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The Impact of Power Sector Reforms on the Poor in Eastern Africa

By

S. Karekezi, J. Kimani, A. Mutiga and S. Amenya

AFREPREN/FWD Secretariat


EXECUTIVE SUMMARY

About 2.8 billion people or close to the half the world’s population is estimated to survive on less than US$ 2 per day - the “poor” as defined by international agencies such as the IEA, World Bank, UNDP, UNEP and OECD. A key distinguishing feature of the world’s poor is inadequate access to cleaner energy services. The majority of those earning less than US$ 2 per day rely on traditional biofuels to meet the bulk of their energy needs and have no access to electricity. Traditional biofuels meet the bulk of the energy needs of an estimated 2.4 billion people. Some 1.6 billion people have no access to electricity and a significant portion have limited or no access to cleaner and more modern fuels such as kerosene, LPG and natural gas.  

This paper is part of a wider global study carried out under the auspices of the Global Network on Energy for Sustainable Development’s “Energy Access” Working Group whose primary objective is to examine the impact of power sector reforms on the poor. It is the final report for the East African sub-regional study focusing on Kenya and Uganda. 

Poverty levels in the East African sub-region are very high, particularly in the rural areas.  For instance, in Kenya, virtually the entire (100%)[1] rural population falls under the US$ 2 per capita per day.  In urban areas (using the US$ 2 figure) about 80% of the population is poor.  When the US$ 1 measure is used, the proportion of the poor remains significantly high at 80% in rural areas (World Bank, 2003) compared to only 40% for urban areas. It is for this reason that the rural population has been used as a proxy for the poor in this study. 

After review of several reform options common to Kenya and Uganda, the amendment of the Electricity Act was selected as the most appropriate option to examine in detail.  The Electricity Act is the central pillar of power sector reforms as it sets out the structure and operations of the electricity sector as a whole.  In addition, the Acts of both Kenya and Uganda provide some modalities to increase electricity access. 

Only about 1% of the rural population in Kenya and Uganda have access to electricity - implying that very few of the poor are electrified.  This proportion appears to have stagnated over the past 8 years.  The two case studies on Kenya and Uganda demonstrate key shortfalls in the provision of electricity to the poor.  First and foremost, the amended Electricity Acts of Kenya and Uganda do not sufficiently address the issue of the electrification of the poor.  In both countries, reports from the utilities, Ministry of Energy and the regulatory agency make no attempt to track electrification of the poor. In Uganda, this is exacerbated by the fact that the distribution utility does not categorise its customers into rural and urban groupings.   

Secondly, power sector reform (in this case, the amendment of the Electricity Act) show no discernable impact on the poor and, if any, it appears negative.  Reforms have led to increased electricity tariffs and as a result have made electricity costly for the poor. In normal circumstances, subsidies should be provided to the poor to cushion them from the impacts of the high tariff increases triggered by reforms.  However, available data on subsidies indicates that the non-poor are absorbing the bulk of the subsidies. This is well illustrated by Ugandan case whereby less than 7% of the subsidies reach the poor. 

A comparison between the amended Electricity Acts of Kenya and Uganda indicates that the Ugandan Act has more detailed provisions for increasing electricity access among the poor.  However, none of the Acts provides new and innovative initiatives to ensure increased electrification of the poor through enhancing the autonomy of the rural electrification agencies and “ring-fencing”[2] the funds for financing electrification of the poor. Also, the Acts, in their current form, do not ensure the representation of the poor in the boards of rural electrification agencies. 

The sequence of power sector reform measures in Kenya and Uganda appears to have been detrimental to the electrification of the poor, particularly in rural areas. In both countries, initiatives aimed at increasing rural electrification commenced at the end of the reform process. Other developing countries such as Thailand, Bangladesh and Philippines, initiated reforms well after establishing independent rural electrification agencies that ensured rapid rural electrification before the advent of market oriented sector reforms. 

