i

WRI: POWER POLITICS

12

P O W E R P O L I T I C SEQUITY AND ENVIRONMENT IN ELECTRICITY REFORM

W O R L D R E S O U R C E S I N S T I T U T E

W A S H I N G T O N , D C

Edited by

NAVROZ K. DUBASH

Contributors:

DANIEL BOUILLEALIX CLARKDIMITAR DOUKOVHILDA DUBROVSKYISHMAEL EDJEKUMHENECRESCENCIA MAURERELENA PETKOVAJULIA PHILPOTTSUDHIR C. RAJANAGUS P. SARIFRANCES SEYMOUR

ii

WRI: POWER POLITICS

BOB LIVERNASHEDITOR

HYACINTH BILLINGSPRODUCTION MANAGER

MAGGIE POWELLLAYOUT

Each World Resources Institute report represents a timely, scholarly treat-ment of a subject of public concern. WRI takes responsibility for choosingthe study topics and guaranteeing its authors and researchers freedom of

inquiry. It also solicits and responds to the guidance of advisory panels andexpert reviewers. Unless otherwise stated, however, all the interpretation andfindings set forth in WRI publications are those of the authors.

Copyright © 2002 World Resources Institute. All rights reserved.

ISBN 1-56973-503-4

Library of Congress Catalog Card No. 2002108597

Printed in the United States of America on chlorine-free paperwith recycled content of 50%, 20% of which is post-consumer.

Cover image: Data courtesy Marc Imhoff of NASA GSFC and ChristopherElvidge of NOAA NGDC. Image by Craig Mayhew and Robert Simmon,NASA GSFC.

iii

WRI: POWER POLITICS

CONTENTS

Acknowledgments ..................................... vForeword ................................................. viiExecutive Summary ................................. 1x

1. Introduction .......................................... 1Navroz K. Dubash

2. The Changing Global Contextfor Electricity Reform ......................... 11Navroz K. Dubash

3. Argentina: Market-DrivenReform of the Electricity Sector ......... 31Daniel Bouille, Hilda Dubrovskyand Crescencia Maurer

4. India: Electricity ReformUnder Political Constraints ................ 51Navroz K. Dubash and Sudhir C. Rajan

5. Indonesia: Electricity ReformUnder Economic Crisis ...................... 75Frances Seymour and Agus P. Sari

6. Bulgaria: Supply-Led VersusEfficiency-Led Electricity Reform ..... 97Dimitar Doukov, Navroz K. Dubash,and Elena Petkova

7. Ghana: Achieving PublicBenefits By Default ........................... 117Ishmael Edjekumhene and Navroz K. Dubash

8. South Africa: ElectricityReform with a Human Face? ........... 139Julia Philpott and Alix Clark

9. Conclusion......................................... 157Navroz K. Dubash

About the Authors ................................. 173

iv

WRI: POWER POLITICS

BOXES5.3: Independent Power Producers, Stranded Debt, and

Electricity Reform in the Philippines

6.1: Profile of the Electricity Sector in Bulgaria

6.2: Chronology of Electricity Sector Reform in Bulgaria

6.3: Electricity Sector Reforms in South Korea: Prospectsfor a Red-Green Alliance?

7.1: Profile of the Electricity Sector in Ghana

7.2: Côte d’Ivoire: Private Sector Participation in ElectricityProvision

7.3: Chronology of Electricity Sector Reform in Ghana

7.4: Summary of Strategic Framework for Power SectorDevelopment Policy

7.5: Potential Customer Savings From Energy Efficiency

7.6: PURC’s Transitional Plan (2000-2002)

8.1: Profile of the Electricity Sector in South Africa

8.2: Bolivia’s Capitalization Program: Privatization ThatServes Social Equity Goals

8.3: Chronology of Electricity Sector Reform in South Africa

8.4: Interests and Issues of Selected EDI Reform Stake-holders

8.5: Interests and Issues of Selected ESI Reform Stake-holders

1.1: Electricity and Sustainable Development Challenges

1.2: How Does Electricity Reform Affect Social Benefits?

1.3: How Does Electricity Reform Affect EnvironmentalBenefits?

2.1: Stages in Change of Ownership and Management

2.2: Approaches to Restructuring for Market Competition

2.3: The California Electricity Crisis

2.4: Shifts in World Bank Policy in the Electricity Sector

2.5: Rural Electrification in Morocco and Chile: Contrast-ing Experiences

2.6: Examples of Policy Options to Design-In Environmen-tal Benefits

3.1: Profile of the Electricity Sector in Argentina

3.2: Chronology of Electricity Sector Reform in Argentina

3.3: World Bank Perspectives on Electricity Reform inLatin America During the Early 1990s

4.1: Profile of the Electricity Sector in India

4.2: Chronology of Electricity Sector Reform in India

4.3: The Enron Affair

4.4: China’s Experiment with a Renewable Portfolio Standard

5.1: Profile of the Electricity Sector in Indonesia

5.2: Chronology of Electricity Sector Reform in Indonesia

FIGURES1.1: Trends in Investment in Energy Projects with Private

Participation in Developing Countries, 1990-99

2.1: World Bank New Lending Commitments to theElectricity Sector (1995-2001)

2.2: Total Investments in Energy Projects with PrivateParticipation, 1990-99

3.1: Argentina’s Post Reform Electricity Sector

4.1: The Indian Electricity Sector Pre-1991

5.1: Evolution of the Java-Bali Electricity System

6.1: Post-Reform Design of the Electricity Sector inBulgaria

6.2: Energy Costs as a Share of Household Expenditures inBulgaria

7.1: Pre-Reform Structure of the Electricity Sector in Ghana

7.2: Proposed Electricity Market Structure in Ghana

8.1: A Near-Term Scenario for Eskom’s Structure and Role

TABLES2.1: Countries Taking Key Reform Steps in the Power

Subsector, 1998 (sample of 115)2.2: Share of Carbon Dioxide Emissions from Electricity

and Heat Production (1999)

3.1: Electricity Prices in Argentina, 1991-1998

v

WRI: POWER POLITICS

ACKNOWLEDGMENTS

This study was a collective effort by several people.The contributors to this volume – from the WorldResources Institute (WRI) and from partner organi-zations — devoted considerable time and energy tothe study. They brought not only commitment to andideas for a strong final product, but also belief in theneed for a more sustainable global electricity future. Ihave been privileged for the opportunity to work withthem.

Within WRI, my colleagues in the InternationalFinancial Flows and the Environment (IFFE) project,Frances Seymour and Crescencia Maurer, providedcore intellectual input and support in conceptualiz-ing and implementing this study, in addition tocontributing chapters to the volume. Two additionalcolleagues in the IFFE project, first Lily Donge, andthen Linda Shaffer Bollert, managed the researchand production process, while also providing re-search assistance. Without their work, this documentwould not have been completed. I deeply appreciatetheir efforts.

Several other colleagues contributed their time andeffort in completing this study. WRI colleaguesCrescencia Maurer, Lily Donge and John Coyle, withassistance from Gretchen Hoff, Fritz Kahrl, andMehr Latif compiled the text boxes on country cases.Yu-Mi Mun from the University of Delaware contrib-uted a box on South Korea. Mara Angeloni, a visitingfellow from the Italian Ministry of Environment andTerritory, and Amy Cassara compiled and analyzed

data on pollutant emissions. Kate Ling and KenOgino assisted with research, production andoutreach during their summer internships at WRI.

This study draws on reflection and input of manypeople from governments, donor agencies, civilsociety organizations and industry. I thank oursources who generously contributed their time andknowledge during interviews and in correspondence.Additional thanks to colleagues who participated in aworkshop held at WRI in October 2000 to reviewpreliminary papers.

The quality of this work has benefited considerablyfrom experts who reviewed the entire manuscript:Sanjeev Ahluwalia, William Ascher, Walt Patterson,and Ian Tellum. In addition, I appreciate detailedreview of portions of the report by: ArmarquayArmar, Daniel Azpiazu, John Besant-Jones, AbeekuBrew-Hammond, Istvan Dobozi, Elsa du Toit,Michael Eckhardt, Paul Galen, Rumen Gechev, DavidHawes, Gilberto Januzzi, Appiah Korang, JaimeMillan, Lulin Radulov, Amulya K.N. Reddy, MartínRodríguez Pardina, Anil Terway, Nurina Widagdo,and Harald Winkler. In addition, I thank WRIcolleagues who reviewed an early draft of the volume:Elizabeth Cook, Paul Faeth, Nancy Kete, WendyVanasselt, and Patricia Zurita. The reviewers’comments and suggestions have considerablystrengthened the report. The authors retain fullresponsibility for any remaining errors of fact orinterpretation.

vi

WRI: POWER POLITICS

Hyacinth Billings, Robert Livernash, and MaggiePowell worked rapidly and diligently to edit, produce,and publish the report. Johnathan Kool producedgraphics for the report. I thank them and additionalmembers of WRI’s communications staff for theirassistance with this publication.

This study, and the work of the InternationalFinancial Flows and the Environment project, is

made possible by grants from the Charles StewartMott Foundation, the Wallace Global Fund, theSpencer T. and Ann W. Olin Foundation, the Nether-lands Ministry of Foreign Affairs, and the U.S.Environmental Protection Agency. I am grateful tothem for their support.

NAVROZ K. DUBASH

vii

WRI: POWER POLITICS

FOREWORD

that political support is critical if electricity reform isto support sustainable development, the authorsexamine the political drivers and interests at theheart of this process.

Instead of sustainable development, they find thatfinancial concerns and donor conditions have drivenelectricity reform. Managed by closed politicalprocesses and dominated by technocrats and donorconsultants, environmental considerations playalmost no role in a re-envisioned electricity sector.Social concerns are given more importance, but onlyto the extent that reforms affect politically powerfulgroups. Donor agencies, such as the World Bank,have been central to stimulating reform, and will beimportant actors helping to determine the future ofthe sector.

In order for a restructured sector to contribute tosustainable development, governments and donorswill need to factor concerns of sustainability intoreform design early, and back them up with politicalcommitment. Civil society groups have a key role toplay by laying the political groundwork for thisagenda, and by holding decisionmakers and regula-tors accountable for their decisions. Finally, throughtheir choice of investments and support for goodgovernance in the sector, private investors cancontribute toward a more sustainable electricitysector. The report provides additional recommenda-tions for each of these groups.

Over the last decade the hitherto staid, stable worldof electricity supply has become tumultuous. Acrossthe globe, rich and poor countries alike have begun amarch toward restructuring their electricity sectorsaround market competition. These reforms havetypically been the province of technocrats, who havedesigned reforms to meet narrow economic andtechnical objectives.

In Power Politics: Equity and Environment in Electric-ity Reform, Navroz Dubash and his colleagues fromthe World Resources Institute (WRI) and around theworld show how electricity reform is, at root, an issueof sustainable development. Electricity reformrepresents an opportunity to focus attention on the1.7 billion of the world’s poor without access toelectricity. It could also be an opportunity to aligninvestor incentives along a trajectory toward a cleanenergy future, one that reduces emissions of green-house gases while promoting development andsupporting livelihoods. The concern is not solely oneof a missed opportunity. Inappropriately done,electricity reform could hinder progress toward amore socially and environmentally sustainableenergy future.

Drawing on six case studies from the developingworld and economies in transition, the contributorsto this volume examine whether and how the processof electricity reform can support rather than hindersustainable development. Starting from the premise

viii

WRI: POWER POLITICS

This report complements other work at WRI thataddresses how institutions and governance caninfluence energy and climate trajectories, including:The Climate of Export Credit Agencies and PublicFinance Restructuring for Sustainable Development inEmerging Market Economies. In addition, this studyadds to WRI’s body of work on the effects of nationaland international policy change on global financialflows including: The Right Conditions: The WorldBank, Structural Adjustment, and Forest Policy Reform;and Will International Investment Rules ObstructClimate Protection Policies?

Support for this study and for the InternationalFinancial Flows and the Environment Project hascome from the C.S. Mott Foundation, the WallaceGlobal Fund, the Spencer T. and Ann W. OlinFoundation, the Netherlands Ministry of ForeignAffairs, and the U.S. Environmental ProtectionAgency. I am pleased to express our appreciation fortheir generosity and foresight.

JONATHAN LASHPRESIDENTWORLD RESOURCES INSTITUTE

ix

WRI: POWER POLITICS

E X E C U T I V E S U M M A R Y

decades to come. Whether market-led or not, reformswill best support sustainable development outcomeswhen they are explicitly designed to do so.

The central question for this study is: How can theprocess of reforming the electricity sector support ratherthan hinder promotion of sustainable developmentoutcomes? We approach this question by examiningthe process and politics of reform in six countries inthe developing world and economies in transition—Argentina, Bulgaria, Ghana, India, Indonesia, andSouth Africa. These countries were selected toensure a mix across early and late reformers, largeand small countries, and to provide a geographicspread. To answer the central question, each countrystudy asks:

• What were the drivers of reform in the electricitysector?

• What political interests were at stake in reform ofthe sector, and how did they shape the reformprocess?

• What role did the World Bank and other interna-tional donor agencies play in electricity sectorreforms?

• How and by whom were social and environmentalconcerns addressed in the process of designingelectricity reforms, and with what outcomes?

Each country study was conducted as a collabora-tive exercise between the World Resources Instituteand a research partner from the country studied.Specific issues in a small number of additionalcountries were briefly examined to supplement themain case studies. Our methods were semi-struc-

During the 1990s, the conventional wisdom aboutthe electricity sector—public ownership and inte-grated utilities—was challenged by a new model ofprivate ownership and unbundled utilities. Debatesabout the viability, applicability, and feasibility ofmarket-led electricity reforms continue today.Nonetheless, at the turn of the new century, coun-tries around the world are taking tentative stepstoward this new approach.

These shifts in the electricity sector have notoccurred in isolation. The new model is part of abroader thrust toward the promotion of markets, agrowing role for private capital, and global economicintegration. These themes place electricity sectorreforms squarely within larger processes of economicglobalization and the debates about its merits andcosts.

Electricity sector reforms and the financial flowsthey attract have serious implications—potentiallyboth positive and negative—for long-term sustainabledevelopment goals. A sector designed to ensureaccess to electricity for all could bring considerablesocial benefits, including opportunities for education,better health and nutrition, and entrepreneurship. Asector designed with environmental considerationsin mind could significantly mitigate the build-up ofglobal and local pollutants. Failure to address thesesocial and environmental concerns—collectively“public benefits”—could undermine progress towardsustainable development.

Decisions made now about the institutionalstructure and functioning of the electricity sector willshape social and environmental outcomes for

x

WRI: POWER POLITICS

tured interviews with key informants from govern-ment agencies, civil society, the private sector, andinternational agencies—all conducted on a not-for-attribution basis to encourage candor. This informa-tion was supplemented by official government anddonor agency reports, other secondary materials, andmedia reports.

ELECTRICITY SECTOR REFORM ANDA SUSTAINABLE DEVELOPMENTAGENDA

Reform of the electricity sector is on the agenda inmuch of the developing world and in transitioneconomies. Diminished barriers to private capitalflows, technological change in power generationtechnologies, and ambitious early experiments withinstitutional restructuring in Chile and the UnitedKingdom have stimulated reform efforts around theworld. In developing and transition economies, aWorld Bank policy of conditioning loans on institu-tional restructuring provided a further impetus toreform. By 1998, of a sample of 115 developingcountries, 33 percent had passed new electricity laws,29 percent had established an independent regulator,and 40 percent had allowed the entry of privatelyowned independent power producers (IPPs) (Bacon,1999).

The approach to reform will determine whether itsupports or undermines sustainable development.Electricity restructuring will influence importantsocial concerns such as access to price, quality ofservice, and labor impacts. In a restructured electric-ity market, price signals and a profit motive alonewill be insufficient to ensure that social goals in thesector are met. (See Box.)

Electricity reform will also shape the future envi-ronmental profile of the sector. Market incentives foreconomic efficiency will likely result in greaterenvironmental efficiency in the short run. However,reforms may not help realize a clean energy future inthe absence of explicit planning mechanisms thatfactor in environmental benefits and costs. Electricityrestructuring also provides a rare opportunity to spur

the transition to a “micropower” future based onsmall-scale distributed generation. To do so, reformdesigners will have to be attentive to the environmen-tal implications of economic regulatory decisions inorder to provide a level playing field and ensure thatreforms do not reduce opportunities for end-useenergy efficiency. (See Box.)

CASE STUDY FINDINGS

The six case studies suggest that, with the exceptionof South Africa, there has been little political com-mitment to promoting sustainable developmentthrough electricity sector reforms.

Argentina: Reforms in Argentina were stimulatedby a severe macroeconomic crisis in the late 1980s.Facing hyperinflation, a heavy debt burden, anddeclining quality of public services, Argentina’sreform program was intended to reduce thegovernment’s role in providing key services, includ-ing electricity. The reforms were designed by a smallgroup of politically powerful bureaucrats—supportedby multilateral agencies such as the World Bank—with little scope for broader debate. The reforms didlead to improved quality of service in urban areasand increases in system efficiency. However, theyalso undermined incentives to increase energyefficiency, limited expansion of electricity to isolatedrural populations, placed a disproportionate burdenon low-income consumers, and failed to effectivelymanage expansion of the transmission system. Asecond generation of reforms in the late 1990s hasattempted to address some of these concerns.

India: In India, concerns over the financial state ofthe sector dominated reform design. In 1991, thegovernment provided incentives for electricitygeneration to stave off a balance-of-payments crisis.The effort to attract private capital not only failed toincrease capacity as planned, but also locked thesector into adverse financial and institutionalarrangements. The World Bank played a central rolein initiating a second stage of state-level reformsbeginning in 1996 to address the fundamentalproblem of inadequate revenue flow in the sector.

xi

WRI: POWER POLITICS

State-level reforms have produced mixed results atbest. Privatization efforts have been fraught withdifficulty. Where utilities have been privatized, thechange has not produced expected gains. Efforts atpromoting public benefits—such as energy efficiencyat the state level and incentives for renewable energysources—have been relatively few and have sufferedfrom a lack of political commitment.

Indonesia: Early efforts at attracting private capitalfor electricity generation in Indonesia in the mid-1990s occurred under a shadow of corruption.These efforts also invited World Bank disapproval,

reversing long-standing donor support forIndonesia’s power sector. The result was theconstruction of costly excess generation capacity,which colored future reform efforts. The 1997Asian financial crisis spurred an attempt at broaderreform as part of an IMF-led economic adjustmentstrategy. The post-crisis reform effort was accompa-nied by a consultation process personally led by theMinister of Energy and Mines. This process wasstalled by political upheavals, unresolved issues withIPPs, and the political challenge of raising tariffs.Social equity—in particular concerns over tariffs—have been at the forefront of reform debates, while

BOX HOW DOES ELECTRICITY REFORM AFFECT SOCIAL AND ENVIRONMENTALCONCERNS?

Social

Access: In a restructured electricity market, profitalone is often an insufficient driver for expandingaccess to relatively unprofitable rural customers andthe urban poor. Incentive schemes, subsidies, orregulatory mandates may be required.

Price: Electricity reforms are typically associated withpressures to limit subsidies and enhance tariffcollection. While these changes make for a betterfunctioning sector, the resultant price increases canalso cause social hardships and spur politicalopposition to reforms. A mitigation strategy canaddress these costs.

Quality: Competition in restructured markets mayincrease the reliability, choice, and responsivenessof electricity service providers, but is not guaranteedto do so absent appropriate regulation and oversight.

Labor: Public sector electric utilities face job cuts asa result of reforms. This retrenchment will bringsocial costs. Opposition from labor interests can be apolitical deterrent to reforms and will have to beaddressed and mitigated.

Environmental

Technology/Fuel choice: The choice of technology andfuel used to generate electricity has environmentalimpact. The market structure put in place byreforms can affect technology choice by changingthe relative attractiveness of capital-cost intensivetechnologies versus those based on high runningcosts. In addition, the existence and basis of aplanning framework for electricity will determinewhether environmental considerations factor into along-term vision for the sector.

Regulatory decisions: Economic regulatory decisionsoften also have environmental outcomes. Regulatorscan influence how level the playing field is fordifferent technologies. They can also implement astrategic vision for the sector. Regulators must havethe mandate and training necessary to play theseroles.

Incentives for efficiency: Electricity reforms thatenforce financial discipline should contribute togreater efficiency of supply, with environmentalgains. However, reforms can introduce additionaltransaction costs, and obscure price and other signalsto customers, raising obstacles to end-use efficiencyimprovements. Conversely, competition could spurretailers to market end-use efficiency services.

xii

WRI: POWER POLITICS

environmental concerns have scarcely influencedreform design.

Bulgaria: Reforms in Bulgaria were initiated by anIMF stabilization program in 1997 following a periodof financial crisis, but the reform program wasshaped by national political currents. Government-led reforms have been driven in large part by adetermination to become an energy exporter, despiteevidence that this is not a viable strategy—a positionthat was only reversed with a change in governmentin 2001. Despite Bulgaria’s environmental obliga-tions under the Kyoto Protocol and its candidacy forEuropean Union membership, environmentalconcerns did not play a role in shaping reforms.After an initial focus on financial issues and prices,donors have actively promoted attention to theconsiderable gains to be achieved from encouragingenergy efficiency in the economy as part of a reformstrategy. Under a new government, a shift in politicalfocus has improved the prospects for this approach.

Ghana: Reforms in Ghana were driven by a short-age of financing for much-needed capacity expansionin 1995; sector reform was a condition of World Banklending for new capacity. But the Ghanaian govern-ment set aside the Bank’s recommendation forlimited reforms and took the initiative to develop amore extensive design. An important political actorin this process was the large and powerful Volta RiverAuthority, which initially feared its position in thesector would be threatened by reforms. Althoughexpansion of access to electricity is a significant issuein Ghana, the government failed to integrate existingelectrification efforts with institutional reforms.While there was little explicit focus on environmentalissues in the course of reform design, measures topromote energy efficiency and provide incentives torenewable energy sources were added to reformefforts.

South Africa: Reforms in South Africa are driven bya broader national agenda to restructure state-ownedenterprises, initiated in the mid-1990s. Reform inthe electricity sector began in earnest in the late1990s. While financial considerations are importantin South Africa, reforms have not been spurred by an

immediate short-term financial crisis, either in thesector or in the economy at large. As a result, thenational government has exercised considerablecontrol over reforms, and has framed them aroundsocial issues such as access to energy and blackeconomic empowerment. The existing public utility,Eskom, has been an important political actor indiscussions about whether this agenda is betterserved by the existing system or by a restructuredsector. In addition, reforms in South Africa haveprovided scope for broader consultation and debate, aprocess in which donor agencies have played arestricted, information-provision role.

A comparison across the case studies suggestsseveral common themes:

Electricity reforms are driven by economic andfinancial concerns, and by donor conditionalities.

Reforms in Argentina, Indonesia, and Bulgaria wereundertaken in an environment of macroeconomiccrisis. In India, Indonesia, Bulgaria, and Ghana,donor conditions were the immediate reason forundertaking reforms. As a consequence, reformdesign was often driven by an immediate need toattract capital—a trend reinforced by donor agencies.However, efforts to attract capital, particularlythrough IPPs, have caused more problems than theyhave solved. In India and Indonesia, IPP entry hasbeen accompanied by allegations of corruption andundermined the financial and institutional health ofthe sector. In Argentina, the urgent need for capitalled to privatization at reduced prices. While reform-ing countries are criticized for not providing suffi-cient incentives to attract foreign capital, it is notclear whether such incentives are politically viableand socially desirable. Structuring reforms mainly toattract finance may not be a sustainable long-termstrategy for the sector. Moreover, the focus onfinancial issues crowds out attention to publicbenefits.

xiii

WRI: POWER POLITICS

Closed political processes and politically powerfulgroups constrain attention to sustainabledevelopment objectives.

To a large extent, reforms were designed by govern-ment bureaucrats and their consultants in the energyand finance ministries, to the exclusion of othervoices. In Argentina, for example, reforms weredesigned and implemented with great speed by asmall group of technocrats. Even within govern-ments, the cases show little evidence of involvementby environment and rural development ministries inthe design stage of reform. Despite a vibrant civilsociety, the cases do not provide instances of partici-pation or influence by nongovernmental organiza-tions (NGOs) in policy design, even though severalNGOs have been active in this area. South Africa—with a more open reform design process, greaterengagement by a range of ministries, and moreparticipation by outside experts—is an exception.

In all the cases, tariff increases and restructuringhave proved to be the single biggest sticking point toelectricity reform and have been greeted by popularuprisings in Argentina, India, Indonesia, Ghana, andSouth Africa. Powerful political constituencies havealso been obstacles to reform. In Ghana and SouthAfrica, existing public utilities initially argued fortheir continued viability as integrated public entities.Faced with the possibility of socially destabilizinglabor retrenchment, labor unions have been apolitical force against reform. However, in bothArgentina and Bolivia, unions won a share in theequity of privatized state enterprises demonstratingthe possibility of political compromise.

The case studies do not conclusively demonstratethat an open process is preferable to the quick andstealthy approach to reforms. The threat remains thatopen reform processes could be politically capturedby narrow interests. However, there are indicationsthat an open process is the better alternative. To bepolitically sustainable, the public must believe thatreforms will lead to demonstrable benefits—anoutcome that is better supported by a transparentprocess. An exclusive process is also prey to being

subverted and used for narrow ends by the newwielders of authority, as was arguably the case withthe experience of IPPs in Asia. An open processwould provide checks on such abuses of power.

Donor agencies have initiated reforms andadvocated attention to environmental concerns,but have been hampered by past reputation anda perception of favoring private interests.

Donor agencies have been central to cutting througha domestic political morass to initiate reforms. InIndia, it took World Bank intervention for govern-ments at the state level to agree to seriously examinethe need for new institutional and financial arrange-ments. While this initial firmness may have beennecessary, a continued heavy hand in steeringreforms undermined domestic ownership, withnegative consequences. For example, donors soughtto expand the role for the private sector and establishthe conditions for profit making in Ghana and India,when it was not clear that the regulatory environ-ment was sufficiently developed to support thosechanges.

At the same time, donor agencies have often takenthe lead in preparing studies and undertakingprojects related to the environmental dimensions ofelectricity reform. World Bank studies on the envi-ronmental impact of restructuring have been influen-tial in shaping policy in Bulgaria, as have efforts bythe Danish government to promote renewable energyin Ghana. Often, however, these efforts have beenlate, too restricted in scope, and not backed byadequate political signals.

Moreover, donor agencies’ efforts to provideassistance have been hampered by a reputationalburden built over a decade or more of controversialstructural adjustment policies, which the publicassociated with economic hardship and unduepromotion of private sector interests. This reputationhas been worsened by the industrialized countries’efforts to promote the interests of their own corpora-tions. Such was the case in Indonesia, where one

xiv

WRI: POWER POLITICS

arm of the U.S. government sought to promote alarge U.S.-funded IPP, even as an advisor supportedby its aid agency, USAID, cautioned against theproject.

To be effective, public benefits need to be factoredinto reform design early and backed by politicalcommitment.

For reform designers, ensuring a financially viablesector was the most relevant definition of publicbenefits. Social and environmental concerns werematters to be grafted onto reforms at a later stage.However, the Argentina experience—where reformsled to subsidy removal and tariffs that were skewedagainst low-income groups—suggests that a laissezfaire approach does not automatically support socialobjectives and can undermine equity in outcomes.Since technical, political, and institutional decisionsmade during reforms constrain future choices, it ishard to retrofit the sector to address public benefits.

For example, IPPs in India and Indonesia lockedthose countries into large generation plants. Thisundermined efforts at energy efficiency and commit-ted utilities to buy electricity at uncompetitive prices.In another example, regulators’ mandates, priorities,and skills were established in the early stages ofreform. Without attention to sustainable develop-ment goals in the inception process, it will be anuphill battle to re-direct regulators’ attention fromshort-term concerns to longer-term social andenvironmental concerns.

These longer-term concerns merit attention. Inseveral countries shifting to a decentralized, marketapproach has contributed to the absence of a broadvision for the sector. In Argentina, this absenceundermined the integrity of the transmission system.In India, the central government has belatedlyattempted to forge a broad vision to guide state-levelreforms. In Bulgaria, a vision for the future wasinitially built on an unviable export strategy. Mostsignificantly, pressing social and environmental

concerns have not been integrated into reforms. InIndia and Ghana, the process of institutional reformwas not coordinated with ongoing, and ineffective,electrification programs. By contrast, in South Africareforms have been closely associated with a politicalcommitment to expand access to electricity. InBulgaria, international environmental commitmentshave not played a role in electricity reform, despitethe sector’s considerable environmental footprint.Without a broad vision and political support, the casestudies suggest that public benefits are prey topolitical whims and shifting trends in donor assis-tance.

RECOMMENDATIONS: TOWARD APROGRESSIVE POLITICS OFELECTRICITY SECTOR REFORMIntegrating environmental and social benefits intoelectricity sector reforms in developing and transitioneconomies will continue to be a daunting challenge.Not only are reforms technically complex, but thecombination of macroeconomic crisis, entrenchedpolitical interests, and centrality of costs often crowdout attention to environmental and social factors.However, the country studies do offer insights intohow reforms are currently shaped, and therefore intohow attention to concerns of equity and sustainabilitycan be reinserted into the reform process.

1. Frame reforms around the goals to be achievedin the sector.A narrow focus on institutional restructuring drivenby financial concerns is too restrictive to accommo-date a public benefits agenda. To build a frameworkthat includes such an agenda requires an articulationof the services that a reformed sector is intended toprovide and the means by which it should do so.While donor agencies often play a central role ininitiating reform, they must step back during theprocess of defining goals to allow a nationally-drivenvision of reform to emerge.

xv

WRI: POWER POLITICS

2. Structure finance around reform goals, ratherthan reform goals around finance.Reform processes have catered to a need to attractprivate capital. Since sustainable development maynot always be aligned with short-term profit motives,reform processes must move beyond the imperativeof attracting capital. While this may seem a far-fetched notion in capital-constrained developingcountries, the time may now be opportune to changethe terms on which private capital enters a country.Efforts to attract capital through risk mitigation andtariff increases have not won popular backing, and asa result have not been politically sustainable. Abroader vision of reform and a public consensussupporting that vision could lower these risks.Private capital may be willing to accept more realisticfinancial returns, if they are combined with less risk.Political legitimacy in a reform program, tied to someinnovation in mechanisms for raising finance, maybe a more promising route than tailoring reforms toshort-term profit horizons.

3. Support reform processes with a system ofsound governance.An open-ended framing of reforms will reflect publicconcerns only if it is supported by a robust process ofdebate and discussion. Hence, a third imperative isto embed debate over electricity sector reforms in asound process of decisionmaking guided by transpar-ency, openness, and participation. Such an approachis more likely to provide the political space forarticulation of a range of public concerns than havethe closed processes prevalent thus far. It is alsomore likely to build public consensus in support ofreforms, making for a more politically sustainableprocess.

4. Build political strategies to support attentionto a public benefits agenda.It is important that public benefits advocatesstrengthen political coalitions supporting sustainabledevelopment and counter those favoring parochialinterests. In particular, the case studies suggest thatsocial concerns carry far more political weight in anational context than do either local or internationalenvironmental issues. Efforts to exploit links betweensocial and environmental agendas would likely be auseful political approach.

By focusing on financial health, reforms in theelectricity sector have excluded a range of broaderconcerns also relevant to the public interest. In thisstudy, we have examined the social and environmen-tal concerns at stake in these reforms. We have foundthat not only are they inadequately addressed, butthat socially and environmentally undesirabletrajectories can be locked-in through technological,institutional, and financial decisions that constrainfuture choices. Consequently, social and environ-mental benefits need to be internalized early inreform decisionmaking.

To do so, the process by which reform goals aredefined and reform decisionmaking must change toembrace a more consensus-driven design of reforms.More complex processes bring with them greaterrisks of capture by special interests and failure due toa cacophony of voices. Yet exclusive reforms of theelectricity sector have not incorporated the breadth ofinterests that deserve a voice and have not yet shownthemselves to be sustainable—financially, socially, orenvironmentally. This study has suggested severalreasons to believe that a modified approach guidedby a vision of a socially and environmentally sustain-able electricity future may yield a more satisfyingoutcome.

REFERENCEBacon, Robert. 1999. Global Energy Sector Reform in

Developing Countries: A Scorecard. Report 219/99.Washington, D.C.: ESMAP.

xvi

WRI: POWER POLITICS

1

WRI: POWER POLITICS

1

electricity projects in developing and transition eco-nomies between 1990 and 1999 (World Bank, 2000).

Electricity sector reforms and the financial flowsthey generate carry considerable implications—potentially both positive and negative—for long-termsustainable development goals. (See Box 1.1.) Thisreport is motivated by the concern that decisionsmade now about the institutional structure andfunctioning of the electricity sector will shapepatterns of development for decades to come. Ourapproach is informed by the view that electricityreforms—market-led or not—can best supportsocially and environmentally progressive outcomeswhen they are explicitly designed to do so. Conse-quently, the central question for this study is:

How can the process of reforming the electricitysector support rather than hinder promotion ofsustainable development outcomes?

Over a three-year period in the early 1990s, a smallteam of technocrats transformed the electricity sectorin Argentina. Responding to a burgeoning foreigndebt and a growing crisis of management in thesector, Argentina terminated any direct governmentrole in electricity supply. Instead, they transformedelectricity into a commodity to be bought and sold onan open market. The intended goal was to reapefficiency gains, and the means was to minimizegovernment interference with the market’s hiddenhand. A decade later, South Africa also embarked onelectricity sector reform. In the midst of a program ofpost-apartheid reconstruction and development,South Africans grappled with how to retain a placefor the sector as an instrument of poverty alleviationconsistent with environmental sustainability, evenwhile re-making it to capture market efficiencies.

The Argentina and South Africa experiences withpower sector reform bracket a decade of change in thesector. During this period, the conventional wisdomfavoring public ownership and operation of the electric-ity sector was challenged by a new paradigm of marketcompetition for electricity. Whether and how countriesshould follow this approach is still a subject of debate,in part because of the considerable problems encoun-tered by the state of California following sectorreforms there. Still, the approach has won manyadherents. By 1998, a survey of 115 developingcountries found that 73 had taken at least minimalsteps down the road to market-oriented reforms in theelectricity sector (Bacon, 1999). In part due to thesechanges, $187 billion was invested in energy and

BOX 1 .1 ELECTRICITY ANDSUSTAINABLEDEVELOPMENT CHALLENGES

● Fifty-six percent of the world’s ruralpopulation does not have access to electricity.*

● Electricity generation accounts for 38 percentof worldwide CO2 emissions. **

* World Energy Assessment, 2000, p. 374.

** Computed by WRI from IEA data.

INTRODUCTION

Navroz K. Dubash

2

WRI: POWER POLITICS

In posing this question, we examined the process bywhich electricity sector reforms are initiated, de-signed, and implemented in six country studies—Argentina, Bulgaria, Ghana, India, Indonesia, andSouth Africa. To understand whether reforms arelikely to contribute to sustainable development byexplicit inclusion of a public benefits agenda innational reform processes, we examined the nationalpolitics that shape reform in each country. Sincenational reforms are influenced by larger globaltrends, we also explored how national circumstancesare shaped by international intervention, particularlyby international aid agencies.

Reforms in the electricity sector need not

follow a single prescription.

As the examples of Argentina and South Africaillustrate, not all countries have followed the samepath toward power sector reform. In Argentina,reforms were dictated by a rigid application ofmarket principles. In South Africa, reform effortswere embedded within a broader debate over eco-nomic and social empowerment. These differentapproaches suggest that reforms in the electricitysector need not follow a single prescription. Byunderstanding the forces that shape reform, thisstudy can suggest ways toward a more progressivepolitics of electricity reform.

THE LINK BETWEEN ELECTRICITYAND SUSTAINABLE DEVELOPMENT

The electricity sector has long been an integral partof the engine of economic growth. It is also a centralcomponent of sustainable development.1 High-quality energy, which includes access to electricityservices, can be a powerful force for development.Access to electricity supports improvements inhealth, education, and opportunities for entrepre-neurship. Yet it is estimated that 1.7 billion peoplelack access to electricity (World Energy Assessment,2000). The effect of sectoral reforms on incentives to

provide broad access to electricity services—and onthe price at which these services are available—canbe a significant determinant of human development.(See Box 1.2.)

The electricity sector is a significant consumer offossil fuels. In addition to the environmental impactsof fossil fuel extraction, the sector is responsible for asubstantial share of local and global pollutants.Decisions made now—as the sector is reformed andelectricity markets restructured—will create bothincentives and disincentives for large or small-scale

BOX 1.2 HOW DOES ELECTRICITYREFORM AFFECT SOCIALBENEFITS?

Access: In a restructured electricity market, profitalone is often an insufficient driver forexpanding access to electricity to relativelyunprofitable rural customers and the urban poor.Incentive schemes, subsidies, or regulatorymandates may be required.

Price: Electricity reforms are typically associatedwith pressures to limit subsidies and enhancecollection of tariffs. While these changes makefor a better functioning sector, the resultant priceincreases can also cause social hardships andspur political opposition to reforms. A mitigationstrategy can address these costs.

Quality: Competition in restructured marketsmay increase the reliability, choice, andresponsiveness of electricity service providers,but are not guaranteed to do so in the absence ofappropriate regulation and oversight.

Labor: Public sector electric utilities face job cutsas a result of reforms. This retrenchment willbring substantial social costs. Opposition fromlabor interests can be a political deterrent toreforms and will have to be addressed andmitigated.

3

WRI: POWER POLITICS

generation, fossil fuels or renewable energy technolo-gies, efficient or inefficient supply and use of energy,and centralized or decentralized generation sources.(See Box 1.3.) To be sustainable, sector reforms mustincorporate attention to social and environmentalbenefits, referred to in this study as “public benefits.”

Incorporating public benefits need not follow pastapproaches, which as the case studies show havesometimes been misguided. For example, electricitysubsidies in India and Bulgaria both encouragedwasteful consumption and did not benefit poorpopulations. Moreover, the ensuing financial short-falls undermined technical performance and wors-ened environmental outcomes.

Decisions made now about the electricity

sector will shape patterns of development for

decades.

The challenge for the future is twofold. First, asdiscussed in Chapter 2, it is to develop electricitysector reform policies and approaches that promotesustainable development while supporting a well-functioning electricity sector. Second, as discussed inthe rest of this study, it is to ensure that sustainabledevelopment remains part of the political calculusthat drives reforms.

THE GLOBAL CONTEXT

Reforms in the electricity sectors of individualcountries have occurred in the context of globaleconomic integration. The broad contours of thisprocess include political, economic, financial,technological, and institutional transformations.These trends are briefly spelled out here and dis-cussed in more detail in Chapter 2.

The globalization of the 1980s and ‘90s presumeda growing faith in the market as an instrument ofeconomic coordination. This shift was accompaniedby an expanding role for private corporations and a

corresponding questioning and renegotiation of theappropriate role of the state in economic activity. Indeveloping countries, a turn toward markets andaway from state-led activity was promoted by twodecades of World Bank structural adjustmentpolicies, which were intended to increase resource-use efficiency by enlarging the scope for privatesector activity (Jayarajah and Branson, 1995). In

BOX 1.3 HOW DOES ELECTRICITYREFORM AFFECTENVIRONMENTAL BENEFITS?

Technology/Fuel choice: The choice of technologyand fuel used to generate electricity hasenvironmental impact. The market structure putin place by reforms can affect technology choiceby shifting the relative attractiveness of capital-cost intensive technologies versus those based onhigh running costs. In addition, the existenceand basis of a planning framework for electricitywill determine whether environmentalconsiderations factor into a long-term vision forthe sector.

Regulatory decisions: Economic regulatorydecisions often also have environmentaloutcomes. Regulatory decisions influence howlevel the playing field is for differenttechnologies. They can also implement astrategic vision for the sector. Regulators musthave the mandate and training to play theseroles.

Incentives for efficiency: Electricity reforms thatenforce financial discipline should contribute togreater efficiency of supply, with environmentalgains. However, reforms can introduceadditional transactions costs and obscure priceand other signals to customers, raising obstaclesto end-use efficiency improvements. Conversely,competition could spur retailers to distinguishthemselves by marketing end-use efficiencyservices.

4

WRI: POWER POLITICS

particular, the structural adjustment agenda includedprivatization of state-owned corporations, such aselectric utilities, as part of a regime of fiscal responsi-bility.

This transition facilitated a greater role for interna-tional private capital in the economies of developingcountries. As Figure 1.1 shows for the energy sectoras a whole, during the 1990s private capital flowsincreased considerably—albeit with a downturnfollowing the Asian financial crisis of 1997. Theentry of private finance influenced the institutionalform of the sector. In order to contain risks, privatefinanciers sought to invest in discrete projects ratherthan around an entire power system, where riskswere harder to measure and manage.

The trend toward financing smaller, discrete unitsrather than an integrated whole was further sup-ported by technological changes in the electricitysector. The development of small and cheap gasturbines reversed the decades-long trend towardgrowing economies of scale in electricity generation(Patterson, 1999). Moreover, the development ofinformation technology and computing power vastlyincreased the capacity to monitor, control, andmeasure electricity usage and flows (Graham andMarvin, 1995). Together, these technological shifts

undermined the natural monopoly characteristic ofthe power sector and challenged the centralizednature of public utilities.

The precedent for institutional reform of theelectricity sector was set by developments in Chileand the United Kingdom (Bacon, 1995; Rosenzweigand Voll, 1997). In both countries in the 1980s,public monopolies responsible for generating andproviding electricity were restructured. The compo-nent parts were sold to the private sector and placedunder a regulatory framework intended to encouragecompetition. In both cases, the transformation toprivate ownership and competition was driven moreby ideological considerations than by evidence of thebenefits of restructuring. While there has beenconsiderable debate about the effectiveness andreplicability of this approach, the demonstrationeffect of the Chile and U.K. experience was undoubt-edly considerable. Following the experience in thesetwo countries, restructuring to encourage competi-tion in the electricity sector became a viable policyoption. In particular, urged by the World Bank andother donor agencies, developing countries andtransition economies have considered bothprivatization and restructuring as policy options toaddress problems of cash shortages, capacity short-falls, and poor management.

