Rethinking Power Sector Reform in the Developing World by Vivien Foster & Anshul Rana

Author:Vivien Foster & Anshul Rana
Language: eng
Format: epub

INTRODUCTION

This chapter evaluates the extent to which the private sector has played its envisaged role in power sector reform across the developing world.1 It examines how countries went about incorporating the private sector into the electricity supply chain, particularly in generation and distribution. Was the introduction of private sector participation (PSP) feasible in developing country power sectors? What were the challenges? What form did PSP predominantly take? Did the experience of private sector ownership and operation function as originally envisaged?

PSP was a pillar of the 1990s power sector reform model (World Bank 1993). Many of its measures were designed to encourage PSP. Power utilities were unbundled in an effort to create an industry structure that isolated the natural monopolies (notably transmission and distribution [T&D]) in the supply chain, leaving intact the potentially competitive elements, notably generation and retail. PSP could then be introduced wherever relevant, thereby sidestepping the transfer of national monopolies from public to private hands. Similarly, regulatory entities were considered as important precursors for PSP because they can build on the commercial orientation of private operators. This commercial behavior works in favor of the public interest by ensuring adequate control over market power in monopoly segments—and by licensing market entry and encouraging competition. At the same time, the endpoint of the 1990s reform model—a wholesale competitive power market—was largely premised on the existence of multiple private sector players in the sector.

The private sector was expected to bring a more robust commercial orientation, which would bring a turnaround in sector performance. The state-owned enterprises (SOEs) prevalent in the 1990s power sector lacked clear commercial incentives (Bacon 1995). Enterprises tended to focus on social and political objectives, from affordable access to electricity for key electoral constituencies to furnishing patronage jobs. Remuneration to directors and managers was not linked to operational efficiency. Moreover, management seldom operated under budget constraints, accustomed as it was to periodic bailouts. The advent of private sector management and ownership greatly simplified matters. Utilities could focus on the bottom line, a focus that created strong incentives to cut costs and boost revenues. At the same time, oversight of output and service quality would safeguard the pursuit of legitimate public interests.

The private sector was also touted as a source of potential investment in the power sector. Investment by SOEs was often constrained by their weak balance sheets—constraints that prevented many of them from raising financing from commercial banks, capital markets, or internal cash generation. State-owned utilities were therefore reliant on loans and grants from the central government, often concessional in nature and originating with international donors. This dependence was particularly true in times of fiscal austerity, and it inhibited the timely expansion of the sector. Even where public utility finances were strong, a state guarantee was generally required to underwrite commercial borrowing, leaving the utility exposed to limits on public sector borrowing. Transfer of responsibility to the private sector was expected to ease these restrictions by allowing finance to be raised directly from the markets without fiscal checks, as long as private operators were able to improve the financial performance of utilities.

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