Reforms appear to have failed to link rural electrification to the overall objective of improving the performance of the power sector. For example, the issue of licenses and concessions is not explicitly linked to the ability of the licensee/concessionaire to increase electricity access among the poor. In addition, the newly unbundled (and privatised) distribution utilities do not appear to have rural electrification targets that are linked to future tariff adjustments. 

Uganda’s rural electrification target by the year 2012 is a paltry 10%.  This is an extremely low target and unlikely to make a substantial difference.  Data from other African countries (notably, Ghana, South Africa and Zimbabwe) demonstrate that for the same period of time (or even shorter), it is possible to achieve much higher levels of electrification. 

The study tables the following recommendations to accelerate the poor’s access to electricity services. 

Firstly, there is the need to keep track of data on electrification of the poor.  This is absolutely essential for monitoring rural electrification programmes.  Utilities, Ministries of Energy and the regulatory agencies should develop databases that track the requisite electrification of both urban and rural households categorised by income and include the data in public domain annual reports. 

Secondly, the newly established Rural Electrification Fund in Uganda as well as the proposed Rural Electrification Agency in Kenya should avoid the pitfalls of previous electrification initiatives that largely became an avenue for revenue collection for utilities with no clear link to expanded electrification of the poor. To avoid this shortfall, the autonomy of the bodies responsible for rural electrification - an important stipulation not provided for by the Electricity Acts - should be strengthened.  

To ensure autonomy, the Act should be amended to ensure that the funds for financing the electrification of the poor are “ring fenced”. The Acts should also provide for the appointment of the institution’s governing board by Parliament which would strengthen the independence of the rural electrification agency. The boards of the rural electrification agencies should include representatives of the poor to ensure that their concerns are addressed.  

The performance of the electrification agencies should be evaluated by the number of new connections, particularly in rural areas and among the urban poor. It should also set significantly higher rural electrification targets than the ones currently indicated. The targets should include explicit and ambitious stretch goals for the electrification of the poor. 

Thirdly, it is recommended that other countries in the sub-region whose reforms are not at advanced stages (e.g. Ethiopia and Tanzania) should ensure that they establish structures and mechanisms for increased rural electrification before embarking on large-scale market-oriented reforms such as privatization.  Evidence from other developing countries indicates that high rural electrification levels have been achieved when rural electrification initiatives precede the privatization process.   

Fourthly, reforms should adopt innovative approaches to promote increased electrification.  One approach could be making electrification targets a pre-requisite for the purchase of attractive distribution rights. For example, the purchase of attractive city distribution rights can be linked to the mandatory electrification of low-income urban settlements as well as selected rural areas. This will ensure that private investors are simply not cherry-picking the most profitable portions of the electricity industry and leaving the unprofitable portion (e.g. rural electrification) to the state. 

Another measure for ensuring that reforms support the electrification of the poor would be to ascertain that a significant proportion of the proceeds from license fees, concession fees and sale of utility assets directly contribute to the Rural Electrification Fund.  

The study concludes by emphasising that the poor state of managerial and financial performance justified the reform of the power utilities in Kenya and Uganda.  The reforms, in fact, led to better financial performance in the Ugandan utility and an improvement (albeit for a limited period) in the general technical performance in the Kenyan counterpart.  However, the reforms implemented appear not to have contributed to increasing the electricity access among the poor. If the current electrification trends remain unchanged, 90% of the current rural population are unlikely to be electrified in the foreseeable future. Only a comprehensive transformation of the  reform process could change the situation and lead to greater electrification of the poor in Kenya and Uganda. Adoption of the aforementioned recommendations would be an important step in realizing this transformation. 


[1] Stated as 100% as the few individuals with income higher than us$ 2/day constitute a tiny total that adds up to a fraction of a decimal point (effectively, a rounding error.)

[2] The term “ring-fencing” refers to ensuring that funds are strictly accounted for and protected from any undue misallocation. 


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