FIGURE 1.1 TRENDS IN INVESTMENT IN ENERGY PROJECTS WITH PRIVATEPARTICIPATION IN DEVELOPING COUNTRIES, 1990–99

Source: World Bank, PPI Database, reproduced with permission from Energy Sector Management Assistance Program (2000).

0

10

20

30

40

50

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999

Bill

ion

s of

19

98

U.S

. dol

lars

5

WRI: POWER POLITICS

THE ELECTRICITY SECTOR ANDGLOBALIZATION DEBATES

Viewed in this context, reforming the electricitysector is about far more than adopting alternativetechnical and institutional models. Current patternsof electricity reform are being integrated into largerprocesses of globalization—notably the predisposi-tion toward markets, the growing role of privatecapital, and efforts to weave the sector into the fabricof international economic integration. Electricitysector reform debates are part of a broader dialogueabout how to organize economic life and ensure thepublic interest in a globalizing environment. As withother dimensions of globalization, debates over theelectricity sector are marked by a polarization ofviews.

Believers in economic integration—typicallyeconomists, regulatory consultants, and some staff ofdonor agencies—argue for reforms aimed at unfet-tered markets for electricity. In the transformation ofelectricity provision into a business venture, they seethe potential for greater efficiency and dynamism,with a corresponding public benefit in the form oflower prices and better service. From this perspec-tive, the electricity sector has suffered from too muchinterference by the state and from too many mis-guided, if well-meaning, efforts at steering the sectortoward social and environmental gains.

The opposite view—often held by representatives ofnongovernmental organizations (NGO’s), somedeveloping country utility managers, and some staffin international organizations—is that a transition toprivatization and competition will lead to an un-checked search for profit and a betrayal of the publicinterest. According to this camp, the obituary for thepublic utility model has been written in unseemlyhaste. From this perspective, electricity is a publicservice that should be guided by broader publicobjectives such as social and environmental goals.

Each of these admittedly caricatured views isproblematic, as we discuss here in brief, and explainin greater detail in Chapter 2. The belief that unfet-tered markets will automatically generate public

benefits is dubious on both environmental and socialgrounds. Left to their own devices, markets are ill-equipped to address equity considerations in accessto electricity or prices. They fail to internalizeenvironmental impacts and, therefore are likely toprovide less than optimal environmental and socialbenefits. On the other hand, a stubborn adherence tothe past ignores the currently dismal technical andfinancial state of the sector in many countries, and islikely to be swamped by the new realities of financialglobalization and rapid technological change. Afuture electricity sector—whether public or private—that resists adaptation and flexibility is just asunlikely to serve the public interest as one that looksto the market alone to provide the right signals.

Markets are ill-equipped to address equity

considerations in access to electricity or prices.

In this report, we suggest that markets are sociallyand politically constructed. If they are to contributeto the public interest, they must be explicitly de-signed to do so (Evans, 2001). Since markets do notexist in a political vacuum, whether or not reformsserve the public interest depends first on howeffectively these concerns emerge from politicalprocesses. This is not to trivialize the intellectual andideological debates about questions of public versusprivate ownership, and bureaucratic versus marketcoordination, but to emphasize that reform debatestoo often focus on false dichotomies. A more usefulapproach is to understand how the politicaldecisionmaking process shapes electricity sectorreform.

THE POLITICAL ECONOMY OFREFORM

Under what circumstances does reform in theelectricity sector incorporate attention to publicbenefits and promote sustainable development?Reforms are nominally under the control of govern-

6

WRI: POWER POLITICS

ments, whether at the federal or at subsidiary levels.But they rarely are initiated, designed, and imple-mented by the state alone in a simple sequence.Reform processes are shaped by the interaction offormal rules, norms of behavior, and sociopoliticalenvironments. Consequently, reforms both requireand lead to a rearrangement of the relationshipsamong states, the private sector, and civil society(Brinkerhoff and Crosby, 2002).

Governments are seldom homogeneous andcoherent entities. Different ministries typically havedivergent interests, which figure heavily in shapingreform agendas. In addition, politicians may notshare the same interests as bureaucrats, and differ-ent branches of government—the executive and thelegislative, in particular—often disagree. In theelectricity sector, public utility officials have much atstake in electricity reforms, and may themselves besignificant players in reform dialogues.

In addition, reforming governments face tremen-dous pressures from below. These pressures may beapplied by well-organized beneficiary coalitions withclaims on public resources (Waterbury, 1992). Thecountry studies that follow illustrate, for example, thepolitical clout of large farmers in India who havegrown used to subsidized electricity for agriculture,and ruling elites in Indonesia who used the sector asa vehicle for graft. Actors such as these are wellmobilized and in a position to voice opposition toreforms. By contrast, potential beneficiaries ofproactive environmental and social policies are oftendiffuse and poorly organized—as for example ruralpopulations that are unconnected to the grid.Promotion of public benefits may thus requiresearching for new coalitions and new players—consumer organizations, environmentalists, pro-pooradvocates, municipalities, and some private corpora-tions.

The private sector stands to gain enormously froma reform agenda that promotes greater privateparticipation in the power sector. Some may try toinfluence the process of reform and seek concessionsfrom governments. In this context, even if liberaliza-tion in the electricity sector leads to state exit from

the direct business of supplying electricity, ensuringgovernmental functions nonetheless requires astrong and capable state role (Brinkerhoff andCrosby, 2002). Other private sector firms mayemerge in reaction to this opportunity by, for ex-ample, developing opportunities for investment inenergy efficiency or providing access to electricitythrough distributed generation technologies. Thisgroup may be potentially important members of acoalition to promote attention to public benefits.

Reforms in the electricity sector have occurred

in the context of global economic integration.

Electricity reforms present civil society groups withan opportunity, but also a challenge. Over the last twodecades, civil society groups have focused on central-ized, often state-owned electricity bureaucracies.They have targeted socially and environmentallydestructive projects, often in alliance with interna-tional NGOs that amplify their reach to donoragencies and international financiers (Keck andSikkink, 1998; Hildyard and Mansley, 2001). Thelarger number of actors and increasing complexity ofdecisionmaking in a restructured electricity sectorchallenges NGOs to re-think their strategy. Someview restructuring as an opportunity to replace staidbureaucracies with a dynamic, decentralized sectorthat will serve sustainable development goals (Hirshand Serchuk, 1999). Others are more circumspectabout the nature of this opportunity, and see littlereason for hope that a restructured sector willpromote a more sustainable energy future (PRAYAS,1999; Mun, 2000; Tellam, 2000; Dixit, Wagle, andSant, 2001). A strong belief among NGOs is thatopen, transparent, and effective governance will be akey ingredient in realizing public benefits in arestructured sector. Consequently, demands for amore participatory and open decisionmaking processare likely to be an important part of the nationalpolitics of electricity reforms.

While pressures from below are imposing, pres-sures from above can be just as sizeable. Interna-

7

WRI: POWER POLITICS

tional lenders, called in to bail out crisis-riddeneconomies, have significant leverage over the trajec-tory of reforms in borrower countries. Correspond-ingly, the space, time, and flexibility to shape reformsavailable to domestic actors, both governmental andnongovernmental, may shrink. At the same time,there is an active debate about how much leverageinternational donors really have over domesticprocesses (Kahler, 1992), in what context aid condi-tionality is appropriately deployed (World Bank,1998), and whether and how donor leverage can bemade to address social and environmental aimsbeyond traditional growth objectives (Nelson andEglinton, 1993). This study assesses the role ofinternational donors in the reform process and askswhether and how they can contribute to the promo-tion of public benefits in the course of electricitysector reforms.

Whether and how different actors and interestsparticipate in shaping the electricity sector dependson the governance structure under which reformsare carried out. There is a broad divide between twoopposing viewpoints on the appropriate governanceof reform processes (Williamson, 1994; Rodrik,1996). One view holds that economic reforms mustbe carried out by a strong executive, unhampered bythe need to consult or seek consensus, in order tostop vested interests from obstructing a reformagenda. From this perspective, while reforms may berational for society as a whole, myopia on the part ofthe general public and a collective irrationalitynonetheless can obstruct reform. The opposingposition argues the central importance of forging asocial consensus around reform. Consultation notonly provides the promise of improving policy, but,by addressing the concerns of the general population,it raises the probability of continued support for areform program, and supports democratic institu-tions. By contrast, an autocratic approach, even if tiedto good economics, can make for undesirable politicsby undermining democratic institutions.

The distinction between these two positions isblurred somewhat by noting that while the initiationof reforms may require a firm and autonomousexecutive with a relatively free hand, consolidation of

reforms may rest in building consensus (Rodrik,1996). If effective implementation requires not onlygood design, but agreement and cooperation fromrelevant agencies and non-state stakeholders, thenthe case for consensus building is further strength-ened (Brinkerhoff and Crosby, 2002).

By permitting trade-offs to be explicit, and provid-ing avenues for a broader range of interests andperspectives to be brought to the table, it appearslikely that the social consensus approach is likely tobe more favorable to promotion of sustainabledevelopment. The counter-argument, however, is thatif reforms are brought to a halt in a futile search forconsensus, then even the benefits of limited reformswill be lost. The relative benefits of the two ap-proaches is an issue considered in the countrychapters.

FRAMEWORK OF THE STUDY ANDRESEARCH METHODS

Chapter 2 sets the stage for the country studies. Itprovides the global context for electricity sectorreform by describing both the forces leading to aninstitutional shift in the sector and the historicalprocess by which this shift occurred. Next, it de-scribes and briefly summarizes debates over theprevalent model that emerge from the Chile and U.K.experience. It then examines how this model spreadaround the world, with an emphasis on the growingrole of private sector financing. Finally, it makes theargument that a laissez faire approach to market-ledreform in the electricity sector is unlikely to fullyserve the public interest.

To further our understanding of electricity sectorreforms as shaped by political processes, this study isorganized around six country case studies (Chapters3-9) from the developing world and economies intransition. The case studies—Argentina, India,Indonesia, Bulgaria, Ghana, and South Africa—wereselected to provide a mix across early and latereformers, large and small countries, and also toprovide a geographic spread. They are presented inthe chapters that follow organized from earliest

8

WRI: POWER POLITICS

reformer to most recent. In addition, the countrystudies are complemented by brief examinations ofreform processes in other countries, the results ofwhich are described throughout the chapters as textboxes. The central concern of this study is howelectricity sector reform processes can promotesustainable development through attention to publicbenefits. Each country study asks:

● What were the drivers of reform in the electricitysector?

● What political interests were at stake in the sectorand in its reform, and how did they shape thereform process?

● What role did the World Bank and other interna-tional donor agencies play in electricity sectorreforms?

● How and by whom were public benefits concernsaddressed in the process of designing reforms,and with what outcomes?

The country studies were conducted as a collabora-tive exercise between the World Resources Instituteand a research partner from each country. Ourprimary methods were semi-structured interviewswith key informants from government agencies, civilsociety, the private sector, and international agencystaff—all conducted on a not-for-attribution basis toencourage candor. Accordingly, interviews cited inthe studies are referenced only by the affiliation ofthe interviewee. This information was supplementedby official government and donor agency reports,other secondary materials, and media reports.

In the conclusion, we examine the results of thecountry studies in comparative context, and drawsome implications about steps toward a moreprogressive politics of electricity sector reform.

NOTES1. We follow the Brundtland Commission (World

Commission on Environment and Development,1997) in defining sustainable development as“development that meets the needs of the present,without compromising the ability of future genera-tions to meet their needs.” We also follow Lele (1991)in further specifying that sustainable development at aminimum includes a desire to limit environmentaldegradation, while allowing for basic needs andeconomic growth, and seeking to accomplish theseoutcomes in a participatory fashion. Finally, weacknowledge the significant conceptual weaknesses ofthe term, but note its political utility as an umbrellaconcept.

9

WRI: POWER POLITICS

REFERENCES

Bacon, R.W. 1995. “Privatization and Reform in the GlobalElectricity Supply Industry.” Annual Review of Energy andEnvironment 20:119-143.

Bacon, Robert. 1999. “A Scorecard for Energy Reform inDeveloping Countries.” Public Policy for the PrivateSector Note No. 175. Washington, D.C.: World Bank.

Brinkerhoff, Derick W., and Benjamin L. Crosby. 2002.Managing Policy Reform: Concepts and Tools for Decision-Makers in Developing and Transition Economies.Bloomfield, CT: Kumarian Press.

Dixit, Shantanu, Subodh Wagle, and Girish Sant. 2001.“The Real Challenge in Power Sector Restructuring:Instilling Public Control through Transparency,Accountability, and Public Participation.” Energy forSustainable Development V (3):95-101.

Energy Sector Management Assistance Program. 2000.Energy Services for the World’s Poor. Washington D.C.:World Bank.

Evans, Peter. 2001. “Looking for Agents of Urban Livabilityin a Globalized Political Economy.” In Livable Cities:Urban Struggles for Livelihood and Sustainability, editedby P. Evans. Berkeley, CA: UC Press.

Graham, Stephen, and Simon Marvin. 1995. “More thanDucts and Wires: Post-Fordism, Cities and UtilityNetworks.” In Managing Cities: The New Urban Context,edited by P. Heal, S. Cameron, S. Davoudi, S. Grahamand A. Madani-Pour. New York: John Wiley & Sons.

Hildyard, Nicholas, and Mark Mansley. 2001. The Cam-paigners’ Guide to Financial Markets. Dorset, UK: TheCorner House.

Hirsh, Richard F., and Adam H. Serchuk. 1999. “PowerSwitch: Will the Restructured Electric Utility SystemHelp the Environment?” Environment 41 (September):4-29.

Jayarajah, Carl, and William Branson. 1995. Structural andSectoral Adjustment: World Bank Experience, 1980-92.Washington D.C.: World Bank.

Kahler, Miles. 1992. “External Influence, Conditionality,and the Politics of Adjustment.” In The Politics ofEconomic Adjustment, edited by R. R. Kaufman.Princeton: Princeton University Press.

Keck, Margaret and Kathryn Sikkink. 1998. Activists BeyondBorders. Ithaca, NY: Cornell University Press.

Lele, Sharachchandra M. 1991. “Sustainable Development:A Critical Review.” World Development 19 (6):607-621.

Mun, Yu-Mi. 2000. “Electric Utility Restructuring and itsImplications for Ecological Sustainability and Demo-cratic Governance: A Preliminary Review.” Unpublishedpaper. Center for Energy and Environmental Policy,University of Delaware.

Nelson, Joan M., and Stephanie J. Eglinton. 1993. GlobalGoals, Contentious Means: Issues of Multiple Aid Condi-tionality. Washington, D.C.: Overseas DevelopmentCouncil.

Patterson, Walt. 1999. Transforming Electricity. London:Earthscan.

PRAYAS. 1999. “Regaining Rationality through Demo-cratisation: A Critical Review of MDBs Power SectorActivities in India.” Unpublished paper. Pune, India.

Rodrik, Dani. 1996. “Understanding Economic PolicyReform.” Journal of Economic Literature XXXIV(March):9-41.

Rosenzweig, Michael B., and Sarah P. Voll. 1997. “Sequenc-ing Power Sector Privatization.” Unpublished paper.Washington D.C.: National Economic ResearchAssociates.

Tellam, Ian, ed. 2000. Fuel for Change: The World BankEnergy Policy, Rhetoric vs. Reality. London: Zed Books.

Waterbury, John. 1992. “The Heart of the Matter? PublicEnterprises and the Adjustment Process.” In The Politicsof Economic Adjustment, edited by S. Haggard and R. R.Kaufman. Princeton, NJ: Princeton University Press.

Williamson, John, ed. 1994. The Political Economy of PolicyReform. Washington, D.C.: Institute for InternationalEconomics.

World Bank. 1998. Assessing Aid: What Works, What Doesn’t,and Why. Washington, D.C.: World Bank.

World Commission on Environment and Development.1997. Our Common Future. Oxford: Oxford UniversityPress.

World Energy Assessment. 2000. World Energy Assessment:Energy and the Challenge of Sustainability. Edited byUnited Nations Development Programme, UnitedNations Department of Economic and Social Affairs,and World Energy Council. New York: United NationsDevelopment Programme.

11

WRI: POWER POLITICS

2

of the industry. In the industrialized world, thepromise of the public, vertically integrated, central-ized power system was largely realized—people hadreliable, affordable power. The problems were thoseof a mature system and technologies. By the 1970s,however, industrialized countries no longer benefitedfrom the smoothly rising demand curves of the past,undermining the predictable sources of income onwhich utilities had relied, and affecting the returnsfrom new power projects (Rosenzweig and Voll,1997). When small, cheap gas turbines becamecommercially viable, the trends in scale economiesthat had dominated the industry until this point weredramatically reversed (Hunt and Shuttleworth,1996).1 Costs and risk in the sector had increaseddue to a rising environmental consciousness, acorresponding increase in regulations, and burden-some investment in large power plants, particularlyhigh-capital-cost nuclear units (Patterson, 1999). Inshort, a virtuous cycle of increasing consumption,growing interconnection, and lower costs driven byscale economies was replaced by a vicious cycle ofincreasing costs, diminishing productivity, anddeteriorating economic performance (Oliviera, 1997).

Countries began to act on these changed realities.In the 1970s, the United States allowed independentpower producers to sell electricity to utilities. Thiswas a shift of considerable significance. It demon-strated that independent generators could be inte-grated into a grid system, and began the unravelingof the conventional wisdom that the utility was anatural monopoly (Hirsh, 1999). In the late 1980s,

THE CHANGING GLOBAL CONTEXT

FOR ELECTRICITY REFORM

Navroz K. Dubash

To a significant extent, national electricity sectorreform initiatives were shaped in response to globaltrends in development ideology, financing, andtechnological change. In this chapter, we review thesetrends and examine their implications for electricityreforms. Based on this discussion we explore adebate over whether preserving and enhancing thepublic interest in the sector will occur automaticallyas a result of reforms, or whether it must be de-signed into reform processes.

ORGANIZATION OFTHE ELECTRICITY SECTOR:FROM SOCIAL COMPACTTO ECONOMIC EFFICIENCY

Until the early 1990s, governments either owned theelectricity sector or controlled the sector throughregulation. Electricity was considered a textbooknatural monopoly (Teplitz-Sembitzky, 1990; Huntand Shuttleworth, 1996). Governments, it wasthought, were best able to mobilize the largeamounts of capital necessary to develop the sectorand bear the long time horizons for recovery of costs.Particularly in developing countries, governmentleadership in the development and use of electricitywas part of a broader “social compact” (World Bank,1988).

In the early 1990s, however, this conventionalwisdom came under siege. With astonishing rapidity,there was a revolution in thinking about the structure

12

WRI: POWER POLITICS

Chile and the United Kingdom took reform a stepfurther by re-making their sectors around theobjective of promoting competition.2 This was aradical idea.3 Before these countries initiated reform,there was near unanimity that transaction costs inthe sector and the technical requirements of electric-ity made competition nearly impossible.4

There was a rush to anoint a new conven-

tional wisdom—competition in the power

sector was not only possible, but inevitable.

The rapid growth and declining costs of communica-tion and information technologies facilitated thedevelopment of new control techniques consistentwith decentralization, which facilitated competition(Graham and Marvin, 1995; International EnergyAgency, 1999). In a few short years, there was a rushto anoint a new conventional wisdom—competition inthe power sector was not only possible, but inevitable.This new model represented a shift from a “socialcompact” to the pursuit of economic efficiency.

A COMPLEX NEW MODEL FOR THEELECTRICITY SECTOR

The emerging model in the electricity sector isfocused primarily on two dimensions: (1) changes inmanagement practices, which may or may notinvolve changes in ownership from government tothe private sector (See Box 2.1.); and (2) restructuringfor competition, which is a process of separating or“unbundling” vertically integrated utilities to progres-sively introduce competition into the system (See Box2.2.).5 In positioning themselves with respect to theseissues, countries have a wide range of choices.However, implementing reforms is by no means assimple as picking locations along these two axes.Putting into practice a competitive model for electric-ity requires developing rules for markets, contractualarrangements, tariff regulation, and a myriad ofother details.

In addition to technical details, there are conceptualchallenges to implementing this model. Privatizationand restructuring, while theoretically distinctprocesses, are linked in practice. Privatization alone,in the absence of competitive market structure, willdo little to promote competition (Oliviera andMacKerron, 1992). However, the introduction of trulycompetitive market structures will limit profits, atleast in comparison to firms with market power.Ironically, the successful introduction of competitioncould mute private sector interest in the sector andactually undercut successful privatization (Bacon,1995). Conversely, if privatization occurs beforerestructuring, private owners have a strong incentiveto ensure that subsequent reform efforts do notundermine their ability to capture monopoly rentsthrough, for example, effective regulation. This mayopen the door to corruption and other means of

BOX 2.1 STAGES IN CHANGE OF OWNERSHIPAND MANAGEMENT

Commercialization: A government surrendersdetailed control over a state-owned enterprisewith the purpose of promoting operation inkeeping with commercial principles. This is achange in practice rather than a change inorganization form.

Corporatization: A government formally andlegally relinquishes control and management of astate-owned enterprise to establish a corporation.It may still set overall objectives and subject thecorporation to regulatory oversight.

Privatization: A government sells a corporationto private owners. The private corporation is ableto tap the capital markets, and is subject to thediscipline of those markets. The private companymay be subject to regulatory oversight.

Source: Hunt, Sally and Graham Shuttleworth. 1996.Competition and Choice in Electricity. New York: JohnWiley and Sons.

13

WRI: POWER POLITICS

influencing the restructuring process. Privatizationand competition, then, while apparently complemen-tary, pose considerable challenges of sequencing andimplementation (Newbery, 1995; Besant-Jones,1996).

To further complicate the picture, competition neednot be accompanied by privatization. For example,Norway has successfully introduced competition

between different state-owned entities, some ownedby the central government and others by municipali-ties (Wolak, no date; Magnus, 1997).

The benefits and viability of implementing amarket model, either in whole or in part, continue tobe hotly debated. Advocates of market-based reformssuggest that reforms provide incentives for costsavings and productivity enhancement (Joskow,1998). These incentives operate by providing appro-priate price signals to consumers to allocate re-sources appropriately, by unleashing the profitmotive to provide an incentive for efficient use ofinputs, and by encouraging cost reductions throughcompetition (Bacon and Jones, 2001). They point tothe experience of early movers among the industrial-ized countries, such as the United Kingdom, tosuggest that these goals have been realized(Littlechild, 2000). However, the U.K. experiencealso shows that competition is at least as importantas privatization in providing incentives for efficiency,and that the costs of system coordination are greaterunder the market system than in an integrated utility(Newbery and Green, 1996).

The benefits and viability of implementing a

market model continue to be hotly debated.

Critics focus on the weaknesses of the marketcompetition model (Watts, 2001). For example, thecost of capital for the sector is likely to be higher inan unregulated market (to reflect higher risks) thanunder either public ownership or regulation based ona stable rate of return. In a capital-intensive sectorlike electricity, the higher cost of capital can result inboth higher average cost and greater price variability.In addition, it is difficult to defend against marketpower in this sector, both because electricity cannotbe stored (giving generators opportunities to exploitmarket power), and because there is little elasticity ofdemand for electricity in the short run. Finally,planning for the transmission system becomes achallenge in a privatized sector where investmentdecisions may be a trade secret, and where choices

BOX 2.2 APPROACHES TO RESTRUCTURINGFOR MARKET COMPETITION

Monopoly: No competition at any level. A singleentity handles generation and transmission todistribution companies, who have a monopolyrelationship with the final consumer.

Single buyer: Competition in generation.Independent power producers (IPPs) may sellonly to a single purchasing agency on the basisof a power purchase agreement (PPA). Thepurchasing agency transmits to distributioncompanies, who have a monopoly relationshipwith the final consumer.

Wholesale competition: Competing generators selldirectly to distribution companies. All generatorshave open access to a transmission network forthe purpose of delivery of power. Distributioncompanies continue to have a monopoly overfinal consumers.

Retail competition: Competing generators selldirectly to distributors, retailers, and finalconsumers. Generators have access to bothtransmission and distribution wires on the basisof regulated prices. Final consumers maypurchase power from a retailer or directly from agenerator.

Source: Hunt, Sally and Graham Shuttleworth. 1996.Competition and Choice in Electricity. New York: JohnWiley and Sons.

14

WRI: POWER POLITICS

BOX 2.3 THE CALIFORNIA ELECTRICITY CRISIS

The Plan

In 1993, California was beginning to emerge from aprolonged recession. Electricity rates were 50 percenthigher than the U.S. national average, owing—amonga host of other factors—to the high costs ofCalifornia’s nuclear power plants and expensive long-term power contracts. Lawmakers feared that the highprice of energy was driving industry out of the state.Deregulation was intended to reduce the price ofelectricity by introducing market competition.

In 1996, after two years of discussion and debate, theCalifornia Legislature unanimously adopted a plan forderegulation. To improve prospects for competition,the plan offered significant incentives to California’sthree largest utilities to separate their generation,transmission, and distribution functions intocomponent parts.

The utilities quickly sold off their oil and natural gaspower plants; their market share in electricitygeneration fell from 81 percent in 1996 to 46 percentin 1999. They also transferred control of electricitytransmission to an independent system operator andestablished a power exchange facility to facilitateelectricity sales between generators and utilities. Thesystem was designed to allow residential customers tochoose their electric service provider and thus injectretail competition into the energy sector.

Significantly, the plan allowed the utilities to recovertheir “stranded costs”—capital costs in plants that werepotentially uneconomic in the new competitivegeneration market—by freezing consumer retail ratesat 1996 levels for up to four years or until the costswere recovered, whichever came first. Since it wasassumed that wholesale rates would remain well belowretail rates, the plan would allow the utilities to lock ina sure profit. This was the carrot that made themwilling to give up their near-monopoly on generationand transmission of electricity. The end result was acomplex, delicately balanced system whose designrepresented a series of political compromises madebetween legislators, interest groups, and the utilities.

Crisis

In 2000, a combination of factors—some relating tosupply, others to demand—combined to plungeCalifornia’s power sector into crisis. On the supply side,a drought in the Pacific Northwest reduced the amountof hydroelectric power available for export to Californiain the spring months of 2000. Natural gas pricesquadrupled in the same time period. Some have arguedthat the state’s strict emissions standards limited theoutput of currently existing plants. Environmentalistscounter that California’s environmental regulationsplayed no part in precipitating the crisis but that lack ofsupply was manufactured by generators exercisingmarket power. All agree, however, that unbundling hadfailed to dilute market power.

The demand for electricity in California surged by 20percent from 1997 to 2000, driven in part by a boom inthe technology sector. Yet because retail prices werefixed by law, there was no way to signal to consumersthat their higher demand was driving up the price ofelectricity. Moreover, in the mid-1990s the utilitiesreduced funding for what had been successful energyefficiency programs which would otherwise havelowered demand.

Exacerbating these problems was a lack of flexibility inthe plan. Assumptions that supply reserves wereadequate, that there would be robust competition, andthat consumers would adjust use in response to marketsignals, all proved to be flawed. Although there wereofficial public hearings, a significant amount of thedrafting process took place in late-night, closed-door,horse-trading sessions between legislators, utilities, andenvironmental and other interest groups. The endresult was a bill designed to satisfy each group.According to some insiders, by appeasing majorinterest groups, the consensus-building process mayhave deflected serious scrutiny of the bill. Finally,because the stakeholder consultation process led to theprogram being institutionalized in law—rather than inregulations, which are more flexible—policymakers hadfewer options when dealing with a fast-changing andgrowing crisis in 2000 and 2001.

15

WRI: POWER POLITICS

BOX 2.3 (CONTINUED)

In mid-May 2000, as excess capacity dwindled,wholesale energy prices began to rise. By June, theutilities were buying power at $120 per megawatt-hourand then selling to retail customers at the fixed price of$65 per megawatt-hour. Two utilities declared theirstranded costs recovered and pleaded with theCalifornia Public Utilities Commission (CPUC) to liftthe retail price restrictions. It refused, arguing thatconsumer rate hikes were politically impossible. Thecrisis was exacerbated by market manipulation;suppliers withheld energy at peak-hours in an attemptto drive up prices. The average number of megawattsoff-line from November 2000 to May 2001 increased by267 percent compared to the same period a year earlier.California’s utilities began losing a great deal of moneyvery quickly.

By mid-December 2000, the utilities were paying $400per megawatt-hour for power on the wholesale market,reselling it for $65 per megawatt-hour, and losingroughly $50 million per day. By mid-January 2001, twoutilities were insolvent, with one declaring bankruptcyin April. The power exchange shut down on January 31,but the governor instructed the California Departmentof Water Resources (CDWR) to buy power to meet theutilities’ short positions. Through May 2001, CDWRhad spent about $8 billion doing so.

Only in the spring of 2001 did a combination ofconservation efforts, price caps, and the willingness of apreviously reluctant government to sign long-termcontracts with energy providers bring wholesale pricesdown to earth. The state of California cut its energy useby an astonishing 8 percent during the month ofFebruary 2001. A reduction in demand helped to nudgewholesale prices downward and to reduce the incentivefor energy generators to take capacity off-line.

By July 1, 2001, electricity prices were back to the levelsof early May 2000. The California government haseffectively taken control of the electricity sector, and isnow saddled with billions of dollars in long-termcontracts that require it to buy power at pricessignificantly above current market rates. This willalmost certainly ensure rate hikes and tax increases for

California’s citizens for the foreseeable future. Thisoutcome is a far cry from the promises made in 1996.

The California story offers several possible lessons forreforming countries. The complexity of the reformchallenge is daunting, suggesting the need for keepingreform simple. In particular, California’s experienceillustrates how pernicious the problem of marketpower can be; unbundling California’s utilities onlytransferred the problem from one cartel to another.With regard to the process of reform, California didmake a serious attempt at broad consultation, whichallowed a broad range of interests to be represented.That the end result was unsuccessful suggests thatwhile stakeholder engagement may be a necessarycomponent of any reform plan, it is not in itselfsufficient to ensure success. Finally, conservation andenergy efficiency efforts were remarkably effective anda major factor in bringing the energy crisis to a close.

Sources:

The Economist. 2001. “A State of Gloom.” (January 20).

Gamson, David. 2001. “The California Conundrum: Rates,Reliability and the Environment Under ElectricRestructuring in California.” Paper presented at “EnergyRestructuring and the Environment” Workshop in Tokyo,Japan. (October 22).

Harvey, Hal, Bentham Paulos, and Eric Heitz. 2001.“California and the Energy Crisis: Diagnosis and Cure.” SanFrancisco, CA: Energy Foundation.

Joskow, Paul L. 2001. “California’s Energy Crisis.” WorkingPaper 8442. Cambridge, Massachusetts: National Bureau ofEconomic Research. (August).

Nieves, Evelyn. 2001. “In California, Solar’s Time to Shine:Alternate Power Systems and Conservation Draw NewConverts.” The New York Times. (May 3).

Reddy, Amulya K.N. 2001. “California Energy Crisis and itsLessons for Power Sector Reform in India.” Economic andPolitical Weekly. (May 5-11).

World Bank Energy and Mining Sector Board. 2001. “TheCalifornia Experience with Power Sector Reform: Lessonsfor Developing Countries.” Washington, D.C.: World Bank.Online at: http://www.worldbank.org/html/fpd/energy/pdfs/e_calexp0400.pdf (May 29, 2002).

16

WRI: POWER POLITICS

between transmission investments may considerablybenefit one generator over another.

Others do not take issue with the model itself, butare cautious about the pragmatics of implementationin developing countries. In small developing coun-tries, there is a trade-off between dividing up genera-tors sufficiently to ensure competition, and ensuringeconomies of scale in generation (Bacon, 1995;Besant-Jones, 1996). Moreover, the starting condi-tions in the sector are an important factor in deter-mining the viability of the private competitionmarket. For developing countries, whether retailprices are above or below costs, or capacity genera-tion is adequate to meet demand, the extent to whichthe population is fully served by electricity access andthe existence of credible regulatory institutions torestrict the emergence of private monopolies will alldetermine decisions on how to proceed with reformof the sector (World Bank, 2001). Finally, while amarket reform model provides incentives for efficientoperation at the level of the firm, it does not by itselfprovide incentives for the balanced development ofthe sector, and would particularly neglect unprofit-able customers or those unconnected to the grid(Reddy, 2001).

The debate has acquired renewed intensity in thewake of California’s disastrous experience in thesummer of 2000 following an extremely ambitious,though arguably flawed, reform program. (See Box2.3 on previous page.) The collapse of the EnronCorporation in the United States—the company mostclosely and visibly associated with electricity mar-kets—has also raised questions about the relativemerits of deregulation and government control.6

It is beyond the scope of this study to conclusivelyconsider these issues. However, based on the briefreview conducted here, it seems true that the modeldescribed here may indeed generate gains, but thereis considerable uncertainty about how best to defineand implement reforms in particular cases. Inparticular, how reforms can best be tailored to thevarying conditions in different countries along bothprivatization and restructuring dimensions, andwhether and how the greater complexity of the

sector can be adequately governed, remain openquestions.

ADOPTION OF THE MODEL:THE STRUGGLE FOR FINANCIALRESOURCES

Developing countries and economies in transitionhave faced some of the same issues as industrializedcountries, notably the emergence of new generationand information technologies and, to some extent,rising costs due to increased regulation. But in otherways the problems have been quite different. Theseproblems are outlined in Chapters 3-9 in greaterdetail.

As summarized in the World Energy Assessment,state-owned monopolies in many countries haveallowed subsidies to proliferate, demonstrated a biasin favor of large and visible projects, been prey to badmanagement, and have placed a strain on govern-ment budgets (World Energy Assessment, 2000). Forexample, subsidized power was often used to propelforward key sectors of the economy. This approach,while effective, also created powerful constituenciesfor the continuation of such policies, as was the casewith farmers in India. In other countries,nontransparent accounting undermined financialdiscipline in the energy sector, as for example inBulgaria through the use of coal subsidies forelectricity and electricity subsidies for districtheating. The sector was often used for narrowpolitical ends, resulting in a weakening of publicinstitutions in the sector across many developingcountries (Teplitz-Sembitzky, 1990). This observationwas reinforced by a survey of 300 World Bank-funded projects from 1965 to 1983, which showed aprogressive deterioration in the performance ofdeveloping country utilities over time (World Bank,1988). In short, there is considerable evidence thatthe electricity sector faces significant problems inmuch of the developing world and in economies intransition.

The type and magnitude of problems are notsimilar all over the world. For example, in contrast to

17

WRI: POWER POLITICS

many other developing countries, the sector inArgentina and South Africa is well-developed andfunctions relatively well. In Bulgaria, and in much ofCentral and Eastern Europe, the sector is well-developed but plagued by inefficiencies (Chandler,2000). For example, energy intensity (the amount ofenergy required to produce a unit of GDP) in thisregion is approximately twice as high as in otherindustrialized countries (Tellam, 2000). In othercountries, such as India and Ghana, the promise ofthe public utility model has failed to materialize.Most African countries provide electricity to less than20 percent of their population (Bhagavan, 1999).Those who do have access to electricity are ofteninadequately served.

Despite these differences across countries, amarket-based reform approach has fast taken root inmany developing countries. While few have taken allthe steps described in Boxes 2.1 and 2.2, severalcountries have undertaken some combination ofsteps toward a market in the electricity sector. (SeeTable 2.1.) For example, 44 percent of 115 countriessurveyed in 1998 had converted their state utility intoa corporation, and 40 percent had allowed the entryof private producers in generation (IndependentPower Producers). A smaller number of countrieshad privatized either generation (21 percent) ordistribution (18 percent). Nonetheless, taking intoaccount the dramatic nature of institutional changerequired, these proportions represent a considerableshift over less than one decade.

What explains this relatively rapid adoption of themodel in the developing world? To a significantextent, the answer lies in the search for finances forthe energy sector in developing and transitioneconomies. Traditionally, much of the developingworld has relied heavily on public developmentfinance, and particularly the World Bank, to financetheir investments in the sector. By the 1990s,international public financial institutions wereincreasingly reluctant to continue funding publicutilities that were trapped in a cycle of low revenuesand declining quality. This led to a steep decline inWorld Bank funding for investment projects in theelectricity sector. (See Figure 2.1.)

In addition, continuing a decade of “structuraladjustment” in borrower countries, the World Bankand the International Monetary Fund sought toexpand the role of the private sector in the develop-ment process. In 1993, a World Bank policy papermade reform in the electricity sector an explicitcondition of continued lending for the sector (WorldBank, 1993). The central thrust of the new policy wasto encourage borrower nations to restructure theirsectors and open them to greater private participation.Toward this end, the World Bank increased lending forpolicy reform. (See Box 2.4.) This shift was not limitedto the World Bank, but is echoed in a 1994 energysector policy paper produced by the Asian Develop-ment Bank (Asian Development Bank, 1994).

Obtaining private finance for the electricity sectorwas no easy task. The institutional framework for

T A B L E 2 . 1 C O U N T R I E S T A K I N G K E Y R E F O R M S T E P S I N T H E P O W E R S U B S E C T O R , 1 9 9 8 (sample of 115)

Corporatize Law Establish Regulator

Independent Power

Producers Restructure Privatize

Generation Privatize

Distribution

51

(44%)

38

(33%)

33

(29%)

46

(40%)

40

(35%)

24

(21%)

21

(18%)

Source: Bacon, Robert. 1999. Global Energy Sector Reform in Developing Countries: A Scorecard. Report 219/99. Washington, D.C.: ESMAP.

18

WRI: POWER POLITICS

private investment in the sector did not exist. Likethe experience in the United States, the UnitedKingdom, and Chile, developing countries andeconomies in transition had to pass new laws andestablish new institutions to attract capital. Inaddition, under the public utility model, the sectorwas organized as an interconnected network. Thisstructure did not lend itself to discrete investmentswith well-defined profiles of risk and return to private

capital. Instead, dependence on private capitalexerted a pressure to divide the sector into discretecomponents (Balu, 1997). Finally, the poor state ofthe sector in many potential recipient countries didnot promise either reasonable expectation of profit ormanageable low risk. Hence, borrowing countrieswere in a bind: to attract capital, the sector had to bein good health, and in order to ensure good health,they needed capital.

FIGURE 2.1 WORLD BANK NET LENDING COMMITMENT TO THE ELECTRICITYSECTOR (1995–2001)

Source: World Bank Annual Report (various years).

5 0005 000

10 00010 000

15 00015 000

20 00020 000

25 00025 000

30 00030 000

FY95 FY96 FY97 FFY98 FY99 FY00 FY01

Mill

ion

s of

U.S

. dol

lars Electric Power

Total Energy

BOX 2.4 SHIFTS IN WORLD BANK POLICY IN THE ELECTRICITY SECTOR

In 1993, the World Bank made reform an explicitcondition of continued lending for electricity. Thestrategy called on borrower countries to:

• establish transparent regulatory processes;

• commercialize and corporatize the power sector;

• allow for importation of power services in somecases; and

• encourage private investment in the sector.

Sources:

Covarrubias, Alvaro J. 1996. Lending for Electric Power inSub-Saharan Africa. Washington, D.C.: World Bank.

World Bank. 1993. The World Bank’s Role in the ElectricPower Sector. Washington, D.C.: World Bank.

From 1978 to 1993, World Bank lending in theelectricity sector supported state-owned monopolypower utilities to:

• provide power service on the basis of least-costdevelopment programs;

• strengthen the sector’s institutions and improvetheir efficiency;

• increase local resource mobilization; and

• improve access to electricity by disadvantagedpopulation groups.

19

WRI: POWER POLITICS

Institutional reforms across the developing worldand transition economies were aimed at overcomingthese hurdles, but took different forms in differentparts of the world. (See Figure 2.2.) Private sectorfinance entered Latin America primarily through awave of privatization. For countries burdened withdebt-heavy utilities—the legacy of a wave of borrow-ing on international markets during the petro-dollarglut of the 1970s and 1980s—the outright sale oftheir public utilities was the most effective way toboth shed debt and raise some capital (Oliviera,1997).

In Asia, countries invited “independent powerproducers” (IPPs) to build and operate power plantsand sell the electricity generated to the state utilities.7

However, given the poor state of the sector in manycountries, IPPs demanded and received highlyfavorable “power purchase agreements” (PPAs)providing concessions designed to minimize theirrisks and guarantee returns on their investment.These included high electricity prices; rigid “take-or-pay” contracts, which required the utility to make aset payment for power, whether it was used or not;and government guarantees against nonpayment forelectricity. As a result, IPPs have been criticized asbeing built on the socialization of loss, butprivatization of profit (Colley, 1997). Moreover, by

attracting capital only to generation, IPPs havepotentially negative environmental implications,since they skew incentives toward new generationand against meeting electricity needs through greaterefficiency. In addition, the purchase contracts haveforced use of high-cost power over lower-cost poweralready available. Not least, suspicion over corruptpractices in striking these deals has tarnished thealready dismal record of governance in the sector(Albouy and Bousba, 1998; Izaguirre, 1998).

In Africa, countries have embarked on electricitysector reform as part of a larger program of struc-tural adjustment with a focus on public sector reform(Turkson, 2000). In addition to IPPs, the privatesector often entered through management andoperation contracts in which operation of the entireutility was handed over to a private entity. Thisapproach was based on the small size of the sector inmany African countries and the lack of strongregulatory frameworks (Covarrubias, 1996).

