A Private Path to Power in Africa

Apr 24, 2019

Source/Author : Théo Sibiya, Mark Saunders, Igor Hulak, Brendan Marais, and Peter Brishimov

Access to the complete article : https://bit.ly/2L0qoL3

Published in : 2017

 

Surging demand for electricity outstrips supply in sub-Saharan Africa, where government-owned utilities lack the resources to improve and expand distribution grids. Properly structured private sector participation can fill the gap.

 

Résultat de recherche d'images pour "photography off grid Africa"

 

A Power-Hungry Region

Sub-Saharan Africa (SSA) experienced lackluster economic growth between 1980 and 2000. Since 2000, at an average annual growth rate of 4.8 percent, regional GDP has more than doubled. Growth would have been even stronger if SSA had enough electricity to meet surging demand. Given the close correlation between electricity consumption and economic growth, the African Development Bank (AfDB) estimates that inadequate electricity supply costs SSA approximately 2 percentage points of GDP growth annually.

Limited access to electricity and chronic power shortages impede efforts to maximize growth and raise living standards for nearly 1 billion people across the region. Insufficient generation capacity, inadequate transmission and distribution networks, and high power-loss levels are the major contributors to the region’s power deficit. Substantial investments are required to expand capacity and improve performance within each segment of the electricity value chain— generation, transmission, and distribution. Although many governments throughout SSA place a high priority on increasing electricity supply, most can’t afford to finance the necessary improvements without private sector capital.

Boosting capacity through private sector participation (PSP) tends to be more difficult in distribution than generation and transmission, due to the inherent complexities between electricity distribution network owners and investors and customer-service aspects of distributing power. PSP ventures in distribution require complex risk-allocation arrangements among investors and network owners, along with incentives to align their interests around capacity and efficiency goals. As natural monopolies, distribution utilities operate under consumer protection mandates and other regulations that squeeze profit margins.

Still, PSP in electricity distribution is essential to meet the growing needs of Africa’s people. This paper presents the case for PSP in distribution and outlines the key elements of a successful electricity distribution PSP arrangement.

The Case for Private Participation

Electricity demand will continue to outpace supply

SSA’s power sector is the most underdeveloped in the world. Consider the following:

  • SSA’s total electricity consumption of less than 500 terawatt hours (TWh) per year is roughly equal to France’s consumption, and less than 3 percent of global electricity usage.
  • With 14 percent of the world’s population, SSA has more than half of the world’s 1.1 billion people who lack access to electricity.
  • SSA’s per capita electricity consumption of 488 kilowatt hours (KWh) annually is well below the global average of 3,104 KWh. South Africa, with per capita consumption of approximately 4,330 KWh, is the only SSA country that exceeds the global average.

However, SSA is expected to see the greatest rise in electricity demand among the world’s largest regions between now and 2040 (see figure 1). Powerful forces are driving the projected demand increase between now and 2040:

Caption
  • SSA’s population is forecast to nearly double to just under 2.1 billion, while the global population is expected to rise by only 20 percent to just under 9.2 billion.
  • SSA is expected to generate compound annual GDP growth of 4.4 percent, the second-fastest rate globally and well above a worldwide average of 3.4 percent.
  • Rapid urbanization rates of 4 to 5 percent per annum are projected to increase the share of SSA residents with electricity access from around 35 percent to 75 percent.

SSA’s power sector needs more capital

To meet projected electricity demand, SSA urgently needs to redirect investment to its power sector. Between 2000 and 2017, approximately two-thirds of energy investments in the region went toward oil production—mostly for export purposes.1 Over the next two decades, however, investment allocations among oil, gas, power, and coal should reflect changing priorities and the most pressing development needs. That means spending in the power sector should increase to around 50 percent of total investments, with approximately 30 percent going toward electricity distribution (see figure 2). This translates to approximately $13 billion (constant 2012 USD) of distribution investments annually through 2040—roughly twice the yearly amount between 2000 and 2017.

Many groups are already working to jump-start investment in SSA’s power sector. Power Africa, a partnership launched by former President Barack Obama in 2013, mobilized US and African governments, private sector firms, international organizations, nongovernmental organizations (NGOs), and others behind a goal of doubling access to electricity in SSA. To date, the consortium reportedly has secured more than $20 billion in commitments for individual projects from more than 100 private sector partners. Various Chinese companies are also investing in the region’s power sector, generally through official Chinese development funding. Their investments accounted for approximately $13 billion, or 20 percent of all investments in the region between 2010 and 2015.2 Another significant source of investment is the AfDB, which aims to foster sustainable economic development and social progress in member countries. Since 2011, the AfDB has approved more than $702 million in financing for African power projects.

