Question

Liberia is a developing country which has recently come of civil war. Eletricity supply is a state owned and vertically integrated. Demand for eletricity is high but there are not enough funds to expand the sector. As a consultant appointed by the government, advise on the steps to take to attract private investment into the sector. (Note: need to draw on the evolution of the power sector in Ghana)

Answer 1

Privatisation of utilities is rare in Africa and therefore sector reform has resulted in a form of hybrid structure whereby most of the sector is controlled by the state with private sector operating on the fringes. In the case where a regulator also exists within this structure, the relationship between the government, the utility and the regulator can become very complicated from the governance perspective since it is often unclear to whom the utility is ultimately accountable to. Promises of politicians to allow the regulator the autonomy carry out its duties are usually not fulfilled, especially in price setting.

In addition, state ownership gives politicians considerable leverage over managers of utilities allowing them to influence management decisions and actions. In the case of Ghana for example, in May 2006, the government instructed the state owned utilities not to charge electricity rate increases that had been approved by the regulator resulting in the utility continuing to charge below cost prices that were detrimental to its financial condition.

Many years after the start of sector reforms in many countries, private sector investment in the power sector is still small. Even though the rhetoric of reform has not been lacking, the reality has been very different. Overall, very few countries have actually been able to take the necessary actions required to create sound frameworks that work effectively in practice. In most countries, the reform process has stalled altogether and the governance situation continues to be poor.

The greater part of private interest in the area has been in green field age ventures, which are generally sponsored by government ensured take-or-pay contracts. The power of green field ventures is an impression of the inclination of speculators for speculation over which they have proprietorship also, operational control. It likewise mirrors the relative simplicity with which such activities can be actualized even in circumstances where state control is as yet predominant since it doesn't require a lot change to the current circumstance.

The executives and rent contracts are the chief type of private segment cooperation in the dissemination part. This is to a great extent because of the hesitance of states to privatize the segment, poor people specialized condition of power appropriation frameworks, just as costs that don't completely recoup cost. Under administration gets, the private part gives no financing however deals with the advantages for improve specialized and budgetary execution. The duty of financing new venture will anyway still stay with the state.

The issue of tarriffs merits exceptional consideration in light of the fact that until duties become cost-intelligent, the weight of financing framework will keep on falling on the state. Without above expense levies, the expense of take-or-pay age agreements should be borne by state, extending as of now stressed government financial plans considerably further. Moreover, utilities will keep on being famished of assets required to improve execution and the circumstance of poor specialized and budgetary execution will proceed. Without the confirmation that there will be sufficient income to pay for all costs along the power esteem chain, the probability of drawing in huge measures of private division financing is low. An overview by the World Bank noticed that private speculators set a high premium on satisfactory levy levels and assortment discipline and were not liable to contribute where these conditions try not to exist.

A significant component of the energy issue in Afrrica which will be trying to be address with private venture is the low degrees of access to power, particularly among rural communities. Right now it is evaluated that just about 23% of Africans approach power. In view of the unbeneficial nature of rustic charge, private part speculation isn't probably going to play a huge job. Henceforth, the financing weight will fall on governments and multilateral offices which, up till presently, have not been capable give sufficient financing to such projects. Thus governments should discover imaginative approaches to fund rural electrification

At the sector level, it is significant for governments to configuration clear and cognizant strategies for dealing with the sector. A key need is additionally to permit administrative foundations more noteworthy independence to define, apply and authorize the essential guidelines overseeing the part. Independence of administrative establishments is required to offer certainty to private financial specialists that administration will satisfy its responsibilities and that guidelines will be applied in a straightforward and unsurprising way. Besides, since the majority of these administrative foundations are in their early stages, accentuation ought to be put on building their ability to play out their capacities. The specialized and monetary execution of state claimed utilities will likewise must be essentially improved. In such manner, the administration of government claimed utilities should be reinforced to such an extent that they work self-governingly as business elements and accomplish the measures of reliability required to draw in private area accomplices. The need ought to be to diminish of specialized and business misfortunes what's more, improve operational and support rehearses.

The flow practice of keeping up power costs beneath cost of flexibly is a significant impediment to private speculation. Therefore, power costs should be expanded to levels that spread cost of flexibly to guarantee feasible financing of intensity foundation. Despite the fact that reasonableness will keep on being of concern, it should never again be utilized as a guise to under-value power. Or maybe, new and all around planned courses of action should be organized to guarantee reasonableness while keeping up the financial integrity of sector. Also, if endowments are to be given, it ought to be done in a straightforward way and completely subsidized by government. Without upgrades in the cash generation capacity of the segment, the weight of taking care of private financing will fall on governments, which will repudiate the reason for going for advancing private sector investment in the primary spot.

Most governments appear reluctant to place such information before the public and to engage in public discussion and education. Such a process would, however, enable the public to participate in decision-making and take a more informed position on tariffs. Governments would feel encouraged to do so if they possess the needed information.

While cost recovery is essential for the sustainable growth of the power sector (irrespective of whether investment is from private or public sources), it is important also to look at the affordability of tariffs to the population served. Countries with low per capita incomes ( below $1000) will likely have greater difficulty in raising cost recovery than those with higher per capita incomes. This poses important policy questions such as whether or not the desired level of cost recovery should vary according to per capita incomes. And also, where cost recovery has to be less than adequate, what options should be considered to ensure sustainable growth of the power sector

Being a state-owned monopoly or a state-approved private monopoly, the power sector has traditionally harboured several inefficiencies, such as: overstaffing, lack of commercial orientation, poor availability and utilisation of plant, excessive system losses and leakages. However, closer scrutiny of cost structures has not usually received serious attention even after private investors having entered the sector. Private investors are often sensitive about fully disclosing commercially sensitive data.