In Central and Eastern Europe, divestitures, alongwith some IPPs and a small number of managementcontracts, were the order of the day, as Figure 2.2suggests. Divestitures were undertaken as part of alarger process of restructuring along the lines of theU.K. model. One important goal of electricity reform

FIGURE 2.2 TOTAL INVESTMENTS IN ENERGY PROJECTS WITH PRIVATEPARTICIPATION, 1990–99

Source: Data from World Bank PPI database, reproduced with permission from Energy Sector Management AssistanceProgram (2000).

0

10

20

30

40

50

60

70

80

Latin Americaand the

Caribbeanaribbean

East Asia andEast Asia andthe Pacific

South Asia Europe andCentral Asia

Middle East andNorth Africa

Sub-SaharanaharanAfrica

Bill

ion

s of

19

98

U.S

. dol

lars

DivestituresDivestituresGreenfield projectsield projectsOperations and management contracts with major capital expenditureOperations and management contracts with major capital expenditure

20

WRI: POWER POLITICS

was to attract capital to replace and retool worn outsystems. The reform process was further complicatedby accession to the European Union and the conse-quent need to standardize systems and regulations,including environmental regulations (Chandler,2000).

In sum, by the 1990s, development and transitioneconomies sought to attract private capital to a sectorshaped by decades of state ownership. In the past,state ownership was synonymous with running thesector to serve social policy—a “social compact.”Indeed, many argue that good intentions led to aninefficient sector that has, in many countries,undermined the social purposes it sought to serve.With private capital as the taskmaster, however, theconcern is a different one: How can a sector orga-nized around private capital and markets sufficientlyaccount for the public interest?

WHY PURSUE A PUBLIC BENEFITSAGENDA?

Will a reformed electricity sector organized aroundcommercial principles automatically promotebroader social and environmental interests? Or isthere a case to be made for intentional scrutiny,oversight, and adjustment to ensure that theseinterests are adequately provided for? In this sectionwe review this case on both social and environmentalgrounds. We conclude that, left entirely to its owndevices, a market-oriented electricity sector providesinadequate long-run direction and runs the risk ofproviding insufficient public benefits.

Social Benefits: Access and PriceElectricity is a pervasive and central part of industrialsociety. Indeed, advocates for electricity sectorreforms argue that the proposed changes will bringbetter quality power at lower average costs, withpositive ripple effects through economies andsocieties. There may indeed be some benefits fromefficiencies gained through application of theconventional reform model. However, when viewed

through the lens of social equity, reforms should notonly result in aggregate benefits, but also benefits tothe least advantaged. From this perspective, access toelectricity and the price at which electricity is avail-able become important considerations. These issuesare the central focus of this section.

Improved energy services provide a wide range ofeconomic and social benefits, such as greaterpotential for education due to better lighting; savingsin time and effort spent gathering traditional fuels;potential for improved access to information anddigital connectivity; scope for greater productivity;scope for improved health services; and improvedindoor air quality (Waddams Price, 2000; WorldEnergy Assessment, 2000). In many developingcountries, increasing access to electricity is an urgentneed. In many African countries, for example, only 5to 20 percent of the population has access to electric-ity with much of this access restricted to urbanpopulations (Bhagavan, 1999).8 In large measure,these dismal numbers reflect the failure of thecentralized public power approach to guaranteeaccess to electricity services.

There are several reasons for this failing. The ruralpoor, in particular, are often costly to serve because ofremote locations and low population density, hightransmission line losses, poor credit and minimalcollateral, and a lack of purchasing and politicalpower (Ehrhardt, 2000; World Energy Assessment,2000). Yet, the proposed new model of marketreform, designed to wring additional economicefficiency gains out of existing electricity networksthrough private sector competition, may be no betterequipped to deal with these problems than the publicutility model.9 Indeed, in a reformed market whereprofitability is a central operating principle, interestin serving poor populations is likely to be furthermuted. A post-reform sector is likely to be dictated byprinciples of cost recovery in order to ensure ad-equate returns to the private sector. Hence, efforts atreform aimed at private participation will have toexplicitly grapple with the tradeoffs between main-taining profitability and a social mandate to expandaccess to electricity, or risk being irrelevant to theproblems of access.10

21

WRI: POWER POLITICS

Without an explicit effort, market reforms will

not support greater access to electricity.

The limited evidence available to date supports theview that without an explicit effort, market reformswill not support greater access to electricity. InBolivia, for example, a World Bank study concludes,“…the necessary expansion of the grid to connect thepoor will not take place as a consequence ofprivatization and restructuring” (ESMAP, 2000).Indeed, the experience in industrialized countriessuggests that rural electrification requires a distinctand directed effort. In the United States, for example,beginning in 1935 the Rural Electricity Administra-tion ran a concerted program built around low-interest public funding, a model of rural electricitycooperatives, standardized engineering to reducecosts, and a principle of universal coverage that washighly successful in electrifying rural areas(McClean, 2000).

Because grid extension is technically and economi-cally challenging, decentralized (usually small)electricity systems are increasingly becoming afeasible option for rural electrification. Among theavailable sources are several renewable energytechnologies, including small hydropower, windpower, solar, and biomass (World Energy Assess-ment, 2000). Since distributed power sources avoidthe high costs of transmission and distribution, thesetechnologies may be cost-competitive for ruralelectrification. Leasing arrangements for technology,subsidies for the initial costs of switching to newsystems, and concessionaire approaches (where aprivate entity is given exclusive right to a market inreturn for an obligation to serve) are all means ofencouraging the spread of distributed electricity.

Whether through the grid or off-grid, therefore,there are various ways of promoting access even inan electricity sector led by private actors (Estache,Gomez-Lobo, and Leipziger, 2000). For example, atthe time of privatization, distribution companiescould be mandated connection targets, regulatorscould promote innovative approaches including

concessionaire arrangements, and subsidies for thecosts of connection to electricity services could helpsupport the transition to electricity access. To meetthe challenge of effectively serving dispersed popula-tions, experiments with “micro-privatization,” wheredelivery of electricity or other services is handed overto small scale-private or community actors, demon-strate better results than either large-scale public orprivate service delivery (Harper, 2000). On a case-by-case basis, the choice of appropriate mechanism orpolicy will depend on, for example, the existence ofsufficient fiscal capacity, administrative capacity, andthe scope for entry of competitive actors in eachcountry (Ehrhardt, 2000). The general point is thatmechanisms do exist to promote enhanced access toelectricity. The contrasting examples of Morocco andChile detailed in Box 2.5 suggest that this holds truefor both public and private ownership, and furtherunderscore the need for explicit mechanisms ifenhanced access to electricity is to become a reality.

A related, concern is the price at which electricitywill be available in a post-reform world. In industrial-ized countries, reforms will likely lead to lower pricesas efficiency gains are captured. In developingcountries, however, prices are likely to rise as currentprice restrictions are removed and cross-subsidieseliminated.11 There is an important tension to bemanaged here. High prices are necessary to recovercosts and to offer scope for profit in and attract privateinvestment to the electricity sector. Yet, higher priceswill disproportionately affect the poor, who tend tospend a larger proportion of their income on energyservices than higher income groups.12 Thus, publicsubsidies will likely continue to be necessary to meetsocial policy goals (Barnes and Halpern, 2000).

Greater end-use efficiency would reduce the

requirements for public subsidies to low-

income consumers.

In this context, programs to encourage better end-use energy efficiency serve a valuable social purposeas well as an environmental one. Greater end-use

22

WRI: POWER POLITICS

BOX 2.5 RURAL ELECTRIFICATION IN MOROCCO AND CHILE:CONTRASTING EXPERIENCES

Over the last decade, Morocco and Chile achievedimpressive results in raising the share of their ruralpopulations with access to electricity services. InMorocco, rural electrification rose from 19 percentof rural villages in 1995 to 39 percent in 1999.Equally impressive, Chile’s electrification rates rosefrom 53 percent in 1992 to 76 percent in 1999.These two countries have radically differentelectricity sectors (an integrated state-owned utilityin Morocco versus decentralized and privatelyoperated generation and distribution in Chile), buttheir rural electrification efforts share a number ofcharacteristics.

In both Morocco and Chile, national governmentsrecognize that increasing access to electricity inrural areas requires closing the gap between theability of rural customers to pay and the higher costof providing electricity services in rural areas. Ruralelectrification efforts in both countries attempt tominimize subsidies. They permit flexibility andexperimentation to identify the most cost-effectivetechnology choices, financing schemes, andmanagement arrangements.

Morocco’s Program of General Rural Electrification(PERG) was established in 1996 as a cooperativeprogram between the national electric utility, theOffice of National Electrification (ONE), ruralvillages or municipalities, and individualbeneficiaries. PERG combines grid extension withdecentralized power generation, and requiresmunicipalities and households to co-finance 45percent of project costs. Using funds from a 2percent levy for on-grid electricity sales, ONEcontributes 55 percent of the financing.

In some cases, ONE assumes full responsibility forinstalling, maintaining, and collecting user fees aswell as payments from local governments. In othercases, ONE contracts private sector retailers to installand maintain distributed power systems in return fora share of user fees. More recently, PERG beganexperimenting with a fee-for-service scheme. Inthese cases, ONE makes a one-time payment of U.S.$300 to a pre-approved private provider that in turnpurchases, installs, and guarantees service andmaintenance of a solar home system over a 7- to 10-year period in return for direct monthly payments

efficiency would decrease the burden of priceincreases borne by households, and reduce therequirements for public subsidies to low-incomeconsumers (Clark, 2000).

The salient point is that there are routes to promot-ing equitable social policies within a privatizedelectricity world. In order to win support for reforms,a sensible approach to promoting such policieswould identify beneficiaries from existing implicitand explicit subsidies; examine the extent of access toelectricity; use the information to design a programof mitigation; and inform the public of the program(Estache, Gomez-Lobo, and Leipziger, 2000). Largely

because of the political challenges, few countriesfollow this route.

There are two other related social concerns that arebriefly treated here. First, the quality of electricityservice in a post-reform sector is a significantcomponent of a public benefits agenda. There isbroad agreement that ensuring good service qualityis central to the regulatory agenda in a post-reformsector, but there is no such consensus in the areas ofaccess and price. Second, privatization is likely to beaccompanied by substantial retrenchment of labor—an issue of great concern to public utilities unions(Colley, 1997; Bayliss and Hall, 2000). Moreover,since unions are typically well organized, labor

23

WRI: POWER POLITICS

concerns offer a considerable stumbling block to theprogress of reforms. Whether and how reformsaddress labor concerns is relevant both to the socialdimensions of reform and to their political viability.

Environment: Balancing Efficiency andSustainabilityThe electricity sector has a large environmentalfootprint. In much of the world, the sector is pow-ered by fossil fuels, which after combustion emitlocal pollutants such as particulates and lead;regional pollutants such as sulfur dioxide; and globalpollutants such as carbon dioxide. All of these

pollutants have impacts on human and ecosystemhealth (World Energy Assessment, 2000). While it isdifficult to quantify the contribution of the electricitysector as distinct from all combustion of fossil fuels,Table 2.2 presents an estimate for one global pollut-ant—carbon dioxide (CO2). Unfortunately, data forlocal and regional pollutants are unavailable. Thedata suggest that the electricity sector is a significantcontributor to carbon emissions in all regions of theworld.

How can reforms in the sector influence thisrelationship between electricity and environmentalharms? From one perspective, reforms will automati-cally result in environmental improvements through

from households. The PERG program has increasedthe number of rural villages electrified annuallyfrom 557 in 1996 to 1,650 in 1999.

Chile’s rural electrification program, launched in1994, was designed to attract commercialparticipation by introducing competition at variouslevels. The central government, through the NationalElectricity Commission (CNE), transfers subsidyfunds to regional governments. The centralgovernment allocates funds among regions based onprogress in rural electrification the previous year,and the share of populations still lacking access toelectricity. The selection of projects and companiesto receive subsidies, however, is delegated toregional governments.

Regional governments pool their own budgetresources with the subsidies allocated by the CNE.Private distribution companies, usually in partnershipwith municipalities or rural communities, submitproject proposals to regional governments to obtainthe bundled subsidies. Using criteria and toolsdeveloped by CNE, the responsible state agencyidentifies projects that qualify for subsidies (only

projects that generate a positive social return, but anegative private return are eligible), and submit theseto the regional government council. Proposals areevaluated on the basis of cost-benefit analyses, shareof the investment covered by the companies, anddegree of social impact. From 1995 to 1999, the statecontributed US$112 million in subsidies, but it alsoattracted US$60 million in private sector investmentsfor rural electrification.

Sources:

Jadresic, Alejandro. 2000. “Auctioning Subsidies for RuralElectrification in Chile.” Public Policy for the PrivateSector. Note No. 214. Washington, D.C.: World Bank.

Jadresic, Alejandro. 2000. “A Case Study on SubsidizingRural Electrification in Chile.” In Energy and DevelopmentReport 2000: Energy Services for the World’s Poor. Edited byEnergy Sector Management Assistance Program.Washington, D.C.: World Bank.

Jamrani, Abderrahim. 1999. “The Moroccan GeneralElectrification Programme (PERG).” Casablanca: OfficeNational de l’Electricite (ONE).

Photovoltaic Market Transformation Initiative and theGlobal Environment Facility. 2000. PVMTI News. No. 2.September.

BOX 2.5 (CONTINUED)

24

WRI: POWER POLITICS

a number of pathways. The greater incentives foreconomic efficiency expected from a post-reformsector will translate into more efficient fuel use, withattendant environmental benefits. Incentives to shiftto low-price fuels may stimulate a shift from coal-burning plants to relatively cleaner natural gasplants. And, since governments are typically morestringent about enforcing regulations with the privatesector than the public sector, privatization will likelybe accompanied by more rigorous enforcement ofenvironmental regulation. These are all feasibleoutcomes, suggesting that reform may well result ina measure of environmental improvement.

However, there remain good reasons for closeattention to the environmental implications ofelectricity market reforms. Market actors makedecisions based on their business interests. Whilethese may, on occasion, align with the interests of thesector as a whole, they are not guaranteed to do so.For example, private companies are likely to ignore

the full life-cycle costs of their generation technolo-gies, and make decisions based on integration withtheir other energy assets as part of a strategic busi-ness plan (Sherry, 2000). The resulting decisionsmay be very different from, for example, an “Inte-grated Resource Planning” (IRP) approach, whichseeks the least costly mix of options to meet energyservice needs (Regulatory Assistance Project, 1994).13

While IRP was originally designed for integratedutilities and may be challenging to implement in amarket framework, the underlying point—the needto develop a long-run vision for the sector andsuitable mechanisms for coordination—still holds.Planning mechanisms should, at a minimum,provide for the tradeoff between present and futurebenefits, include environmental sustainability, andmake provisions for incentives in line with thatvision. As concerns over both local and globalenvironmental harms grow ever larger, reform in theelectricity sector offers an opportunity to systemati-cally promote a more sustainable energy future.

Economic regulation should not discriminate

against cleaner technologies.

Indeed, in electricity sector reforms, some analystsforesee an opportunity to spur a transition to a“micropower” future—a sector based on small-scalegeneration units, of about the same size as the loadsthey power, and located closer to the end-user(Patterson, 1999; Dunn, 2000; Vaitheeswaran,2001). Such a vision promises greater local control,reliability, and environmental benefits. Visions of amicropower future appear remote when juxtaposedagainst present realities in developing countries ofinefficient and dirty centralized generation equip-ment, economically unviable pricing structures, andpoor forms of governance. Yet, since the occasion toradically redesign institutions and promote innova-tion comes but seldom, it is important to seize suchopportunities to put in place incentives for a moresustainable energy future.

While it is by no means clear what route a pathfrom centralized power to micropower will take, it is

T A B L E 2 . 2 SHARE OF CARBON DIOXIDE EMISSIONS FROM ELECTRICITYAND HEAT PRODUCTION (1999)

Region (%)

Middle East and North Africa 26

Sub-Saharan Africa 50

South Asia 50

Latin America and Caribbean 21

East Asia and Pacific 39

Europe and Central Asia 51

North America 42

High-Income Europe 30

Other High Income 40

World 38

Source: Computed by the WRI from International Energy Agency (IEA) data. CO2 Emissions from Fossil Fuel Combustion. Paris: OECD. Note: Includes publicly or privately owned plants producing electricity or heat, for own use or for sale.

25

WRI: POWER POLITICS

likely that the process of electricity restructuringcould put in place key preconditions for amicropower future based on renewable energytechnologies. (See Box 2.6.) These include marketaccess policies and price signals that reflect the truebenefits of distributed power. Because innovativemicropower systems will require new technologicaland institutional forms, the most promising opportu-nities to promote this approach may arise in cur-rently underserved areas in the developing world,where the rigidities of the current system are not anobstacle (Patterson, 2001). In these areas, reforms inthe electricity sector afford an opportunity to leap-frog to a new technological future.

Even if the goal is a somewhat more modest one ofincremental improvements in environmental quality,an argument for separation of economic and envi-ronmental regulation, sometimes put forward byreform experts (Joskow, 1998), does not withstandscrutiny. Economic regulation can affect technologychoice and can shape the transactions costs ofdifferent ways of supplying energy services. Eco-nomic regulators de facto make environmentaldecisions on a regular basis. Given this reality, is itnot better that regulators are aware of and activelyconsider the environmental impact of their deci-sions?14 At minimum, economic regulation shouldnot discriminate against cleaner technologies.

BOX 2.6 EXAMPLES OF POLICY OPTIONS TO DESIGN-IN ENVIRONMENTAL BENEFITS

• Environmental Dispatch: Use a pollution index to“dispatch” power, in order to prioritize electricityfrom clean plants over dirty sources.

• Standard Contracts: Develop standardized contractsfor power purchase to lower the negotiation coststo small renewable project developers.

– Example: Small hydropower in Sri Lanka.

• Price–driven Renewable Energy Incentives:

– Example: Avoided cost (U.S.) — utilities wererequired to purchase all the renewable poweroffered to them at the price it would otherwisehave cost them to generate that power—the“avoided cost.”

– Example: Non-Fossil Fuel Obligation (U.K.) —a tax collected from fossil fuel generation wasused to support renewable electricity plants.

– Example: Feed-in law (Germany and Denmark)— sets a guaranteed price for the purchase ofrenewable energy.

• Renewable Portfolio Standard: A quantity-basedpolicy that requires a specific amount ofrenewable energy to be purchased by all retailenergy service providers.

– Example: Several European countries and U.S.states.

• Net Metering: Use of a bi-directional meter toregister electricity flow in both directions, makingpossible sale of extra power generated on site bydistributed energy sources.

• Public Benefits Fund: Establish a fund createdthrough a charge on transmission, for example, tobe spent on public benefits such as wider access,energy efficiency, or development of sustainableenergy technologies.

– Example: PROCEL (Brazil) — concessionairesare required to spend 1 percent of revenues onenergy conservation, and 0.25 percent on end-use efficiency.

Sources:

Hamrin, Jan. Forthcoming 2002. “Policy Options for‘Building-in’ Environmental Protection at Different Stagesof the Restructuring Process: Practical Advice on CleanEnergy Policy.” In Energy Market Restructuring and theEnvironment, edited by Martha Harriss. Lanham, MD:University Press of America.

World Energy Assessment. 2000. World Energy Assessment:Energy and the Challenge of Sustainability. Edited by UnitedNations Development Programme, United NationsDepartment of Economic and Social Affairs, and WorldEnergy Council. New York: United Nations DevelopmentProgramme.

26

WRI: POWER POLITICS

For example, economic rules that allow open accessto the transmission system are critical to encourag-ing independent suppliers to develop renewableenergy sources. In India, such open “wheeling”policies have played a role in catalyzing a windindustry (Gupta, 2000).15 Moreover, whether or notrenewable energy competes on a level playing fieldmay be determined by the details of electricity supplycontracts, which specify issues such as how powercan be purchased from remote locations and fromintermittent sources such as renewable energysources (Kozloff, 1998).

In another example, pricing of distributionservices can either promote or hinder distributedgeneration (Regulatory Assistance Project, 1999).Since distribution costs can vary widely across aservice area, power generated on site can bringconsiderable savings. Pricing of distribution servicesbased on the average cost fails to send consumersappropriate signals on opportunities for cost savings.If regulators were to set the rates at which they buypower back from consumers to reflect the full cost ofdistribution, customers would have a greater incen-tive to invest in distributed power sources. Thesemeasures are particularly necessary since renewableenergy technologies, which typically face high capitalcosts, may be at a disadvantage in raising capitalunder the conditions of volatile wholesale markets(Kozloff, 1998).

Efforts at energy efficiency may be a casualty

of market reforms.

Finally, efforts at energy efficiency may well be acasualty of market reforms. For example, “unbun-dling” of utilities into generation, transmission, anddistribution functions introduces transactions andinformation costs in the chain from production toconsumption relative to a vertically integratedstructure. These costs can erect severe barriers topromotion of end-use energy efficiency. For example,generating companies in an unbundled structurehave no means of meeting new supply needs throughend-use efficiency or demand management. For their

part, distribution companies are unable to capturethe full savings in transmission and generationcreated by greater efficiency, since these benefits areshared by other distribution companies. The result-ant “free rider” problem is a disincentive to under-take efficiency enhancing programs (USAID, 1998).Evidence from restructuring efforts in industrializedcountries suggests that these perverse incentiveshave not been addressed in reform programs. Tomake matters worse, industrialized country reformshave been accompanied by a decline in funding forenergy efficiency programs (USAID, 1998).

This section has summarized arguments for a long-term vision for electricity, and the intertwined natureof economic regulation and social and environmentaloutcomes. The intent is not to argue for reforms to bedriven by either social or environmental outcomes tothe exclusion of economic concerns. However, takencollectively, these arguments present a strong case fornot treating either social or environmental concerns asa residual, and for actively incorporating a publicbenefits agenda into the mainstream of reform efforts.

CONCLUSION

Electricity sector reform is emblematic of rapidlyaccelerating global integration. The nature of thedebate has been transformed with the emergentdominance of market ideology, with institutionalrestructuring, and with accelerating flows of privatecapital into the sector. As with other debates aboutglobalization, the future of the public interestdepends on whether globalization will automaticallytake into account public concerns, or whether socialand environmental interests will be explicitly factoredinto reform processes. This chapter has argued thelatter, that market-led changes cannot automaticallyensure the public interest. Having established thatsocial and environmental concerns should bemanaged, the next question is how, and whether theyare, in practice, internalized in reform processes. Thefollowing six chapters consider this question bydrawing on the experience in a range of countries inthe developing world and countries in transition.

27

WRI: POWER POLITICS

NOTES1. Small gas turbines generate electricity that costs about

4 cents per kilowatt-hour compared to 12 cents perkilowatt-hour for power from the nuclear plantscompleted in the late 1980s (Flavin and Lenssen,1997). By one estimate, the minimum efficient plantsize decreased from 1,000 megawatts in the early1980s to between 50 megawatts and 350 megawatts bythe late 1990s (International Energy Agency, 1999).

2. Motivations in both countries were similar: macroeco-nomic restructuring based on an ideological predispo-sition to private ownership and competition; a desireto increase efficiency in the sector; and privatization tostem a drain on public finances (Bacon, 1995;Rosenzweig and Voll, 1997; Patterson, 1999).

3. These changes were preceded by a number ofmeasures introduced in the United States in the 1970sto address the changed context, including competitionin generation, to boost new technologies, and topromote energy efficiency services aimed at thecustomer (Flavin and Lenssen, 1997; Patterson, 1999).

4. Indeed, those who initiated reforms in the UnitedKingdom admitted that even as they promotedcompetition, they had no clear idea of how competitivestructures should be established (Hunt andShuttleworth, 1996).

5. The following description of institutional reformsrelies heavily on Hunt and Shuttleworth (1996).

6. In the wake of the Enron Corporation’s problems,some analysts noted that deregulation was increas-ingly associated with high risk, and that some states inthe United States were more actively consideringretaining or returning to a central role in the sector(Johnson, 2002). Others argued that Enron’s troublesare not tied to deregulation, and that an appropriateresponse would be to press forward with a deregula-tion approach based on greater competition andtransparency (Vaitheeswaran, 2001).

7. Turkey was the first developing country to adopt thisapproach, which was a substantial departure from thethen prevalent approach of building a power plant andhanding it over to the government for operation(Patterson, 1999).

8. Specifically, in Malawi, 4 percent of the population hasaccess to electricity; in Tanzania, 6 percent; in Uganda,12 percent; and in Zimbabwe, 14 percent (Bhagavan,1999).

9. As Brook and Besant-Jones (2000) put it, “… it isarguable that the poorest of the poor, who make up themajority of the estimated 2 billion people who do nothave access to modern energy, do not stand to benefitmuch from reforms aimed primarily at existingelectricity and gas networks.”

10. Privatization could also lead to a decrease in access toelectricity unless potential problems are anticipated upfront and mitigated. In Argentina, privatized distribu-tion companies shut off supply to the poorest urbanneighborhoods and emergency settlements in order toreduce losses (Bouille and Dubrovsky, 2000). Similarexperience with disconnection of supply followingprivatization has been reported from Georgia,Moldova, and the Dominican Republic (Bayliss, 2001).

11. In the longer term, efficiency improvements may holddown costs and lower prices.

12. Moreover, as happened in Argentina, private sectorfirms will have an incentive to discourage consump-tion by their poor and less reliable consumers byincreasing their prices, and decreasing those of thewealthy (Bouille and Dubrovsky, 2000).

13. According to one view, IRP is a necessary complementto competition because price only provides informa-tion on what a resource costs, not on its full worth to autility (Reddy and Sumithra, 1997). By focusing on the“avoided cost” of supply, IRP provides a framework tocompare the true worth of energy sources from boththe demand and supply sides. For example, a sourceof power that has a higher price than another may alsohave a worth that justifies the price premium if itprovides largely peak power, or if it saves on transmis-sion and distribution costs.

14. As the Regulatory Assistance Project—a body offormer U.S. government officials with considerableexperience in regulatory theory and practice—compellingly argues, no utility regulator would urgetheir environmental counterpart to remain ignorant ofthe economic effects of environmental regulation(Regulatory Assistance Project, 1999).

15. Moreover, whether or not renewable energy competeson a level playing field may be determined by thedetails of electricity supply contracts, which specifyissues such as how power can be purchased fromremote locations and from intermittent sources suchas renewable energy sources (Kozloff, 1998).

28

WRI: POWER POLITICS

REFERENCES

Brook, Penelope J. and John Besant-Jones. 2000. “Reach-ing the Poor in an Age of Energy Reform.” In EnergyServices for the World’s Poor, edited by Energy SectorManagement Assistance Program. Washington, D.C.:ESMAP.

Chandler, William. 2000. Energy and Environment in theTransition Economies. Boulder, CO: Westview Press.

Clark, Alix. 2000. “Making Provision for Energy EfficiencyInvestment in Changing Electricity Markets: Interna-tional Perspectives.” Paper read at IEI Workshop onPublic Benefits and Power Sector Restructuring, CapeTown, South Africa, April 10.

Colley, Peter. 1997. Reforming Energy: Sustainable Futuresand Global Labour. London: Pluto Press.

Covarrubias, Alvaro J. 1996. Lending for Electric Power inSub-Saharan Africa. Washington, D.C.: World Bank.

Dunn, Seth. 2000. Micropower: The Next Electrical Era.Washington, D.C.: Worldwatch Institute.

Ehrhardt, David. 2000. “Impact of Market Structure onService Options for the Poor.” Paper read at conference,Infrastructure for Development: Private Solutions andthe Poor, London, U.K., May 31 - June 2.

Energy Sector Management Assistance Program. 2000.Introducing Competition into the Electricity Supply Industryin Developing Countries: Lessons from Bolivia. Report 233/00. Washington, D.C.: ESMAP.

Estache, Antonio, Andrews Gomez-Lobo, and DannyLeipziger. 2000. “Utilities ‘Privatization’ and the Poor’sNeeds in Latin America: Have We Learned Enough toGet it Right?” Paper read at conference, Infrastructurefor Development: Private Solutions and the Poor,London, U.K., May 31 - June 2.

Flavin, Christopher and Nicholas Lenssen. 1997. “Power-ing the Future: Blueprint for a Sustainable ElectricityIndustry.” Quarterly Bulletin. 18 (3).

Graham, Stephen and Simon Marvin. 1995. “More thanDucts and Wires: Post-Fordism, Cities and UtilityNetworks.” In Managing Cities: The New Urban Context,edited by P. Heal, S. Cameron, S. Davoudi, S. Grahamand A. Madani-Pour. New York: John Wiley & Sons.

Gupta, Ajit K. 2000. “Policy Approaches: The IndianExperience.” Paper read at conference, AcceleratingGrid Based Renewable Energy Power Generation for aClean Environment, Washington, D.C., March 7-8.

Albouy, Yves, and Reda Bousba. 1998. “The Impact of IPPsin Developing Countries—Out of the Crisis and into theFuture.” Viewpoint Note No. 162 (December). Washing-ton, D.C.: World Bank.

Asian Development Bank. 1994. “Bank Policy Initiativesfor the Energy Sector.” Manila, Philippines.

Bacon, R.W. 1995. “Privatization and Reform in the GlobalElectricity Supply Industry.” Annual Review of Energy andEnvironment. 20:119-143.

Bacon, Robert. 1999. Global Energy Sector Reform inDeveloping Countries: A Scorecard. Report No. 219-99.Washington, D.C.: UNDP/World Bank.

Bacon, Robert, and John Besant-Jones. 2001. “GlobalElectric Power Reform: Privatization and Liberalizationof the Electric Power Industry in Developing Countries.”Annual Review of Energy and Environment 26:331-359.

Balu, V. 1997. “Issues and Challenges ConcerningPrivatisation and Regulation in the Power Sector.”Energy for Sustainable Development III. (6):6-13.

Barnes, Douglas F., and Jonathan Halpern. 2000. “TheRole of Energy Subsidies.” In Energy Services for theWorld’s Poor, edited by Energy Sector ManagementAssistance Program, Washington, D.C.: World Bank.

Bayliss, Kate. 2001. “Privatisation of Electricity Distribu-tion: Some Economic, Social and Political Perspectives.”London: Public Services International Research Unit.April. Online at: http://www.psiru.org/reports/2001-04-E-Distrib.doc. (May 20, 2002).

Bayliss, Kate and David Hall. 2000. “Privatisation of Waterand Energy in Africa.” London: Public Services Interna-tional Research Unit. September. Online at: http://www.psiru.org/reports/2000-09-U-Afr.doc. (May 20,2002).

Besant-Jones, John. 1996. “The England and WalesElectricity Model—Option or Warning for DevelopingCountries.” Viewpoint Note. No. 84. Washington, D.C.:World Bank.

Bhagavan, M.R. 1999. “Introduction.” In Reforming thePower Sector in Africa, edited by M. Bhagavan. London:Zed Books.

Bouille, Daniel and Hilda Dubrovsky. 2000. “Reform of theElectric Power Sector in Developing Countries: CaseStudy of Argentina.” Unpublished manuscript. BuenosAires: Institute of Energy Economics, FundaciónBariloche.

29

WRI: POWER POLITICS

by Experience of Electricity Privatization in the UK?”Energy Policy (February):153-162.

Patterson, Walt. 1999. Transforming Electricity. London:Earthscan.

———. 2001. “Introduction.” Paper read at conference,Keeping the Lights On: Electric Tradition or Innova-tion?, London, U.K., March 14-15.

Reddy, Amulya K N. 2001. “California Energy Crisis and itsLessons for Power Sector Reform in India.” Economicand Political Weekly XXXVI (May 5-11).

Reddy, Amulya K.N. and Gladys Sumithra. 1997. “Inte-grated Resource Planning.” Energy for SustainableDevelopment III (6):14-16.

Regulatory Assistance Project. 2001. IRP and Competition.Regulatory Assistance Project 1994. Online at: http://www.rapmaine.org/irp.html. (April 21, 2001).

———. 2001. Electric Industry Restructuring and theEnvironment. Regulatory Assistance Project 1999.Online at: http://www.rapmaine.org/environment.html.(April 21, 2001).

Rosenzweig, Michael B. and Sarah P. Voll. 1997. “Sequenc-ing Power Sector Privatization.” Unpublished manu-script. Washington, D.C.: National Economic ResearchAssociates.

Sherry, Christopher John. 2000. “Economic Globalization,the Environment, and the Electric Power Industry: U.S.Foreign Direct Investment in the Greenhouse.” Mastersthesis, Center for Energy and Environmental Policy,University of Delaware, Newark, DE.

Tellam, Ian, ed. 2000. Fuel for Change: The World BankEnergy Policy, Rhetoric vs. Reality. London: Zed Books.

Teplitz-Sembitzky. 1990. Regulation, Deregulation orReregulation: What is Needed in the LDCs Power SectorIndustry and Energy Departments? Washington, D.C.:World Bank.

Turkson, John K., ed. 2000. Power Sector Reform in SubSaharan Africa. London: MacMillan Press.

United States Agency for International Development. 1998.Case Studies of the Effects of Power Sector Reform on EnergyEfficiency. Report No. 98-03. Washington, D.C.: USAID.

———. 1998. Promoting Energy Efficiency in ReformingElectricity Markets. Report No. 98-02. Washington, D.C.:USAID.

Harper, Malcolm. 2000. Public Services through PrivateEnterprise. London: Intermediate Technology Publica-tions.

Hirsh, Richard. 1999. Power Loss: The Origins of Deregula-tion and Restructuring in the American Electric UtilitiesSystem. Cambridge, MA: MIT Press.

Hunt, Sally, and Graham Shuttleworth. 1996. Competitionand Choice in Electricity. New York: John Wiley and Sons.

International Energy Agency. 1999. Electricity MarketReform: An IEA Handbook. Paris: OECD/IEA.

Izaguirre, Ada Karina. 1998. “Private Participation in theElectricity Sector—Recent Trends.” Viewpoint Note No.154. Washington, D.C.: World Bank.

Johnson, Kirk. 2002. “Turn out the Lights, the Party’s Over:After Enron, Deregulation Looks More Risky than Sexy.”New York Times. (February 10):29.

Joskow, Paul L. 1998. “Electricity Sectors in Transition.”Energy Journal. 19 (2):25-52.

Kozloff, Keith. 1998. “Electricity Sector Reform In Develop-ing Countries: Implications for Renewable Energy.”REPP Research Report No. 2. Washington, D.C.:Renewable Energy Power Project.

Littlechild, Stephen. 2000. Privatization, Competition andRegulation in the British Electricity Industry, with Implica-tions for Developing Countries. Report 226/00. Washing-ton, D.C.: World Bank.

Magnus, Eivund. 1997. “Competition withoutPrivatization—Norway’s Reforms in the Power Sector.”Energy for Sustainable Development III. (6):27-35.

McClean, Christopher. 2000. Paper read at conference,Village Power 2000, Washington, D.C., December 4-7.

Newbery, David. 1995. “A Template for Power Reform.”Viewpoint Note 54. Washington, D.C.: World Bank.

Newbery, David M. and Richard Green. 1996. “Regulation,Private Ownership and Privatisation of the EnglishElectricity Industry.” In International Comparisons ofElectricity Regulation, edited by R. Gilbert and E. P.Kahn. Cambridge: Cambridge University Press.

Oliviera, Adilson de. 1997. “Electricity System Reform:World Bank Approach and Latin American Reality.”Energy for Sustainable Development III. (6):27-35.

Oliviera, Adilson de and Gordon MacKerron. 1992. “Is theWorld Bank Approach to Structural Reform Supported

30

WRI: POWER POLITICS

Vaitheeswaran, Vijay. 2001. “A Brighter Future?” Economist.February 10.

———. 2001. “Electricity Deregulation is Still SoundPolicy.” New York Times. December 15.

Waddams Price, Catherine. 2000. “Better Energy Services,Better Energy Sectors—and Links with the Poor.” InEnergy Services for the World’s Poor, edited by EnergySector Management Assistance Program, Washington,D.C.: World Bank.

Watts, Price C. “Heresy? The Case Against Deregulation ofElectricity Generation.” The Electricity Journal. 2001(May):19-24.

Wolak, Frank A. No Date. Market Design and Price Behaviorin Restructured Electricity Markets: An InternationalComparison. Department of Economics, StanfordUniversity. On line at: http://www.stanford.edu/~wolak(March 22, 2002).

World Bank. 1988. “A Review of World Bank Lending forElectric Power.” Energy Series No. 2. Washington, D.C.:World Bank.

———. 1993. The World Bank’s Role in the Electric PowerSector. Washington, D.C.: World Bank.

———. 2001. “The California Experience with PowerSector Reform.” Unpublished manuscript. Washington,D.C.: World Bank. Online at: http://www.worldbank.org/html/fpd/energy/pdfs/e_calexp0400.pdf (May 29, 2002).

World Energy Assessment. 2000. World Energy Assessment:Energy and the Challenge of Sustainability. Edited byUnited Nations Development Programme, UnitedNations Department of Economic and Social Affairs,and World Energy Council. New York: United NationsDevelopment Programme.

31

WRI: POWER POLITICS

3ARGENTINA

MARKET-DRIVEN REFORM OF THE ELECTRICITY SECTOR

Daniel BouilleHilda Dubrovsky

Crescencia Maurer

INTRODUCTION

In 2001, Argentina garnered considerable interna-tional attention as the country’s government tookincreasingly desperate measures to jump-start itseconomy. Mired in four years of recession, Argentinasought to avert the devaluation of the Argentine peso,and prevent outright default on billions in debtobligations to international banks and bond-holders.The current economic crisis is reminiscent ofanother that gripped Argentina in the late 1980s andalso precipitated the downfall of a president. Thesetwo crises frame Argentina’s experience with electric-ity sector reform.

In the 12-year period between crises, Argentinaradically changed how the electricity sector wasorganized and the public sector’s role in the supply ofelectricity services. In the early 1990s, new regulatedand competitive markets were created to allow privateactors to enter and supply electricity services previ-ously owned and operated by federal and provincialutilities. The federal government, followed eventuallyby a number of provincial governments, redefined itsrole. It set the framework for markets to operate andregulated their operation in the public and privateinterest. In the context of this report, Argentina is ofparticular interest both because of its wholesaleadoption of market reforms and the length of itsexperience with their implementation. For a profile ofthe electricity sector in Argentina see Box 3.1.

Electric power reforms in Argentina created asignificant number of public benefits, among them

BOX 3.1 PROFILE OF THE ELECTRICITYSECTOR IN ARGENTINA

Population (2001)1: 37 million

Population with access to electricity (2000)2:Total: 95% Rural: 70% Urban: 98%

Installed electricity generation capacity (1999)3

Total: 23 gigawatts (0.72% of total world capacity)Thermal: 57%Hydro: 39%Nuclear: 4%Geothermal and Other: 0%

CO2 emissions from electricity and heat as a shareof national emissions (1999)4 : 22%

Notes:

1. World Resources Institute. 2000. People andEcosystems: The Fraying Web of Life. Washington, D.C.:World Resources Institute.

2. http://eclac.org/publicaciones/Poblacion/2/LCG2052/BD6311.html (June 17, 2002).

3. Argentine Energy Secretary.

4. Computed by WRI using International Energy Agency(IEA) data. IEA, 2001. CO2 Emissions from Fossil FuelCombustion. Paris: OECD.

improved quality of service in urban areas, reduc-tions in technical and non-technical losses, expan-sion of supply in urban areas and increased effi-ciency. Nevertheless, other public benefits failed to

32

WRI: POWER POLITICS

materialize. Evidence points to an absence of incen-tives to increase energy efficiency among distributioncompanies and household consumers, limitedexpansion of electricity access to the most isolatedrural populations, and a failure to correct regulatoryobstacles that prevented expansion of the transmis-sion system.

Despite Argentina’s relative success with theintroduction of market reforms in the electricitysector, policymakers and donors recognized (in theformer case only reluctantly) that a number of publicbenefits were underserved by the newly reformedelectricity markets (World Bank, 2000). Secondgeneration reform efforts to address problems withpublic benefits consisted largely of tinkering with orrefining the operation of the competitive and regu-lated markets. There was little political interest inrevisiting the reforms themselves to better protectpublic benefits.

All reform processes such as those implemented inArgentina are dynamic in nature and respond tochanging circumstances and challenges. This chapterassesses whether reformers responded to sustainabledevelopment concerns when they established thedirection of reform, in its subsequent implementation,and in follow-on efforts to introduce additional reform.In other words, how and when were social andenvironmental issues raised during the 12-year period?

BACKGROUND

The privatization and reform of Argentina’s electricpower sector in the early 1990s reflected a radicalchange in vision about the role of the public sector ineconomic development. In 1989, hyperinflation,crushing debt, and poor public services led to theresignation of President Raul Alfonsín five monthsbefore the end of his term. Carlos Saul Menem,already the president-elect, stepped into office. Thenew president entered into a political agreement withthe opposition that facilitated congressional passageof two laws that were key precursors to the electricityreforms. These laws were the State Reform Act, whichgave the executive extraordinary powers to reorganize

and privatize public enterprises, and the EconomicEmergency Act, which suspended subsidies and liftedbarriers to foreign investment (Abdala, 2001). Withtheir passage, Menem embarked on a wholesalereform program that had as its centerpiece theintroduction of competitive markets and the reductionof a direct public sector role in key economic sectors,including electricity (World Bank, 1995).

Policymakers and donors recognized that a

number of public benefits were underserved by

the newly reformed electricity markets.

For the Menem administration, the electricitysector illustrated the inefficiencies and problemswith the public sector’s monopoly provision ofeconomic services. In the late 1980s, federal utilitiesexperienced successive brownouts, fluctuatingvoltage levels, and electricity shortages. Theseproblems were worsened by a drought that restrictedhydropower generation—one of the country’s mainsources of electric power. In addition, federal utilitiesconstituted a significant drain on the federal budget;their operating costs and debts far exceeded therevenues they generated. Repeated efforts to“corporatize” these utilities had proven unsuccessful.Vested interests, including the utilities’ own techni-cians and bureaucrats, trade unions, federal andprovincial politicians, and private suppliers andcontractors limited the effect of such efforts.1

The reformers selected by Menem—principallyDomingo Cavallo, the Economy Minister—believedthat the solution to the electricity sector’s problemswas the introduction of competitive markets. Thiswould be achieved mainly through vertical andhorizontal unbundling of the power chain—genera-tion, transmission, and distribution—and theirsubsequent privatization. They believed thesechanges would bring market discipline to the sectorand eliminate the drain on the federal budget.