SSA governments can’t afford to improve and expand electricity distribution infrastructure

African governments running substantial budget deficits don’t have enough resources to finance power sector improvements. The estimated weighted average budget deficit for SSA countries amounts to –4.5 percent of GDP, compared to a world average of –3.2 percent (see figure 3). Even if governments invested only in electricity distribution, budget deficits would increase by at least half a percentage point of GDP. Funding all electricity investment needs from government budgets would enlarge deficits by 1.5 to 2 percentage points. Clearly, external capital is needed to bring reliable electricity to Africa’s growing population. To attract that capital, governments need to create structures for private sector participation in electricity distribution.

Despite challenges, PSP shows promise in SSA

Today, electricity distribution utilities in 38 of 48 SSA countries are under state ownership and control (see figure 4). Many of the 10 SSA countries where private sector participants have been awarded licenses to fulfill the electricity distribution obligations did so in conjunction with broader power sector reforms. PSP has also been involved on a smaller scale in other SSA countries, including Liberia and Tanzania, typically through management contracts, where private sector participants have a smaller and more focused scope of responsibilities. Even so, PSP has produced mixed results in SSA electricity markets over the past two decades.

In Côte d’Ivoire, Companie Ivoirienne l’Electricité (CIE) runs the state-owned electricity distribution utility under a concession awarded in 1990 and extended for another 15 years in 2005. Access to electricity has increased from 37 percent of the population to around 60 percent since CIE took over, while connections more than tripled to about 1.3 million. In addition, Côte d’Ivoire’s electricity exports to Ghana, Burkina Faso, Mali, Benin, and Togo have climbed steadily since 1995 and now represent approximately 14 percent of total electricity sales.

In 2001, AES Corporation acquired 56 percent of Cameroon’s state-owned utility, SONEL, and entered into a 20-year concession to generate, transmit, and distribute electricity. Over the next decade, AES transformed SONEL from a money-losing government utility into a profitable enterprise that has attracted additional investments. By 2011, private sector financing had increased Cameroon’s power capacity to 1,033 MW, electricity connections had expanded by 75 percent, and nearly half the country had access to electric service. Cameroon remains the only African country to have privatized its entire power sector, as opposed to first unbundling it and then introducing PSP. However, Cameroon’s failure to match private investment with government financing has slowed infrastructure expansion.

Nigeria launched power sector reforms in 2005 under legislation allowing private companies to invest in the sector. The Electric Power Sector Reform Act unbundled the state-owned National Electric Power Authority into 18 separate entities responsible for generation, transmission, or distribution. After years of delay, $2.5 billion worth of stock in six new generating companies and 11 distribution companies was sold at auction in 2013. Improvements have been modest so far. Nigerian families and businesses now pay for electricity, but some get no more than seven hours of service per day. Many use generators to fill the gap, if they can afford one.

Uganda’s privatization has been even less successful. In 2005, the state-owned Uganda Electricity Distribution Company (UEDC) awarded a 20-year concession to Umeme, which subsequently went through three ownership changes. By 2014, only approximately 20 percent of Ugandans had access to electricity, one of the lowest rates in the world, and power system losses were running high, in excess of 20 percent.

Notwithstanding the spotty track record, electricity service is improving in SSA countries with PSP in their distribution sectors. For example, their average system losses of 16 percent are 7 percent lower than losses in countries where government still owns and operates electricity distribution utilities. Customers also get access to electricity five weeks faster, on average, in countries with PSP. On the other hand, PSP usually brings price increases as private operators impose new tariffs that accurately reflect operating costs and governments reduce cross-subsidies that held down electricity rates before privatization. In Nigeria, tariffs rose 60 percent in the two years after privatization, far outpacing inflation rates of 8 percent to 9 percent. Such post-privatization increases reflect the fact that tariffs fell below full cost-recovery levels in many countries, as political pressures deterred government-operated utilities from raising power prices.

