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The economics of electricity market reforms in developing countries: an African experience and lessons

Student thesis: Doctoral Thesis

  • Ifeanyichkwu Nworie
The restructuring of state-owned utilities in the power sector has been an ongoing trend for over three decades, with many countries adopting market-oriented reforms. One of the main expectations why developing countries embarked on power sector reform was based on the assumption that reforms would improve efficiency and enhance productivity levels within the industry.
This study seeks to verify the impact of market-oriented reform in the power sector, with a specific focus on the African experience. The project uses data on 30 selected African countries from the World Bank Development Indicators, the African Development Bank, the U.S. Energy Information Administration (EIA), the International Energy Agency (IEA), the Africa Infrastructure Country Diagnostic Database (AICD), and the Private Participation Infrastructure database (PPI), to construct datasets enabling us to complete panel, cross-sectional data and cross-country analyses for electricity reform spanning the period from 1989 to 2014.
In Africa, almost without exception, governments have amended their electricity acts in order to allow for greater private sector participation. In many cases the motivation to adopt market-oriented reforms have been strengthened by World Bank and other financial donors’ recommendations to do so. Historically, Independent Power Producers (IPP’s) were introduced as private electricity generators, to increase power generation. The IPPs normally signed purchase agreements with the state-owned utilities to buy electricity as a single buyer. The most common form of IPPs in the region are Build-Own-Operate-Transfer (BOOT) and Build-Operate-Transfer (BOT) enterprises. Multinational corporations such as Electricite de France (Edf), US-based AES Corporation and Germany’s Siemens have played a dominant role in many countries in the region.
The first empirical chapter finds that each individual reform variable (on its own) is not sufficient to improve power generation performance. Instead, reform tends to be more effective when they are combined. So, for countries to obtain first-best outcomes in terms of electricity market reform, it is important to introduce more than one reform at a time in the reform process. (2000 -2013). The analysis is based on a stochastic distance function approach, assuming that the number of outages (a quality of service proxy) enters into the company’s production function as an underdesirable input, i.e. an imperfect substitute for (the lack of) maintenance activities and capital investment. This enables identification of the sources of technical inefficiency and the underlying trade-off between quality of service and other inputs/costs faced by the operators. Using a multiple output translog input distance technology, we found that exogenous factors affect estimated technical efficiency levels significantly. Our result also shows that incorporating quality of service is important in helping to benchmark performance of the different electricity distribution companies.
The third empirical chapter explores the notion that institution structures stimulate private sector investment. We used cross-sectional data for twenty-eight African countries between 1990 and 2014 to test empirically the impact of political institutions, market-oriented reforms and macroeconomic stability on private sector investment in the electricity market. The results generated from our models indicate that political institutions matter, but market-oriented reform and macroeconomic stability are insignificant. We also found private sector investment is greatly influenced by an increase in the real GDP per capita of a country. Somewhat surprisingly, our results suggest that African countries with a high corruption perception index attract more private sector investment in their electricity market.
Power sector reform in African countries is characterized by amending the electricity law (so as to attract IPPs), the corporatization of service provision, and the creation of new institutions (such as regulatory authorities) to support reform activities. There is currently no strong commitment to fully embark on privatization and unbundling across the region, as governments prefer to engage in public-private partnership. This system promotes a hybrid structure where state-owned vertically integrated power companies still dominate, acting as a single buyer. Governments and policy makers in this region should therefore adopt reforms that acknowledge local conditions, deepening their involvement in market-oriented reforms where necessary, in order to achieve first-best outcomes.
Original languageEnglish
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Award dateMar 2017
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