Over a two-year period (1990-1991), a small teamin the Secretary of Energy carried out technical

33

WRI: POWER POLITICS

the existing 500-kilovolt lines, setting a price capconcession holders can capture from charges ongenerators selling electricity in the wholesale market(Estache and Rodriguez-Pardina, 1999). Newtransmission lines, however, were to be financed in adifferent manner. In such cases ENRE approves abuild, operate, and maintain (BOM) contract thatallows costs to be recouped through charges onbeneficiaries. Alternatively, ENRE can approve aprivate contract between a generator and the con-sumers who will use the added transmission capac-ity. Under the first option, beneficiaries are definedas the network of users located on a node whereelectricity flows will change as a result of the newproject. If beneficiaries representing at least 30percent of the pool contest the proposed transmis-sion charge, ENRE blocks the proposed project(Abdala and Chambouleyron, 1999).

The distribution assets of the federal electricitysector were divided into three 99-year concessions—2 in Buenos Aires and 1 in La Plata—with 10-yearintervals for the revision of price caps, and the optionfor concession holders to give up the concession andallow a new competitive bidding process. Distribu-tion concession contracts include requirements foruniversal service to all residential and small consum-ers, but also guarantee a concessionaires’ monopoly.

After reforms and privatization were complete atthe federal level, the Secretary of Energy, led byCarlos Bastos, sought to extend reforms to theprovinces. Under Argentina’s federal system,provincial authorities retain regulatory andpolicymaking powers and can structure ownership oflocal generation and distribution assets as they seefit. Beginning in 1993-94, the federal governmentused the power of the purse to push provinces tofollow the federal reforms. The transfer of federalfunds—including provinces’ shares of the NationalElectricity Fund, federal fuel taxes, and end usertariffs—was conditioned on provincial governments’conformance with the federal pricing structure(Pistonesi, 2000). Only those provinces able tooperate their utilities without these transfers retaineda measure of autonomy. By 2001, 14 of 24 provinceshad privatized their distribution assets.

studies and developed rules and operational guide-lines that formed the basis for the electricity sector’srestructuring. In 1992-93, the reform processaccelerated with the passage of the ElectricityRegulation Act, the privatization of federal utilities,and the creation of a new sectoral regulatory bodyknown as the National Entity for Electricity Regula-tion (ENRE). The speed of the reform was such thatgeneration and distribution assets were privatizedbefore ENRE began to operate (Abdala, 2001). Box3.2 provides a chronology of major legal andregulatory changes in the sector.

The new structure drew from experiences withpower sector reform in the United Kingdom (verticaland horizontal unbundling of the sector), and Chile(an open access wholesale market, marginal costpricing of wholesale electricity, and deregulation oflarge power consumers) (Besant-Jones, 1996).Argentina introduced innovations of its own, such aslimiting concentration of ownership both acrosssegments (vertical) and within segments (horizontal),and the introduction of a sector-specific regulator(Estache and Rodriguez-Pardina, 1999). The struc-ture of the post-reform electricity sector is illustratedin Figure 3.1.

Under the reformed structure, government retains apolicymaking role and participates in the operation ofthe wholesale electricity market managed by anindependent nonprofit corporation, CAMMESA,jointly owned by the federal government (representedby the Secretary of Energy), power generators, trans-mitters, distributors, large consumers, and brokers.The mandate of the sector regulator, ENRE, includedestablishing safety and operating standards, settingtariffs for transmission and distribution, enforcingstandards and laws that apply to distribution andtransmission companies, resolving disputes in thesector, and conducting public hearings on regulatoryreforms. Five commissioners govern ENRE. Each isselected through a competitive nomination process,and is subject to approval by Congress.

The reforms allowed the regulated entry of privatesuppliers into the transmission market. The federalgovernment auctioned transmission concessions for

34

WRI: POWER POLITICS

THE REFORM PROCESS INARGENTINA

The conceptualization and implementation of theinitial reform program was carried out by a smallgroup of policymakers and financial, legal, andtechnical consultants in the Secretary of Energy,which was part of the Ministry of Economy andPublic Works. This team, including the EnergySecretary, Carlos Bastos, shared the Minister’s

disciplinary and technical background, and hiscommitment to market-based reforms. The group’shomogeneity, the urgency of the national economiccrisis, and the closed nature of the reform processdid not allow for internal or external debate about thespeed or content of the reform.

During this period, few political or economic forcescould challenge the Menem administration’s pre-mises or plans. The Menem administration worked

BOX 3.2 C H R O N O L O G Y O F E L E C T R I C I T Y S E C T O R R E F O R M I N A R G E N T I N A

• 1987 The Secretary of Energy and Economy passes Resolution No. 475 calling for the development of environmental norms and regulations for the energy sector.

• 1987 Government issues official environmental management handbook for hydroelectric projects.

• 1988 Government issues official environmental management handbook for high-tension transmission lines.

• 1988–89 Electricity supply crisis.

• 1989 New presidency assumes executive branch (Menem administration).

• 1989 Administrative Reform Law No. 23696 establishes the basis for privatization of all state-owned companies.

• 1990 Government issues official environmental management handbook for conventional central thermoelectric generating plants.

• 1991 The World Bank grants the Government of Argentina a $300 million loan to assist with public sector reforms and privatization of state companies in the telecommunications, railroad, and fossil fuel sectors. This loan included funds to assist with privatization in other sectors.

• 1991 Decree No. 634 issued on the reconversion of the electric power sector. This decree establishes a wholesale market, defines final consumers, and unbundles generation, transmission, and distribution functions.

• 1992 Law No. 24065, the Electricity Regulation Act, comes into force and assigns normative responsibilities to the Secretary of Energy. These responsibilities include environmental enforcement, application of environmental management handbooks, and establishing emission limits for thermal generating plants.

• 1992 Resolution No. 61, Organization of the Electric System, defines private agents and procedures for the function of the electricity market.

• 1992 The National Entity for Electricity Regulation (ENRE) is created. Environmental regulation is assigned to public security entities required to enforce specific regulations and apply penalties (articles 77 and 78).

35

WRI: POWER POLITICS

with congressional members from its own Peronistparty to form a legislative alliance that drafted andpassed the necessary framework legislation for theelectric sector reforms. The legislative branch neitheropposed nor critically reviewed the executive branch’sproposals. Furthermore, through the passage of theState Reform Act, the Congress effectively limited itsoversight role to that of providing broad directionrather than contributing substantive decisions abouthow to privatize or regulate industries or services(Abdala, 2001).

It should not be assumed, however, that there wascomplete agreement with the federal government’sdiagnosis of the sector’s problems or the proposedmarket solutions.2 Academic and research communi-ties and some donors maintained that the sector hadoperated efficiently in the hands of the state for manyyears. They pointed out that state control achievedself-sufficiency, expanded modern energy sources,established an adequate balance between reservesand consumption, and guaranteed future supplies ofelectric power. This group believed the sector’s

BOX 3.2 ( C O N T I N U E D )

• 1992–93 Federally owned power plants and distribution companies are privatized. Distribution concessions eliminate subsidies.

• 1993–97 Concessions awarded to companies to construct hydroelectric plants and expand the transmission system.

• 1993–2002 14 of 24 provinces privatize distribution companies in line with federal reform.

• 1994 Resolution No. 6, the “Four-Year Framework Agreement,” is adopted. It establishes a four-year time period for reductions of illegal or irregular consumption. As a result, approximately 650,000 consumers are formally connected to the grid system.

• 1994 Resolution 159/94, issued by the Secretary of Energy, creates a regime for large consumers (those consuming between 100 kilowatts and 2 megawatts) allowing them to purchase electricity directly from generators.

• 1995–98 The PAEPRA Program to supply electricity to isolated rural areas is designed and receives the support of the Global Environment Facility (GEF) and the World Bank.

• 1998 A resolution is issued by the Secretary of Energy that reduces the floor of what constitutes a large consumer (to 50 kilowatts) and allows them to establish defined supply contracts with a generator.

• 1999 A large electricity blackout in the EDESUR distribution concession area affects more than 160,000 in the federal capital, in some cases for over 10 days.

• 2000 Transmission connections are established with Brazil and agreements are finalized to permit the export of 1,000 megawatts.

• 2000 De la Rua administration takes office and initially endorses a federal role in the expansion of the national electric transmission system proposed by Energy Secretary Mac Karthy in the last Menem administration.

• 2001 Economy Minister Cavallo assumes reins of Argentine economy and rescinds order that established a federal role in funding expansion of the transmission system.

• 2001 Argentine economic crisis leads to the resignation of President de la Rua and Economy Minister Cavallo.

36

WRI: POWER POLITICS

problems were caused by developments that wereexternal to the sector—including high levels offoreign debt, economic recession, and drought—butwhich affected its fiscal and technical performance.Given the speed and closed nature of the reformprocess, these viewpoints did not influence thedecisions taken by the Bastos team (World Bank,2000).

Among civil society organizations, Argentina’slabor unions had a long history of activism and heldconsiderable political power. Over 120 state-ownedenterprises were privatized in the early 1990s;surprisingly, only some unions opposed theprivatization. One of the reasons was that employeesof privatized enterprises were granted 10 percent ofthe new firms’ equity shares, allowing labor groups

FIGURE 3.1 ARGENTINA’S POST-REFORM ELECTRICITY SECTOR

FEDERAL JURISDICTION PROVINCIAL JURISDICTION

Federal RegulatorQuality of ServiceRetail PricesConflict Resolution

Energy SecretaryPolicy MakingSets RulesAuthorizes New Members

Federal Distributors

GeneratorsSelf-producersCo-generators

Large ConsumersContracts> 50 kilowatts

TransmittersLocalInternational

Energy DepartmentLocal PolicySets Local TaxesGrants Dist. Concessions

Provincial RegulatorLocal DistributorsQuality of ServiceRetail Prices

CAMMESALoad DispatchTechnical AuthorityMarket Management

W E MHOLESALE LECTRICITY ARKET

Provincial Distributors

37

WRI: POWER POLITICS

to capture economic rents from the process(Margheritis, 1999). More importantly, the majorityof unions were closely associated with the PeronistParty, Menem’s political party. Consequently, unionssupported the reforms to preserve their historicpolitical alliance and to capture rents.

The government frequently asserted that

reform would dramatically increase economic

efficiency, which in turn would generate

positive social and environmental spillover

effects.

The Secretary of Energy also marketed Argentina’sprivatization program to international banks, privateelectric utilities, and independent power producersin the United States and Europe (Bastos and Abdala,1996). The government employed consultants,including a number from Wall Street firms, toproduce financial evaluations of the new businessunits to be created from existing federal utilities, andto explain the newly restructured sector’s policies andregulations. The government’s principal concern wasto demonstrate that it was re-establishing macroeco-nomic stability, committed to a market-based ap-proach, and deserving of better financing terms fromcapital markets (Bastos and Abdala, 1996).

In addition to this marketing effort, the govern-ment sold the federal utilities on terms that werequite favorable for private buyers. It set no floor onthe price bidders could offer for these utilities. Itaccepted debt securities at below-market values aspayments for shares in newly privatized companies,and released buyers from obligations to honor debtguarantees that utilities had taken on beforeprivatization. The overriding concern of the reform-ers was to attract and retain private investment in thenewly privatized utilities (Hasson, 1994).

The government frequently asserted that thereforms would dramatically increase economicefficiency, which in turn would generate positive

social and environmental spillover effects. Privateprovision of electricity would increase competitionand efficiency, and lead to higher quality but lowercost electricity services. The government also arguedthat the reforms would permit it to focus on itsregulatory and enforcement roles (Bastos andAbdala, 1996). Not surprisingly, the Bastos team didnot formally consult with other branches of govern-ment or civil society groups on the reform plans; theneed to resolve the country’s economic crisis justifiedproceeding to immediate implementation.3

The Role of the MultilateralDevelopment BanksAt the initial stages of reform (1990-93), the stron-gest donor support for Argentina’s power sectorreforms came from the World Bank. During the1970s and 1980s, the World Bank had provided loansfor government ownership and development ofintegrated utilities. By the early 1990s, that institu-tion was reassessing the performance of publiclydominated electricity sectors and coming to theconclusion that market competition should beintroduced to increase their efficiency, cover operat-ing costs, and attract the necessary investments tofund expansion of generating capacity (World Bankand OLADE, 1991). (See Box 3.3.)

To speed resources to the government, the WorldBank amended loan agreements originally intendedto support improvements in the operational andmanagerial performance of the three main federalutilities (SEGBA, Hidronor, and Agua y Electricidad).These funds were reprogrammed to permit paymentof consultants and support staff within the Secretaryof Energy who were developing the reform andprivatization plan. Because this involved an amend-ment rather than approval of an existing loanagreement, no conditionalities were placed onexpenditures or disbursements.4

The Inter-American Development Bank (IDB) alsoprovided considerable support for the power sectorreforms, but it did so around 1994, a few years afterthe World Bank, when the reform and privatization

38

WRI: POWER POLITICS

BOX 3.3 WORLD BANK PERSPECTIVES ONELECTRICITY REFORM IN LATINAMERICA DURING THE EARLY 1990s

“Efficiency improvements, the transformation ofstate electricity companies into business entities,the establishment of independent regulationauthorities, and the total or partial transfer ofconstruction, operation, and maintenanceactivities to the private sector would reduce fiscalpressure on public resources and relieve the stateof the responsibility for micromanagingelectricity companies…[The] aim is for state-owned companies to meet exploitation costs anddebt obligations and, above all, to makereasonable contributions to support expansion.”

“The challenges in Latin America are the same asthose facing the rest of the developing world:

• Establishment of a legal and institutionalframework guarantees stability whileproviding sufficient flexibility to adapt tochanging conditions;

• Introduction of the market forces whereverpossible in a sector that until recently wasconsidered a natural monopoly;

• Mobilization of resources, especially thosefrom the private sector; and

• Protection of populations and theenvironment affected by electricity projects.”

“...In view of today’s changing environment, thetraditional model of the electric sector does notalways provide adequate incentives to reduceproduction costs over time or to operate in anefficient and reliable way.”

Source: The World Bank and OLADE. 1991. The Evolution,Situation, and Prospects of the Electric Power Sector in theLatin American and Caribbean Countries, Vol. II.Descriptions of Individual Power Sectors. Latin America andthe Caribbean Technical Department, Regional StudiesProgram, Report No. 7. August.

program was already defined and the process ofimplementation under way. IDB staff were morecritical of the Argentine power sector reforms thanwere World Bank staff. Some sector specialists didnot agree with the privatization of federal utilities.And, in general, IDB staff believed that sectorreforms should be completed before the privatizationof federal utilities.5 Although the IDB provided a$300 million fast-disbursing sector loan to assist theSecretary of Energy, this loan was directed at reformefforts rather than privatization. Conditionalitiesplaced on this loan included demonstrated progressin the definition of the Secretary of Energy’spolicymaking role after privatization, the operation ofENRE, and development of the Secretary of Energy’senvironmental and social assessment unit.6

Provinces were reluctant to emulate federal

reforms because they garnered considerable

rents from local utilities and they were conve-

nient vehicles for political patronage.

At early stages in the process, both the World Bankand the IDB believed that significant public benefitswould flow from both sector reforms andprivatization. Staff at both banks believed thatimproving the economic performance and efficiencyof the federal utilities would generate positiveexternalities such as improvements in local airquality, higher quality electricity services at lowerwholesale and retail prices, and increased privateinvestment in new generation capacity.7

In the years immediately following privatization ofthe federal utilities (1993-94), the Bastos teamworked in concert with the World Bank and the IDBto push provincial governments to adopt the federalmodel of sector reform and privatization. Manyprovinces were reluctant to emulate federal reformsbecause they garnered considerable rents from localutilities and they were convenient vehicles forpolitical patronage.

39

WRI: POWER POLITICS

The assistance the IDB and the World Bank offeredto provincial governments included conditionsimposed by the federal government. The federalgovernment would not approve multilateral develop-ment assistance to the provinces unless they agreedto conform to the federal reform scheme, in particu-lar the tariff and electricity pricing structure estab-lished for distribution concessions (Pistonesi, 2000).Other conditions imposed by the federal governmentor the banks included creation of independentprovincial regulators, reform of electricity supplystructures, and reduction of employees in provincialenterprises.8

The provinces that were most dependent on federalor donor funds generally adopted the federal model.Other provincial governments followed the federalmodel, but made significant adjustments such asrequiring holders of distribution concessions tomake mandatory investments or refusing to indexelectricity prices to U.S. inflation. The conditionsimposed by the banks and the federal governmentproved only partially successful. To date, 10 of 24provinces—among them Cordoba and Santa Fe,which are large and account for significant electricityconsumption—have not begun, or have interruptedthe privatization of their distribution and transmis-sion services.

Interestingly enough, the measures the federalgovernment and the World Bank recommended toprovincial governments implicitly recognized anumber of shortfalls in the federal reform process.Provinces were encouraged to take the followingactions:

• Maximize the benefits of market competition;

• Offer new owners incentives to take actionsconsistent with the public interest;

• Include contract stipulations that state as clearlyas possible all rights and obligations;

• Allow room for the renegotiation of contracts;

• Spell out the responsibilities of private ownerswhen transferring public assets;

• Avoid underestimating the importance of tariffdesign; and

• Give equal attention to provincial regulatorycapacity and to concession licenses and contracts(World Bank, 1996).

These recommendations actually representedstricter or more rigid guidelines for privatizationthan those implemented at the federal level.

PUBLIC BENEFITSIn Argentina, the public benefits that generated thegreatest controversy and public attention in the1990s were those generally defined as “socialbenefits.” The most salient of these included accessto and quality of service, the distribution of the costsand benefits of electricity reform among economicand social groups, and the impacts on unemploy-ment. The other class of public benefits analyzed inthis report—“environmental benefits”—received farless attention from policymakers, public interestgroups, or Argentine consumers. The environmentalissues that emerged in the reform process includedthe impact of the reformed tariff structure andunbundling on incentives for demand-side manage-ment or end-use efficiency, the development ofsignificant national renewable energy resources, andmeeting voluntary commitments to reduce green-house gas emissions. Interestingly enough, donorsresponding to international developments or theinterests of their domestic constituencies were themost active proponents of preserving or enhancingenvironmental benefits.

Social Benefits: Creating Space for theirAttention Post-Reform

Expanding Access to Isolated Rural PopulationsA social issue that emerged in the reform processwas the difficulty of expanding or maintaining basicaccess to electricity for the most isolated ruralpopulations. Nationally, electrification access was 91percent before reforms were implemented, and by

40

WRI: POWER POLITICS

2000 had risen to 95 percent. But this improvementin access was due largely to the formalization ofpreviously illegal connections in urban and suburbanareas rather than to expansion of electricity servicesin rural areas. The majority of the populations thatremain unconnected are located in isolated areaswhere it is costly to expand transmission or distribu-tion grids—roughly 30 percent of the total ruralpopulation (Secretaría de Energía y Minería, 2001b).After privatization, it remained commerciallyunattractive for private distribution companies toconnect these populations. Under the federalscheme, regulators cap the maximum price adistributor can charge end-users. Distributorsmaximize their returns by delivering electricity at thelowest average cost per kilowatt. Not surprisingly,most distributors made investments or improve-ments to distribution networks in densely populatedurban and suburban areas. In these areas, per capitaincreases in demand and densification (morecustomers per square kilometer) reduced the averagecost of delivering electricity, and thus alloweddistribution companies to increase profits.

In 1995, the Secretary of Energy responded to theproblem of under-served rural areas by announcing afive-year program known as Power Supply forDispersed Rural Populations (PAEPRA). The pro-gram was designed to establish concession contractsfor distributed energy to isolated populations(Secretaría de Energía, 1999c). Yet, by 1999, thePAEPRA program was falling far short of its an-nounced goals despite complementary funding fromthe Global Environment Facility (GEF) and the WorldBank to introduce a renewable energy componentknown as Renewable Energy for Rural ElectricityMarkets (PERMER). The original objectives of thePAEPRA project included connecting 314,000households (1.4 million people), and 6,000 publicservices (schools, libraries, hospitals) in 16 provinces.At the end of 2000, EDJESA—an Argentine/Chileancompany who was the sole concession in operationin the Province of Jujuy—had connected 3,107 ruralcustomers (Secretaría de Energía y Minería, 2001a).

The principal problems encountered by PAEPRAincluded provincial governments’ unwillingness to

contribute subsidy payments to concession holders,as well as a lack of interest from commercial entitiesor companies. With support from the World Bankand the GEF, the program is being redesigned, yet itsfuture is uncertain given the current nationaleconomic crisis and the pressure to reduce fiscalexpenditures (Secretaría de Energía y Minería,2001b). What is clear from this experience, however,is that federal efforts to provide rural electricityservices require greater subsidies, and concessiondesigns that go beyond tweaking the existing modelsoperating in urban and suburban areas with distribu-tion grids.

Connecting Poor Urban HouseholdsIn urban areas, the privatization of distributionservices also affected the lowest-income consumers.Those least able to pay—illegally connected “colgados”(“hangers”) concentrated in urban slums—wereinitially cut off from service by distribution compa-nies. The International Finance Corporation (IFC)provided loans to distribution companies to fundtechnical and infrastructure changes that madeelectricity theft very difficult. As a result, non-technical losses in distribution networks (beforeprivatization, losses reached 27 percent of theelectricity supply) were drastically reduced (Inter-American Development Bank, 1995). These changesensured the solvency of the distribution companies,but ignored the problem of how to provide basicelectricity services to those without the economicresources.

A significant social scandal ensued over thetermination of service to the colgados, and severalcourt cases were brought against distributioncompanies. The basis for these cases was thatprivatization deprived a very significant population ofbasic services, even though they were obtainedillegally. In response to negative media attention andmounting public pressure,9 the federal government,the government of the Province of Buenos Aires, andtwo private distribution companies (EDENOR andEDESUR) entered into an agreement called the“Four-Year Framework Agreement” (Chisari andEstanche, 1999).

41

WRI: POWER POLITICS

As part of this agreement, the federal government,the Buenos Aires provincial government, andmunicipalities reimbursed the companies for theunpaid balances associated with illegally connectedshantytowns and provided subsidies to distributors tocover the cost of establishing collective meters andconnections to their networks. In turn, the compa-nies agreed to waive any claims, surcharges, orinterest that had accrued on unpaid bills since 1992,pledged to install at least 10,000 meters a month inlow-income areas, and agreed to conduct a householdcensus with the informed consent of residents. As aresult of this agreement, roughly 650,000 users wereformally connected to the network (Chisari andEstache, 1999).

Federal efforts to provide rural electricity

services require concession designs that go

beyond tweaking the existing models operating

in urban and suburban areas.

For the most part, consumption by low-incomecommunities unable to pay for electricity is paid bymunicipal governments. Cities generally recoupthese expenditures by imposing a tax on householdelectricity consumption. The public’s unwillingnessto accept the elimination of services to low-incomepopulations was the primary reason the govern-ments, companies, and municipalities negotiated asettlement that did not abide by the commercialprinciples established for distribution concessions.

Initial federal reforms retained some cross-subsi-dies. Decree 1398/1992 established subsidies forpensioners, public interest institutions, nonprofitorganizations, and electricity-intensive industries.The National Electricity Act (Law 24065) establisheda National Electricity Fund capitalized from a tax onelectricity sales in the wholesale market. Sixty percentof these tax revenues are distributed to provinces thatadhere to the federal scheme for distribution tariffsto subsidize consumers; the remaining 40 percent isdirected to electricity development in the country’s

interior. Despite the retention of these cross-subsi-dies, there was a significant drop in levels of socialtariffs enjoyed by lower-income groups post-reform.

The Impacts of Electricity Pricing on Low-Income GroupsAnother relevant public benefits issue is the impactof electricity prices at the household level. By 1995,electricity prices in the wholesale market had fallenby more than 50 percent. This fact is widely cited andreceives considerable praise from donors, econo-mists, and energy specialists (ENRE, 1998; Greenand Rodriguez-Pardina, 1999). But almost nomention is made of how these price declines weredistributed among income or consumption classes. Arecent study on the effect of reforms on pricesindicates that between 1991 and December 1998,residential and industrial consumers with the highestlevels of electricity consumption experienced thelargest price declines (71 percent and 44 percentrespectively). Households with low consumptionlevels, generally representing lower-income popula-tions, experienced only marginal price declines (1.6percent) (FLACSO/SECYT-CONICET, 1999). Ingeneral, industrial concerns, large consumers (2megawatts-50 kilowatts or more per annum), anddistribution companies that could buy electricity onthe wholesale market experienced price declines of50 percent or more. Absolute and relative prices byconsumption classes are shown in Table 3.1.

Several aspects of the reform produced regressivesocial pricing. The new regulatory frameworkrequired that electricity services reflect the cost ofsupply. Distribution costs are in inverse proportion tothe quantity and voltage of the supply. Thus, con-sumers with low consumption and voltage levels paidmore relative to industrial and high residentialconsumers. In effect, the more one consumed, thelower the per-unit price paid. The discrepancy inprices may also be due to a possible error on the partof ENRE—in its allocation of distribution costs to becovered by low- versus high-consumption house-holds—that remained uncorrected during the first10-year tariff period.10

42

WRI: POWER POLITICS

Interestingly, in 2000, ENRE initiated the first 10-year distribution tariff revision process, and includedrequirements to incorporate social tariffs and marketincentives for energy efficiency in the development ofthe next 10-year price cap. Unfortunately, the tariffrevision process was suspended in 2002 with thedissolution of the pesos’ peg to the U.S. dollar andthe Euro.

Another contributing factor was the five-year fixed-price electricity supply contracts that were bundledwith the distribution concessions when they wereinitially privatized. These long-term price contractswere designed to reduce the risk of price fluctuationsfaced by potential private investors. The contractscovered up to 50 percent of projected demand forelectricity within a concession area. As a result,although prices in the wholesale spot market wheredistribution companies purchased the remainder ofthe electricity needed to meet demand droppeddramatically, much of these savings were not passedon to residential consumers.

By the late 1990s, World Bank staff in the Argen-tina country office recognized that power sectorreforms had produced regressive economic andsocial effects. Some of the conclusions arrived at in aWorld Bank seminar on Argentina’s public sectorreforms included the following:

• The poor were most affected by the privatizationprocess;

• The rich were the greatest beneficiaries of theprivatization process;

• The system should internalize transfer mecha-nisms favoring the poor (cross-subsidies);

• A social tariff should be established based on thecapacity-to-pay; and

• New concessions should include a clear strategy toforce operators to serve sectors with limitedeconomic resources (World Bank, 1999).

Early in the reform process, the World Bank arguedagainst cross-subsidies and for the elimination ofsocial tariffs because they would distort price signalsand weaken budgetary discipline (World Bank, 1993).

The World Bank and other donors also argued thatefficiency improvements generated by market forceswould be passed on to consumers in the form oflower prices, particularly for the poor (World Bank,1993). Ironically, by the end of the 1990s, the WorldBank was arguing for increases in social tariffs andactions to correct the market’s failure to serveincome groups with limited resources.

Electricity Privatization and UnemploymentDuring the period in which the Argentine govern-ment implemented its public sector reform program,Argentina’s unemployment rate climbed from 6.8percent in 1991 to 20 percent in 1995, and fluctuatedbetween 14-18 percent for the period 1996-99.Government privatizations displaced an estimated350,000 individuals through the loss of public sectorjobs or the elimination of jobs that depended on thepublic sector (Clarín, 2000; Pistonesi, 2000).

In the electricity sector, employment fell from22,500 before the reform process began to 6,500 in1998 (Duarte, 2001). More than 50 percent of theselosses were sustained between 1991 and 1993. They

TABLE 3.1 E L E C T R I C I T Y P R I C E S I N A R G E N T I N A , 1 9 9 1 – 1 9 9 8

US cents per kilowatt-hour March 1991

December 1998

(compared to March 1991= 100)

Residential low consumption 8.2 8.1 (98.4 %)

Residential high consumption 15.9 4.7 (29.6 %)

Industrial low consumption 14.0 10.5 (75.3 %)

Industrial average 8.4 7.4 (88.5 %)

Industrial high consumption 5.6 3.7 (66.6 %)

Average 8.8 7.8 (89.1 %)

Source: FLACSO/SECYT-CONICET. 1999.“Privatizaciones en la Argentina: Regulación tarifaria, mutaciones en los precios relativos, rentas extraordinarias y concentración económica.” Buenos Aires. April.

43

WRI: POWER POLITICS

came about through dismissals, early retirementplans, voluntary retirement programs, and hiringfreezes. Financing from the World Bank supportedearly and voluntary retirement packages in the 1991-93 period (Duarte, 2001). Above and beyond volun-tary retirement packages, however, the governmentdid not put in place any comprehensive policies toaddress unemployment impacts at the time that itprivatized public sector enterprises. In fact, govern-ments and donors only began to implement jobcreation and labor policy reforms in the late 1990s,when unemployment had turned into a persistentand chronic problem.

Most efforts to address or enhance environ-

mental benefits did not enjoy the political

support of senior policymakers. Most striking

is the lack of demonstrated interest of Argen-

tine public interest environmental groups.

After 1993, the newly privatized distributioncompanies undertook an additional wave of layoffs.These layoffs were not voluntary, but were accompa-nied by generous retirement or severance packages.After they reduced their labor pool, distributioncompanies ensured adequate staffing byoutsourcing functions or services previously carriedout by in-house employees to third party contrac-tors. Third-party contracting allowed distributioncompanies to obtain services at lower cost (contractemployees enjoyed fewer benefits, lower pay), andon an as-needed basis (Pistonesi, 2000). Althoughmany former utility employees were re-hired bythird party contractors, the terms of their employ-ment were generally less favorable, as was the casenationally for most of the unemployed (Martínez,1998).

Environmental Benefits: A Case ofLimited Political and Public InterestIn Argentina, concerns about how reforms affectedthe environment and where opportunities existed to

generate environmental benefits received little or noattention from national policymakers or environmen-tal organizations. Most efforts to address or enhanceenvironmental benefits were isolated or did not enjoythe political support of senior policymakers. Moststriking, however, is the lack of demonstratedinterest, with a few exceptions, of Argentine publicinterest environmental groups.

Establishing Environmental Regulation in theElectricity SectorIn the early 1990s, the main concern of the reform-ers was to update and modernize environmentalregulations in the electricity sector. ENRE was givenauthority to set environmental rules and regulationsand to outline the procedures necessary for genera-tion, transmission, and distribution to comply withthese regulations. Procedures were spelled out inenvironmental annexes (dating from the 1980s) thatestablished environmental impact assessmentprocedures for thermal generation, hydroelectricity,and transmission projects. The annexes wereexpanded to include management plans for compli-ance with ambient air quality and emission stan-dards, and requirements for periodic auditing andmonitoring by ENRE.

Among the banks, the IDB made a consciouscommitment to strengthen the government’scapacity to develop, regulate, and enforce environ-mental laws and policies. This commitment includedloans for capacity building and strengthening forArgentina’s Secretary of Environment and NaturalResources and the Secretary of Energy’s social andenvironmental assessment unit.11 There were few ifany actions taken beyond these IDB-funded efforts tomodernize environmental regulation. The mainreason for this was that the IDB, the World Bank,and the federal government initially shared the viewthat instituting market reforms would establish pricesignals that reflect scarcity values, drive improve-ments in efficiency, and ultimately encourage therational use of energy resources.12 Beginning in themid-to-late 1990s, however, donors showed theirgrowing interest in addressing environmentalproblems by increasing funding to projects that

44

WRI: POWER POLITICS

examined the environmental dimensions of energyconsumption and development.

Improvements in Energy EfficiencySome of the efficiency gains predicted by the federalgovernment materialized. For example, transmissionand distribution losses fell from an all time high of27 percent to below 10 percent for the period 1992-97 (ENRE, 1998). Most of these reductions wereachieved by eliminating illegal connections to thegrid through grants provided by donors or cross-subsidies imposed by municipal governments. Inaddition, thermal generation of electricity increasedin efficiency as natural gas plants displaced olderthermal plants and reduced the energy consumptionper kilowatt-hour from 2,600 kilocalories in 1996 to1,600 kilocalories in 2000 (Vásquez, 2000). Never-theless, the efficiency improvements in natural gasgeneration must be examined in the context of otherpower generation sources. The energy and carbonintensity of electricity production in Argentinadeclined between 1986 and 1996, but this is largelydue to new capacity additions from hydropowerprojects initiated before the electricity reformprogram (Olander, 2000). Given the significantexpansion in natural gas plants slated to come on-line on or before 2004, the emissions intensity ofelectricity generation is actually projected to increasefrom 17.9 metric tons in 1998 to 36.5 metric tons by2010 (Olander, 2000; Secretaría de Energía, 1999b).

Managing Electricity DemandBecause the advantages of energy efficiency arecaptured primarily in generation, vertical unbundlingreduces the incentives at the distribution level toincrease efficiencies among end users or finalconsumers. Even so, the high incidence of fixed costsfaced by distributors should encourage them toimprove network load factors in order to postponenew investments. But, in Argentina, the continualdownward revision of what defined a large electricityconsumer (lowered to 50 kilowatts per annum in1998) eroded any remaining incentives distributorsmight have had to invest in energy efficiency.Distributors were left with a customer base of low-

consumption households and businesses, lengthen-ing the payback period and reducing the potentialsavings from such investments. Among residentialhouseholds, the highest income consumers ac-counted for the greatest increases in energy con-sumption. This group experienced falling per-unitprices because of the decreasing block price struc-ture, and consequently had few incentives to investin energy efficiency. (See Table 3.2.)

Attempts by donors to promote energy savingscompanies (ESCOs) or engage distribution compa-nies in efforts to get consumers to reduce or managetheir energy consumption have been short-lived.Chief among these was the IDB’s attempt to establisha project—dubbed sustainable markets for sustain-able energy (SMSE) —that would, among otherthings, promote ESCOs and energy-efficiencyservices in Argentina. A lack of official interest andchanges in personnel in the Secretary of Energy, ledthe IDB to end the program in Argentina.13

Neither the creation of distributed power

concessions nor the subsidies offered by inter-

national donors proved sufficient to draw

investment to renewable energy for distributed

power.

Although the Secretary of Energy had a NationalOffice for the Rational Use of Energy (URE), it did notpromote comprehensive policy instruments or efforts.URE was largely devoted to implementing a suite ofdonor-funded pilot projects and programs, particularlyfrom European Union (EU) agencies and govern-ments.14 Outside of URE, it was also donors thatdemonstrated the greatest interest in addressingenergy-related environmental problems. Some of thesedonor-funded efforts included: the transfer of energy-efficiency technologies and practices to small andmedium enterprises (GTZ); demand-side manage-ment and integrated resource planning (USAID); andthe renewable energy component of the PAEPRAprogram (GEF and World Bank). Although these

45

WRI: POWER POLITICS

programs were initiated in collaboration with theSecretary of Energy, most were not institutionalized(Secretaría de Energía y Minería, 2001b).

Development of Alternative and RenewableGeneration SourcesArgentina has abundant small hydro and windresources, but these have attracted little or noinvestment because falling electricity prices—fromthe development of natural gas resources and thereturn of normal hydroelectricity production after thedrought of the early 1990s—limited their commer-cial viability. For the better part of the 1990s, privateinvestments generally went to upgrading or buildinggas-fired power plants and developing natural gasfields and pipelines. As of 1999, investments innatural gas plants, exploitation, and transportationwere valued at $1.5 billion in Argentina, and $2billion in binational projects with other countries(largely Chile and Paraguay) (Campodónico, 1999).Neither the creation of distributed power concessionsunder the PAEPRA program nor the subsidiesoffered by international donors under the PERMERproject proved sufficient to draw investment torenewable energy for distributed power.

The lone example of a domestic effort to supportrenewable energy was a 1998 campaign led byGreenpeace to promote wind power in southernArgentina. This campaign was funded heavily bywind-power developers.15 The resulting public supportgenerated by the campaign led Argentina’s congress toapprove legislation that provided a subsidy to compa-nies that manufacture wind turbines domestically.This legislation had little buy-in from the executivebranch, and the Secretary of Energy delayed issuingsupporting regulations until December 1999. Becauseof this delay and the failure of wind developers tobuild turbines domestically, very few if any projectshave taken advantage of this legislation.

Early in 2001, ELECNOR and ENDESA —anArgentine distribution company and Spanish energycorporation respectively—announced their intentionto form a renewable energy joint venture, EnergíasArgentinas S.A. (ENARSA). They committed to

building 3,000 megawatts of wind power generationin four southern provinces. The total estimatedinvestment at the time was $2.3 billion over 10 years(Office of Argentine President, 2001). Interestinglyenough, the legislation that was passed as a result ofthe Greenpeace campaign appears not to havemotivated the formation of this joint venture. In fact,ELECNOR and ENDESA qualified their commitmentby noting that it would depend on the construction oflocal distribution networks and a supportive regula-tory regime that ensured price stability over a 15-yearperiod. The price stability and investments ininfrastructure called for by ENARSA now seemhighly improbable, given Argentina’s debt defaultand generalized economic crisis.

Following Through on Climate ChangeCommitmentsClimate change analysis and policy follows a trajec-tory similar to efforts to address the environmentaldimensions of energy. In 1997, donor funding andinterest, particularly from the U.S. government, ledthe Secretary of Energy to undertake analyses thatpermitted Argentina to formulate a voluntarynational commitment to reduce greenhouse gasemissions. The commitment was announced at theFifth Conference of the Parties of the United NationsFramework on Climate Change (UNFCCC) hosted byArgentina in November 1998. After the fact, neitherthe Menem administration that was responsible formaking the commitment, nor the subsequent butshort-lived de la Rua administration, ever gave anyofficial indication of whether or how they planned tofulfill it. Even before the current crisis, which hasfocused national attention on economic survival,there was extremely limited public interest orawareness in this commitment or in climate change.

MANAGING MARKETS IN THEPUBLIC INTEREST: THE STATE’SREGULATORY ROLE

Framing the above discussion is the larger questionof the role the state should assume in an economywhere important public services are provided

46

WRI: POWER POLITICS

through competitive markets. The Menemgovernment’s initial concern in the reform processwas to establish a strong market regime that wouldattract and retain private sector participation. Thisconcern is reflected in the official mandate of ENRE,the electricity regulator: mediation of disputesbetween electricity companies; enforcement offederal laws and regulations and terms of conces-sions; definition of service standards for distributioncompanies; and determination of the maximumprices transmission and distribution companies maycharge (Estache and Rodriguez-Pardina, 1996).Defense of the public interest is implicit in thisdocument, but it is unclear how and when it isappropriate for ENRE to defend consumers or thepublic interest.

One incident illustrates ENRE’s cautious efforts indefense of consumer interests. The incident inquestion was a February 1999 blackout that affected160,000 residential customers. Known as the“EDESUR incident,” it knocked out telephones,water supply, traffic lights, and subway lines in acentral Buenos Aires neighborhood for upwards of10 days. Although this incident might constitute anisolated event, the distribution company—EDESUR—had a history of relatively poor perfor-mance, and accounted for over half of all consumercomplaints related to distribution services in theGreater Buenos Aires metropolitan area for theperiod 1993–99 (ENRE, 1998; 2000). During theremainder of 1999, additional problems withdistribution services plagued the Buenos Airesmetropolitan region, prompting ENRE to callmeetings with distribution companies to investigatethe reason for blackouts and consumer complaints(Petrochemical, Petroleum, Gas and Chemical Maga-zine, 1999).

During the EDESUR incident, ENRE very narrowlydefined its role—to punish the distributor and tosatisfy consumer demands that service be re-estab-lished. Despite evidence of poor performance andrepeated problems with distribution services, ENREfocused largely on retroactive corrections. Later in1999, ENRE belatedly brought together distributioncompanies to discuss larger service quality and

reliability issues arising from the EDESUR incidentand other repeated blackouts.

During the same period, the capacity to ensureoptimal investments in transmission expansion,another ENRE responsibility, also came into ques-tion. Since the mid-1990s, parts of Argentina’snational interconnected grid have been running at ornear full capacity, increasing the risk of large-scalepower outages. Despite this fact, the only twotransmission expansion proposals to come beforeENRE in the mid-1990s were blocked by beneficia-ries that rejected the proposed transmission charges(Abdala and Chambouleyron, 1999). Private con-tracts for individual lines linking particular industrialcustomers or communities to the grid were approvedby ENRE, but these did not solve the larger conges-tion problems plaguing the 500-kilovolt lines thatinterconnect the national grid (Abdala andChambouleyron, 1999).

Fernando de la Rua’s administration sup-

ported a renewed federal role in the provision

of transmission infrastructure, and even went

as far as to question the regulatory system’s

capacity to ensure reliable electricity services.

In the final months of the second Menem adminis-tration (December 1999), the Energy Secretary, CésarMac Karthy issued an executive order establishing aFederal Electricity Transmission Fund (FETF). Thefund was to be capitalized with a surcharge ofUS$0.06 per megawatt on large consumer anddistribution company purchases in the wholesaleelectricity market. In principle, the FETF was createdto finance in whole or part the construction of high-tension (500 kilovolt) transmission lines identified asa priority by the Federal Electricity Commission(Secretaría de Energía, 1999a). Mac Karthy’s orderresponded to an increasing number of blackouts inlate 1999—over 80 in the last 50 days of that year.Many were linked to the fact that electricity supplyand demand were exceeding the capacity of the

47

WRI: POWER POLITICS

transmission system (Petrochemical, Petroleum, Gasand Chemical Magazine, 1999).