Lessons from Latin America and Europe

Chile was the first Latin American country to embrace PSP, unbundling and privatizing underperforming state-owned utilities in the late 1980s. Most other Latin American countries, including Argentina, Brazil, and Peru, followed suit in the 1990s. They divided vertically and horizontally integrated state-owned utilities into distinct companies focused on generation, transmission, and distribution, with a goal of sparking competition and drawing private investors into the sector. Weak macroeconomic conditions in the 1990s and transitions from socialist to neoliberal governments also fueled the privatization of state-owned assets in Latin America. A number of well-articulated regulatory reforms that preceded PSP helped lay the groundwork for its success, leading to a reduction in system losses and sparking rapid growth in power consumption and electrification rates.

Eastern European countries that joined the European Union during the 2000s, along with former Soviet republics that became independent around the same time, experienced a similar combination of power sector privatization and market liberalization—too quickly in some cases. A World Bank study found that PSP turned out better in countries that enacted a range of economic and regulatory stabilization measures before seeking private investment.3 Hungary, Poland, and Turkey made major reforms to their legal, regulatory, and commercial frameworks before embarking on PSP, and enjoyed reasonable success in attracting strategic investors and shifting to liberal market models. Conversely, Ukraine, Georgia, and other countries that emerged from the Soviet Union’s collapse privatized electricity sectors without first instituting reforms. As a result, those countries saw less interest from strategic investors, low privatization receipts, disinvestment, and stalled reforms. These divergent outcomes confirm that tariff and legal reforms, better regulation, and commercialization of operations are critically important to electricity sector PSP efforts.

While governments, policymakers, and utilities in sub-Saharan Africa may be tempted to replicate PSP models that historically worked in Latin America and Europe, a high level of caution should be applied as every country’s situation is unique. While directly comparing successful PSP models between countries, similarities to consider include:

  • Macroeconomic factors including future economic growth rates, political stability, availability of domestic funding, and other factors
  • PSP objectives including growing the electricity distribution network, improving efficiencies, enhancing customer service, and other objectives
  • State of the regulatory environment while considering the enforceability of tariffs, the governing laws, strength of regulatory institutions, and other considerations
  • State of the electricity grid while comparing the levels of technical and commercial losses, age of the grid infrastructure, level of technology used, and other factors
  • Availability of human capital including the level of available technical and managerial expertise and other contributors

Based on A.T. Kearney’s experience in supporting governments, policymakers, private sector investors, and utilities with tackling similar challenges across the world, we have distilled our experiences into seven success factors.

Seven Keys to Success

At first blush, PSP in electricity distribution resembles a standard commercial transaction between two private entities—such as a management contract between a real estate developer and a hotel chain. Like commercial relationships, privatizations involve separate legal entities with well-defined business models, cost-based revenue streams, professional management, clear scopes of service, and distinct customer bases.

The similarities are only skin deep. Fundamentally, PSP in electricity distribution has more in common with complex, custom-designed, public-private infrastructure partnerships—such as ventures formed to build and operate a dam. These arrangements take a much broader view of stakeholders and their respective objectives, and often require advanced regulatory frameworks, business model scrutiny, and carefully calibrated risk allocation. They also establish a structured transaction process to ensure the private participant achieves its objectives. The “natural monopoly” characteristics of the electricity distribution sector, coupled with its strategic importance—especially for developing economies—raise the stakes even further. For these reasons, PSP in electricity distribution requires a highly structured framework.

PSP in distribution takes various forms reflecting the degree of private sector involvement in the utility. Formats range from management contracts at the lowest level of private involvement to asset sales at the high end. The appropriate structure for any given PSP effort depends on what’s expected of the private participant in terms of investments, efficiency gains, and quality of supply improvements.

Management contracts (such as the five-year concession awarded to Canadian-based Manitoba Hydro International in 2010 by state-owned Liberia Electricity Corporation) leave operational risk and asset ownership with the state, which pays a private company for specified services. Because these structures are limited in scope and duration, they won’t yield comprehensive improvements in a country’s power sector. Rather, they focus on improving critical activities such as procurement, customer service, or revenue assurance.

