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Impact of Power Sector Reform on
Private Investment and the Poor
by
Patrick M. Nyoike
Executive
Summary
The Kenyan
power sector has, in the past, been plagued by a host of problems. These have
arisen largely due to the inability to mobilize resources from within the
economy. Development within the sector is facilitated mostly through donor
funding. The situation is further compounded by the existence of very many
players, all interested in tapping from the same sources. A number of
parastatals compete with various government ministries for the same kitty of
funds. This results in sub-optimal distribution of finance to the interested
parties and the slowing down of development in the sector.
In addition,
the Kenya Power and Lighting Company (KPLC), a quasi-government organization, is
unable to generate sufficient funds to sustain system expansion. This is a
situation that plagued the company until 1994, and the low-income levels became
detrimental to the sector’s development. Electricity tariffs were also not
adjusted to reflect inflation thus further making them insufficient to support
the operations of KPLC. A bloated labor force, coupled with associated wages
bills and high system losses further weighed down on the company's financial
performance, to the detriment of system expansion and maintenance. Imprudent
dividend policies in 1996 and 1997, driven by massive tariff increases in 1994
and a further modest increase in 1996, also weighed down the ability of the
company to expand and maintain its network. These hefty dividend payouts were
also accompanied by sharp increases in salaries, wages and other staff related
benefits which essentially eroded the tariff adjustment objectives of providing
sufficient funds for system operations and expansion.
Faced with this
untenable power supply situation and subsequent policy shift by donors (from
encouraging state participation in power sector development in favor of the
private sector, and subsequent donors insistence on power sector reforms to
attract private sector participation in the power system expansion), the Kenyan
Government embarked on power sector reforms (PSR) in 1993, embracing both policy
reforms and legal and regulatory framework (LRF) reforms. Some of the key
reforms undertaken in the power sector include:
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Enactment of new legislation, the Electric Power Act 1997, which among other
things provided for the establishment of an autonomous regulatory body, the
Electricity Regulatory Board (ERB) which was formally constituted in June,
1998 through two legal notices in the Kenya gazette, one appointing the
Chairman and the other appointing five members. The seventh member, an
ex-officio, is the permanent secretary to the Ministry for Energy and is a
permanent member of ERB. The ERB now performs regulatory functions
previously undertaken by the Minister of Energy.
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Rationalization of the parastatal organizations involved in power sector
activities by first merging two 100% government-owned companies in 1996 to
form one company, the Kenya Electricity Generating Company (KenGen) and
secondly, consolidating all the generating assets under KenGen and
transmission and distribution assets under KPLC, also a parastatal. Under
this reform measure, power assets belonging to another two (multi-purpose)
parastatals, Kerio Valley Development Authority (KVDA) and Tana and Athi
Rivers Development Authority (TARDA) were transferred to both KenGen and
KPLC in June 1999.
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Retrenchment of KPLC personnel to improve the customer ratio from about 31
customers per employee in June 1993, to 51 customers per employee by June
1997. With the separation of the generation function from the transmission
function in September 1997, KPLC’s customer to staff ratio improved to 63.
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Since
the liberalization of power generation in 1996, three (3) Independent Power
Producers (IPPs) with a combined installed capacity of 112 MW have become
operational. One of the three IPPs is developing a geothermal facility,
while the other two operate thermal power plants. A fourth IPP is developing
a 75 MW medium speed diesel power plant.
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Out-sourcing of non-core and core activities by KPLC as a means of enhancing
efficiency of service delivery to consumers and reducing operating costs.
Among the non-core activities that have been privatised include cleaning and
security services, while the core activities include labour contracts for
the construction of transmission and distribution systems.
This study set
out to investigate the impact of reforming the electricity industry in Kenya on
(i) attracting private investment, and (ii) protecting the poor. It would
appear that the PSR and macro economic policy reforms in place, despite having
attracted some investment in power generation from IPPs, do not appear to
provide sufficient benefits to attract adequate investments in the power
sector. The continued weak financial performance of KPLC since the financial
year 1999/2000 to date might not augur well with attracting IPP investments
since the company is the sole buyer of bulk power from KenGen and IPPs. There is
therefore need to deepen the restructuring of KPLC to enhance productivity of
both capital and labour with a view to turning it around as soon as possible.
There is need
to undertake further PSR to, among other things, allow IPPs access large power
consumers as a way of risk diversification and of enhancing competition in power
sector. Currently, IPPs are not allowed to sell bulk power to any other
consumer apart from KPLC.
To address the
issue of attracting increased IPP investments, the following recommendations are
proposed:
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The
current on-going reforms relating to the restructuring of KPLC should be
accelerated in order to enhance the efficiency or productivity of KPLC’s
resources: financial, human and physical. In particular, there is need to
improve the financial performance of the company in order to create a
positive image on the profitability of the power sector. Good financial
returns will serve as an indicator to IPPs in making investment decisions.
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Further PSR reforms should be undertaken to provide for direct access by
IPPs to large retail consumers, in addition to selling electricity in bulk
to KPLC, as a way of mitigating excessive demands for payments and
securities by IPPs. It is noted that such securities have included letters
of credit and or bank guarantees covering at least two months of capacity,
non-fuel energy and fuel charges. Such onerous payments tie up a lot of
funds which could be used in providing quality electricity services.
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It
has been found out that the perceived political risks by IPPs (because of
the political instability, which continues to be experienced by some of the
neighbouring countries) have contributed to limited interest by private
investors. It is proposed that guarantees be provided as a matter of policy
to all those IPP investors requiring them. Such guarantees, in addition to
encouraging private investments, could also reduce the bid prices through
reduced investment risk premiums associated with political risks.
The findings in
this study have revealed certain weaknesses in the legal and regulatory
framework which need to be addressed to ensure that KPLC ensures increased
electricity access to the poor. The following changes to the LRF are therefore
recommended:
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Section 13 of the EPA which stipulates the conditions of the licenses
granted should be amended to include provisions for meeting defined minimum
standards of electricity service quality and the number of new connections
to be achieved per annum over the duration of the license (the latter change
will ensure that the poor benefit from investments in electrification).
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Section 23 of the EPA which requires a distributor to construct power
distribution mains for the supply of electricity should be amended to
include a provision for submission of annual progress reports on works
carried out on such extensions in all areas covered by the license including
informal settlements (which house the majority of the urban poor), taking
into account environmental and safety factors.
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