Fernando de la Rua’s administration, which tookoffice in January 2000, supported a renewed federalrole in the provision of transmission infrastructure,and even went as far as to question the soundness ofprivatization and the regulatory system’s capacity toensure reliable electricity services. President de laRua called for “a thorough investigation of the designof privatization to determine what problems existfrom a technical perspective and identify whetherthere are guarantees for service provision.” (Petro-chemical, Petroleum, Gas and Chemical Magazine,1999). Soon after this statement, the de la Ruaadministration was caught up in a larger economiccrisis that took precedence over electricity concerns.

Desperate to find a way out of Argentina’s deeprecession and looming $140 billion debt obligations,de la Rua invited Domingo Cavallo to becomeEconomy Minister in March 2001 and to put in placean emergency economic recovery plan (Calero, 2001).Cavallo pushed through labor reforms, deregulationof healthcare and telecommunications, budget cutsof $1.4 billion, tax increases of $2 billion, and publicsector wage cuts of 15 percent (Colitt, 2000). Thiswas followed in August 2001 by additional austeritymeasures (including a zero deficit budget), reducedincome and consumption taxes to stimulate growth,and negotiations of emergency loan packages withthe International Monetary Fund (IMF) and the IDB(BBC News, 2001; Drajem, 2001).

Cavallo, and the team he brought with him,reasserted the need for market discipline andsignificant public sector reforms. Cabinet ministrieswere reorganized, and Carlos Bastos—the chiefarchitect of the reform and privatization of theelectricity sector in the early 1990s—was namedMinister of Infrastructure and Housing, whichincluded the Secretary of Energy and Mining. In June2001, Bastos suspended Mac Karthy’s executiveorder establishing FETF, and issued a separatedecree that reaffirmed the original electricity re-forms. The decree introduced a new market instru-ment (congestion licenses) intended to make invest-

ments in transmission more attractive. Additionally,it established a transmission reimbursement fund toprovide additional payments to transmission compa-nies, parties to BOM contracts, or holders of conges-tion licenses, if and when their investments en-hanced the overall stability of the transmissionsystem (Poder Nacional Ejecutivo, 2001). The latterhalf of 2001 saw few additional changes to electricitypolicy or regulation. The economic crisis engulfingArgentina led Cavallo and de la Rua to resign inDecember 2001 amid violent street protests.

The current crisis is leading Argentinepolicymakers and the public to reassess the country’sopening to foreign investment, and the economicconstraints dictated by repeated IMF, World Bank,and IDB bailouts. To maintain the country’s access toprivate and multilateral development bank credits, dela Rua and Cavallo continued to cut social expendi-ture and wages in the hopes of boosting productivityand releasing revenues to service an ever-growingand more onerous foreign debt (Felix, 2001). Theimpact on Argentina’s electricity sector is potentiallyserious. Consumers will pay in devalued pesos or notpay at all. Electricity companies (distribution,transmission, and generation) that hold debts inforeign denominated dollars may see their revenuesshrink and be forced into bankruptcy or default.Shareholders in these companies will see the nomi-nal value of their assets disappear. A difficult roadlies ahead for Argentina’s electricity sector, economy,and society.

CONCLUSIONS

This analysis of Argentina’s reforms does not pointto a particular path that developing countries shouldfollow to preserve public benefits in a deregulatedelectricity sector. However, the analysis does permitthe following conclusions about the realities ofdefending public benefits in Argentina:

• The economic crisis of the late 1980s and early1990s permitted policymakers and reformers torevisit the whole structure of the electricity sector.Such a revisiting may occur again, given the

48

WRI: POWER POLITICS

country’s current crisis. Although this might bodewell for public benefits, past experience alsoindicates that it is extremely difficult to focuspolicymakers and donors on the issue, which isperceived as a second order objective under suchcircumstances.

• Argentina’s experience during the 1990s demon-strates that public benefits do not flow automati-cally from a financially solvent and efficientelectricity sector. Public benefits require explicitattention, and there is a greater likelihood they canbe enhanced if they are considered when reformsare designed and first implemented. After reformsare implemented, it is much harder to introducechanges that will favor social and environmentalbenefits.

• When the public at large demonstrated a directinterest in a public benefit, it was possible tobroker solutions (e.g., the EDESUR incident or thetermination of service to poor urban slums) thatpreserved or enhanced its supply. In the absenceof such interest (for example, climate change),minority or expert constituencies rarely exercisedany leverage or ability to influence the terms of thepublic debate or to change public policies.

• A few donors, particularly the World Bank, hadconsiderable influence at the initial stage ofArgentine reforms, because at that time theArgentine government’s ability to carry forward itsreform plans depended on obtaining sufficientresources from donors. After this initial period,however, most donor leverage was limited totinkering around the edges of the restructuredelectricity sector.

• A narrow definition of the state’s regulatorymandate focused on the enforcement of marketrules limits the state’s leverage to prospectivelyand pro actively incorporate public benefits intoregulatory activities. Electricity regulation inArgentina requires a broader mandate thatexplicitly balances the regulator’s responsibility toensure that markets function with the need toprevent encroachment on public interests.

NOTES1. Interview with IDB staff person, August 10, 2000. All

interviews for this chapter were conducted on a not-for-attribution basis. Consequently, interviewees areidentified only by their institutional affiliation.

2. Interview with former Energy Secretary staff andacademic energy experts, Spring 2000.

3. Interview with former staff at the Secretary of Energy,Spring 2000.

4. Interview with World Bank staff in Latin Americanand Caribbean Department, September 22, 2000.

5. Interview with IDB staff, July 27, 2000.

6. Interview with IDB staff, July 27, 2000.

7. Interview with IDB staff, July 27, 2000 and interviewwith World Bank staff in the Latin American andCaribbean Department, September 22, 2000.

8. Interview with World Bank staff, September 22, 2000and interview with IDB staff, July 22, 2000.

9. Interview with former staff at the Secretary of Energy,Spring 2000.

10. Interview with IDB staff, March 14, 2002.

11. Interview with IDB staff, July 22, 2000.

12. Interview with World Bank staff, September 22, 2000and interview with IDB staff, July 22, 2000.

13. Interview with IDB staff, August 3, 2000.

14. Interview with IDB staff, August 3, 2000.

15. Interview with a commercial wind-power developer,Spring 2000.

49

WRI: POWER POLITICS

REFERENCES

prestatarias de servicios publicos.” Buenos Aires:FLACSO – Area de Economía y Tecnología.

Entidad Nacional de Regulación Eléctrica (ENRE). 1998.Informe Eléctrico: 5 años de regulación y control. 1993-Abril1998. Buenos Aires.

———. 2000. Annual Report for 1999. Buenos Aires.

Estache, Antonio and Martin Rodriguez-Pardina. 1996.“Regulatory Lessons from Argentina’ s Power Conces-sions.” Public Policy for the Private Sector Note No. 92.Washington, D.C.: World Bank. (September).

———. 1999. “Light and Lighting at the End of the PublicTunnel: Reform of the Electricity Sector in the SouthernCone.” Regulatory Reform and Private EnterpriseDivision. Economic Development Institute. PolicyResearch Working Paper No. 2074. (March).

Felix, David. 2001. “Is Argentina the Coup de Grace of theIMF’s Flawed Policy Mission?” Foreign Policy in Focus.Interhemispheric Resource Center and the Institute forPolicy Studies. (November). Online at: http://www.foreignpolicy-infocus.org/pdf/reports/argentina.pdf (May 1, 2002).

Green, Richard and Martin Rodriguez-Pardina. 1999.“Resetting Price Controls for Privatized Utilities: AManual for Regulators.” Washington, D.C.: World Bank.

FLACSO/SECYT-CONICET. 1999. “Privatizaciones en laArgentina. Regulación tarifaria, mutaciones en losprecios relativos, rentas extraordinarias y concentracióneconómica.” Buenos Aires: (April).

Hasson, Graciela. 1994. “Análisis de la PrivatizacionesEléctricas.” Desarrollo y Energía. 3 (5).

Inter-American Development Bank. 1995. Project Sum-mary for Project No. AR-0195 (Edenor S.A.). Washing-ton, D.C.

———. 2000. Energy Sector Strategy. Annex Table 1.Sustainable Development Department. Sector Policyand Strategy Paper Series. (May).

Margheritis, Ana. 1999. “Características e impacto de laimplementación del programa de privatizaciones en laArgentina.” Baima de Borri, Marta et al. (comp.) Laprivatización de los servicios básicos y su impacto en lossectores populares en Argentina. Buenos Aires: BancoMundial, Grupo de Trabajo de ONGs Sobre el BancoMundial, and Instituto de Investigaciones del NuevoEstado. Editorial de Belgrano.

Abdala, Manuel A. 2001. “Institutions, Contracts andRegulation of Infrastructure in Argentina.” Journal ofEconomic Literature. IV (November): 217-254.

Abdala, Manuel A. and Andres Chambouleyron. 1999.“Transmission Investment in Competitive PowerSystems: Decentralizing Decisions in Argentina.” PublicPolicy for the Private Sector Note No. 192. Washington,D.C.: World Bank. (September).

Bastos, Carlos M. and Manuel A. Abdala. 1996. Reform ofthe Electric Power Sector in Argentina. Buenos Aires.

BBC News. 2001. “Argentina Minister Appeals for Calm.”Business section. July 13. Online at: http://news.bbc.co.uk/hi/english/business/newsid_1436000/1436129.stm (May 1, 2002).

Besant-Jones, John. 1996. “The England and WalesElectricity Model–Option or Warning for DevelopingCountries?” Public Policy for the Private Sector Note No.84. Washington, D.C.: World Bank. (June).

Calero, Róger. 2001. “Economic Crisis Spurs ProtestsAcross Latin America.” The Militant. 65(22).

Campodónico, Humberto. 1999. “The Natural GasIndustry and its Regulation in Latin America.” CEPALReview No. 68 (August). Santiago: United NationsEconomic Commission for Latin America and theCaribbean.

Chisari, Omar and Antonio Estache. 1999. “UniversalService Obligations in Utility Concession Contracts andthe Needs of the Poor in Argentina’s Privatizations.”WPS 2250. Washington, D.C. : World Bank. Online at:http://www.worldbank.org/wbi/regulation/pdfs/ (May 1,2002).

Clarín. 2000. “Privatizaciones: las asignaturas pendientes.”Tapa suplemento Económico. (August 13). Online at:http://www.clain.com/suplementos/economico/2000/08/13/index.html (May 1, 2002).

Colitt, Raymond. 2000. “Uphill Battle for Argentina.”Financial Times. (September 20). Online at: http://specials.ft.com/worldeconomy2000/FT33VSTPBDC.html (May 1, 2002).

Drajem, Mark. 2001. “Argentina’s Cavallo Says HeThanked U.S., IMF During Visit.” Bloomberg LatinAmerica. (August 29).

Duarte, Marisa. 2001. “El impacto del proceso deprivatizaciones sobre el empleo de las empresas

50

WRI: POWER POLITICS

Martínez Gerardo. 1998. “The Prospect of ReducingPoverty and Improving Social Balance in Latin America:The Improvement of Employment Opportunities.”Conference paper. Fourth Annual World Bank Confer-ence on Development in Latin America and theCaribbean, San Salvador, El Salvador, June 28-30.

Poder Nacional Ejecutivo. 2001. “Decree 0804/2001.”Published in Official Bulletin No. 29.673. Buenos Aires.(June 21).

Office of the Argentine President. 2001. “Invertirán 2,250millones de dólares para construir parques eólicos.”Press Release. (February 6).

Olander, Jacob. 2000. “Climate Change, Private Invest-ment and Power Generation in Latin America.”Unpublished study produced for the World ResourcesInstitute. (December).

Petrochemical, Petroleum, Gas and Chemical Magazine.1999. “El Año Que Pasó: Diagramas en Tensión.” Vol.158 (December).

Pistonesi, H. 2000. “The Argentine Electricity Sector: Post-Reform Performance.” Institute for Energy Economics.Buenos Aires: Fundación Bariloche.

Secretaría de Energía. 1999a. Resolution SE No. 0657/1999. Published in the Official Bulletin. No. 29.292.Buenos Aires. (December 14).

———. 1999b. Prospectiva 1999. Buenos Aires.

———. 1999c. “Abastecimiento Eléctrico a la PoblaciónRural Dispersa Argentina.” Online at http://energia.mecon.gov.ar (August 22, 2001).

Secretaría de Energía y Minería. 2001a. Informe del SectorElectrico Año 2000. Buenos Aires. (October).

———. 2001b. Prospectiva 2000. Buenos Aires. (April).

———. 2001c. “Proyecto de Energías Renovables enMercados Rurales.” Online at: http://energia.mecon.gov.ar/electricidad/permer/default.htm(May 10, 2002).

Vásquez, Patricia I. 2000. “El Sector Eléctrico en Argen-tina: Reconversión y Mitigación de Gases de EfectoInvernadero.” Unpublished study produced for theWorld Resources Institute. (April).

World Bank and Organización Latinamericana de Energía(OLADE). 1991. “The Evolution, Situation, and Prospectsof the Electric Power Sector in the Latin American andCaribbean Countries, Vol. II. Descriptions of IndividualPower Sectors.” Latin America and the CaribbeanTechnical Department, Regional Studies Program,Report No. 7. (August).

World Bank. 1993. “The World Bank’s Role in the ElectricPower Sector: Policies for Effective Institutional,Regulatory and Financial Reform.” Policy paper 11676.Washington, D.C.: World Bank.

———. 1995. “Privatizing Argentina’s Public Enterprises.”Operations Evaluation Department. Precis No. 100.Washington, D.C. : World Bank. (December 1).

———. 1996. “Argentina: Reforma de las empresasprovinciales de servicios públicos: Problemas, desafíos ymejores prácticas.” Buenos Aires: World Bank. (June).

———. 1999. “The Privatization of Basic Services and itsImpact on Low-Income Sectors in Argentina.” SeminarReport. Buenos Aires. (May).

———. 2000. Operations Evaluation Department Memo-randum to the Executive Directors and the President.Subject: Argentina Country Assistance Evaluation. (July10).

51

WRI: POWER POLITICS

4INDIA

ELECTRICITY REFORM UNDER POLITICAL CONSTRAINTS1

INTRODUCTION

For much of the history of post-independence India,the electricity sector has been an entrenched symbolof the nation’s state-led economic developmentapproach. Publicly owned, and operated and man-aged by state employees, the sector was conceived ofand run as an instrument of development policy.Beginning in 1991, however, these basic assumptionsbegan to be challenged. Sector reform efforts havebeen as much about contesting this mindset as aboutundertaking changes in ownership, investment, andmanagement practices. For a profile of the electricitysector in India see Box 4.1.

Electricity sector reform in India has becomepolarized. Efforts to shrink the role of the state andreplace it with greater private sector participationallowed little or no place for state stewardship of apublic benefits agenda. On the other hand, efforts tocontinue operating the sector as an instrument ofdevelopment policy failed to recognize the dire stateof the sector. This study of the political economy ofdecisionmaking seeks to go beyond this dichotomy tounderstand how public benefits can be promoted in apost-reform sector. A central theme of the chapter isthe need for more democratic decisionmaking in thesector.

There have been four overlapping but distinctperiods of electricity sector policy approaches: (1) pre-1991; (2) the 1991 indepedent power producer (IPP)policy and its aftermath; (3) the World Bank-led

BOX 4.1 PROFILE OF THE ELECTRICITY SECTOR IN INDIA

Population (2001)1 : 1.0 billion.

Population with access to electricity (2000)2:Total: 46% Rural: 33% Urban: 82%

Installed electricity generation capacity (1999)3

Total: 103 gigawatts (3.2% of total world capacity)Thermal: 76%Hydro: 21%Nuclear: 2%Geothermal and Other: 1%

CO2 emissions from electricity and heat as a share ofnational emissions (1999)4: 53%

Notes:

1. World Resources Institute. 2000. People and Ecosystems: TheFraying Web of Life. Washington, D.C.: World ResourcesInstitute.

2. International Energy Agency. 2002. Electricity in India:Providing Power for the Millions. Paris.

3. www.eia.doe.gov/pub/international/ieapdf/t06_04.pdf(February 6, 2002).

4. Computed by WRI using International Energy Agency (IEA)data. IEA, 2001. CO2 Emissions from Fossil Fuel Combustion.Paris: OECD.

Navroz K. Dubash Sudhir C. Rajan

restructuring policy, which began to be implementedaround 1993 in Orissa; and (4) the period shortlyafter 1998, when the restructuring model was scaled

52

WRI: POWER POLITICS

up through national legislation and state-levelreforms. In this report, these periods are describedthematically rather than sequentially. Nonetheless,distinguishing between them is useful in order torecognize how and when different types of institu-tional arrangements were “locked in” with consider-able impact on the electricity sector.

BACKGROUND:A LEGACY OF STATE CONTROL

During the 1990s, electricity sector reforms werepart of a seismic shift in India from a closed toward amore open economy. From Indian independence in1947 until the mid-1980s, the state played a strongrole in planning and implementing strategies foreconomic development. Internal and externalpressures to rethink this approach emerged in the1980s, as the country went through a moderaterecession. These views were endorsed primarily bystrong statements from development agencies thattheir borrowers would henceforward have to increas-ingly look to international capital markets for theirfinancing needs.2

The immediate impetus for action was a seriousbalance of payments crisis in 1991. The response wasto liberalize investment in key sectors of theeconomy, including electricity, to reduce licensingrestrictions on industry, lift government controls onthe financial sector, and partially free currencytransactions. Both the intent, and the actual policies,marked a significant departure from the previous 40years of government policy.

The Electricity Sector Before 1991Operating under the Electricity Act of 1910, privatecompanies or local authorities supplied more than80 percent of the total generation capacity in thecountry prior to independence in 1947 (World Bank,1993b). In 1948, the Electricity Supply Act broughtall new generation, transmission, and distributionfacilities within the state’s purview. Each statesubsequently established its own vertically integrated

state electricity board (SEB).3 Significantly, SEBs werefinanced through state government loans and wererun as extensions to state energy ministries.4 As aresult, SEBs were “indebted in perpetuity,” and wereforced to continue in a relationship of financialdependence and administrative thrall to energyministries.5 Nonetheless, SEBs were the backbone ofthe electricity infrastructure, and by 1991 controlled70 percent of electricity generation and almost alldistribution (World Bank, 1991).

Electricity sector reforms were part of a shift

from a closed toward a more open economy.

Under the Indian constitution, the electricity sectoris a “concurrent” subject, allowing both the centraland state governments some authority in the sector.SEBs are under the control of state governments,which also controlled the critical tariff-settingfunction. The central government was responsiblefor electricity policy, long-term planning, technicalanalysis, and project approvals through the PowerMinistry, Planning Commission, and Central Elec-tricity Authority. (See Figure 4.1.)

In addition, in response to declining SEB perfor-mance and to establish a “model of modern opera-tional practices that the SEBs could emulate,” thecentral government established two central powergeneration corporations—the National ThermalPower Corporation (NTPC) and the National Hydro-electric Power Corporation (NHPC) (World Bank,1999a).6 NTPC, now the world’s sixth largestthermal power company, is widely considered anefficient and well-respected public corporation.7

By 1991, the first four decades of public-sector-ledelectricity development had chalked up some notableaccomplishments. Between 1948 and 1991, genera-tion capacity increased by a factor of 50 with anannual growth rate of 9.2 percent—considerablygreater than the economic growth rate (World Bank,1991). Moreover, official reports claimed that electrifi-cation rates were 80 percent.8

53

WRI: POWER POLITICS

The Seeds of CrisisDespite these accomplishments, there were reasonsfor concern about the future of the sector. Well before1991, the sector had been locked into arrangementswith electricity users, and into management practiceswith negative long-term implications. These arrange-ments constrained future reform efforts.

Perhaps the most damaging practice was thepolitical decision in many states to provide highlysubsidized or free electricity to farmers. Provision ofelectricity to run irrigation pumps was an importantingredient in the Green Revolution technologypackage aimed at increasing the productivity ofIndian agriculture. However, from 1977 onward,electricity increasingly became an instrument ofpopulist politics. By offering electricity at flat rates—based on pump capacity rather than metered con-sumption—or even completely free, several stategovernments cultivated farmers as a vote bloc.9

Subsidized electricity imposed high costs andcompounded the technological, institutional, andpolitical problems in the sector.

These practices had several negative effects. First,by the mid-1990s, the World Bank estimated that

SEBs paid an annual subsidy of about $4.6 billion(1.5 percent of GDP) to agricultural and residentialusers (World Bank, 1999a). Second, since flat rate orfree electricity rendered the meter redundant,existing meters were no longer monitored and wereoften broken or removed. This “de-metering” hasincreased the financial and organizational challengeto the re-introduction of a consumption-based tariff.Third, agricultural tariff policy has had negativespillover effects on overall management practices ofthe SEBs. Since electricity load for agriculture is notwell measured, technical losses as well as theftthroughout the sector are conveniently allocated toagricultural consumption (Reddy and Sumithra,1997). Finally, although agricultural electricitysubsidies have been introduced in the name of socialbenefits, poor farmers typically do not benefit fromthis subsidy, and indeed may be hurt by it.10 How-ever, wealthier farmers have successfully organizedthemselves to lobby for continuation of this policy.

Other negative effects followed. Although manystates had a declared social policy to provide agricul-tural subsidies, they did not always pay the SEBsdirectly to compensate for the loss of revenue.Indeed, agricultural de-metering meant that the

FIGURE 4.1 THE INDIAN ELECTRICITY SECTOR PRE-1991

Ministry of Power, Government of India(power policy)

State Electricity Boards

Public Sector CorporationsNational Thermal Power CorporationNational Hydro Power CorporationPower Grid CorporationPower Finance CorporationRural Electrification Corporation

(loans, power contracts)(loans, power contracts)Single arrow ( ) refers to chain of command.Double arrow ( ) refers to flow of information, finance or electricity.

State Ministry of Power

Central Electricity Authority(Technical Analysis and

Approval of Projects)

Planning Commission(planning)

54

WRI: POWER POLITICS

actual level of compensation required was often amystery. Instead, SEBs developed an elaborate andself-defeating system of cross-subsidies from indus-trial consumers to make up for the growing revenuelosses from agriculture and theft. Over time, indus-trial consumers found it more cost-effective to set uptheir own captive power plants to supplement, orreplace, SEB electricity. In 1960, industrial con-sumption accounted for 67 percent of SEB sales; by1991, its share had dwindled to 40 percent. Over thesame period, agriculture consumption leaped from10 to 25 percent (Tata Energy Research Institute,1993). Losses from theft also seemed to be a seriousproblem. SEBs seemed reluctant to acknowledge theextent of such losses, perhaps because it was sodifficult to distinguish theft from technical losses andunmetered consumption. Recent evidence suggeststhat while the focus has been on agricultural losses,industries using high-tension lines may be respon-sible for much of the theft and loss (Purkayastha,2001; Mahalingam, 2002).

Hence, the SEBs found themselves in the unenvi-able position of facing growing loss-making seg-ments of their business, and a shrinking profit-making segment. Considerable staff developmentand morale problems followed, with wages stagnantand sales per employee among the lowest in theworld (Gutiérrez, 1993). The quality of the electricityprovided inevitably suffered, with low frequency,brownouts and blackouts, and billing problemsincreasingly common. Poor service quality hastenedthe exit of industrial users from the grid, anddiminished the willingness of consumers to accepthigher tariffs, both of which accelerated the spiral ofdeterioration.

Attempted Reform of the SEBsThrough the 1980s and early 1990s, various effortsat SEB reform led by the central government, theWorld Bank, and independent researchers allsuffered from either insufficient or weak implemen-tation.11 In 1991, the central government attemptedto solve the problem of electricity supply to farmers.A committee recommended the establishment of a

common minimum agricultural tariff, and a subse-quent Chief Ministers’ conference proposed thatagricultural tariffs meet the modest target of 50percent of the average cost of supply.12 However, inthe face of mobilized farmer vote banks, stategovernments took little action.

The World Bank provided loans to SEBs forfinancial restructuring, tariff adjustment, improvedmetering and collection, and other measures toincrease distribution efficiency and revenue flow(World Bank, 1999a). In addition, World Banksupport for NTPC was intended, at least in part, topromote good management practices within SEBs.By 1993, however, the World Bank had decided thatSEBs had sunk into both a political and institutionalquagmire and that institutional reform under thecurrent ownership structure was a lost cause.

In 1991, an independent team of scholars pub-lished the DEFENDUS (DEvelopment-Focused,END-Use oriented, Service-directed) model, a uniqueIntegrated Resource Planning approach that empha-sized access, equity, and efficiency improvements.13

Using this model, an analysis for the state ofKarnataka showed that the requirements of electricityand installed capacity would only be about 40 percent of what would be required in 2000, according toa conventional projection commissioned for thestate. But administrators only seemed to have aperfunctory, academic interest in this approach, andin Integrated Resource Planning in general.14 It wasnever seriously examined, despite several appeals todevelop long-term electricity policy for the country.

By the beginning of the 1990s, there was broadconsensus that the electricity sector was in direstraits and that the status quo was unsustainable,particularly in financial terms. If there was a mo-ment to seriously consider re-regulation of the sectorto reassert the independence of SEBs from theirpolitical masters, devise mechanisms of accountabil-ity, and cut through the Gordian knot of politicallyinfluential consumers pampered by subsidies, thiswas it. But the moment passed without any consid-ered reflection about policy reform. With the growingconsensus favoring a shift in macroeconomic policy,

55

WRI: POWER POLITICS

spurred by the balance of payments crisis, India wasset to press the accelerator and motor into the nextcentury. The electricity sector was at the forefront ofthe new liberalizing India.

A MANY-LAYERED REFORM PROCESS

The reforms themselves unfolded in four stages. In1991, the central government invited private invest-ment in generation. When this approach failed toaddress the root problems in the sector, a WorldBank-supported reform effort in the state of Orissa,organized around unbundling and privatization inthe sector, heralded a new stage in the reformprocess. This model was then followed by severalother states. Finally, the central government reen-tered the debate by proposing a sweeping legislativereform package. (See Box 4.2.)

Attracting Private Investment: The IPPDebacle

In late 1991, the Ministry of Power swept away fourdecades of public monopoly in an act of greatpolitical significance. The new Independent PowerProducer (IPP) policy was greeted with enthusiasm.However, little actual investment materialized, and adecade later, the IPP policy is broadly viewed as aflawed and halfhearted approach to reforms.

The Electricity Laws (Amendment) Act of 1991allowed private entities to establish, operate, andmaintain electricity generation plants as IndependentPower Producers (IPPs) and to enter into long-termpower purchase agreements with SEBs. Industrygroups and urban middle class consumer groupswelcomed the diminution of a public sector role andthe entry of the private sector (Desai, 1999).

BOX 4.2 C H R O N O L O G Y O F E L E C T R I C I T Y S E C T O R R E F O R M I N I N D I A

• 1991 Electricity Laws (Amendment) Act allows private sector participation in generation, with foreign investors allowed 100 percent ownership.

• 1992-97 Eight projects given “fast-track” approval status and sovereign guarantees by the central government.

• 1995 Orissa Electricity Reform Act established the Orissa Electricity Regulatory Commission and provided for unbundling of Orissa State Electricity Board.

• 1996 World Bank support for Orissa Power Sector Restructuring Project approved.

• 1996 Chief Ministers’ Conference formulated a common minimum action plan for electricity.

• 1997 World Bank Haryana Power Sector Restructuring Project approved, and Haryana state government passes the Haryana Electricity Reform Act.

• 1998 Electricity Regulatory Commissions Ordinance Notification provides for establishment of a Central Electricity Regulatory Commission and state-level electricity regulatory commissions.

• 1999-2001 Andhra Pradesh, Karnataka, and Uttar Pradesh proceed with preparation of Electricity Reform Acts. The World Bank prepares and approves projects supporting reform in each of these states.

• 2001 Energy Conservation Bill passed by Parliament.

• 2000-2002 Draft central government Electricity Bill prepared and introduced in Parliament.

56

WRI: POWER POLITICS

Believing that private investors would be reluctantto come to India without generous incentives, thegovernment acted with extravagance. IPPs wereoffered a guaranteed 16- percent return on equity,with bonuses for improved capacity utilization, a five-year tax holiday, and low equity requirementsequivalent to 20 percent of project costs (Ahluwaliaand Bhatiani, 2000). To further hasten implementa-tion, the central government subsequently declaredeight of the most promising projects “fast track”projects with expedited clearance procedures, andprovided government counter-guarantees and escrowaccounts against nonpayment of dues by SEBs.These incentives had the desired effect. By mid-1995,project developers and financiers had put forward189 project offers totaling over U.S. $100 billion,which would have increased capacity by 75 gigawatts.

Believing that private investors would be reluc-

tant to come to India without generous incen-

tives, the government acted with extravagance.

Despite the initial “euphoric” reaction, as onesenior bureaucrat put it, there were also earlygrumbles of discontent from various quarters, whichsteadily grew louder as the IPP policy failed to deliver(Pillai and Krishnamurthy, 1997). While supportingthe policy, IPPs grew increasingly critical of bureau-cratic delays and hurdles in implementation, andever more concerned about recovery of dues fromSEBs. In reaction, an Independent Power ProducersAssociation of India (IPPAI) was established in 1995to serve as a “neutral proactive forum.”15 IPPAI didcreate an important space for articulation of concernsabout the reform process, although there was also aprevailing “negative opinion” within governmentranks of IPPAI’s perceived emphasis on winningspecial favors for IPPs.16

The central government was by no means unifiedon the IPP policy. The Ministry of Power was per-ceived as the primary promoter of the policy, withsupport from the Ministry of Finance. One widelyheld view was that although the IPP policy was

“flawed,” it had “been the most promising option atthat time.”17 However, within each ministry therewere stronger dissenting voices, with some at theMinistry of Finance who argued that concessions toIPPs might lead to net foreign exchange outflowsrather than inflows. Moreover, the Ministry ofPower’s suspension of technical and environmentalclearance for smaller projects aroused the ire ofagencies responsible for those clearances.

Multilateral donors played a curious dual role in theIPP policy. While welcoming private electricityinitiatives in principle (World Bank, 1991), the WorldBank delivered a strong critique of the highest profileIPP, the Enron project, in a confidential memo to theGovernment of India. (See Box 4.3.) The memo statedthat the project was “not economically viable, andthus could not be financed by the Bank,” but urgedthe government to “explore ways to sustain theinterest of the project sponsors” (Vergin, 1993). Thatthe World Bank expressed its concerns about theproject is laudable; that it did so only in a mutedfashion is problematic. The IPP policy itself waswidely viewed as faulty, since it threatened to furtherweaken the fiscal situation of states. Since the WorldBank was actively supporting SEB reform at thistime, it could well have been more public with itsviews. While there is no direct evidence on this point,Bank staff may have faced pressures to reconcile anIPP policy they viewed as flawed with the Bank’senthusiastic support for India’s liberalization efforts.As a result, an important moment for criticalreflection on the IPP policy was lost.18

The long-term impacts of the IPP policy wereseveral and diverse, and are well illustrated by thehigh-profile case of the Enron project. First, keyinstitutions responsible for long-term planning, andtechnical and economic clearance were weakened.Officials at well-functioning public agencies such asNTPC felt that the IPP policy created an unevenplaying field in favor of foreign investors. Second, thereckless focus on capacity expansion excludedconsideration of a more rational least-cost planningapproach to electricity development. Finally, in itsconception and implementation, the IPP policyoffered opportunities for graft and malfeasance.

57

WRI: POWER POLITICS

Projects were not typically selected through competi-tive bids, and power purchase agreements were keptsecret even though they contained “take-or-pay”contracts involving public financial obligations fordecades to come.19 While no accusations have beenconclusively proved, some high-profile projects havebeen caught in a swirl of accusations concerninghuman rights abuses, flawed environmental clear-ances, and corruption.20

Moreover, the IPP policy had a polarizing effect atmultiple levels. Early support by urban middle classconsumer groups and industry associations, who sawin the policy the promise of efficient power delivery,translated into anger toward public interest advocateswho were seen as unnecessarily obstructionist(Desai, 1999). Within government ranks, those whosaw the policy as the best option at the time werepitted against those who viewed the policy as flawedfrom the start. Thus, technically, economically, andpolitically, the policy created a hangover effect forfuture attempts at reform.

An Experiment with SEB Reform: TheWorld Bank-Led Orissa ModelOn a parallel track to the IPP process, the WorldBank played a major role in arguing for fundamentalreforms of SEBs, and in persuading a few states—ledby Orissa—to initiate reforms. Having unsuccess-fully tried in the 1980s to reform SEBs within theexisting structure, World Bank efforts in the 1990swere directed at unbundling and privatizing SEBs.Hence, these reforms were considerably more far-reaching than the IPP policy.

Within India, there was broad agreement that theroot causes of the problem were the technical,financial, and management problems of SEBs, butthere was no agreement on the solution and on howto address the political thicket that SEB reformentailed. The World Bank stepped into this morass,armed with its new 1993 policy for lending to theelectricity sector (World Bank, 1993a). At a workshopfor Indian policymakers, the Bank highlighted theexperience of ongoing reform experiments in the

United States, United Kingdom, Argentina, andChile. It offered to provide lending to support “…theboldest…most deserving state-level power sectorreforms,” but it would not finance or provide guaran-tees for electricity projects in states that did notundertake restructuring (World Bank, 1993b).

Of the few states that expressed interest in theWorld Bank’s offer, the state of Orissa in easternIndia was the first to proceed with a reform program.By the early 1990s, Orissa’s electricity sector was inshambles. Transmission and distribution losses wereestimated at 43 percent, only 17 percent of bills werecollected, and the ratio of customers to staff was anastonishingly low 29:1 (Thillai Rajan, 2000, p. 660).However, the Bank selected Orissa mainly forpolitical reasons. The Chief Minister of the statedemonstrated strong political support for carryingthrough reforms.21 Orissa also had a small electricityload in the agriculture sector and a weak farmerlobby (Thillai Rajan, 2000).22 With low levels ofpolitical mobilization and a minor national profile,Orissa was “an experimental rat” for reforms.23

While local political support was undoubtedlynecessary, the World Bank was the driving force forreform and the most consistent motivator ofchange.24 For example, the Bank urged increases intariffs to lay the groundwork for reforms.25 WorldBank staff candidly described their role as overcom-ing “natural resistance to change” within the state.26

Reform consultants, NGOs, government officials,and the media eventually referred to electricity sectorreforms in Orissa as the “World Bank model.” Theseopinions were often not cast in a negative light, butas an appreciation of the Bank’s proactive role inbuilding momentum for change, and of the effortand commitment of particular staff members.27

The World Bank’s “Orissa Power Sector Restructur-ing Project” required $997.2 million, and waspartially funded by the then-Overseas DevelopmentAgency of the United Kingdom. Almost three fourths(74 percent) of the financing went to rehabilitation ofdistribution and transmission. A second component(23 percent) was allocated to demand side manage-

58

WRI: POWER POLITICS

ment, with the remainder going to support thereform process (World Bank, 1996).

International consultants brought in by the WorldBank and other donors played a considerable role inshaping reforms.28 While consultants were hired fortheir technical knowledge, they frequently also had toassess the sociopolitical and institutional context forreforms. For example, consultants decided on asingle-buyer system for Orissa, based on an assess-ment that the underlying technical, institutional, andcommercial capabilities in the state were insufficientto support wholesale competition. In consideringapproaches to unbundling public utilities, they had to

consider the need to minimize layoffs to avoid unionopposition. Some national actors questioned theappropriateness and ability of international consult-ants playing these roles. One domestic public officialsaid that consultants “sought to fit Orissa into theirpatterns,” while another argued that their approachwas like “applying principles of aviation to a jeep.”29

Some national consultants with considerable experi-ence in the sector resented being placed in juniorpositions, although they were well-placed to educateinternational consultants on local conditions.30 Sincenational and international consultants compete forcontracts, these comments should not be uncriticallyaccepted at face value. However, international

BOX 4.3 THE ENRON AFFAIR

complicity among officials to bend laws toaccommodate Enron’s demands and obtain thenecessary clearances. Others predicted that thefinancial terms of the deal were highly unfavorableto the Maharashtra state electricity board, and thatpublic funds were being jeopardized through theuse of counter-guarantees. In addition, followingcharges of violence against opponents of the project,a Human Rights Watch investigation found that thestate government had engaged in systematicsuppression of freedom of expression and assembly,and that the Dabhol Power Company and EnronCorporation were complicit in these violations.

Despite this growing rumble of protest, within 2months of the project being canceled, a new PowerPurchase Agreement (PPA) was signed on therecommendation of a government committee withfew changes to the original project. All clearanceswere subsequently awarded and counter-guaranteesapproved. Despite a pending public interest lawsuitchallenging the final clearances that were given tothe project and alleging fraud, the first phase of theproject has been commissioned.

By 2001, the project had started to generate severefinancial problems for Maharashtra. The SEB,

In October 1992, the Congress-led government ofMaharashtra announced to the world that it hadsigned a memorandum of understanding withDabhol Power Company (DPC), the Indiansubsidiary of the U.S. based Enron Corporation, fora liquefied natural gas plant of 2,000 to 2,400megawatt capacity, and to purchase electricity for 20years. In what would later become a source ofcontroversy, the deal was completed with alacrityand secrecy, despite the considerable size andfinancial obligations of the project, amounting to anexpenditure of roughly $1.3 billion per year.

Despite strong reservations expressed by some stateand central government bureaucrats, and by theWorld Bank, the project was cleared. Just as lendingarrangements were being concluded, the newlyelected state government, whose election platform in1995 had stressed national self-reliance, canceledthe contract and proposed to invite competitive bids.The international response was primarily negative,with concerns expressed about the viability ofIndia’s reform program and India’s commitment tocontractual obligations.

Yet, there were good grounds for concern about theproject. Journalists and analysts found indications of

59

WRI: POWER POLITICS

consultants’ own views suggest that there aredownsides to reliance on expatriates. As one consult-ant put it, “subtleties…got past us.”31

National actors—whether official or unofficial—didnot substantially modify the consultants’ proposals.The reform process was managed by a set of workingcommittees, guided by a steering committee thatreported to the Orissa Secretary of Power. The intentwas to bring together government officials, SEBofficials, and donor agencies. However, the reformcommittees, with limited experience with privateownership and competitive electricity markets, madefew modifications to the consultants’ proposals.

Consultations and a media campaign were in-tended to reach out to the broader public.32 Critics ofthe consultation process charge that the goal was to“achieve consensus on a model rather than to evolvea model through a consensual process.”33 Interviewssupport this view. Participants saw the role ofconsultations as explaining changes and “reducingtension.”34 NGOs reported that their concerns—including the impact on access for electricity to thepoor—did not result in any changes to the ap-proach.35 Indeed, the process appeared designed tousher reforms through rapidly, based on a politicaljudgment that a long process would allow vestedinterests time to mobilize opposition to reforms.

BOX 4.3 (CONTINUED)

which had been profitable in 1998-1999, plungedinto losses exceeding $300 million (excludingsubsidies received from the state government) in1999-2000. In order to honor its contract, the statehad to buy power from the Dabhol plant at a costtwice that of the average production cost ofelectricity in the state.

Following a series of defaults on payment by theSEB, Dabhol invoked its financial guarantee fromthe state. When the Maharashtra governmentexpressed its unwillingness to pay, the state’s creditrating was downgraded. DPC subsequently invokedthe counter-guarantee, by which time the SEB andthe state government cleared their dues. Indeed,Enron officials mobilized senior U.S. governmentofficials to raise the subject with the Indiangovernment. DPC has since initiated arbitrationproceedings in London, but the SEB has counteredthat the proper forum for settling all disputes withthe company is the state regulatory agency, adispute that has since moved to the Supreme Court.Most recently, with Enron Corporation itself in deepfinancial trouble, the troubled plant is up for sale tocompeting bidders.

Sources:

Enron Action Group. “The Enron Saga.” Online at: http://altindia.net/enron (May 30, 2002).

Godbole Committee Report. 2001. Report of the Energy ReviewCommittee. (April 10). Online at: http://altindia.net/enron/Home_files/doc/godbole/godbole-report.doc (May 30, 2002).

Human Rights Watch. 1999. Enron Corporation: CorporateComplicity in Human Rights Violations. New York: HumanRights Watch.

Mehta, Abhay. 1999. Power Play: A Study of the Enron Project.Hyderabad, India: Orient Longman.

Reddy, A.K.N. and A. D’Sa. 1995. “The Enron and OtherSimilar Deals vs. the New Energy Paradigm.” Economic andPolitical Weekly. Vol. XXX (24) June 17: pp 1441-48.

Reuters News. 2001. “Moody’s ‘disappointed’ in India’s fiscaleffort.” (June 1) Online at: http://investor.cnet.com/investor/news/newsitem/0-9900-1028-6159822-0.html (May 30,2002).

Sant, Girish, S. Dixit and S. Wagle. 1995. “The EnronControversy: Techno-Economic Analysis and PolicyImplications.” Pune: Prayas. Online at: http://www.prayaspune.org/energy/eng_pub_sel.htm (May 30,2002).

Weisman, Steven R. 2002. “Money, Energy Politics, andEnron’s Costly Misadventure in Bombay.” New York Times.(February 3).

60

WRI: POWER POLITICS

The Content of ReformsReforms in Orissa, following the Bank’s approachbeing implemented in much of the world, consistedof:

• unbundling generation, transmission, anddistribution;

• allowing for private participation in generationand transmission utilities;

• privatizing existing thermal generation anddistribution utilities;

• establishing an autonomous regulatory agency;and

• reforming tariffs at the bulk electricity, transmis-sion, and retail levels.36

The lynchpin of the reform process was the passingof the Orissa Electricity Reform Act in 1995, whichprovided for the establishment of an independentregulatory commission and the divestment of equityin generation and distribution to the private sector.

