report, 1996: 218). 

The modest energy resources & stable economies seem (EMS) category accounts for the largest number of African countries.  The electricity supply and demand profile of most countries in this category is somewhat similar.  These countries have low but steady rates of economic growth and relatively well established primary industries, as base for industrial growth.  In some cases, such as for Zambia and Zimbabwe, coal acts as a substitute for electricity especially for heat generation applications.  In general, the power sectors of these countries have experienced slow but steady growth since independence and in most case, possess sufficient installed generating capacity to meet growing demand. 

The modest energy resources and rapidly reforming economies (EMR) include countries such as Uganda, Ghana and Eritrea.  They have in the past been in the brink of complete economic collapse, but recently adopted far-reaching political and economic reforms that have given them a new lease of life and consequently a more promising future.  Reform, high economic growth rates and recovery have paved the way for rapid rehabilitation and growth of the power sector. 

The category of modest energy resources and unstable economies (EMU) include countries such as Somalia, Rwanda, Burundi and Liberia.  The power sectors of these categories is characterised by general disarray and almost complete collapse of the power sector.  Industry has all but died down and prospects for future power sector development are dim.  Mozambique, classified in this category houses Africa’s largest hydropower station, Caborra Bassa; but due to the country’s civil war, the station has not been in operation for a long period.  It was recently rehabilitated but the transmission connection to South Africa, the main customer to electricity from Caborra Bassa, has been under repair for sometime and tariff questions continue to bedevil its viability.  The last two chapters of this report attempt to broaden the deviate on policy implications of restructuring of the regions’ power industry by examining the benefits and drawbacks of the wide range of reform and privatization options as well as identifying potential winners and losers of the power sector reform process.  Concomitant legal and regulatory changes needed for successful power sector reform are also discussed with specific reference to the ubiquitous “Electricity Acts” found in most African countries.   

In order to analyze further the various reform options the study uses empirical ranking so as to recommend the best options for the different African countries.  Each reform option is analyzed on the basis of the following policy indicators/filters: 

  • Legal and regulatory framework

  • Organization and management

  • Finances and human resources

According to the analysis, commercialization and corporation ranked highest as the most feasible options for most of the countries in Africa, mainly due to the fact that they require minimal changes in the already preset legal and regulatory frameworks, are more straightforward and less costly to implement.  The analysis also showed that contract management was the second best options for most projects and unbundling of the power sector are much more complicated and more caution is required to plan for their implementation.  These options require changes in the electricity Acts, adequate finances and human resources in order to put in place and run any new institutions arising from such changes implemented in the power sector. 

One major aspect that comes out clearly from the study is that in most African countries, the need for power sector reform was not extensively discussed within or outside parliament.  The case of power sector reform has yet to be made to the public and it is unclear whether there exists consensus even within key policy making bodies, such as parliament.  The omission of public debate may create problems in the future.  Privatization has been more accepted in Uganda where the Government initiated a very public and highly successful campaign to garner public support for privatization.  The encouraging signs of success of Ghana’s power sector reform could be attributed to initial diagnostic studies and in-depth research on reform options initiated, well before any reform was implemented.  Such initiatives are crucial if power sector reform is to be successful.

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