An asset sale (such as the purchase of 56 percent of Cameroon’s state-owned electricity utility, now known as ENEO Cameroon, by UK-based investor Actis) transfers part or all of the state’s ownership to the private sector. Asset sales carry the greatest potential for broad-based improvements, and pose the highest risk for both parties. They rarely succeed without a seasoned independent regulator and a transparent market structure. A well-developed regulatory framework serves the same purpose as contractual conditions in service and management agreements. But regulations address a much broader range of enhancements, including network expansion, system loss reduction, supply improvement, and efficiency gains in individual processes such as operations, maintenance, and customer service.

A range of PSP models, each with varying degrees of private sector involvement, is shown in figure 5.

Effective PSP programs address these interrelated factors holistically, not as a one-time effort, but as a continuous, structured collaboration among various stakeholders focused on shared strategic objectives (see figure 6).

Factor 1: Setting transparent consensus objectives

Consensus and transparency on outcomes and objectives (for example, investment, efficiency, and quality of supply) are hallmarks of successful privatizations. This can be a significant challenge in developing countries with complex political dynamics and limited power sector expertise. Yet all parties benefit from transparency, which ensures a PSP structure likely to attract suitable private sector participants. A transparent PSP regime has several important facets, most notably the following:

Stakeholder consensus

In laying the groundwork for the transaction, identify and map all relevant government, regulatory, private, and other stakeholders. This is especially important in a politically complicated region such as Africa. A detailed understanding of the interests and influence of major stakeholders will reveal crucial issues to address in structuring the transaction.

Transparency of outcomes

Various stakeholders in a privatization often have competing agendas. Private entities likely will view the transaction primarily from a commercial perspective, focusing on medium- and long-term investment returns. They often favor cost reduction initiatives and high-return projects. On the other hand, the government and incumbent utility management will emphasize service improvement through higher electrification rates, decreased losses, and better customer service. These inherent tensions flare up in four common scenarios:

  • Private sector investors move to reduce costs by eliminating jobs, sparking resistance from the incumbent, unions, and the general population. Privatized national utility companies tend to cut staff by 40 percent in the first 10 years after privatization.
  • Private sector investors seek to reduce non-technical losses by cutting off illegal or unpaid connections, which in Africa will likely deprive many people of electricity services they can’t afford.
  • Private sector investors champion high-ROI projects, while the government and the incumbent call for capital-intensive rural electrification projects that produce very low returns and extend service into impoverished areas where many residents can’t pay for electricity.
  • Private sector investors seeking to maximize returns—or at least effectively recover their costs—push to increase tariffs that have been held at artificially low levels by political pressures. Higher tariffs anger people who expected electricity prices to fall after their government reaped a financial windfall from privatization. In Africa this issue can particularly be a sore point due to widespread corruption.

Transparency of communication

Clear and open communication to all stakeholders helps defuse natural tensions and smooths the way for privatization by addressing potential areas of conflict between various groups. Effective communications strategies ensure that all stakeholders receive relevant information in a timely manner, while guarding against premature leaks that might jeopardize the transaction.

Successful PSP initiatives often conduct stakeholder communication workshops for human resources and communications executives of the incumbent utility—and labor union representatives, if they’re willing to participate. Workshops identify key formal and informal channels for communicating information about the privatization. They also align communications channels and messaging with local cultural traditions, respecting established hierarchies and adopting the expected communications etiquette. A good communications program also has the flexibility to adapt and respond quickly when external developments—such as public opposition from an influential local political figure or an opinion leader—threaten to derail the privatization.

Factor 2: Picking the right model

After agreeing on PSP goals, planners must decide how to achieve their objectives. They face several important decisions, including how many private sector participants to engage and whether to change the current regulatory framework. We recommend a sector assessment, which supports informed decision-making by clarifying key constraints and development needs. The sector assessment typically answers these questions:

  • What technical constraints—for example, system losses or operational reliability—hamper the electricity distribution sector?
  • Are the technical constraints caused by underinvestment, poor planning, inadequate maintenance, bad management, or a combination of these and other factors?
  • Will existing legal, regulatory, and policy frameworks enable a shift from government to private management of electricity distribution services?
  • What is the capacity of existing institutional and government structures to take on new functions or improve current operations after privatization?
  • How will the commercial, financial, and economic characteristics of the country’s power sector affect its future development?

Sector assessment findings and conclusions guide planners designing an optimal PSP model along three key dimensions—transaction scope, tenure, and adaptability.