NGOs reported that their concerns—including

the impact on access for electricity to the poor—

did not result in any changes to the approach.

Public officials and Indian consultants suggest thatthe reforms were single-mindedly focused onfinancial issues and on privatizing the sector. Accord-ing to one official, international donors were ob-sessed with removing subsidies and increasingtariffs.37 Another characterized the donor approachas “privatization must be done; let’s do it some-how.”38 A representative of a donor agency confirmedthis perspective when he described the Orissareforms as “basically a bankruptcy workout.”39

International consultants emphasized that theyreceived instructions to promote rapid privatization,and to “create a process that was irreversible.”40,41

Donor agencies saw financial issues at the heart ofthe restructuring and enhanced private participationin the sector as the best solution. It was anticipated

that private finance would develop new generationcapacity and enhance availability of existing capacity.Private participation in distribution was expected toimprove service quality and increase financialperformance. Donor agencies were not alone in thisview. Some senior national and state officials held thesame position. Others reluctantly agreed, onlybecause they felt that all other options, notablycontinued public ownership, had been exhausted.42

Yet, attracting investors for privatization in Orissaproved to be a difficult task. To make the distributionsector more attractive, 75 percent of the sharedfinancial liabilities were transferred to the publiclyheld transmission sector.43 To make generation moreattractive, generation companies were allowed toincrease the price they charged to the public trans-mission company, but the transmission companywas not allowed to pass on higher prices to distribu-tion companies. As a result, the only public compo-nent, the transmission company, built up enormousliabilities that undermined its long-term viability.Ultimately, privatization was carried out, but therewas limited interest and few bids.44

The results have not been positive. Sinceprivatization, the new owners have brought neithernew funds nor discernible management skills to thenewly established companies.45 Revenues fromprivatization were not plowed back into the sector,but absorbed into the government budget for otherpurposes.46 The public has faced substantial tariffincreases but seen few benefits in service, which hasled to growing political discontent with the reformprocess and a call to bring back the publicly ownedsystem. The private operator of one distributionzone, which also operates one generation unit,believes that the government has neither cededmanagement control nor paid its own bills.47 As aresult, this company has taken steps to withdrawfrom the sector in Orissa. Consequently, the Govern-ment of Orissa established a high-level committee toreconsider the reforms. The committee found thatthe new distribution companies had failed to bring insignificant additional financing and that reductionsin transmission and distribution losses had beenminimal.48 Despite these problems, the fact that

61

WRI: POWER POLITICS

Orissa had embarked on and been through severalstages of a reform process, including privatization,provided a powerful demonstration effect withinIndia. Other states soon lined up to follow Orissa’slead.

Scaling up the ModelBy 1998, Orissa had managed to demonstrate that itcould privatize its distribution business, and the moreproblematic aspects of the Orissa experiment had notyet materialized. Growing disenchantment with theIPP policy left states with few alternatives other thanreform of SEBs to address an electricity sector crisisthat showed no signs of abating. Moreover, as eco-nomic liberalization grew more palatable, oppositionto privatization faded. Even states with avowedlycommunist governments competed to invite privateinvestors (Echeverri-Gent, 2000). Finally, the WorldBank continued to stand ready to support states thatwished to embark on a reform program. As a result,since 1995, several large and politically significantstates have concluded (or are in an advanced stage ofnegotiating) loan agreements with the World Bank toreform their electric power sectors.

These states have followed the basic parameters ofthe Orissa model, in many cases guided by the sameconsultants, but there have also been some signifi-cant differences. First, in subsequent efforts, electric-ity reforms have been part of the broader frame-work—articulated in the World Bank’s CountryAssistance Strategy for India—of state-level financialrestructuring. This approach is relatively new for theWorld Bank, since it involves providing a broadmacroeconomic restructuring loan at the state levelrather than to a national government. Second, mostof the new World Bank loans are structured as“Adaptable Program Loans” (APLs) that release smallamounts of funds over many years, with eachtranche dependent on the fulfillment of conditions.Compared to a single large loan, this approachenables the World Bank to provide a down paymenton future support, to signal seriousness of intent toinvestors, and to provide the World Bank flexibility inadapting to future conditions (World Bank, 1997b).49

Finally, in response to difficulties faced by privatedistributors in Orissa, subsequent efforts havesought to mitigate risks that tariffs will not be raised,payments will not be collected, or thefts will not bereduced.50

Attracting investors for privatization in Orissa

proved to be a difficult task.

The World Bank has not been the only donoragency active in the sector in India. The U.K.’sDepartment for International Development (DFID),Canadian International Development Agency(CIDA), U.S. Agency for International Development(USAID), and Japanese aid agencies have alsoprovided funding for elements of the reform. Ofthese, DFID has provided considerable funds fortechnical assistance with the reform program (WorldBank, 1999b). Much of DFID’s contribution hasbeen in the form of a grant rather than a loan.According to one World Bank observer, DFID’s grantsupport for basic technical work was critical toimplementation of reforms.51

It is important to note that not all states havedecided to follow Orissa. A few states, includingGujarat, Madhya Pradesh, and Tamil Nadu, havedecided to focus on commercialization of their SEBsrather than going down the road toward privatization.In some cases, they are receiving support from theAsian Development Bank. While it is too early tocompare experiences across states, in the futurethese varied approaches will provide valuable mate-rial for a comparative assessment.

The Central Government Follows theLead of the StatesWith many states following the Orissa approach, thecentral government took steps to provide a legislativeframework for state-level reforms. In 1998, theMinistry of Power championed an Electricity Regula-tory Commission Act, creating a central regulatory

62

WRI: POWER POLITICS

agency and providing an umbrella framework foreach state to establish its own agency.52 This actmarked the first formal sign of recognition by thecentral government of the significance of Orissa’sreform efforts, and was a late effort to provide atemplate for state-level reforms.

In 2000, the Ministry of Power initiated thedrafting of a comprehensive Electricity Bill to replaceall existing legislation in the sector. This bill is themost dramatic initiative taken to date by the centralgovernment to exercise some leadership over thedirection of the sector. In contrast to the statereforms, preparation of this bill has been a domesticeffort, initiated and led by the Ministry of Power. TheWorld Bank has limited itself to comments on drafts.The bill requires states to unbundle their SEBs,establish independent regulatory commissions,facilitate open access to transmission (wholesalecompetition), develop a spot market for electricity,and meter all electricity supply (Suri, 2000). Al-though the Ministry of Power now does supportprivatization, the bill does not explicitly requireprivatization, but gives the states some flexibility onhow to organize ownership of an unbundled sector.

Plans to introduce the bill in Parliament, originallyintended for 2000, were postponed after the suddendemise of then-Minister of Power Kumaramangalam.In the interim, the debate has been shaken by thetumultuous experience with post-reform competitiveelectricity markets in California and the meltdown ofthe Enron Corporation. In particular, ambitiousmarket frameworks such as spot markets for electric-ity have now been placed on the back burner (Eco-nomic Times, 2001).

The central government has sought to promotefiscal responsibility. For example, a central govern-ment-convened expert group recommended in mid-2001 that SEBs take responsibility for past dues, andthat incentives were needed to support this effort.53

They also argued that failure to service futureobligations should meet with heavy censure.

Central government direction has also led a broadtrend away from acceptance of electricity provision as

a purely commercial enterprise, and more willing-ness to reinsert social and economic developmentgoals within a broad framework of fiscal accountabil-ity.54 For example, a ministerial committee haspromoted a concerted dialogue on rural electrifica-tion in the context of the electricity bill. This commit-tee is likely to embrace a system of decentralizedlicenses managed by state electricity regulatorycommissions for rural electricity provision, andintroduction of a system of subsidy auctions—inspired by experiences in Argentina and Chile—forthose willing to undertake rural electrification.

In addition, evidence of a more proactive approachto environmental considerations as they relate to thefiscal and other goals of reform have begun tosurface. For example, the Ministry of Non-Conven-tional Energy Sources has proposed that a preferen-tial tariff be introduced for wind energy projects,and that the Electricity Bill mandate that a mini-mum of 10 percent of electricity generation beobtained from renewable sources (Bulletin on EnergyEfficiency, 2002a). Few developing countries havepursued such an approach, although China isamong this small group. (See Box 4.4.) In addition,an Energy Conservation Bill was passed by Parlia-ment in August 2001. It calls for the establishmentof institutional and legal structures to implementenergy efficiency, relying on both regulatory en-forcement and market inducements (Bulletin onEnergy Efficiency, 2002b).

With regard to the broader reform agenda, thedebate appears to have shifted from the far-reachinggoals of instituting complex spot markets to usingthe Electricity Bill to meet more pressing demands.These include the long-standing objectives ofmetering all consumers, increasing tariffs andremoving cross subsidies, and reducing transmissionand distribution losses. Since implementation of thisagenda will require considerable funds, the course ofactual reforms will be dictated by the availability offinancing. In this context, the World Bank’s policy ofmaking funding conditional on private participationin the sector takes on renewed significance. Onlystates that signal willingness to privatize will haveaccess to external funds.

63

WRI: POWER POLITICS

In sum, central government efforts to steer reformsdo provide an opportunity to step back from theOrissa model driven by narrow financial consider-ations and think through the broader objectives ofreform. However, it is not clear how these efforts willmesh with World Bank-funded state reforms, whichso far have been focused on financial restructuring.

THE ROLE OF PUBLIC BENEFITS INTHE REFORM PROCESS

It is far too early to conclude whether social andenvironmental conditions on the ground haveimproved as a result of the reforms. But a close lookat the process provides insights into whether and

BOX 4.4 CHINA’S EXPERIMENT WITH A RENEWABLE PORTFOLIOSTANDARD

There remain significant obstacles to China’simplementation of an RPS in the near future.Primary among them is a need to pass a lawimplementing a RPS. In addition, implementationwill require creating a unified national power grid(as yet unrealized); convincing provincial authoritiesthat run the grids to honor the terms of privateenergy contracts; and establishing a competitivenational energy market. None of these reforms willbe easy. Nonetheless, observers both inside andoutside China have voiced cautious optimism thatthe government’s flirtation with an RPS may yet leadto a cleaner, greener electricity sector for China.

Sources:

China Daily. 2001. “Premier’s Report on Outline of New 5-Year Plan at the Fourth Session of the Ninth NationalPeople’s Congress on March 5, 2001.” Online at: http://www1.chinadaily.com.cn/highlights/docs/2001-04-30/3550.html (March 5, 2001).

China Internet Information Center. “Look in the Next FiveYear Plan: Blueprints.” Online at: http://www.china.org.cn/e-15/15-3-b/15-3-b-31.htm (May 21, 2002).

Hamrin, Jan. 2002. Centre for Resource Solutions. Personalcommunication. (May 23).

Martinot, Eric. 2001. “Renewable Energy MarketDevelopment in China.” Presentation made at WoodrowWilson Center, Washington, D.C., July 19.

United States Embassy in China. 2001. “Energy Goals for the10th 5-Year Plan.” Beijing Environment, Science and TechnologyUpdate. September 7. Online at: http://www.usembassy-china.org.cn/english/sandt/estnews090701.htm (May 21,2002).

In mid-2000, the Chinese government announcedthat it was considering adopting a renewableportfolio standard (or RPS) as a part of its TenthFive-Year Plan for National Economic and SocialDevelopment covering the years 2001-05. Under theproposed RPS system, about 5.5 percent of eachprovince’s and autonomous region’s electricitywould be required to come from renewable energysources. This plan, it was hoped, would provideincentives to replace coal-fired power plants withrenewable energy sources, leading to a reduction inair pollution. Because many of the sources ofChina’s renewable energy—wind farms, smallhydroelectric dams—are in the relativelyimpoverished west, those designing the RPS systemexpected that provinces in the relatively wealthy eastwould have to buy electricity from westernproducers to meet the 5.5 percent mandate, therebyrealizing a politically desirable transfer of wealthfrom east to west.

When the official Tenth Five-Year Plan forEconomic and Social Development was announced,it contained a single sentence that urged thegovernment to “implement favorable pricing forbringing new and renewable energy sources ontothe electricity grid, and to support the promptdevelopment of the Mandated Market Share (RPS).”Although it is important not to read too much intoone sentence, it is nonetheless significant that thisexplicit endorsement of an RPS came from theNational People’s Congress, the highest organ ofstate power in China.

64

WRI: POWER POLITICS

how public benefits were factored into thedecisionmaking process by the major actors involved.

Social Issues through a Fiscal LensTo the extent social issues have been raised in thereform context, they tend to be viewed primarilythrough the lens of better fiscal management. TheWorld Bank, in particular, suggests that reforms inthe electricity sector would free state funding for“higher priority use in the social sectors” (WorldBank 1999b, p. 27). Thus, the framing of the electric-ity sector largely excludes explicit consideration of itssocial dimensions, a break with the previous ratio-nale for state involvement in the sector. Where socialconsiderations are explicitly addressed, the reformloans do not build in measures to ensure they areachieved.

For example, the World Bank emphasizes theimportance of defending concessional rates for low-income groups in the face of price increases (WorldBank, 1999b). Yet, it is not clear how the continua-tion of lifeline rates, which will continue to placeburdens on the state exchequer, can be reconciledwith a desire to free funds for allocation to otherpriority social sectors. The magnitude of the financ-ing shortfall is well illustrated by Ahluwalia (2000),who computes that about 50 percent of all house-holds (81 million households) are unable to affordcommercial rates for electricity.55 Hence, even thoughthe current burden on the state budget comes largelyfrom a debt service obligation, even if these were tobe minimized, social spending in the sector couldeasily consume much of the savings. If these house-holds are to be provided electricity at affordable rates,there should be no illusions about the continuedneed for public funds even in a privatized andrestructured sector.

On the important question of increasing access toelectricity services, World Bank loan documents notethat the commercial orientation introduced by thereforms will lead to more modest targets. At thesame time, they argue that the enhanced efficiency ofthe resultant institutions will lead to more effective

implementation on the ground, more than compen-sating for the lower targets (World Bank, 1996;World Bank, 1999b). Yet, since the private sector isunlikely to invest in connecting low-income, andtypically loss-making customers, it is unlikely thateven modest targets will be met without a financialincentive. Hence, a strong case can be made thatreforms—whether the sector is under public orprivate ownership—should be accompanied byintentional efforts to provide incentives for increas-ing access. Of the various actors in the reform arena,only the central government has shown any interestin exploring the potential for such schemes. As yet,however, no concrete measures have been taken toaddress the problem of limited access to electricity.

Finally, there is one hopeful outcome from theprivatization experience in Orissa. Privatization hasallowed decentralization of distribution responsibili-ties with an attendant improvement in performance.For example, the local Xavier Institute of Manage-ment (in collaboration with the Bombay SuburbanElectricity Company) has established village collec-tives to manage and organize bill collection tasks in afew pilot rural areas. The initial experience suggeststhat rural residents respond very positively to controlover electricity management at the village level. Forexample, newly formed village committees achieved a100 percent increase in bill collections over a six-month period.56 Certainly, this approach needs to besubject to greater scrutiny to ensure that decentrali-zation does not transfer power into the hands of localelites. Nonetheless, this limited experience doessuggest that aside from the debated benefits ofprivatization, there are potential collateral benefitsarising from the greater scope for decentralizedforms of organization in the sector following aloosening of state control.

A Restricted View of EnvironmentalCosts and BenefitsThe World Bank is the most explicit of the variousactors on the need to address environmental con-cerns. However, discussion of the environmentalimplications of reform is driven by the World Bank’s

65

WRI: POWER POLITICS

internal “safeguard” policies, which are designed toensure that negative effects of investment projectsare guarded against and mitigated. Within thisframework, environmental impacts refer rathernarrowly to the direct environmental impact of loanfunds spent on physical infrastructure, such asresettlement due to power plant construction, landacquisition for transmission lines, and the like. Thisnarrow interpretation fails to account for environ-mental impacts of the broader regulatory reform putin place through the reform process. Consequently,the Bank’s interpretation of its environmentalguidelines hew to a rather narrow do-no-harmapproach, rather than looking for environmentalgains through reforms.

The World Bank did conduct a substantial study onenvironmental issues in the electricity sector (WorldBank, 1998).57 The study notes that the sector is onthe verge of massive changes, but it explicitly doesnot address the environmental impacts of theinstitutional and managerial dimensions of reform—such as unbundling or tariff liberalization—or theimplications of changes in ownership from public toprivate. Instead, the focus is on the environmentalimpacts of implied changes in technology and in theprice of electricity. Other than encouraging attentionto demand side management (see below), there is littleevidence of the impact of the study on the design ofstate-level reform packages and associated WorldBank loans.

Social issues tend to be viewed primarily

through the lens of better fiscal management.

Sources within the World Bank place responsibilityfor the limited scope of the study with the Ministry ofPower. When the study was in progress in the mid-1990s, the Ministry was not convinced of the value ofinstitutional reform. With this mindset, they wereconcerned that such a study could lead the Bank toimpose environmental conditions on reforms, andthat the study would contribute to a consensusfavoring one particular route forward for state-level

reforms, pre-empting a broader debate.58 Thislimited the scope of the study. While the environ-mental issues study does provide useful informationon the relative costs and benefits of specific techno-logical measures, the inattention to institutionalchanges was an opportunity lost.59

At the state level, the only concrete attempts toimplement an environmental component to thereforms involved promoting demand side manage-ment (DSM). In Orissa, the World Bank, whichallotted 13 percent of the reform loan to DSM efforts,led this effort. This enthusiasm was driven in part bythe demonstrably large potential for DSM in India. Itwas also a political reaction to fierce criticism of theBank for its lending program in India, particularlyfor the controversial Narmada valley dam projects.However, there was widespread skepticism aboutDSM among other donor agencies, internationalreform consultants, and state officials, who cynicallyviewed DSM as a measure to satisfy internal Bankpolitics and procedures—“a box to be checked.”60

For two reasons, the results in Orissa were notencouraging. First, the technical scope for DSM inOrissa was limited. Orissa had surplus electricity atthe time of reforms, and there was no incentive forthe utility to reduce consumption by paying custom-ers. In addition, Orissa had a small agriculturalsector. In other states, the agricultural sector is aprime candidate for DSM, since it is a loss-makingsector for the utility. Second, DSM staff complainedthat they received little political support from theWorld Bank, and this view of DSM as an “embellish-ment” percolated through to consultants and publicofficials. As a result, despite the allocation of sub-stantial funds, even the opportunities that wereavailable were not taken.61

DSM has remained on the agenda for other states,where it is a more timely idea. Moreover, support forthe idea has deepened and broadened within theWorld Bank and within India. Implemented cor-rectly, DSM could ameliorate supply shortfalls andbuild a political constituency for reforms—particu-larly in rural areas—by bringing demonstrablebenefits early in the reform process. However, the

66

WRI: POWER POLITICS

lesson of the Orissa experience is that realizing bothtechnical and political benefits requires morepolitical support and attention to DSM as an integralpart of reform efforts.

Finally, as discussed earlier, the national govern-ment has attempted to promote renewable energytechnologies and energy efficiencies through variouslegislative instruments. These efforts represent anencouraging attention to environmental concerns,but have not yet led to any concrete gains.

Innovations in Governance: TheEmergence of an IndependentRegulatory Culture?Since past problems in the electricity sector aredirectly associated with the effective capture ofelectricity sector institutions by vested interests,regulatory commissions are a lynchpin in a newmodel aimed at independent operation. The firstregulatory commission set up for the electricitysector, the Orissa Electricity Regulatory Commission(OERC), has set impressive standards for transpar-ency in India. So far, its performance with respect toaccess to information and consultation has beenstrong. Notably, the OERC has set up a comprehen-sive web site to disseminate information. On severalissues, the Commission has held open hearings,where labor and consumer groups have spoken.62

The only concrete attempts to implement an

environmental component to the reforms

involved promoting demand side management.

With regard to independent operation, the centralissue for state regulatory agencies has been theircontrol over tariffs (Balakrishna, 2000;Indiapoweronline.com, 2000b). In some states,notably Orissa and Maharashtra, regulators havebeen reluctant to allow tariff increases withoutevidence of reduced losses. Regulatory decisions ontariffs have not gone unchallenged. In Orissa, the

World Bank explicitly urged the OERC to approvetariff increases to “provide comfort” to investors justbefore privatization, a request that they rejected.63 InMadhya Pradesh, the regulatory agency refused toallow tariff hikes, a decision that was challenged bythe state government. In Andhra Pradesh, in con-trast, tariff increases were strongly opposed by thepublic and by opposition parties(Indiapoweronline.com, 2000a).

State regulatory commissions exhibit a remarkablediversity of operation, particularly in the vigor withwhich they have defended their independence. SomeState Electricity Regulatory Commissions (SERCs)are termed “mere extensions of government,” at leastin their regulatory culture, because they do not holdopen hearings and tend not to pay attention tostakeholder comment or complaints.64 In othercases, there is an active interest in seeking technicalassistance and informal consultation from analystsand consumer groups, resulting in bold initiativesthat annoy donors and state governments becausethey are seen as beyond the regulators’ mandate.65 Inone instance, a consumer advocacy group has evenprovided regulators with analysis of utility perfor-mance.66 Curiously, most regulators have come frombureaucracies with no great tradition of indepen-dence or public participation and consultation. Stateregulatory commissions have included as membersformer civil servants, judges, and former central orstate electricity agency members with technicalexpertise. Yet, in some cases, as with the Orissaregulator, they have enthusiastically assumed the roleof principled public oversight.

At the same time, critics have pointed out that theprovisions requiring transparency and publicconsultation that guide regulatory functioning are byno means sabotage-proof (Dixit, Sant, and Wagle,1998). The pressures for political accommodationremain as strong as before, as both regulators andgovernment officials unofficially acknowledge. Asone official put it, “There is not only one God in theIndian pantheon. Any regulator who does not talk tothe government is living in a fool’s paradise.”67 Inthis context, principles of good governance arediluted by granting the regulators discretionary

67

WRI: POWER POLITICS

powers, which allow them to circumvent applicationof these principles in a variety of ways.

The Orissa Electricity Regulatory Commission

has set impressive standards for transparency

in India.

Most significant is the zeal with which members ofthe public, including consumer advocates, environ-mentalists, the media, and even casual observers,have greeted the new institutions. There is keeninterest among members of the public to “democra-tize” the commissions at an early stage. At the sametime, few civil society groups are equipped to dealwith the complex technical character of the sector,which can limit the degree of engagement withregulators.

While public participation is a necessary compo-nent, it cannot substitute entirely for public policydirection. Indeed, governments must give regula-tory agencies appropriate guidelines on how tomake the difficult political tradeoffs betweeneconomic, social, and environmental implications oftheir decisions. Unfortunately, state governmentsperceive the reform process as an opportunity to ridthemselves entirely of what has become a burden-some sector, leaving an absence of responsibility forlonger-term and broader issues raised by electricitysector development. Drawing from the experienceof the first regulatory agency in Orissa, regulatorsare setting a precedent of ignoring these tradeoffsby limiting themselves to economic decisions, andin particular to a tariff-setting role, to the exclusionof the broader landscape of electricity developmentin the state (Sankar and Ramachandra, 2000). Partof the problem lies in the enabling legal framework,which does not empower regulators to addresseconomic regulation and its economic and socialeffects in an integrated fashion. Despite thislimitation, electricity regulators do occasionallyembed environmental concerns in regulatorydecisions.68

Moreover, the training that regulatory commissionsreceive on regulatory practice does not focus on thelinkages between economic regulation and environ-mental outcomes. This training is often dispensed byinternational consultants with narrowly definedterms of reference, whose ranks are staffed byregulatory economists with neither the expertise northe inclination to explore broader issues of publicbenefits in the sector. Since the past ills of the sectorwere perceived as the result of mixing social develop-ment with the business of providing electricity, themessage typically delivered to the regulator is “it isnot your role to solve social problems.”69 Yet, at themoment, there is no other body in a position to doso. Early attention to these issues is necessarybecause it will be hard to graft attention to publicbenefits onto the mandate and expertise of regulatorycommissions at a later date. The initial period notonly develops skills, but also sets priorities andshapes institutional cultures. The lack of attention toa long-term vision could ultimately limit the fullpotential of regulatory commissions as a progressiveforce in the sector.

CONCLUSION

Electricity sector policy in India has been locked intoadverse arrangements at least twice in its history. Thefirst was when agricultural consumption was de-metered and extensive subsidies were offered. Thesecond was when SEBs signed IPP contracts withmajor fiscal implications. A third set of circum-stances, with the potential for equally powerful formsof institutional rigidities, are in the making with thereproduction of the Orissa model on a national scale.These circumstances may yield favorable institutions,like democratic and transparent regulation, but mayalso result in unfavorable ones, such as locking outintegrated resource planning or scaling back pro-grams to expand services to rural areas.

The World Bank has played a central role in movingthe sector to the threshold of a new organizationalform. The Bank forcefully argued that the sector hadreached the end of its current road, and backed upthis assertion by conditioning funds on bold reforms.

68

WRI: POWER POLITICS

The Bank’s success has rested only in limited part onthe brute force of conditionality, and rather more onskill in building what appear to be genuine constitu-encies for reform among bureaucrats and politicians.Nonetheless, it is problematic that the Bank’sdexterity led to the adoption, without broad publicdebate, of what appears to be a single dominantapproach to transformation of a critical sector. That afew other states have adopted a different route basedon reform, but no change in public ownership, willprovide an interesting basis for comparison in a fewyears. By the time reform was served up to the nationin the form of the Electricity Bill, many of the keydecisions had been made. A broader debate about theultimate goals of policy change and the best means toachieve these goals could not only broaden the rangeof ideas, but also mobilize new actors to play a role inthe regulatory process and build a constituency forreform. While the World Bank and its supportershave argued that opening a debate would condemnthe sector to paralysis, the back-door approach,particularly in the early days of reform, limitedparticipation in the debate to a few technical andfinancial experts. More recently, there are welcomesigns that state-level reforms are subject to an openand more broad-based debate.

While public participation is a necessary

component, it cannot substitute entirely for

public policy direction.

This review of the reform process suggests thatthere was little explicit attention paid to either thesocial or environmental dimensions of a publicbenefits agenda. While social issues received lipservice, few measures were put in place to ensurethat these objectives would be realized. With theexception of a genuine effort at demand side man-agement at the state level by the World Bank, discus-sion of innovative financing schemes for ensuringrural access by the central government, and somediscussion of incentives for renewable energy, therehas been little explicit attention to environmental

outcomes. While reforms may yet indirectly lead toboth social and environmental gains through theconstruction of a better functioning sector, there hasbeen little attempt by any of the reformers to ensurethis outcome. It is by no means clear that a long-termsocial and environmental vision can be subsequentlywoven into the fabric of reforms. Nor is it fully clearthat social and environmental benefits are alwayscoterminous with the techno-managerial vision of thesector based on privatization and a measure ofcompetition. The history of agricultural subsidiesand the IPP debacle should teach us how expedientchoices in the present constrain our collective future.

Looking forward, considerable hope rests on thenew autonomous governance structure of theregulatory commissions. Still, even that expectationis only tenuously sustained by the experience insome states, and less so in others. With regard toactively shaping a visionary future, independentregulation so far does offer many opportunities topromote public benefits. While enabling legislationprovides some room for interpretation, regulatorsseem inclined to define their job narrowly, aninclination that is reinforced by the internationalconsultants who train them. A conservative andnarrow regulatory culture could be a particularlysignificant force for institutional lock-in that willshape the future development of the sector.

It is late, but perhaps not too late to have aninformed public debate about the future of the sector.Such a debate should actively consider increasedaccess to electricity, social pricing, and the promotionof sustainable energy futures as concerns to beintegrated into reforms. Such debates could favor adecision to pursue short-term financial motivationsfirst, as those who have led reforms thus far suggest.But it is also possible that broad dialogue will bothenhance scrutiny over and the effectiveness ofexisting reforms, and suggest ways to achieve bothshort-term financial health and longer-term socialgoals. Either way, without explicit attempts to bringdiverse groups into the debate, in a democratic politythe political sustainability of policy reform will alwayshang in the balance.

69

WRI: POWER POLITICS

NOTES1. This chapter is a substantially revised and updated

version of Navroz K. Dubash and Sudhir Chella Rajan,“Power Politics: The Process of Power Sector Reformin India,” Economic and Political Weekly. XXXVI (35):3367-3390.

2. There were clear warnings from the donor communitythat only about one fifth of required finance fordeveloping countries’ projected electricity needs wouldbe available from multilateral sources (Churchill andSaunders, 1989).

3. A small number of private companies continuedoperation, particularly in large cities, largely buyingelectricity from SEBs.

4. SEBs are expected to operate on a commercial basisand earn at least a 3-percent return on their net fixedassets.

5. Interview with a former member of the PlanningCommission, July 18, 2000. All interviews for thischapter were conducted on a not-for-attribution basis.Consequently, interviewees are identified only by theirinstitutional affiliation.

6. The World Bank was supportive of this move, anddirected more than half of its total allocation of $7billion in sector funding between 1970 and 1991 toNTPC (World Bank, 1999a).

7. This record has been tarnished recently by the reportsof human rights abuses at Singrauli in MadhyaPradesh (World Bank, 1997a).

8. This figure, drawn from various Central ElectricityAuthority surveys, must be treated with some caution.That distribution lines had reached most hamlets didnot mean that all households were necessarily able toaccess and use electricity.

9. Interview with former Andhra Pradesh state official,July 20, 2000.

10. Sant and Dixit (1996) suggest that the benefits flowlargely to landed farmers who can afford mechanizedirrigation, and who use irrigation to grow high-valuecash crops. Landless populations do not benefit fromthis policy (Verma, 1999), unless it is indirectlythrough greater employment opportunities. Moreover,cheap electricity encourages profligate use of ground-water, and large farmers are better able to mobilizecapital to chase the water table than are small farmers(Dubash, 2002).

11. For example, see Government of India (1980) andPlanning Commission of India (1994).

12. Reported in Government of India (1999).

13. Reddy et al. (1991). DEFENDUS modeled its frame-work on energy services by examining supply expan-sion as well as efficiency improvements, and allowedfor environmental costs to be internalized. A commit-tee for the Long-Range Planning of Power Projects(LRPPP) set up by the government of Karnatakaprojected that the state would require a six-foldincrease in electricity supplies by the year 2000—fromthe 1986 consumption of 7.5 terawatt hours to 47.5terawatt hours, and from the 1986 installed capacity of2,500 megawatts to 9,400 megawatts. With end-useefficiency improvements, the DEFENDUS scenarioproposed 17.9 terawatt hours of electricity and aninstalled capacity of 4,000 megawatts by 2000,together amounting to roughly one third of the cost ofthe original scenario.

14. Within the U.S. context, IRP has a rather specificmeaning applicable to traditional (vertically integrated)utilities, which are required to submit plans toregulators for integrating demand side as well asgeneration options in their tariff submissions. We usethe term here more broadly to refer to any attempt toidentify, analyze, and acquire cost-effective resources,which would lower the long-term cost of energyservices. In this definition, long-term resourceplanning (taking into account supply side and demandside efficiencies) would be conceivable even in anunbundled situation as long as a regulator coulddevelop and implement incentives structures topromote more cost-efficient resource use.

15. See http://ippai.org.

16. Interview with government bureaucrat, July 20, 2000.

17. Interview with power sector official, July 13, 2000.

18. It is important to bear in mind, however, that sectionsof civil society were very active during this time informulating their own responses to IPP policy. Invarious newspaper and magazine articles and otherpublic forums, journalists, former bureaucrats,academics, and environmentalists criticized specificprojects as well as the overall framework. One groupof critics formed a “National Working Group onPower,” and organized workshops and campaignsagainst IPP policy. Public interest litigation was filedon behalf of citizens against the government as well asspecific IPPs on grounds of corruption, environmentaldamage, and constitutional violation.

19. The World Bank held a workshop on competitivebidding at Hyderabad in 1994, (personal communica-tion, World Bank staff, February 2002). Nonetheless,

70

WRI: POWER POLITICS

by then many of the largest power purchase agree-ments were negotiated in secret and without competi-tive bidding (Reddy and D’Sa, 1995).

20. For example, in the case of the Mangalore PowerCorporation, where Cogentrix Corporation was thedeveloper, public interest litigation was filed by aconsumer activist in the Karnataka High Courtalleging offshore payments by Cogentrix’s partnersthrough a subsidiary in the British Virgin Islands.The company has since withdrawn from the Karnatakaproject, citing delays in gaining government approvalsand in resolving the litigation (Fernandes andSaldanha, 2000).

21. The initial reason for support was the World Bank hintthat funding for a favored hydroelectric project wouldbe more forthcoming if the state undertook broadreforms. While this tactic was instrumental in initiallygetting the Chief Minister’s attention, several inter-views with senior state officials (July 20, 2000)indicate that he very quickly developed a deep personalbelief in the need for fundamental reforms in thesector. Thillai Rajan (2000) confirms this account.

22. Agriculture accounted for 6 percent of load in Orissaversus around 40 percent in many other states (ThillaiRajan, 2000).

23. Interview with power sector official, July 14, 2000.

24. Interview with Orissa state official, July 20, 2000, andinterview with former national power sector official,July 18, 2000.

25. Interview with former national power sector official,July 18, 2000.

26. Interview with World Bank staff, July 13, 2000.

27. Interview with public power sector officials, July 18,July 20, July 25, 2000.

28. Interview with reform consultant, September 13, 2000.

29. Interview with Orissa public sector officials, July 25,July 26, 2000.

30. Interview with Indian consultant, July 15, 2000, andwith academic, July 26, 2000.

31. Interview with international reform consultant,September 13, 2000.

32. World Bank (1996), and interview with Orissa publicofficial, July 25, 2000.

33. Interview with NGO staff, July 22, 2000.

34. Interview with academic, July 26, 2000.

35. Interview with academic, July 26, 2000.

36. See World Bank (1996).

37. Interview with consultant, July 18, 2000.

38. Interview with Orissa power sector official, July 15,2000.

39. Interview with donor agency staff, December 7, 2000.

40. Interview with international consultants, September13, 2000.

41. Indeed, the Bank adopted a reform mantra, “Failure isnot an Option” to emphasize “the importance ofrelentless pursuit of reform implementation at timesof difficulties.” World Bank (1996, Annex 5.3 p.4).

42. Interview with Orissa public official, July 20, 2000,and July 25, 2000, and interview with former nationalpower sector official, July 27, 2000.

43. For details see Mahalingam (2000).

44. One company, Bombay Suburban Electricity Supplypurchased three of the four distribution zones, andsought to purchase the fourth, but was turned down inorder to introduce some competition (Mahalingam2000, p. 96).

45. Interview with former Orissa power sector official, July25, 2000.

46. According to one report, only 3 percent of theprivatization revenues from the sale of the OrissaPower Generation Corporation were re-invested in thesector (Indiapoweronline.com, 2001a).

47. Personal communication with international reformconsultant to Orissa, September 18, 2001.

48. See Pragativadi.com (2002).

49. For example, the Andhra Pradesh Adaptable ProgramLoan was structured around five sets of conditions: (1)pass a reform bill and reform tariff setting; (2) notifythe bill, establish a regulatory commission, andunbundle the SEB; (3) partially privatize distribution;(4) further privatize distribution and list shares of thegeneration company on the stock market; and (5)privatize distribution completely and list shares of thetransmission company (World Bank, 1999c).

50. For example, in the state of Karnataka, one proposedmechanism is the introduction of a “distributionmargin” that guarantees income to the distributioncompany during a transition phase. This approachhas been criticized as unduly insulating the privateinvestor from risks that are within their ability tomanage, and potentially limiting the authority of theregulator (Menon, 2002).

51. Interview with World Bank staff, July 6, 2000.

52. Under the Act, each state had the choice of establish-ing a commission on the basis of the central govern-

71

WRI: POWER POLITICS

ment Act or through state level legislation, as Orissahad done.

53. Specifically, the committee proposed that SEBs beallowed to issue bonds in favor of creditors, theincentive being a waiver of 50 percent of the intereston past dues of SEBs. While this broad approach hasbeen welcomed, whether it adequately recognizes thechallenge to states to meet future obligations has beenquestioned (Ahluwalia, 2001).

54. Interview with power ministry official, March 8, 2000.

55. Most of these 81 million households currently do nothave access to electricity. If the considerable challengeof providing them access to electricity is met, andthese households were asked to meet half the averagecost of supply, the remaining subsidy burden on thetreasury would be about $1.4 billion. This is approxi-mately the amount now spent on electricity subsidies,an amount which clearly does not reach the poorestand most needy. However, as this calculation sug-gests, the issue is not whether subsidies will beneeded, but how they should be best targeted to reachthe poorest.

56. Interview with staff from Xavier Institute of Manage-ment, July 26, 2000.

57. The study develops a methodology that is applied fortwo states, Andhra Pradesh and Bihar.

58. Interview with World Bank staff, July 6, 2000.

59. Indeed, sources within the government do suggestthat World Bank studies—such as an early study onlong-term issues in the sector, or an ongoing study onfarmer uses of electricity—are influential and usefulin internal debates (Interview with governmentofficial, July 14, 2000).

60. Interview with international consultant, September 13,2000, and interview with donor agency staff, July 17,2000.

61. Interview with reform consultant, September 16,2000.

62. Interview with representative of consumers group,July 25, 2000.

63. Interview with public official, July 20, 2000, and withconsultant, September 13, 2000.

64. Interviews on July 27, 2000 with consumer advocateand consultant.

65. Donor interviews, July 15-17, 2000.

66. In interviews, Prayas, a nongovernmental organizationin Pune that has focused on sustainable energy issues,was referred to by officials and regulators as a credibleNGO actor in the sector. Interview with governmentofficial, July 14, 2000 and interview with regulatoryofficial, July 20, 2000.

67. Interview with former public official, July 20, 2000.

68. For example, regulators provide incentives forimproved efficiencies in generation, transmission, anddistribution through “no regrets” policies. Personalcommunication, Sanjeev Ahluwalia, February 2002.

69. Interview with international consultant, September 13,2000.

72

WRI: POWER POLITICS

REFERENCES

Fernandes, D. and L. Saldanha. 2000. “Deep Politics,Liberalisation and Corruption: The Mangalore PowerCompany Controversy.” Law, Social Justice and GlobalDevelopment. 1. Online at: http://elj.warwick.ac.uk/global/issue/2000-1/fernandes.html (April 18, 2002).

Government of India, 1980. “Report of the Committee onPower, (Chaired by V.G. Rajyadaksha), Ministry ofEnergy, Department of Power.” New Delhi: Governmentof India.

———. 1991. “Policy on Private Participation in PowerSector.” Gazette of India, October 22. No. 237. NewDelhi: Ministry of Power. Online at: http://www.indiainfoline.com/infr/lapo/poli/popv.html (April18, 2002).

———. 1999. “Power Sector Reform and Restructuring–Financial Restructuring of GRIDCO, Orissa–interimproposals.” November 29. New Delhi: Ministry ofPower.

———. 2001. “Conference of Chief Minsters/PowerMinisters: Agenda Notes.” March 3.

Gutiérrez, L. 1993. “International Power Sector Experience:A Comparison with the Indian Power Sector.” Confer-ence on Power Sector Reforms in India, Jaipur, India,October 29-31, Energy Sector Management AssistanceProgram, Washington, D.C.

Indiapoweronline.com. 2000a. “Power Regulators Grapplewith Tariff Issues.” July. Online at: http://indiapoweronline.com (April 4, 2001).

———. 2000b. “Regulators Get Down to Business.”September. Online at: http://indiapoweronline.com(April 4, 2001).

———. 2001a. “Orissa: What Went Wrong?” July. Onlineat: http://indiapoweronline.com (April 4, 2001).

———. 2001b. “Expert Group Recommends SecuritisationContingent on Reform.” June. Online at: http://indiapoweronline.com (April 4, 2001).

Mahalingam, S. 2000. “Power Reforms in Trouble.”Frontline. 17 (March 4-17): 94-98.

———. 2002. “The Great Power Robbery.” Frontline. 19(March 16-29).

Menon, Parvathi. 2002. “Undistributed Risks.” Frontline.19 (February 16-March 1).

Ahluwalia, Sanjeev. 2000. “Power Sector Reforms: AReview of the Process and an Evaluation of the Out-comes.” Refereed paper for the NCAER-ADB supportedproject on Economic Reforms. March.

———. 2001. “Power Experts Get it Wrong.” EconomicTimes. June 5.

Ahluwalia, Sanjeev and Gaurav Bhatiani. 2000. “TariffSetting in the Electric Power Sector: Base Paper on IndiaCase Study.” Paper presented at TERI Conference onRegulation in Infrastructure Services, November 14-15.

Balakrishna, P. 2000. “Power Regulators Grapple withTariff Issues.” July. Online at: http://indiapoweronline.com (March 29, 2002).

Bulletin on Energy Efficiency. 2002. “Preferential Tariff forWind Energy Proposed.” Bulletin on Energy Efficiency. 2(4) February. Online at: www.renewingindia.org (March29, 2002).

———. 2002. “Strategic Approach and Road Map for theEstablishment of the Bureau of Energy Efficiency.”Bulletin on Energy Efficiency. 2 (4) February. Online at:www.renewingindia.org (March 29, 2002).

Churchill, A.A. and R.J. Saunders. 1989. “Financing of theEnergy Sector in Developing Countries.” FourteenthCongress of the World Energy Conference, Montreal,Canada, September 14-22.

Desai, Ashok. 1999. “The Economics and Politics ofTransition to an Open Market Economy: India.” OECDTechnical Paper. CD/DOC (99) 12.

Dixit, S., G. Sant, and S. Wagle. 1998. “Regulation in theWB-Orissa Model : Cure Worse Than Disease.”Economic and Political Weekly. XXXIII (17).

Dubash, Navroz K. 2002. Tubewell Capitalism: GroundwaterDevelopment and Agrarian Change in Gujarat. NewDelhi: Oxford University Press.

