Privatisation of Electricity Distribution Companies— A Way Forward?

Introduction

The private sector has long been promoted as a solution to the service delivery gap and to overcome financial constraints faced by the developing countries. The general belief is that state-owned utilities have no incentive to improve (Estrin and Pelletier, 2018). Political pressures and rent-seeking activities do not allow them to operate efficiently. The recruitment of managerial staff is under political pressure rather than merit, thus compromising management efficiency in the distribution utility. Therefore, the expectation is that the private management/ ownership with the profit motive will lead to efficiency gains and cost savings, besides improving service delivery (Scott and Seth, 2013). 

Box 1. Why Privatise Distribution Utilities?

• To expand distribution capacity through increased investments.
• To improve operational and financial performance of distribution systems, which is operating poorly under state ownership; and above all.
• To minimise public sector budgetary constraints and expand revenues by divesting state owned (distribution) companies.

PRIVATISATION EXPERIENCE IN ELECTRICITY UTILITIES

Privatisation of electricity utilities was one of the components of energy reforms of the 1980s and early 1990s. The origin of this reform effort can be traced back to 1937 in the ‘Wealth of Nations” by Adam Smith, then later by Milton Friedman in 1955. Yet, private sector control of electricity distribution was not common before energy sector reforms of the late 1980s and early 1990s, even in developed countries. After these reforms, many developing countries like developed countries also opened their electricity utilities to the private sector. In most cases, it was for expanding generation capacities. Privatisation of state-owned utilities was an effort towards a free-market economy.

Under energy reform programs, several countries in Latin America and the Caribbean, Europe, Asia, and Sub-Saharan Africa attracted private capital to the power distribution sector as well. The speed of private participation in electricity distribution dropped after 2000. Exceptions were Brazil, Bulgaria, India, Russia and Turkey, private transactions in these countries account for about 60 percent (Vlahinić-Dizdarević, 2011; ESMAP, 2015; Pudney, 2018; and Foster and Rana, 2019).

In early reforming developing countries, the most successful (privatisation of distribution companies) were only middle-income countries with large urban centers. These countries had stable governments and political motivation to get rid of a system of subsidised tariffs at the time of the privatisation decision. Above all, successful privatisation in these countries was due to a competent regulatory framework in the electricity sector. In other countries or cases, private participation/ privatisation in distribution utilities had remained challenging. Most of the documented cancellations took place after almost five years; either through re-nationalisation by the government or by private operators_ who dissatisfied with contractual conditions left willingly (Izaguirre, 1998; Victor et al., 2015; Alkhuzam et al., 2018; and Foster and Rana, 2019).

Box 2. Privatisation Failure—ExamplesUkraine successfully privatised its five distribution companies in 1998. However, the privatisation of six more distribution companies between 2001 and 2004 faced corruption allegations. The lack of effective regulatory frameworks and governance structures did not allow the sector to solve its critical issues. Consequently, the privatisation process ceased.In Sub-Saharan Africa, about 30 percent of the contracts get cancelled (i.e., reversed back to the state control).In absolute terms, maximum cancellations (almost half of the total cancellations) took place in Latin America. The Dominican Republic was one of the first countries to renationalise two distribution utilities in 2003. Other countries followed.

In terms of total transactions, in Latin America, only 2 percent of regional transactions got cancelled or reversed. Whereas, in Sub-Saharan Africa, cancellation affected only 7 cases, 22 percent of transactions in the region.

Europe and Central Asia also witnessed a few cancellations of privatised distribution utilities.

Indian privatised distribution company in the state of Odisha also faced difficulties and was renationalised.

Source: Foster and Rana (2019) & Hall, et al. (2005).

PRIVATISATION CHALLENGES

 Preference for Large Urban Centres

Evidence suggests privatisation of only selected areas and not the entire distribution sector. Even among the middle-income countries (opting for privatisation), very few privatised all their distribution companies. The private utilities provide services to large commercial centres, and the rest of the country is served by state-owned distribution utilities. For instance, the Philippines has privatised its urban distribution utilities, whereas cooperatives are providing electricity in rural areas (ESMAP, 2015). In Colombia, the strong municipal presence in the electricity sector led to a hybrid approach_ where only a few urban distribution companies got privatised, while others remained under municipal control (Foster and Rana, 2019).

The decision to privatise depends on the commercial feasibility of the service areas and the local political environment. The private sector preferred large cities with more commercial and industrial demand.  By privatising revenue-generating urban areas rather than rural areas with more issues reflect the mendacity of governments in solving power sector issues (Etieyibo, 2011 and Srijan, 2009)