Transaction scope

The right model for any PSP transaction in electricity distribution depends largely on the scope of responsibilities given to private sector participants, which should reflect the country’s needs. For example, if operational efficiency is the primary shortcoming, charge the private sector participant or participants with improving management practices and systems. If government lacks capital to expand electric service, ask private investors to underwrite new infrastructure. A well-articulated scope influences not only the choice of PSP model, but also transaction tenure.

Transaction tenure

The tenure of a PSP transaction should align with its scope. For instance, if a private sector participant is expected to invest extensively in electricity distribution assets, the PSP arrangement should last long enough to allow recovery of those investments. However, longer tenures also extend the host country’s vulnerability to performance failures by the private sector investor. Close monitoring by the restructured national utility company is essential to ensure the private participant meets its obligations.

Transaction adaptability

Various PSP models offer different degrees of adaptability after the transaction closes. In general, asset ownership is the crucial factor that determines a country’s power to adjust contract terms over time or unwind a PSP transaction that isn’t working out. Under concession agreements, countries keep control of assets and maximize their authority to make future changes. Joint ventures allow less maneuvering room, and asset sales even less. Countries usually are well advised to avoid asset sales unless they need to raise cash by selling off electricity infrastructure. Retaining ownership simplifies and accelerates the process of unwinding a transaction, and enables a country to modify or add new provisions to the PSP arrangement.

Along with scope, tenure, and adaptability, a few other factors come into play when choosing a PSP model. Unique needs of the country or its electricity distribution sector may influence the choice. In some countries, high-ranking government officials may prefer one model over others. Investors also have their preferences, affecting the level of private sector interest in various models at any given time.

Factor 3: Planning for the long term

Successful PSP transactions include long-term plans that address issues identified in the sector assessment (before implementation, to the extent possible). Several planning guidelines help ensure a robust and effective PSP blueprint.

Incorporating objectives into PSP mechanics

Set objectives for the PSP based on agreed-upon technical performance indicators. Outline these targets in the bidding, contractual, and regulatory documents related to the privatization. Common technical indicators include the following:

  • System loss reductions
  • System reliability improvements
  • Electricity connection increases
  • Customer service improvements

Legal, regulatory, and policy frameworks

Identify legal, regulatory, and policy issues that could hinder the PSP effort, and establish a realistic timetable for changes in law or regulatory structures that may be needed to support privatization.

PSP initiatives also may require policy or regulatory changes outside the power sector. For example, monetary policy adjustments can make a country’s investment landscape more hospitable to overseas investors and facilitate foreign borrowing. Argentina pegged its volatile and devaluating peso to the US dollar to support investors with dollar-denominated debt.

Roles and responsibilities

PSP initiatives often trigger a reallocation of roles within the power sector. A state-owned electricity distribution company that turns over operations to a private company may restructure itself for a new role as an asset owner overseeing outside contractors. Shifting responsibilities usually require additional capacity and new skills in existing institutions, as well as the formation of new institutions.

Long-term tariff levels

In a sustainable PSP model, tariffs reflect the cost of distributing electricity. Calculate costs using a robust, flexible financial model with broad appeal. Modify tariff structures accordingly, based on five key principles:

  • Tariff levels cover distribution costs
  • Transparency in tariff adjustment processes
  • Political commitment to tariff modification
  • Broad stakeholder participation in, and acceptance of, tariff modifications
  • Tariff methodology is sustainable over the long term

Factor 4: Finding and keeping the right partner

Attracting and retaining the right private sector participant is crucial to the success of any PSP effort. Provided that all other success factors are in place, finding the right partner is essentially a procurement activity. It requires a robust procurement strategy that will attract the firm or consortium best equipped to achieve the technical and financial objectives of privatization.

Successful PSP strategies establish fair, competitive, transparent, and efficient procurement processes. Some African countries, such as South Africa and Egypt, have codified public-private partnership procurement rules into laws, regulations, and guidance materials. Although some countries have fewer formal guideposts, strong procurement processes share several common elements.

Marketing and road shows

Effective marketing attracts the attention and interest of potential private investors. Many PSP initiatives promote the project in investor presentations or “road shows,” along with advertisements in various publications.

Testing the market

Early sounding of the key industry players and financial investors’ interviews provides very insightful information on the PSP’s market success potential. A request for expressions of interest (RFEOI) gauges the level and quality of market interest in the project. An RFEOI typically takes the form of a short public advertisement calling for responses from interested parties. It is important to disseminate the RFEOI as widely as possible.