Echeverri-Gent. 2000. “Politicians’ Incentives to Reform:Globalization, Partisan Competition, and the Paradox ofIndia’s Economic Reform.” Unpublished paper. Onlineat: http://www.people.virginia.edu/~jee8p/smuart2.htm(April 18, 2002).

Economic Times. 2001. “Government Rules out Spot Marketfor Power Trading.” The Economic Times. (December 6).

73

WRI: POWER POLITICS

Pillai, S.M.C. and R. Krishnamurthy. 1997. “Problems andProspects of Privatization and Regulation in India’sPower Sector.” Energy for Sustainable Development.III(6):67-76.

Planning Commission of India. 1994. “Report of the NDCCommittee on Power.” New Delhi: Government ofIndia.

Pragativadi.com. 2002. “Finding working capital notmandatory: BSES.” Online at: http://www.pragativadi.com/260102/business.htm (April 4,2002).

Purkayastha, Prabir. 2001. “Power Sector Policies and NewElectricity Bill: From Crisis to Disaster.” Economic andPolitical Weekly. XXXVI (June 23): 2257-2262.

Rajan, A. Thillai. 2000. “Power Sector Reform in Orissa:An Ex-Post Analysis of the Causal Factors.” EnergyPolicy. 28: 657-669.

Reddy, A.K.N., G.D. Sumithra, P. Balachandra, and A.D’Sa. 1991. “A Development-focused End-use-orientedElectricity Scenario For Karnataka.” Parts I and II.Economic and Political Weekly. XXVI (14 & 15): 891-910and 983-1001.

Reddy, A.K.N. and A. D’Sa. 1995. “The Enron and OtherSimilar Deals vs. the New Energy Paradigm.”Economicand Political Weekly. XXX (June 17):1441-1448.

Reddy, A.K.N. and Sumithra, G. 1997. “Karnataka’s PowerSector–Some Revelations.” Economic and PoliticalWeekly. XXXII (12): 585-600.

Sankar, T.L., and U. Ramachandra. 2000. “ElectricityTariffs Regulators: The Orissa Experience.” Economicand Political Weekly. XXXV May 27 (21/22):1825-1834.

Sant, G. , and S. Dixit. 1996. “Beneficiaries of IPS Subsidy.”Economic and Political Weekly. XXXI (December 21).

Suri, Jyoti. 2000. “Attempt at Real Reforms” Powerline.April 10-16.

Tata Energy Research Institute. 1993. “Performance of thePower Sector in India.” Conference on Power SectorReforms in India, Jaipur, India, October 29-31, EnergySector Management Assistance Program, Washington,D.C.

Vergin, Heinz. 1993. Letter to M.S. Ahluwalia, Secretary,Ministry of Finance, Government of India, April 30.

Verma, P.S. 1999. “Akali-BJP Debacle in Punjab Wages ofNon-Performance and Fragmentation.” Economic andPolitical Weekly. XXXIV (December 11-17).

World Bank. 1991. India: Long Term Issues in the PowerSector. Washington, D.C.

———. 1993a. The World Bank’s Role in the Power Sector.Washington, D.C.

———. 1993b. Conference on Power Sector Reforms inJaipur, India, October 29-31, Energy Sector ManagementAssistance Program, Washington, D.C.

———. 1996. “Staff Appraisal Report: Orissa Power SectorRestructuring Project.” Report No. 14298 (April 19).

———. 1997a. “Inspection Panel Report and Recommen-dation, NTPC Power Generation Project.” Loan 3632-IN(July 24).

———. 1997b. “Haryana Power Sector RestructuringProject.” Project Appraisal Document. Report No. 17234(December 16).

———. 1998. “India: Environmental Issues in the PowerSector.” Report No. 205/98 (June).

———. 1999a. “Meeting India’s Energy Needs (1978 -1999): A Country Sector Review.” Report No. 19972. Vol.1 (December 23).

———. 1999b. “Andhra Pradesh Power Sector Restructur-ing Project.” Project Appraisal Document. (January 25).

75

WRI: POWER POLITICS

5

Indonesia’s archipelagic geography poses particularproblems for electrification, and precludes a singleunified grid. Three quarters of PLN’s total installedcapacity of 20.5 gigawatts is concentrated in the Java-Bali system. The remaining 5.3 gigawatts of PLN’scapacity is distributed among 12 electrificationregions outside Java and Bali. Currently, all transmis-sion and distribution networks are owned andoperated by PLN. More than 70 percent of thetransmission network—and about half of the distri-bution network—is concentrated on the island ofJava, home to the majority of Indonesia’s population.

INDONESIA

ELECTRICITY REFORM UNDER ECONOMIC CRISIS1

Frances Seymour2

Agus P. Sari3

INTRODUCTION

By mid-2001, when Megawati Sukarnoputri assumedthe presidency of Indonesia, electricity sector reformhad not progressed far. A brief spurt of reform-oriented activity in the aftermath of the 1997–98Asian financial crisis lost momentum as the countryfailed to regain economic and political stability.Nevertheless, the Indonesian experience usefullyilluminates constraints on the inclusion of environ-mental objectives and other elements of the publicbenefits agenda in electricity sector reform, as well aslimitations on the leadership of international donoragencies in this arena.

BACKGROUND

The Electricity Sector in Indonesia4

As in many other countries, the contours of theelectricity sector in Indonesia have been shaped inpart by the country’s history, geography, and naturalresource endowment. Although there had beenprivate commercial production of electricity duringthe Dutch colonial period and briefly followingindependence in 1945, the national government hastaken the lead role in the development and adminis-tration of the electricity sector in Indonesia for thelast half-century (Pelangi, 2000). The NationalElectric Power Company (Perusahaan Umum LisktrikNegara, hereafter PLN) was established in 1950, andhas been a key player in the rapid development of thesector (GOI, 1998a). By the 1990s, PLN was one of

BOX 5.1 PROFILE OF THE ELECTRICITYSECTOR IN INDONESIA

Population (2000)1 : 212 million

Households connected to PLN (1996)2:Total: 67% Rural: 51 % Urban: 90 %

Installed electricity generation capacity (1999)3

Total: 21 gigawatts (0.7% of total world capacity)Thermal: 81%Hydro: 14%Nuclear: 0Geothermal and Other: < 2%

CO2 emissions from electricity and heat as a share ofnational emissions (2000)4: 21%

Notes:

1. World Resources Institute. 2000. People and Ecosystems:The Fraying Web of Life. Washington, D.C.: World ResourcesInstitute.

2. Asian Development Bank (1999b).

3. www.eia.doe.gov/pub/international/ieapdf/t06_04.pdf(February 6, 2002).

4. Computed by WRI using International Energy Agency(IEA) data. IEA, 2001. CO2 Emissions from Fossil FuelCombustion. Paris: OECD.

the largest such companies in the world, with some22 million customers and more than 50,000 employ-ees (Pelangi, 2000). Box 5.1 provides a profile of theelectricity sector in Indonesia.

76

WRI: POWER POLITICS

PLN’s installed capacity represents only 58 percentof Indonesia’s total; most of the rest is captive powerfor the manufacturing industry. (Captive power is off-grid generation capacity dedicated to a specificelectricity requirement.) Captive power has beeninstalled mainly by facilities without easy access toPLN’s distribution grid—almost half is outside Javaand Bali—or to provide backup for PLN’s unreliableservice (Kristov, 1995). Approximately 60 percent ofcaptive power capacity is estimated to come fromdiesel generators, and about a quarter from cogen-eration plants. While the diesel-fueled portion hasnegative environmental impacts, captive power maybe a more efficient alternative to PLN supply forcompanies using process steam, and for the highpeak loads required by extractive industries in theouter islands.

Provision of electricity at low uniform rates

throughout the archipelago has symbolized a

commitment to social equity.

In PLN’s Java-Bali system, which has been thefocus of restructuring efforts and is the subject ofthis chapter, gas and coal are the dominant sourcesof electricity. Gas combined-cycle generation andcoal-fired steam constituted about 6 gigawatts and6.5 gigawatts, respectively, or about 85 percent of thetotal in 1998. Gas and coal are expected to continueto be the main sources of electricity in the Java-Balisystem, as large hydropower projects are believed tohave reached peak energy production (PLN, 1998).While hydrocarbon fuels have been heavily subsi-dized in Indonesia, the government has also pro-moted increased use of the country’s 20,000 mega-watt geothermal potential as a renewable alternativeto fossil fuels.5

Electricity development in Indonesia has experi-enced extraordinarily high growth rates over the last20 years. PLN’s installed capacity grew at a rate of 15percent per year between 1982 and 1989 (Pape,1999), and overall growth continued at 10 percentper year between 1990 and 1998 (PLN, 2000). Even

during the financial crisis in 1998 (described below),when the economy experienced negative growth of 15percent, growth in the electricity sector continued at4 percent per year. In light of Indonesia’s 55 percentelectrification rate (80 percent on Java and Bali, 20percent on other islands), there is still considerableroom for continued growth. The Indonesian govern-ment projects demand to increase by 8.9 percent peryear between 2000 and 2010 in Java and Bali, and 10percent per year outside Java and Bali (GOI, 2000c).

In addition to being an important driver and areflection of Indonesia’s economic development, theelectricity sector also plays significant social andpolitical roles. Provision of electricity at low uniformrates to consumers throughout the archipelago hassymbolized a commitment to social equity withinand among the islands. As in other countries,populist sentiment has proven a political constrainton raising electricity tariffs. Maintenance of lowuniform rates has required cross-subsidies within theelectricity sector, as well as between the electricitysector and the national budget. These cross-subsidieshave not been transparent.

The Special Relationship with theWorld BankThe World Bank’s involvement in the electricitysector in the 1980s was emblematic of the Bank’sspecial relationship with the Government of Indone-sia during that period.6 The oil crisis in the 1970shad focused the government’s attention on the needfor structural reform in the sector, which was basedon provincial oil-fired steam plants and diesel-basedself-generation, in order to release those fuels to thelucrative export market.7 In the 1980s, Indonesia wasthe Bank’s largest borrower in the electricity sector;by mid-1989, the Bank had financed 18 projects inthe sector (World Bank, 1996). As a complement tothis large loan portfolio, the Bank also producedanalytical reports (so-called “Economic and SectorWork,” or ESW) on the Indonesian electricity sectorat an unusually high rate, averaging one per yearfrom 1981 to 1988 (World Bank, 1989).

77

WRI: POWER POLITICS

World Bank staff worked closely with technocrats inthe government to pursue a joint long-term agendaof investment and reform to integrate the system andexpand capacity based on coal and hydropower. Thiscollaboration was characterized by one Bank officialas a “model relationship with a borrower” in thecontext of a “golden age at the dawn of Indonesianreform.”8 However, other analysts have noted that theBank was not successful in promoting price reformsduring this period. Indeed, with the exception of abrief suspension of lending in 1987–88, the Bankcontinued to support the sector despite “long periodsof noncompliance even as to its financial covenants”(Haugland, et al., 1997).

In the 1980s, Indonesia was the Bank’s largest

borrower in the electricity sector.

The Bank’s ability to exercise influence through thepersuasiveness of its analysis and its partnership withthe technocrats was demonstrated in 1987, when apower struggle came to a head inside the governmentover whether or not to invest in nuclear power. FuturePresident Habibie, then Minister of Research andTechnology, was the main proponent of the nuclearoption. His case was bolstered by a parade of Westernheads of state who visited Jakarta to promote agree-ments on technical cooperation designed to generatebusiness for Western corporations. While thesegovernments and corporations and their partners inthe Indonesian nuclear agency produced massivestudies in favor of nuclear power, opponents in theMinistry of Finance were able to prevail by utilizing amodest analysis by the World Bank showing the highcost of nuclear compared to coal.9

Many of the issues that would arise in the contextof electricity sector restructuring in the late 1990swere foreshadowed in the Bank’s lending and policydialogue with Indonesia’s government in the 1980s.Most importantly, the joint agenda of the Bank andthe technocrats focused on the corporatization ofPLN. A 1989 Power Sector Institutional Develop-ment Review recommended that, in order to meet

the demand for rapid expansion, PLN should pursuea strategy of “deregulation, decentralization, andcompetition” in order to move “from bureaucracy toenterprise” (World Bank, 1989).

Issues in electricity restructuring in the late

1990s were foreshadowed in the Bank’s policy

dialogue with Indonesia in the 1980s.

The impetus for these restructuring prescriptionswas the need to attract private capital to finance thegrowth in generation capacity necessary to meetsoaring demand for electricity.10 Box 5.2 provides achronology of electricity restructuring in Indonesia.

The 1989 sector review suggested the possibility ofbreaking up PLN into smaller units that mighteventually be candidates for privatization. In addi-tion, the report suggested that the governmentconsider creating an environment in which privatepower producers could compete with PLN. Thereport was prescient, however, in cautioning thatwhile privately owned power plants were a potentiallyattractive option, “their economic advantages forIndonesia cannot be taken for granted and need to beevaluated with care” (World Bank, 1989).

The Era of Independent PowerProducersFinancing of the Paiton Thermal Power Project in1989 marked the beginning of the end of the WorldBank’s special relationship with the Indonesiangovernment in the power sector, in large part becauseit coincided with the advent of Indonesia’s experi-ment with private participation in the sector. Whilethe project itself was satisfactorily completed in 1995,two issues arose during its implementation thatwould strain cooperation to its limits in the late1990s. First was the issue of the corruption that wasendemic to private power deals negotiated in theabsence of competition. This concern appears

78

WRI: POWER POLITICS

between the lines of the project’s implementationcompletion report prepared by the World Bank:

It is interesting to note that, for contractsawarded through competitive bidding, the actualcosts were slightly less than the estimated costsfor all contracts, whereas for contracts awardedthrough direct negotiation, such as in the case ofbilateral cofinancing, the actual costs came out tobe significantly higher than the estimated costs(World Bank, 1996).

Second was the issue of excess generating capacityon Java, a prospective problem that would be exacer-bated by a whole generation of independent powerprojects initiated in the early 1990s.

The door had been opened to private sector partici-pation in electricity generation by a law passed in1985. However, the law only came into effect whenthe necessary accompanying regulations werepromulgated through Presidential Decree No. 37 in1992, which encouraged the participation of privateenterprises in electricity generation, transmission,

BOX 5.2 C H R O N O L O G Y O F E L E C T R I C I T Y S E C T O R R E F O R M I N I N D O N E S I A

• 1985 New Electricity Law passed.

• 1989 World Bank sector review recommends introduction of competition and possible eventual privatization.

• 1990 President Suharto approves first Independent Power Producer (IPP) project.

• 1992 Implementing regulations for 1985 law promulgated as Presidential Decree No. 37, which encouraged private participation in the sector.

• 1994 Government Regulation No. 23 corporatizes PLN.

• 1994–1997 25 additional IPP projects signed.

• 1997 Asian financial crisis sweeps Indonesia, bankrupting PLN.

• January 1998 World Bank suspends new lending to the electricity sector.

• May 1998 Civil unrest—in part driven by tariff increases—forces President Suharto to step down.

• August 1998 Habibie government announces electricity sector restructuring policy, issuing a “White Paper” following a workshop with donors.

• March 1999 Asian Development Bank (ADB) announces $400 million in loans to support Indonesia’s electricity sector restructuring program; Japan Bank for International Cooperation follows with a $400 million loan tied to the ADB support.

• October 1999 Indonesia’s first democratic elections replace Habibie with Abdurrahman Wahid.

• February 2000 Controversy erupts in Parliament and in the press over proposed tariff increases.

• February 2001 Government forwards new draft electricity legislation to Parliament.

• August 2001 Adburrahman Wahid is replaced by Megawati Sukarnoputri.

• October 2001 Parliament passes new oil and gas law.

• November 2001 Public hearing on draft electricity law held by House of Representatives.

79

WRI: POWER POLITICS

and distribution. An unfortunate feature of thedecree was that it opened the door to unsolicitedproposals for the private production of electricity.11 Atthe time, the privatization of electricity generationwas opposed by the head of PLN’s research division,who argued that privately supplied electricity wouldbe almost 50 percent higher than PLN’s costs due toequity return requirements and interest rates (Sudja,1993). However, a later study found that if all hiddensubsidies were taken into account, PLN’s truegeneration costs would increase by 46 percent(Kristov, 1995).

Prior to the 1992 decree’s enactment, then-President Suharto in 1990 had agreed to developanother coal-fired power plant at the Paiton site asthe first private power project in Indonesia. This wassoon followed by another. Because the new plantsreached financial closure before the World Bank-supported plant at the site began operations, andwere financed under “take-or-pay” contracts, PLNwould be forced to utilize their capacity in preferenceto power from the first plant, thereby underminingthe economics of the Bank’s investment (WorldBank, 1996). The World Bank and an advisor fromUSAID had counseled the Government of Indonesiato “start small” in its experimentation with privatepower production to reduce risk. Future PresidentHabibie, however, wanted to “start big,” and—incontrast to the fate of his nuclear ambitions in the1980s—got his way with the two plants at the Paitonsite. The commercial interests of donor governmentsaided his case. U.S. President Clinton’s visit toIndonesia in late 1994 for the Asia-Pacific EconomicCooperation (APEC) meeting put pressure on bothgovernments to have deals ready for his signature.Clearly, the influence of the World Bank and itstechnocratic allies in the government had beeneclipsed by other actors.

During 1994–97, 25 more power-purchase agree-ments (PPAs) were issued and signed with indepen-dent power producers (IPPs). The majority of theseagreements were based on unsolicited,nontransparent bidding processes, and resulted inoverpriced, dollar-pegged, take-or-pay conditions thatgreatly favored project investors. These projects were

driven by the interests of private developers, whooften had close connections to the president’s familyand cronies. Many were also linked with NorthAmerican, European, and Japanese corporations,which were in turn backed by bilateral export creditand guarantee agencies.12 The level of corruptionseen in these deals has been characterized as “stag-gering” (Fried, 2000).

The World Bank had counseled the Govern-

ment of Indonesia to “start small” in its

experimentation with private power produc-

tion to reduce risk.

The PPAs for new installed capacity did not reflectPLN’s long-term plans for development of genera-tion and transmission capacity. Indeed, many of thenew plants would produce unneeded power,sometimes far from existing transmission lines. TheWorld Bank had first expressed concerns about the“looming problem” of excess capacity in late 1993,even before the surge of unneeded PPAs. Bankofficials subsequently “raised this issue repeatedlyat high levels of authority in its continuing policydialogue with GOI” (World Bank, 1996), includingforceful representations by the Bank’s countrydirector in mid-1994.13 In November of that year,the Bank sent a strongly worded letter warning ofthe prospective $8 billion dollar cost—“a staggeringfigure”—that PLN would incur over the next 10years from excess capacity and excessive costs.Bringing down the projected excess capacity reservemargin—one of the highest in the world—wasmade a condition of the Second Power Transmis-sion and Distribution Project in 1996 (World Bank,1996). In 1995, the World Bank’s Country Eco-nomic Memorandum for Indonesia warned that thecountry risked following the example of the Philip-pines, in which the national utility was forced topurchase power from high-cost take-or-pay con-tracts with private producers while reducing use ofits own lower-cost generation capacity (World Bank,1995). Box 5.3 describes the Philippine experience.

80

WRI: POWER POLITICS

BOX 5.3 INDEPENDENT POWER PRODUCERS, STRANDED DEBT, ANDELECTRICITY REFORM IN THE PHILIPPINES

During 1992-93, the Philippines sustained poweroutages and brownouts that resulted fromweaknesses in power project planning andimplementation by the Government of thePhilippines (GOP) and its National PowerCorporation (Napocor). In response to this crisis, theRamos administration negotiated build-own-operate(BOO) or build-own-transfer (BOT) contractsbetween Napocor and independent power producers(IPPs) that would permit quick expansion of powergeneration capacity and improve the reliability andquality of electricity supply.

These contracts were bundled with long-term powerpurchase agreements (PPAs) on terms very favorableto the IPPs. The agreements required Napocor topurchase minimum amounts of electricity generatedby IPPs (known as a take-or-pay contract) and weredenominated in foreign currency. The contractsthemselves also included mandatory buy-backclauses should the government fail to honor its take-or-pay agreements. During this period, the AsianDevelopment Bank, the World Bank, and the JapanExport-Import Bank (now the Japan Bank forInternational Cooperation) were providing technicalassistance to the GOP to undertake comprehensivepower sector reforms. The lending institutionswelcomed the entry of IPPs, believing this to beconsistent with their policy advice related to creatingspace for private firms; introducing marketcompetition; and unbundling the sector into separategeneration, transmission, and distribution functions.

Even before the Asian financial crisis in 1997, anumber of problems were evident with IPP contracts.The electricity prices Napocor agreed to pay under

the PPAs were nearly twice the cost of power fromNapocor-owned and operated plants (1.86 pesos perkilowatt-hour versus 0.99 pesos per kilowatt-hour).As IPPs increased their share in the powergeneration mix (from 25 percent in 1995 to 40percent in 1997), they exerted upward pressure onelectricity tariffs, already the second highest in Asiaafter Japan. The PPAs were inherently uneconomicalbecause they were set high above Napocor’s cost ofpower and what the market would bear in acompetitive environment.

In addition, BOT and BOO contracts—basicallypayments for the power plants built by the IPPs—entered Napocor’s books as long-term debt in theform of lease obligations. This worsened Napocor’salready high debt-to-equity ratio from 0.62 in 1995to 0.81 in 1997. During 1995-97 Napocor’s long-termdebt increased 169.9 percent. Most of this increasewas driven by the rise in obligations to IPPs, whichhad shorter maturities (5-8 years) relative to the debtheld as concesssional loans or bond issues (11 years),despite the 20-year period necessary to write offdepreciation charges on IPP assets.

The onset of the Asian financial crisis plungedNapocor into deeper financial trouble. Thedevaluation of the Philippine peso worsenedNapocor’s debt burden. Its revenues and domesticcash flow were denominated in pesos, but itsobligations under the PPAs were set in foreign-denominated currency. As a consequence, Napocor’soperating losses ballooned to 5.9 billion pesos by1999 as the institution tried to service debtobligations and cover its take-or-pay contracts. Reliefwas provided by multilateral and export credit

Financial Crisis and Political Change

In mid-1997, the Asian financial crisis swept throughIndonesia. The Indonesian currency, the Rupiah, lost80 percent of its value in only four months. Prices

soared, capital fled the country, factories closed, andwithin a year some 30 million people fell below thepoverty line, joining the 26 million people alreadythere (World Bank, 2001b). Unlike many developingcountries Indonesia had, until 1997, escaped the

81

WRI: POWER POLITICS

institutions ($300 million from the AsianDevelopment Bank, and $400 million each from theWorld Bank and Japan’s Bank for InternationalCooperation). But the release of tranches of thesefinancial packages was conditioned on the passage oflegislation that would privatize Napocor, verticallyunbundle the electricity sector into competitive orregulated electricity markets, and eliminate cross-subsidies among consumer groups—as well asimprovements in Napocor’s financial performance.

The question of what institutions or economic groupswould assume responsibility for Napocor’s strandeddebts under the proposed reforms created widespreadpolitical controversy in 1999 and 2000. Domesticconstituencies critiqued the GOP’s proposed solutioncontained in legislation under consideration beforethe Philippine Congress: imposition of a universallevy on electricity consumers. The PPAs were to betransferred to buyers of Napocor’s generating assets,but the government would cover the cost differentialbetween the price to be paid under the PPAs and themarket price of power. This burden would also betransferred to electricity consumers in the proposedlevy.

These controversies and the political crisis generatedby the impeachment of President Estrada in 2000stalled the passage of the reform legislationchampioned by international donors. The election ofGloria Macapagal-Arroyo in May 2001, and arenewed effort by Arroyo’s government to build adomestic constituency for the passage of reformlegislation broke the deadlock. Domesticconstituency-building was assisted by a stakeholder

consultation process supported by the USAIDmission in Manila. In June 2001, the PhilippineSenate and House of Representatives passed theElectric Industry Reform Act (EIRA). The actpreserved the original reform program supported bydonors, but included some key concessions todomestic constituencies, such as a 5-percent cut inelectricity tariffs for the poorest populations andrecognition that PPAs would need to berenegotiated.

The Philippine experience demonstrates that privatesector entry into the business of electricitygeneration prior to political consensus on structuraland tariff reforms can impede the forging of suchconsensus.

Sources:

Asian Development Bank. 1998. “Report andRecommendation of the President to the Board of Directorson a Proposed Loan and Technical Assistance Grants to theRepublic of the Philippines for the Power RestructuringProgram.” Report No. RRP: PHI 31216. (November).

Carpio, Denis T. 1998. “Power Industry Restructuring in thePhilippines: Issues and Alternative Solutions.” Conferencepaper. 17th Congress of the World Energy Council, Houston,Texas, September.

Dalangin, Lira. 2001. “Filipinos to Pay P619 Yearly forNapocor Debt: Work Group.” Online at: http://www.inq7.net/brk/2001/may/26/brkpol_8-1.htm (May 31, 2002).

USAID. No date. Philippines Activity Data Sheet.

Winrock International. 2001. “Renewable Energy State ofIndustry.” Reports No. 1 and 2. (May and August).

Wong, Susanne. No date. “An Overview of ADB’s Support forEnergy Sector Reform.” Briefing Paper 10. InternationalRivers Network.

discipline of externally imposed stabilization andstructural adjustment programs. However, inSeptember, it was forced to request a bailout packageorganized by the International Monetary Fund (IMF).

The financial crisis caused chaos among thegovernment agencies, private developers, financiers,and international financial institutions involved inthe Indonesian power sector. PLN was plunging intobankruptcy. The value of revenues in Rupiah de-

BOX 5.3 (CONTINUED)

82

WRI: POWER POLITICS

clined even as dollar-denominated debts, take-or-paycontracts, and spare-parts prices soared.

Projects that had been of questionable viability evenbefore the crisis became even less defensible in lightof a crashing economy and currency. Between Julyand December, a flurry of communications regardingprojects in various stages of development ricochetedamong the president’s office, the Ministry of Minesand Energy, PLN, the World Bank, and the IMF.Presidential Decree No. 37/1997 subsequentlysuspended some 27 IPP projects.

Exacerbating concern that PLN would not be able tomeet its existing financial obligations, much less newones, was the proposed Tanjung Jati C power plant—an IPP project linked to President Suharto’s daughterand steeped in allegations of corruption. In a Novem-ber 1997 letter to the Ministry of Mines and Energy,the World Bank’s country director suggested that theproject be reconsidered. The signing of the deal wasannounced in December; in January the countrydirector informed the ministry that it was suspend-ing a loan then in preparation, thus terminatingalmost three decades of lending to the Indonesianelectricity sector. The “special relationship” betweenthe World Bank and the Indonesian electricity sectorhad come to an end.

Soon the economic crisis led to a political crisis aswell. By March and April 1998, riots and protestswere spreading. Some of the protests were sparkedby price increases mandated by the IMF, including ahike in electricity tariffs in March. Following theshooting deaths of several student demonstrators,tens of thousands of students took to the streets,eventually taking over the Parliament building.Ultimately, President Suharto stepped down in May,and was replaced by his vice president, Habibie.

“REFORMASI” IN THE ELECTRICITYSECTOR

Historically, major changes in Indonesia’s trade andindustrial policy have been linked to major politicaland economic crises (Pangestu, 1996). In mid-1998,

it appeared that the political and economic events ofthe preceding months had set the stage for restruc-turing of the electricity sector. Reformasi total or “totalreform” was the slogan on everyone’s lips, and itappeared that radical changes in the way the countrywas governed were in progress. Electricity sectorreform appeared inevitable, as PLN’s financialviability had been destroyed by the combination ofthe economic crisis and the accumulation of ill-considered PPAs. Suddenly, the reform gainedmomentum, largely due to the need to privatize asmany PLN components as possible to generate cashand staunch financial hemorrhage.

IMF Conditionality and Kuntoro’sLeadershipIn responding to the economic crisis, the electricitysector in particular was a focus for reform for boththe government and the international donor commu-nity. In a series of letters of intent and supportingdocuments, the government made commitments tothe IMF that included establishing the legal andregulatory framework to create a competitive electric-ity market; restructuring of the organization of PLN;adjustment of electricity tariffs; and rationalizingpower purchases from PPAs (GOI, 1999a).

Habibie-promoted nuclear and IPP schemes hadbeen antithetical to the World Bank’s agenda in theelectricity sector. Ironically, Habibie as presidentcreated conditions favorable to reform. KuntoroMangkusubroto, the Minister of Mines and Energy,was one among “as good a crop of ministers as youcould hope for,” according to one World Bank offi-cial.14 Kuntoro quickly set about fulfilling Indonesia’scommitments to the IMF to reform the electricity andoil and gas sectors. He took ownership of the results ofan independent audit of PLN commissioned by theIMF that highlighted the need for improved efficiency,and pushed for the formulation and passage of newlegislation to govern the sector.

Kuntoro himself took a personal interest in thedesign of electricity sector reforms and buildingconstituencies for them. He is said to have carefully

83

WRI: POWER POLITICS

corrected and commented on five drafts of a “WhitePaper” that laid out the content of the proposedreforms.15 While the white paper was under develop-ment, Kuntoro had periodic breakfast meetings withkey stakeholders in the electricity sector. Theseincluded government officials, business people, andnongovernmental activists. Despite the exclusiveappearance of “by-invitation” breakfasts with theminister, these meetings were among the firstattempts to open up participation in electricity sectordecisionmaking. The so-called “breakfast club”evolved into a formal organization—the IndonesianElectricity Society—to serve as a forum for exchangebetween the minister and stakeholder representa-tives.

In August 1998, the minister convened a majorworkshop attended by representatives of variousgovernment and donor agencies at which the draftwhite paper was discussed. The paper was thenreleased to the public, and was later cited in a letterof intent to the IMF as the basis for the government’selectricity sector restructuring policy (GOI, 1999a).

Content of the Proposed Reform16

The August 1998 white paper articulated fourobjectives for electricity sector restructuring: (1) therestoration of financial viability; (2) competition; (3)transparency; and (4) more efficient private sectorparticipation. The six areas targeted for reform were(1) industry restructuring and unbundling; (2)introduction of competition; (3) tariff-setting, costrecovery, and removal of subsidies; (4) rationalizationand expansion of private sector participation; (5)redefinition of the government’s role; and (6)strengthening of the legal and regulatory framework(GOI, 1998a).

The white paper reflected a reform agenda in-formed by a series of studies commissioned by theWorld Bank or by the GOI in previous years. A studycommissioned by the Bank from the consulting firmNorplan A/S in 1993 provided an institutionalframework for restructuring, which included unbun-dling of the generation, transmission, and distribu-

tion functions of PLN (Norplan A/S, 1993). The GOIsubsequently commissioned a study by Coopers andLybrand on the regulatory framework and strategy forprivate power production that was completed in1996.17

The restructuring agenda put forth in the whitepaper aims to separate the commercial, social, andregulatory functions of PLN. Government RegulationNo. 23 of 1994 had already changed PLN’s statusfrom a public utility to a public company, markingthe corporatization of PLN. In the restructuredsector, electricity producers would operate commer-cially and be financially independent of the govern-ment. Social functions would be continued by thegovernment, which would provide transparentsubsidies to poor regions and customers from aSocial Electric Power Development Fund. Regulatoryroles would be played by a new, autonomous agencydistinct from the Ministry of Mines and Energy to beestablished under a new electricity law to be enactedby 1999.

According to the 1998 plan, the independentregulatory body, an independent transmissioncompany, and an independent regional companywould begin operation in 2000, while subsidies weregradually removed. Generation and distributioncompanies would operate under the supervision ofthe Java-Bali Electricity Company (JBECs). A PLNservices company would be the only remainingcomponent of the former monopoly. It was expectedthat in 2001–2002, independent generation anddistribution companies would begin to emerge, whilethe ones controlled by JBEC would either be priva-tized or enter into direct competition with the IPPs;and by 2003, a complete multiple buyer/multipleseller system would emerge, as all generation anddistribution companies would be independent andJBEC would be privatized. Figure 5.1 compares thesystem in 1998 to the one envisioned for 2003.

Many details of the restructuring process were to betreated separately in three additional documents(GOI, 1998a). A tariff code, with the status of apresidential decree, would establish tariff structuresand subsidy mechanisms. A ministerial-level plan-

84

WRI: POWER POLITICS

ning and competitive tendering code would detailplanning arrangements and procedures for biddingon generation and transmission projects. Finally, aministerial-level grid code would govern operation ofpower transmission, scheduling, and dispatch. Thefate of much of the public benefits agenda wouldreside in these documents, which were being writtenby donor-funded consultants.18

The Role of International DonorAgenciesInternational donor agencies played important rolesin the electricity sector reform process. The 1997–98financial crisis transformed the World Bank’s overallrelationship with the government. Instead of a large

portfolio of project lending in various sectors, theBank now focused on a policy reform agendaleveraged through a series of policy reform supportloans coordinated with the conditionalities of theIMF bailout package. Among the conditionalitiesprepared by World Bank staff were those related tothe electricity sector. The World Bank was a keyparticipant in a flurry of activities focused on electric-ity sector reform in mid-1998. In July, Bank officialsparticipated in the drafting of the white papermapping out the restructuring plan championed byMinister Kuntoro, and according to an internationalconsultant involved in the process, were primarilyresponsible for the “public benefits” content that itcontained.19

The Asian Development Bank (ADB) also played anincreasingly important role. Like the World Bank, theADB had been lending to the Indonesian electricitysector for almost three decades, with some 28 loanstotaling more than $3 billion (ADB, 2001). Thefinancial crisis marked a shift in the ADB’s role fromproject financier to a proponent of policy reformbacked by sector lending. At the time of the August1998 workshop, an ADB mission was in Jakarta tobegin preparation of an electricity sector loan.Indeed, according to an ADB official, the ADB hadconditioned its assistance on production of the whitepaper.20 In March 1999, the ADB’s board approved a$380 million loan to support the government’srestructuring agenda, and an additional $20 milliontechnical assistance loan for “capacity-building toestablish a competitive electricity market” (ADB,1999a). Co-financing in the amount of $400 millionwas arranged from the Japanese Bank for Interna-tional Cooperation.

The World Bank’s suspension of new lending in thesector in early 1998 followed by the ADB’s entry witha major sector loan prompted a shift in the relativeinfluence of the two institutions over the reformagenda. The ADB and the World Bank worked out aninformal division of labor in the electricity sector:ADB took the lead on sectoral restructuring issues,while the World Bank focused on PLN corporate andfinancial restructuring. Thus, the ADB wouldsupport technical assistance for development of the

FIGURE 5.1 EVOLUTION OF THEJAVA-BALIELECTRICITY SYSTEM

Generation

Transmission

Distribution

Generation

Transmission

Distribution

MULTI BUYER/MULTI SELLER (2004)

PrivatizedEx-Indonesia

Power

RationalizedIPPS

NewIPPS

Java-Bali Transmission andLoad Dispatch Centre

Private DistributionCompanies

Captive Powerand Utility IPPS

CURRENT SYSTEM

IndonesiaPower

Java-BaliGenerationCompany

IPPS

Java-Bali Transmission andLoad Dispatch Centre

PLN Java Distribution,PLN XI Region,

Indonesia Power, JBEC

Captive Powerand

Utility IPPS

RE

GU

LA

TO

RY

BO

DY

85

WRI: POWER POLITICS

draft law, the tariff, procurement, and grid codes, aswell as development of a new regulatory body.

The financial crisis marked a shift in the

ADB’s role from project financier to a propo-

nent of policy reform.

One of the objectives of ADB support was to buildpublic acceptance of the electricity price increasesthat would be necessary to restore PLN’s financialviability, while protecting the interests of consumers(ADB, 1999a). Toward this agenda, the ADB loansupported assistance to the government and PLN inbuilding the case for tariff increases, and the conven-ing of a multistakeholder, Working Group on Re-structuring, which brought together nongovernmen-tal organizations, industry lobbyists, and governmentofficials.

The United States Agency for International Devel-opment (USAID) played an interesting role inIndonesia’s electricity sector restructuring process.Over the last decade, USAID has financed a series ofexperts to advise the Indonesian government onelectricity sector issues. In 1990, a USAID-fundedadvisor based in Jakarta had joined the World Bankin cautioning the Indonesian government against itsheadlong rush into private participation in electricityproduction.21 The expert’s advice was reportedly anirritant to the U.S. ambassador, as it conflicted withthe embassy’s agenda of promoting U.S. commercialinterests in the sector (ADB, 1999a).

A conflict of interest within the U.S. governmentregarding IPPs arose again after the financial crisis,when the Government of Indonesia canceled a PPAfor a geothermal energy plant with California Energy.California Energy’s investment had been guaranteedby the U.S. Overseas Private Investment Corporation(OPIC). After the company went to arbitration with aclaim of $290 million and won, OPIC had to pay out$217.5 million and private insurers $72.5 million(Watson, 2001). As soon as the case entered arbitra-tion, USAID had to withdraw an advisor providing

legal advice to the government on how to deal withthe IPP issue.22 According to USAID officials inJakarta, although PLN officials requested furtherassistance to help them deal with the issue, USAIDhad to say no. After protracted negotiations, theIndonesian government ultimately agreed to pay$260 million to reimburse OPIC and other insurers(Harvest International, 2000).

USAID was otherwise active in electricity sectorrestructuring debates, and the staff participated inthe August 1998 workshop that finalized the whitepaper. The agency has also provided financial supportfor Indonesian NGOs such as the IndonesianConsumers Union, encouraging them to speak out inthe restructuring process.23

There was concern that increasing demand for

power would soon exceed available generating

capacity, lending a sense of urgency to the

process of reform.

Both USAID and the World Bank claim credit forpromoting renewable energy in the context of powersector reform. According to the staff in Jakarta,USAID has championed a grid code that wouldinclude renewable energy sources without penalty.24

Just before the financial crisis hit in mid-1997, theWorld Bank had approved a loan and companiongrant from the Global Environment Facility to createa market for privately financed renewable energyprojects (World Bank, 1997). Under the project,which was canceled in the wake of the financialcrisis, PLN would have offered to purchase powerfrom small-scale renewable sources at tariffs basedon PLN’s avoided costs.

The Process StallsWith the electricity sector restructuring white paperand donor assistance in place, reform was expectedto progress quickly. While continued reserve genera-

86

WRI: POWER POLITICS

tion margins and the economic downturn providedsome breathing space, there was concern thatincreasing demand for power would soon exceedavailable generating capacity, lending a sense ofurgency to the process. Given the long lead time fornew projects to come on line, reform advocates sawthe post-crisis period as a window of opportunity torestructure the sector and attract new investmentbefore power shortages began to constrain economicgrowth.25 In a March 1999 letter of intent, thegovernment articulated its expectation that a newelectricity law would be passed by December 1999(GOI, 1999a). However, a series of factors conspiredto stall the process.

Reform advocates saw the post-crisis period as

a window of opportunity to restructure the

sector and attract new investment.

First, there is some indication that key officials inthe Indonesian government chose to make reform ofthe oil and gas sector a higher priority. While the oiland gas sector and the electric power sector wereinextricably linked through distorted pricing of fuels,the former was seen as more difficult to reform dueto the higher financial stakes.26 In addition, PLN wasseen as more prepared for restructuring than thenational oil company (Pertamina), so priority atten-tion was given to the latter.27

In October 1999, the first democratically electedPeople’s Consultative Assembly was convened andselected Abudurrahman Wahid as president. When anew cabinet was formed, Kuntoro lost his position asMinister of Mines and Energy. The new governmentexpressed its intention to proceed with electricitysector reform, and in January 2000 agreed to speedup the restructuring of a number of state-ownedcorporations, including PLN (GOI, 2000a). But afterKuntoro’s departure, little progress was made.According to an international consultant, the newleadership in the ministry was not supportive of therestructuring agenda,28 while many PLN employeeshad resented Kuntoro’s leadership on the issue.29

The most significant stumbling block was thedifficulty the government faced in raising electricitytariffs, which, in May 1999, were still below PLN’sproduction costs (GOI, 1999b). While arguablyessential to restoring PLN’s financial viability,attracting new investment, and providing resourcesto expand access to electricity, tariff increases wereopposed by a number of constituencies. Within theministry, key officials responsible for drafting thenew electricity law harbored doubts about proposedtariff increases. According to an internationalconsultant, the May 1997 riots “didn’t do much toencourage people in government to make harddecisions.”30 As described below, proposed tariffincreases would later prove controversial when thedraft law was submitted to the Parliament. Tariffincreases were opposed by students and the left-wingPeoples Democratic Party (Suara Pembaruan,2000b).

Another obstacle to the reform process was thedifficulty faced by PLN in negotiating payment termswith the IPPs (GOI, 2000b). As long as this loomingfinancial liability remained unresolved, the restruc-turing process could not move forward. Yet anotherobstacle was the political distraction of controversyover President Wahid’s leadership, which eventuallyled to his replacement by Megawati Sukarnoputri inAugust 2001.

Tariff Increases and the Public InterestThe relationship between tariff increases and thepublic interest has proven to be the most contestedaspect of the electricity sector reform process inIndonesia. On one side, international donor agen-cies, some government officials, independentanalysts, and some NGOs argue that tariff increasesare essential to maintain the viability of the electricitysector.31 They point to the economic distortionsinduced by low tariffs—including inefficiency—andthe fact that subsidized rates have drained the publictreasury while benefiting electricity customers whocan pay the economic cost of electricity. They assertthat the impact of tariff increases on the poor can bemitigated through a rate structure that maintains a

87

WRI: POWER POLITICS

high subsidy content for the smallest householdconsumers. Furthermore, higher tariffs are necessaryto finance expansion of access to electricity, especiallyto rural areas.

The relationship between tariff increases and

the public interest is the most contested aspect

of the electricity sector reform in Indonesia.