Sizing up potential bidders

A request for qualifications (RFQ) prequalifies interested firms or consortia, focusing on the technical and financial capabilities of prospective bidders. Prequalification criteria often address the following factors:

  • The prospective bidder’s experience in comparable markets
  • The prospective bidder’s financial resources
  • Minimum operating revenues from a comparable service run by the bidder
  • Minimum required equity investment for members of a bidding consortium

Managing the bidding process

A well-run bidding process bolsters the credibility of the project with potential investors, who expect clear, fair, and efficient “rules of the road” covering matters such as:

  • Single-stage versus multistage vetting of candidates
  • Structure and contents of technical and financial proposals
  • Criteria for determining whether a technical proposal is complete
  • Process and criteria for evaluating and comparing proposals

Negotiation

After evaluating bidders’ proposals, officials overseeing the privatization enter negotiations with preferred candidates. To maintain a brisk pace, countries often limit the ability of bidders to alter the draft contract during negotiations. The following additional steps also help to minimize last-minute changes:

  • Requesting detailed evidence of the company’s financial capabilities and commitments during the bidding stage
  • Addressing bidders’ comments and concerns early in the procurement process
  • Circulating draft contracts with the RFP to give bidders time to consider all of the terms
  • Maintaining a fallback list of runners-up to call on if negotiations with the top bidder(s) fall through

Factor 5: Building an integrated business case

An integrated business case outlines potential benefits of the PSP to the national utility company. Although transaction advisors usually lead the development of a business case, all stakeholders should participate. Business cases drafted by a single party in isolation tend to be overly optimistic and biased. Without input from people familiar with likely grassroots obstacles to privatization, a business case may rest on theoretical assumptions that collapse on contact with reality.

Comparisons and projections

While every privatization is different, successful business cases share similar underlying mechanics. Most importantly, they develop realistic comparatives in an iterative, collaborative process. They also use realistic projections and assumptions, which not only justify the PSP transaction, but also set future expectations—a crucial element planners often overlook when building a business case.

Risks, restructuring expenses, and stranded costs

Incorporate all risks and costs into the business case, including those associated with labor rightsizing, which influence severance costs and other expenses arising from staff cuts. A thorough risk analysis also takes account of other power sector initiatives that might affect investor returns. For example, additional unbundling of assets in the sector or liberalization of retail electricity markets might generate restructuring expenses and stranded costs that may or may not be passed along to electricity customers.

Factor 6: Managing regulatory and principal–agent risks

An important and delicate task in every PSP transaction is allocating various political and commercial risks among different parties. Each party is more sensitive to certain risks and less concerned about others. Initially, risk allocation is hashed out at the negotiating table, where various entities representing the government “principal” bargain with representatives of the private sector “agent.” However, after the transaction closes—and especially after the first few years when transaction-specific covenants are in force—the regulator becomes the dominant figure. The regulator is the channel through which the PSP mechanism operates, achieves its financial and operational goals, and manages broader risks such as tariff levels and employment impacts.

Independent, competent, strong regulation

Regulatory theory for natural monopolies has evolved significantly over the past decades. A major driver in Europe has been the separation of natural monopoly components of the value chain (power grids) from the competitive segments (generation, wholesale, and retail). This transition led to major changes in grid regulation, as utility overseers moved from simple cost-plus methods to advanced incentive-based frameworks. A country embarking on PSP in electricity distribution needs a regulatory model that combines aspects of cost-plus and incentives in a framework suited to its unique requirements.

Regulators also need enough strength and independence to stand up to political leaders on tariffs and employment levels, and to hold private sector participants to their performance targets. Just as an independent central bank helps insulate monetary policy from short-term political pressures, an independent energy regulator discourages government interference in electricity distribution activities that have been turned over to private companies.

Investment risk–return profiling

The major risk for private sector participants is investment recovery and returns. That’s why they usually seek tariff increases before agreeing to take responsibility for electricity distribution. After taking over, they often invest in measures to reduce system losses that erode the value of higher tariffs. A combination of incentives is needed to encourage investments that improve the quality of supply and bring electricity to less-profitable regions. With the right incentive structures, such investments will appeal to rational, profit-seeking investors.

Efficiency through rightsizing

Private sector operators are hard-pressed to meet efficiency targets without addressing labor costs, the primary driver of efficiency. But any move to reduce employment, especially in the public sector, risks strong political backlash in SSA. Unemployment averages 7.2 percent across the region (masking, however, a vulnerable employment rate of between 32 percent and 68 percent) and ranges up to 26 percent in South Africa. Nevertheless, PSP transactions invariably entail job cuts, setting up a clash of political and commercial priorities. Successful privatizations find a way to balance the two.

Of course, somebody has to absorb the costs of rightsizing. Commercially motivated private sector participants looking to maximize returns and minimize risks will seek to pass along those costs through a higher transaction price, higher tariffs, or redundancy payments from the incumbent national power organization. In each case, the general population eventually pays the price for rightsizing. This exacerbates political risk, diminishing the attractiveness and long-term prospects of the PSP effort.

Quality of supply as a counterweight

Quality-of-supply targets can counterbalance the pure-profit motive. Without them, the private sector participant has an incentive to invest only in projects with the shortest payback horizons and slash costs wherever possible—including maintenance and customer service cutbacks. However, quality-of-supply targets buttressed by suitable financial penalties for non-compliance help align the private company’s incentives with the goals of the state and regulatory authorities.

Local champion

Bringing a “local champion” into a PSP transaction fosters effective risk allocation and builds public support for the deal. Every PSP initiative needs some degree of local investment. If a local individual known for business acumen provides a portion of the local capital, the transaction will be seen as commercially viable. It is important—particularly in Africa—to find a local champion with a positive reputation and provide full transparency regarding the individual’s role in the transaction. This will ensure that the general population considers the local champion a representative of the national interest, rather than an ordinary investor concerned only with financial gain.

Factor 7: Measuring impact

A monitoring regime is critical to keeping the PSP effort on track toward its targets. Effective monitoring completes the success cycle for PSP by continuously measuring progress against consensus objectives and identifying any course corrections needed to reach those goals. Well-designed monitoring regimes establish clear roles and responsibilities, detailed performance benchmarks, effective incentives, and a viable back-up plan.

Monitoring regime

Robust and transparent monitoring requires the involvement of government, regulatory bodies, and owners of the electricity distribution network. It clarifies the roles and responsibilities of all stakeholders, and incorporates well-defined standards and key performance indicators (KPIs) in all transaction, legislative, and regulatory agreements. Monitoring regimes often use the following KPIs:

  • Structure and value of investments and maintenance
  • System loss reductions
  • Improvements in bill collection efficiency
  • Improvements in system reliability
  • Adherence to local content guidelines
  • Customer growth and service level improvements

Incentives

Private sector participants need incentives to meet KPIs and hit targets established by the monitoring regime. Such incentives might link achievement of targets to the extension or continuation of the PSP agreement, and impose penalties for missing targets.

Back-up plan

A plausible alternate solution or back-up plan gives stakeholders a strong incentive to work together. Every stakeholder needs a safety valve to activate if the PSP goes badly awry. The government should have monitoring bodies positioned to take over electricity distribution if a private operator fails to deliver. And private investors should have recourse to government support schemes and investment protection to ensure the venture does not deviate far from investment-grade credit status. These measures give all stakeholders the tools to meet potential challenges. Hopefully, they’ll never have to use those tools.

Powering up Africa

Rapid economic expansion, population growth, and urbanization are exacerbating electricity supply shortages in sub-Saharan Africa. To meet surging demand, countries across the region need to boost generation capacity while strengthening and expanding electricity grids.

But African governments can’t afford those investments. Some form of private sector participation in electricity distribution is essential to give Africa’s growing population access to reliable electric power. Yet Africans view privatization with caution, based on the mixed results of previous PSP transactions and the often-conflicting interests of private sector participants and governments.

Understandable public skepticism notwithstanding, well-structured privatizations can work for everyone, not least the people. In our experience, the seven factors outlined in this paper are essential to a successful PSP in power distribution. While the list is by no means exhaustive, these success factors provide a road map for African governments aiming to bring more power to their people through PSP.
 

The authors wish to thank Tobias Lewe, Martin Kuca, Arnold Rofner, Tariq Sheikh, Khadija Ameen, and Nicole Malanda for their valuable contributions to this paper.


Other news

Cookies help us deliver our services. By using our services, you agree to our use of cookies.