On the other side, students and more populist-oriented NGOs have demonstrated against tariffincreases on the grounds that they will imposefurther hardships on the poor.32 They argued thateven if poor households are shielded from the directimpact of electricity tariff increases, those increaseswill provoke a rise in the prices of other goodsconsumed by the poor, including Sembako, anabbreviation for “the nine staple goods.” Oppositionto electricity tariff increases is part of a broaderopposition to liberalization of the Indonesianeconomy that is driven by pressure from the IMF,the World Bank, and the Asian Development Bank.33

In February 2000, a national controversy eruptedwhen a group of NGOs was reported to have sup-ported a proposed 55-percent increase as part of apackage discussed in the ADB-supported WorkingGroup. The NGOs were excoriated in the press,described as being “biased against the people” (SuaraKarya, 2000), and even accused of taking bribes.34 InMarch, Kuntoro, now president of PLN, was thetarget of student protests against electricity priceincreases (Rakyat Merdeka, 2000).

Electricity tariffs were in fact increased in 2001, assubsidies to business and industrial users weregradually withdrawn, and further staged increaseswere planned for 2002. The debate continued intoearly 2002, as the new electricity law made its waythrough the Parliament. While the 2001 increasesdid not spark significant protest, small rallies againstthe higher 2002 tariff increases were staged inJanuary in several cities by such groups as thePeoples Democratic Party (PRD) and the Anti

Subsidy-Revocation Alliance (A2PS) (Tempo Interactif,2002b). Other groups, such as the IndonesianConsumers Foundation, were cautiously supportiveof tariff increases, as long as they were accompaniedby improvements in PLN’s performance, and well-supervised implementation of the subsidy schemefor poor households (Tempo Interactif, 2002a).

THE PUBLIC BENEFITS AGENDA

The public benefits agenda—specifically concernsregarding social equity, environmental protection,and good governance—received uneven attention inthe design of Indonesia’s electricity sector restructur-ing process.

Concern about Social EquityIndonesia’s electricity sector restructuring agendahas focused almost exclusively on Java and Bali. TheAugust 1998 white paper justifies this focus, sug-gesting that the Java-Bali electricity system is suffi-ciently mature for commercialization, while thesmaller, more isolated systems on other islands,characterized by higher costs and lower electrifica-tion rates, should be restructured more slowly (GOI,1998a). Mobilization of private resources for thesector on Java and Bali would enable the governmentto focus limited public finance on other islands—“where it is most needed” (GOI, 1998a).

At the time the white paper was being drafted, therewas strong consensus among all parties about theneed to protect social equity as part of the restructur-ing process. All participants were aware of thesymbolic importance of affordable electricity inIndonesia historically. For example, in its sectorreview 10 years earlier, the World Bank had recog-nized the government’s social objectives related to“equality”—including the provision of electrificationthroughout the archipelago—and “fairness,” includ-ing the maintenance of electricity rates at affordablelevels (World Bank, 1989). The white paper—andsubsequently the draft electricity law—proposed a“Social Electric Power Development Fund” to finance

88

WRI: POWER POLITICS

continued subsidies to poor households and ex-panded access to electricity in underdevelopedregions.

In 1998, however, participants were also keenlyaware that protests against price increases hadhelped bring down the Suharto regime. Concernsover the impacts of restructuring on the poormotivated the most significant sources of oppositionto reform. Populist sentiments, expressed by studentdemonstrators and the popular press, denouncedproposed tariff increases, and muted the voices ofthose NGOs who understood that the preponderanceof existing subsidies were captured by the nonpoor atthe expense of the national development budget.

Another source of opposition to reform related toits likely impact on employment, including fromPLN’s own labor union. The union may have fearedjob losses in the process of unbundling and afterPLN was exposed to competition, but did not raisethis concern in their public statements. Instead, theunion criticized the proposed restructuring asunconstitutional. Article 33 of the IndonesianConstitution states that “branches of production thathave large implications to the life of the generalpublic should come under the control of the state.”Unions have interpreted this provision to meangovernment ownership. Representatives of laborinterests have been assertive participants in a civilsociety coalition for the Indonesian power sectorformed in late 2001.

Industry associations also raised the specter of jobloss as a reason to oppose electricity price increases.For example, in early 2000, the Indonesian TextileAssociation, though not an energy-intensive industry,threatened that increased tariffs would cause layoffs.Their lobbying efforts directed at the Ministry ofTrade and Industry, the Ministry of Labor, andPresident Wahid were soon followed by similarspecial pleading from the Chamber of Commerce,the Indonesian Railway Company, and the hotelindustry (Bisnis Indonesia, 2000a, 2000b; SuaraPembaruan, 2000a; Republika, 2000).

Proponents of reform, particularly in the interna-tional donor community, were frustrated by thepublic discourse on the impacts of reform on thepoor and on employment, which according to theiranalyses was misleading. For example, the PovertyImpact Assessment conducted in conjunction withthe ADB loan asserted that “the overall impact of theprogram is pro-poor” (ADB, 1999b). While conced-ing that tariff increases and restructuring would haveshort-term negative impacts (increases in prices ofgoods and services purchased by the poor andcontraction in employment), the assessment pointsto targeted social protection mechanisms to deal withshort-term impacts, and to lower prices and newemployment opportunities in the long run (ADB,1999b). A study undertaken by the Bandung Tech-nology Institute indicates that the poorest householdsare willing to accept a 10-percent increase in electric-ity tariffs, while other electricity consumers are ableto pay the full economic cost of power (Center forResearch on Energy, 2001).

Populists denounced proposed tariff increases and

muted the voices of those NGOs who understood

that subsidies were captured by the nonpoor.

On the other hand, international NGOs havepointed out that the positive impacts promised by thedonor agencies depend crucially on a set of assump-tions about how the reforms will be carried out(Motoyama and Widagdo, 1999). In particular, theyhave questioned the availability of financing for theSocial Electric Power Development Fund, and theaccountability of the proposed independent regula-tory board. (Motoyama and Widago, 1999)

The ADB’s Poverty Impact Assessment also pointsout that only 40 percent of Indonesia’s poor areconnected to the grid. Thus, those who opposed tariffincreases in the name of the poor failed to addressthe question of why continued subsidies to house-holds already connected to the grid was a higherpriority for public finance than expanded access toelectricity for the poor majority.

89

WRI: POWER POLITICS

Concern about EnvironmentalSustainability

In contrast to the first-order concern about socialequity, concern about environmental sustainabilitywas at best a third-order consideration in the designof Indonesia’s electricity sector reform. Historically,the World Bank had worked with PLN to promoteenvironmental protection at the project level. The1989 sector review noted “environmental preserva-tion” as among the objectives PLN had been asked topursue. According to World Bank staff, PLN’sperformance in addressing the environmental andsocial impacts of its projects in the 1980s was “ashining model of how it should be done,” pioneeringbest practices in resettlement for hydropowerprojects, and mitigation of emissions from coalplants.35 The Paiton Thermal Power Project—financed the same year the World Bank formalizedan environmental assessment policy in 1989—included among its objectives strengthening “thegovernment’s environmental monitoring capabilityas well as its ability to formulate and enforce environ-mental standards in the energy sector.” According tothe project’s implementation completion report,significant results were achieved (World Bank, 1996).

However, environmental concerns do not appear tohave influenced the design of electricity sectorrestructuring. The lack of attention to incentives forenergy efficiency (other than tariff increases) isparticularly striking in light of the potential forefficiency to reduce requirements for new generationcapacity.36 The World Bank’s analysis focused insteadon the environmental benefits to be realized fromderegulating energy prices overall, which it waspursuing through proposed reforms in the oil andgas sector. Such deregulation would reduce subsidiesto petroleum products used in electricity generation,such as diesel and fuel oil, and provide incentives forefficiency and for switching to cleaner fuels such asnatural gas (World Bank, 2000).37

The August 1998 paper makes brief references toincentives for energy efficiency in tariff-setting as thelast of six objectives (led by cost-recovery) under thatsection of the paper. The white paper makes no

reference to incentives for the development ofrenewable resources, and no mention of environ-mental objectives per se. Similarly, while the pre-amble to the draft electricity law alluded to the need“to take into account the preservation of environmen-tal functions, energy conservation, and energydiversification,” only one sentence in the bill referredto the environment (Supplemental State Gazette,2000).38

As described above, some donors and NGOspromoted increased attention to renewable resourcesin discussions of electricity sector reform. Forexample, in late 2001, an Indonesian environmentalNGO hosted a regional meeting to discuss equity andsustainability in the context of electricity sectorreform, at which participants concluded that insuffi-cient attention was being given to environmentalimpacts and to removing barriers to renewableenergy technologies (SPENA Newsletter, 2001).Others have questioned the lack of attention todemand side management in the reform process(Motoyama and Widagdo, 1999).

Concern about Good GovernanceIn the earliest discussions of power sector reform inIndonesia, attention to good governance includedcalls for increased financial transparency in thevarious subsidized transactions between PLN, thegovernment, and consumers (World Bank, 1989).However, the focus of the reform effort in the late1980s and early 1990s was on narrowing, ratherthan broadening, participation in decisionmaking. Aspart of the corporatization process, the World Bank’s1989 sector review recommended streamliningdecisionmaking to reduce the “micromanagement”of PLN by government officials (World Bank, 1989).At that time, neither other ministries—such as theMinistry of Environment—nor civil society actorswere on the radar screen as potential contributors tothe process of reform.

By the late 1990s, attention to good governance inthe Indonesia power sector restructuring processcontinued to focus on increasing the financial

90

WRI: POWER POLITICS

ness to be associated with the expenditure of loanfunds that would add to Indonesia’s debt burden,several key NGOs refused to participate.39

Perhaps due to the slow pace of reform, as of early2002, participants in the reform process had paidlittle attention to the governance challenge of devel-oping an independent regulatory function. The whitepaper envisioned that an autonomous agencyreporting to the Minister of Mines and Energy wouldbe created by the new electricity law. The new agencywould be vested with regulatory authority for theentire energy sector, including electricity, gas, andoil. It would issue licenses and supervise compliance.While donor agencies saw such an autonomousagency as likely to be more transparent and account-able than its precursors, public interest advocatesremained unconvinced in the absence of specifics(Motoyama and Widagdo,1999).

The draft electricity law stated that “the RegulatingBoard shall make decisions independently and makea transparent clarification regarding all of theconsiderations in its decisionmaking,” but deferredspecifics to regulations that would be developed later.Prior to passage of the law and under pressure frominvestors, the government enacted PresidentialDecree No. 15/2002, which revokes the 1997 decreethat suspended IPP projects in preparation. How thegovernment performs in supervising these projectswill be an early test of commitment to genuinereform.

Given the recent history of corruption and politicalinterference in the sector, in addition to the technicaland managerial capacity that will be required toregulate the complexity of the proposed system, thisgovernance challenge appears to have been under-appreciated in the process to date.

CONCLUSIONThe Indonesian experience with power sectorrestructuring was profoundly influenced by severalcontextual factors. The 1997 financial crisis andongoing economic crisis both stimulated and

transparency of the sector, and added concern aboutstakeholder participation in the reform process itself.Little attention was devoted to the challenge ofcreating a new independent regulatory body togovern private participation in the electricity market.

In the era of reformasi, one thing that government,donor, and civil society actors could agree on was theneed for increased transparency—one of the fourobjectives of power sector restructuring articulated inthe white paper. Among World Bank/IMF condition-alities was a requirement that the governmentundertake an independent audit of PLN (GOI,1998b), and NGOs and the Parliament demandedthat the results of the audit be made public (MediaIndonesia, 2000). Concerns raised by the IPP dealshad put anti-corruption efforts high on the NGOadvocacy agenda.

Good governance in the sector restructuring

process focused on the financial transparency

of the sector, and stakeholder participation in

the reform process.

There was also an attempt to increase stakeholderparticipation in the reform process itself. As men-tioned above, Minister Kuntoro conducted his ownoutreach early in the process through the “breakfastclub.” Later, a $20 million component of the ADBloan was allocated to develop constituencies forpower sector reform through public awareness-building and engagement in the process. Accord-ingly, a multistakeholder, Working Group on PowerSector Restructuring, was set up. InternationalNGOs questioned the ADB’s emphasis on gainingacceptance of policies rather than civil societyparticipation in the policymaking process (Motoyamaand Widagdo, 1999). In addition, participation in anADB-sponsored forum was controversial within theIndonesian NGO community. Due to a generalperception that the ADB was not an institutionworking in the interest of Indonesia’s long-termsustainable development, and a particular unwilling-

91

WRI: POWER POLITICS

complicated power sector restructuring. On the onehand, the collapse of the currency bankrupted thenational electric utility; on the other hand, it madeconstituencies for labor (PLN employees union) andconsumers (students and NGOs) more likely tooppose any reform that implied job losses or priceincreases.

At the same time, the legacy of independent powerproducers and purchase agreements strongly coloredthe domestic and international politics of powersector restructuring in Indonesia. Attention to thepower sector on the part of domestic and interna-tional NGOs focused on the high degree of corrup-tion associated with the agreements, and the likeli-hood that Indonesian consumers and taxpayerswould end up shouldering the public and privatedebt incurred. The deep involvement of bilateralexport credit and guarantee agencies in tainted dealsconstrained the ability of institutions such as theWorld Bank and USAID from providing technicalassistance to the government to help remove thisbarrier to restructuring.

The 1998-99 political transitions created a contextin which political roles and constituencies were influx. The climate of reformasi total that followed thefall of Suharto opened political space for attention toincreased transparency and NGO participation ingovernment decisionmaking, as well as an increas-ingly meaningful role for the Parliament. However, acharismatic Minister of Mines and Energy whochampioned restructuring in the Habibie cabinet wasreplaced following Wahid’s election.

The international donor community has played animportant but ultimately limited role in Indonesia’spower sector restructuring process. The World Bankhad a long history of power sector project loans andpolicy analysis, and had encouraged the governmentto pursue corporatization as early as the 1980s.However, the increasingly scandalous IPP agree-ments led the World Bank to terminate lending to thesector in 1998, and its involvement in restructuringdebates after 1998 has been limited. The IMF (at theWorld Bank’s urging) included power sector reformas one of many structural conditionalities in its series

of bailout packages starting in 1998. The AsianDevelopment Bank, through a $400 million loan,encouraged attention to public participation in thedesign of power sector restructuring, but manyNGOs—not wanting to participate in activity fundedby loans that would add to the country’s debt bur-den—refused to participate. Finally, USAID hashistorically provided valuable advisors to the sector,but has been constrained by the emergence of IPP-related disputes.

The public benefits agenda received unevenattention in Indonesia’s power sector reform debates.Concern about promoting equity in the context ofpower sector restructuring was widely shared amongdomestic and international, government and nongov-ernment constituencies, and was not controversial.The white paper produced in August 1998 includedspecific provisions to continue subsidies to poorregions and poor consumers, and dealt with laborissues. However, the relationship between electricitytariff increases and the public interest continues tobe controversial.

Environmental implications of power sectorrestructuring received very little attention in thedesign process. A handful of NGOs have promotedmore attention to efficiency and renewables, butenvironment was not a first-order consideration ofany of the principals in the process. Improvedgovernance has been a general theme of restructur-ing discussions, but the preponderance of attentionhas been focused on increasing financial transpar-ency in the sector. Very little detailed considerationhas been given to the structure and functioning of anindependent regulatory body, which will play acritical role in determining who benefits fromIndonesia’s electricity sector reforms.

The Indonesia case demonstrates the challenges ofincorporating public benefits into the electricitysector reform agenda. On the one hand, there is asense of urgency among proponents of reform, whoforesee power shortages constraining economicgrowth and poverty reduction if tariff increases andrestructuring are not put into place to attract privateinvestment in new generation capacity. On the other

92

WRI: POWER POLITICS

hand, measures to promote the public interestthrough reform—including social equity, environ-mental sustainability, and good governance—arequite complex, and require significant investment inanalysis and public outreach to support informedpublic debate. Reconciling the need to move quicklyand to safeguard the public interest will continue tobe a challenge as the reform process moves forward.

NOTES1. Most of the research for this chapter was undertaken

in mid-2000, and was updated to reflect developmentsas of early 2002.

2. Frances Seymour would like to acknowledge researchassistance provided by John Coyle.

3. Agus Sari is the Executive Director of Pelangi, aJakarta-based NGO whose current and former staffhave been active in the Working Group on PowerSector Restructuring. He would like to acknowledgethe contributions of Ophelia Cowell, Rizka Elyza,Barbara Haya, Muhammad Suhud, Nasrullah Salim,and Fabby Tumiwa.

4. This chapter draws on a background paper for thisstudy prepared by Agus Sari, 2001, “Power SectorRestructuring and Public Benefits, Who Cares?” whichis available at http://www.wri.org/governance/iffepowercases.html.

5. For example, Presidential Decree No. 49 of 1991provided tax breaks to geothermal generating compa-nies to compensate risk and attract investment.Ministry of Mining and Energy Regulation No. 996.K/43/MPE/1999 prioritized PLN power purchases fromsmall-scale generators of geothermal and otherrenewable energy sources above those based on fossilfuels.

6. For a description of how Indonesia was the “jewel inthe Bank’s operational crown” in that era, see Kapur,Lewis, and Webb (1997).

7. Interview with World Bank official, June 21, 2000. Allinterviews for this chapter were conducted on a not-for-attribution basis. Consequently, interviewees areidentified only by their institutional affiliation.

8. Interview with World Bank official, June 21, 2000.

9. A World Bank official described the relative heft of thecompeting studies as “three big elephants versus alittle mule” (Interview, June 21, 2000). Habibie

continued to promote nuclear power into the mid-1990s.

10. Interview with World Bank official, July 10, 2000.

11. Interview with World Bank official, July 10, 2000.

12. Ironically, even as World Bank officials in Jakarta weretrying to discourage the frenzy of PPAs, the WorldBank Group’s Multilateral Investment and GuaranteeAgency (MIGA) was helping to facilitate them,providing a $15 million guarantee for U.S.-basedEnron Corporation’s participation in a power plantproject. When the Indonesian government decided tosuspend the project in 2000, Enron demandedcompensation, resulting in a pay-out by MIGA (FOE,2001).

13. Interview with World Bank official, July 10, 2000.

14. Interview with World Bank official, July 10, 2000.

15. Interview with ADB official, July 13, 2000.

16. This section draws significantly on material from“Power Sector Restructuring and Public Benefits, WhoCares?” by Agus Sari, 2001.

17. “Power Sector Regulatory Reforms,” Coopers andLybrand, (1996), not available to the authors. Whiledonor agency officials point to this study as seminal tothe subsequent reform agenda, Indonesian govern-ment officials downplayed its significance, saying “itwas just a study” (Interview with staff of the Ministryof Energy and Mineral Resources, April 3, 2002).

18. Interview with ADB official, July 13, 2000.

19. Interview with international consultant, July 13, 2000.

20. Interview with ADB official, July 13, 2000.

21. Interview with World Bank official, July 10, 2000.

22. Interview with USAID officials, July 12, 2000.

23. Interview with USAID officials, July 12, 2000.

24. Interview with USAID officials, July 12, 2000.

25. Indeed, a recent study of electricity consumption,“Energy Outlook & Statistics: Indonesia 2000”projected that consumption would reach 281 terawatt-hours by 2020. Assuming that power is provided by600 megawatt steam power plants, the capitalinvestment needed would be approximately $90billion, or $47 billion if met by combined cycle powerplants.

26. Interview with World Bank official, November 15,2000.

27. Interview with ADB official, July 13, 2000. A new Oiland Gas Law was eventually passed by the IndonesianParliament in October 2001 (Oil and Gas Journal

93

WRI: POWER POLITICS

Online, 2001), and hearings on the new Electricity Lawbegan a month later.

28. Interview with international consultant, July 13, 2000.

29. Interview with USAID officials, July 12, 2000.

30. Interview with ADB official, July 13, 2000.

31. See, for example, Haugland, et. al. (1997), Center forEnergy Research (2001), Tempo Interactif “YLKIMaklumi Kenaikan Harga BBM dan Listrik” (2002).

32. See, for example, Tempo Interactif “PRD dan A2PSDemo Tolak Kenaikan Harga BBM, Listrik, danTelepon” (2002), Nusantara “Mahasiswa NyarisBentrok dengan Petugas Mahasiswa Domo TolakKenaikan Harga BBM” (2002).

33. At a public hearing on the Electricity Law in November2001, NGOs expressed concern about the role of theMDBs in pushing the restructuring agenda. (Personalcommunication, Rizka Eliza, April 8, 2002). In April2002, the NGO Working Group on Power SectorRestructuring published two reports that articulatedthis concern: Listrik yang Menyengat Rakyat: MenggugatPeranan Bank-Bank Pembangunan Multilateral[Electricity that Stings the People: Criticizing the Rolesof Multilateral Development Banks] by Fabby Tumiwa,and RUU Ketenagalistrikan Dalam Perspektif ORNOP[The Electricity Law from the Perspective of Non-Governmental Organizations] by Tubagus H.Karbyanto.

34. Interviews with NGO leaders, July 11 and 13, 2000.

35. Interview with World Bank staff, June 21, 2000.

36. A study cited in the World Bank’s (1994) report,Indonesia Environment and Development, referenced a1992 study that conservatively estimated that 486megawatts could be saved from a demand sidemanagement program.

37. The World Bank’s more recent study on the environ-ment in Indonesia (World Bank, 2001a) focused onmanagement of terrestrial resources, and did not treatenvironmental issues in the electricity sector.

38. Chapter IX, Article 27 states “Any electric powerbusiness activity shall be obligated to conform with therequired conditions in the prevailing laws andregulations on the environment.”

39. The credibility of the Working Group was challengedin mid-2001, when it was revealed that a member ofthe Working Group representing the IndonesianConsumers Foundation was also a founder of anorganization that received a six billion Rupiah contractfrom PLN. The contract was to produce materials togenerate public support for electricity tariff increases,leading one Member of Parliament to observe that itgave the impression of PLN using the Foundation toease public acceptance of the rate hikes (MediaIndonesia, July 2001). While denying the existence of aconflict of interest, the individual resigned from hisposition at the Foundation and hence the WorkingGroup.

94

WRI: POWER POLITICS

REFERENCES

Kapur, Devesh, John P. Lewis, and Richard Webb (eds).1997. The World Bank: Its First Half Century. Washing-ton, D.C.: Brookings Institution Press.

Karyanto, Tubagus H. 2002. RUU Ketenagalistrikan DalamPerspektif ORNOP. Jakarta: NGO Working Group onPwer Sector Restructuring.

Kristov, Lorenzo. 1995. “The Price of Electricity in Indone-sia.” Bulletin of Indonesian Economic Studies, 31(3).Canberra: Australia National University.

Media Indonesia. 2000. “DPR Akan Tolak Usulan KenaikanTDL Jika Hasil Audit PLN Tak Diumumkan” [Parlia-ment Will Reject the Tariff Increase Proposal if theAudit on PLN Not Made Public]. (February 9).

Media Indonesia. 2001. “Agus Pambagio Harus Mundurdari YLKI.” [Agus Pambagio Forced to Pull Out ofYLKI]. (July 9).

Motoyama, Hisako, and Nurina Widango. 1999. PowerRestructuring in Indonesia: A Preliminary Study forAdvocacy Purposes. Washington D.C.: Bank InformationCenter.

Norplan A/S. 1993. Institutional Framework and Regulationof the Power Sector in Indonesia. Washington D.C.: WorldBank.

Oil and Gas Journal Online. 2000. “Indonesian LegislatorsEnd Pertamina Monopoly With New Law.” Online at:http://ogj.pennet.com (October 24).

Pangsetu, Mari. 1996. Economic Reform, Deregulation, andPrivatization: The Indonesian Experience. Jakarta: Centerfor Strategic and International Studies.

Pape, H. 1999. “Captive Power in Indonesia: Developmentin the Period 1980-1997.” Paper presented at the half-day Seminar on Captive Power in Indonesia: Develop-ment, Current Status and Future Role. Jakarta: Indone-sia (July).

Pelangi Indonesia. 2000. “Power Sector RestructuringProgram.” Unpublished manuscript. Submitted to theWorld Resources Institute.

Perusahaan Listrik Nasional (PLN). 1998. Statistik PLN[PLN Statistics]. Jakarta.

Perusahaan Listrik Nasional (PLN). 2000. Empowering theIndonesian Villages. Jakarta.

Rakyat Merdeka. 2000. “Kuntoro Didemo Ativis Gerakh”[The ‘Movement Against Price Increase’ Activists Staged

Asian Development Bank. 1999a. “ADB Loans a Big StepTowards Reforming Indonesia’s Power Sector.” AsianDevelopment Bank Press Release (March 23). Online at:http://www.adb.org/Documents/News/1999/nr1999015.asp (May 31, 2002).

———. 1999b. Report and Recommendation of the Presidentto the Board of Directors on Proposed Loans to the Republicof Indonesia for the Power Sector Restructuring Program.(RRP: INO 31604). March 1999. Manila: Asian Develop-ment Bank.

———. 2001. “A Fact Sheet: Indonesia and the ADB.”Online at: www.adb.org/Documents/Fact_Sheets/INO.asp?p=ctryino (October 22).

Bisnis Indonesia. 2000a. “Kadin: Kenaikan TDL dan BBMPukul Industri Nonekspor.” [The Chamber of Com-merce: The Increases in Electricity and Fuel Tariff HitNonexportable Industries]. (February 23).

Bisnis Indonesia. 2000b. “Industri Hotel Cemaskan TarifListrik” [The Hotel Industry Worried About ElectricityTariff ]. Bisnis Indonesia (March 4).

Center for Research on Energy. 2001. Kajian Harga ListrikYang Rasional. Jakarta.

Fried, Stephanie and Titi Soentoro. 2000. “Export CreditAgency Finance in Indonesia.” Unpublished manu-script. Washington D.C.: Environmental Defense.

Government of Indonesia (GOI). 1998a. Power SectorRestructuring Policy. Jakarta: Ministry of Mines andEnergy.

———. 1998b. Letter of Intent to IMF (November 13).

———. 1999a. Letter of Intent to IMF (March 16).

———. 1999b. Letter of Intent to IMF (May 14).

———. 2000a. Letter of Intent to IMF (January 20).

———. 2000b. Letter of Intent to IMF (May 17).

———. 2000c. “Konsep Akhir Rencana UmumKetenagalistrikan Nasional” [Final Concept of theMaster Plan for the National Power Plan]. Jakarta:Ministry of Energy and Natural Resources.

Harvest International. 2000. “Indonesia Agrees to PayOPIC’s Claim of $260 Million.” Online at: www.harvest-international.com/perspec/jun2k1ef_1.htm (June).

Haugland, Torleif, Kjetil Ingeberg, and Kjell Roland. 1997.“Price Reforms in the Power Sector.” Energy Policy25(13).

95

WRI: POWER POLITICS

Demonstration Against (PLN President Director)Kuntoro]. (March 25).

Republika. 2000. “KAI Protes Kenaikan Tarif Oleh PLN”[Indonesian Railway Company Protests the TariffIncrease by PLN]. (March 2).

Sari, Agus. “Power Sector Restructuring and PublicBenefits: Who Cares?” Unpublished manuscript. 2001.

Suara Karya. 2000. “Kenaikan TDL Jangan Pakai AsumsiRasional” [Tariff Increase Should Not Use RationalAssumptions]. (February 9).

Suara Pembaruan. 2000a. “Kenaikan TDL MempengaruhiDaya Saing Produk Indonesia” [Tariff Increase Influ-ence the Competitiveness of Indonesian Products].(February 22).

Suara Pembaruan. 2000b. “Tim Tariff DPR RI KlarifikasiNaiknya Harga Listrik dan BBM” [Parliamentary Teamon Tariff Clarified Increase for Electricity and Fuel].(March 2).

Sudja, Nengah. 1993. “Power Pricing Structure forCommercial Viability of Various Types of PowerProjects.” Unpublished manusript. Jakarta: PerusahaanListrik Nasional.

Supplementary State Gazette of the Republic of Indonesia.2000. “Draft Elucidation for Law of the Republic ofIndonesia Concerning Electric Power.” Jakarta: Govern-ment of Indonesia.

Sustainable and Peaceful Energy Network Asia (SPENA)Newsletter. 2001. Volume 3, Number 2, December 2001.

Tempo Interactif. 2002a. “YLK Maklumi Kenaikan HargaBBM dan Listrik” [The Indonesian Consumers Founda-tion Understands the Increased Tariffs of Fuel andElectricity]. (January 2).

Tempo Interactif. 2002b. “PRD dan A2PS Demo TolakKenaikan Harga BBM, Listrik dan Telepon” [PRD andA2PS Demonstrate Against the Increase of Fuel,Electricity, and Telephone Tariffs]. (January 7).

Tumiwa, Fabby. 2002. Listrik yang Menyengat Rakyat:Menggugat Peranan Bank-Bank Pembangunan Multilat-eral. Jakarta: NGO Working Group on Power SectorRestructuring.

Watson, Peter. 2001. Presentation to United States-Indonesia Society. Notes online at: http://www.usindo.org/Briefs/Peter%20Watson.htm (Septem-ber 6).

World Bank. 1989. “Indonesia Power Sector InstitutionalDevelopment Review.” Washington D.C.

World Bank. 1994. Indonesia Environment and Development:Challenges for the Future. Washington, D.C.

World Bank. 1995. “Country Economic Memorandum forIndonesia.” Report #14006-IND. Washington, D.C.

World Bank. 1996. “Implementation Completion Report:Indonesia Paiton Thermal Power Project.”Loan 3098-IND Washington, D.C.: World Bank.

World Bank. 1997. “World Bank Approves Global Environ-mental Facility Trust Fund Grant.” World Bank PressRelease (June 25).

World Bank. 2000. Indonesia Oil and Gas Study. Washing-ton, D.C.: World Bank Energy and Mining Sector Unit.

World Bank. 2001a. Indonesia: Environment and NaturalResource Management in a Time of Transition. Washing-ton, D.C.

World Bank. 2001b. Poverty Reduction in Indonesia:Constructing a New Strategy. Washington, D.C.

97

WRI: POWER POLITICS

6BULGARIA

SUPPLY-LED VERSUS EFFICIENCY-LED ELECTRICITY REFORM

Dimitar Doukov1

Navroz DubashElena Petkova

BOX 6.1 PROFILE OF THE ELECTRICITYSECTOR IN BULGARIA

Population (2001)1 : 8.1 million

Percentage of households with access to electricity2:Rural: 100% Urban: 99.9%

Installed electricity generation capacity (1999)3

Total: 12 gigawatts (0.37% of total world capacity)Thermal: 58%Hydro: 17%Nuclear: 33%Geothermal and Other: 0

CO2 emissions from electricity and heat as a shareof national emissions (1999)4 : 56%

Notes

1. World Resources Institute. 2000. People and Ecosystems:The Fraying Web of Life. Washington, D.C.: World ResourcesInstitute.

2. Alan Townsend. 2000. “Energy access, energy demands,and the information deficit.” Energy Services for the World’sPoor.

3. www.eia.doe.gov/pub/international/ieapdf/t06_04.pdf(February 6, 2002).

4. Computed by WRI using International Energy Agency(IEA) data, 2001. CO2 Emissions from Fossil Fuel Combustion.Paris: OECD.

INTRODUCTION

Electricity sector reforms in Bulgaria have takenplace under the shadow of extreme economic crisisand under the watchful eye of the InternationalMonetary Fund (IMF). This crisis context is similarto that of several other studies in this study: a historyof inefficient operation, flawed price signals, and thepotential social costs of price reform. But the Bul-garia case, and that of Central and Eastern Europe ingeneral, also differs from reforms in developingcountries in several ways. Most significantly, accessto electricity in Bulgaria is more or less assured, andthe country has surplus generation capacity. Inaddition, Bulgaria bears significant internationalenvironmental commitments that raise the profile ofenvironmental concerns. With commitments underthe Kyoto Protocol, along with a dramatically en-hanced environmental profile required for accessionto the European Union (EU), environmental con-cerns presumably would rank high on an electricitysector reform agenda. For a profile of the electricitysector in Bulgaria, see Box 6.1.

Despite these circumstances, reforms in theelectricity sector have been dominated by short-runeconomic concerns. Where social factors have playeda role, it has largely been in postponing sociallydifficult decisions rather than finding lasting solu-tions. In spite of external pressures, reforms haveproceeded without explicit attention to opportunitiesfor environmental gains. The failure to anticipateeither social or environmental concerns is arguably

rooted in the conflicting incentives faced by variousgovernment actors, the delayed attention given tothese issues by donor agencies, and the lack of an

98

WRI: POWER POLITICS

active, vocal, and capable constituency to advanceattention to public benefits. Fortunately, there arehopeful signs of change; both a new governmentelected in 2001 and the World Bank have introducedinitiatives that pay far greater attention to the socialand environmental dimensions of reform.

BACKGROUND

Macroeconomic, Social, and PoliticalCrisesElectricity reform in Bulgaria took place during adecade of economic and political change, when thenation began the difficult transition from a socialistto a market-led economy and society. This transitionhas been marked by several crises.

In 1991, the government initiated an economicstabilization program based on restrictive monetaryand fiscal policy.2 The resulting budgetary restric-tions led to social unrest in the early 1990s, forcingsomewhat less restrictive policies. By 1994, a cur-rency crisis led to a near doubling of the exchangerate in just one year and a steep increase in inflationto a 90-percent average annual rate. Between 1995and 1997, a precipitous drop in hard currencyreserves, burgeoning debt payments (Todorov, 2001),and the failure to negotiate a successful agreementwith the IMF all combined to undermine publicconfidence in the financial system. In 1996, privatecitizens responded with a run on bank deposits.

The economic crisis, and the imposition of auster-ity measures to tame it, took a terrible social toll.Between the early 1990s and the height of the crisisin 1996, the average wage had fallen by about 80percent, the average pension by 84 percent, and the“guaranteed minimum income” by 70 percent.3 Duein part to the insolvency of state enterprises, unem-ployment levels soared, reaching 15 percent in 1997(National Statistical Institute, 1998). As employmentdropped, so did payments into the country’s socialinsurance system. By mid-2000, when energy sectorreforms were to begin, the country faced a fragile

economy recently emerged from deep crisis, a societylosing patience with a decade of declining livingstandards, and a government that sought to balanceresponsible financial policies and commitments todonors, against the demands of a weary populationtired of austerity.

The Pre-Reform SectorAs in many other parts of Central and EasternEurope, the pre-1989 electricity sector in Bulgariawas shaped by several strategic concerns. At mini-mum, policymakers in the sector considered itimportant that the country was fully electrified andthat regular and reliable supplies were available topower the economy. In addition, energy security hasbeen and continues to be a major concern. Bulgariais relatively energy-poor. It has traditionally relied onimports, primarily from Russia, for between 65 and70 percent of its fuels (National Statistical Institute,1993). While importing primary fuel, Bulgaria hasbeen an exporter of electricity to neighboring coun-tries. By the late 1990s, the country generatedsurpluses for export on the order of 2,000 mega-watts, which provided much-needed revenues for thestate budget. Electricity exports also serve politicalends, which have changed over the years. Over thelast five years, exports to neighboring Turkey haveserved to strengthen political and economic ties withthis potentially large customer for Bulgarian power.Finally, the energy sector (particularly when the coalsector is included) is a major employer, accountingfor 4.5 percent of all jobs available in Bulgaria in1999 (National Statistical Institute, 2000).

As a result of these concerns, the pre-reform sectorwas integrated and control was centralized under agovernment agency. The Energy Committee (re-named on many occasions between 1989 and 2001)was responsible for policy development for the coaland natural gas sectors and for electricity generation,transmission, and distribution. This body, laterreconstituted as the State Agency for Energy andEnergy Resources (SAEER), had primary responsibil-ity for restructuring energy institutions in thecountry. In December 2001, it was renamed yet again

99

WRI: POWER POLITICS

as the Ministry of Energy and Energy Resources. In1997, a National Energy Efficiency Agency was alsocreated, later transformed into a State EnergyEfficiency Agency.

Due to age and poor maintenance, the system

as a whole is highly inefficient.

The Energy Committee had policy responsibility,but the responsibility for managing and operating thegeneration, transmission, and distribution of electric-ity was almost exclusively handled by the state-ownedNational Electricity Company (NatsionalnaElektricheska Kompania - NEK). This two-tierarrangement, which existed with minor modifica-tions until about 1999, led to considerable lack oftransparency in financial management. The twoinstitutions shared subsidies and revenues in amanner that undermined financial responsibility. Forexample, revenues were allocated through an extra-budgetary Energy Resource Fund, which was man-aged by a board of directors and chaired by thepresident of the Committee of Energy. The electricity,coal mining, and district heating sectors were linkedby the opaque shuffling of finances through theEnergy Resources Fund. With little knowledge of thetrue cost of inputs, and therefore of true returns inthe sector, there was little scope for prudent financialmanagement. The financial implications of thesearrangements were serious, since the Energy Re-source Fund was considerable. The expected incomeof the fund was BGL 268 billion, ($152 million), or6.42 percent of the State Budget for 1998(Alexandrova, 1997).

An additional problem in the sector was the poorcondition of the nation’s power infrastructure. Priorto reforms, NEK controlled 90 percent of generation,with the rest owned by district heating companies.Many of the coal-powered plants, which together withother thermal sources account for about 48 percentof generation, were built in the 1950s and 1960s.The Kozloduy nuclear power plant, which providesabout 44 percent of all electricity generated in

Bulgaria, is an old design and among the most riskyin Europe. Hydropower plants provide the remainder7 percent of generation (National Electric Company,2001). Due to age and poor maintenance, the systemas a whole is highly inefficient. Between 30 and 35percent of power generated is lost during transmis-sion and distribution, in part due to theft. With highreliance on coal, the sector contributes significantlyto local air pollution and to emissions of greenhousegases. Energy production and transformationactivities actually are the single most importantcontributor to greenhouse gases, and account forabout 65-70 percent of the country’s total carbondioxide emissions (Republic of Bulgaria Council ofMinisters, 2000a).

From the early 1990s, donor agencies played asignificant role in attempting to reform the sector,largely through a series of studies and programs oftechnical assistance. These included efforts at loadforecasts for the sector; a least-cost generation andtransmission expansion program; a tariff study; astudy on approaches to reorganization of the sector;and a feasibility study for retrofitting and rehabilita-tion of thermal power projects (World Bank 1992a;1992b; 1993; Center for the Study of Democracy,1995). A range of agencies were engaged in theseefforts, including the World Bank, the Commissionof the European Community, United States Agencyfor International Development (USAID), UnitedStates Environmental Protection Agency (USEPA),and United States Trade and Development Program(USTDP). A World Bank summary study recom-mended increasing efficiency through more realisticpricing policies and energy saving investments;expanding domestic production and reducingimports; and improving safety and the environmentalperformance of the sector (World Bank, 1992b;1993).

In addition to studies on the energy sector, donoragencies also conducted studies of Bulgaria’s envi-ronmental performance. A March 1992 joint WorldBank, USAID, and USEPA study on an environmentstrategy for Bulgaria concluded that the poor state ofthe environment was rooted in the flawed economicand management policies of the transition period

100

WRI: POWER POLITICS

(World Bank, 1992a). It suggested that marketreforms, particularly privatization, would bringtangible environmental improvements. The reportassumed that environmental improvements would bean indirect benefit of market reform, and did notemphasize the need for environmental protectionand consideration apart from market liberalization. Asubsequent December 1994 World Bank study didfind marked improvements in the environmentalsituation. Distressingly, however, these improve-ments were largely a result of declining economicactivity (World Bank, 1994).

Environmental concerns were an input into thedesign of a World Bank Bulgaria Energy Projectinitiated in 1993. The project aimed at improving theoperating efficiency of the system; introducingcommercial practices at NEK; realigning, improving,and depoliticizing the tariff structure; reducing theneed for high-cost imports of electricity; and increas-ing safety in the system (World Bank, 1993). Thesewere to be accomplished through two technicalcomponents and a third component based ontechnical assistance and directed at institutionalreform. Drawing from the environment strategystudy, the energy project aimed to achieve these goalsby increasing energy conservation and efficiency ofuse. This approach foreshadowed subsequent reformefforts.

However, implementation was limited for politicalreasons. First, the government changed hands in1993, leading to a dismissal of the management teamof the Committee of Energy and NEK. While the newteam made progress on one of the technical compo-nents of the project, the real casualty was the institu-tional reform component. The government’s overallpolicy was to maintain the public monopolies incritical sectors such as electricity generation. Thispolicy stalled reform in the electricity sector. Thedonors promoted commercialization in the sector asa first step in breaking the monopoly—to be followedby a separation of power generation, transmission,and distribution into separate entities.4 But the newsocialist government contended that the structure ofthe sector, built around the premise of a centrallyplanned economy, precluded commercialization. The

government’s main anti-reform argument wastechnical. They argued that each power facility wasbuilt to support a specific load of the system, and theopportunity for real competition between them wasvery limited.5

While the government rejected a reform trajectorybased on eventual private ownership of the sector, itfailed to formulate an alternative vision and did notundertake the financial and management reformsneeded to put the sector on a sound footing.

In addition to donor engagement, Bulgaria alsofaced external pressures pertaining to internationalpolitical obligations. Bulgaria is a signatory to the UNFramework Convention on Climate Change. As anAnnex 1 country under the Kyoto Protocol, it willhave to reduce its emissions by 8 percent from a1988 baseline level during the period 2008–12.However, as with other countries in the region,aggregate greenhouse gas (GHG) emissions havedeclined precipitously due to an economic slowdown,and by 1997 were 40 percent below 1988 levels(Council of Ministers, 2000a). Nonetheless, there aregood reasons to continue to pay attention to theseemission levels. First, emissions are likely to grow aseconomic growth picks up, and second, emissionreductions offer potentially valuable financialopportunities to Bulgaria in an emerging market forgreenhouse gas reductions.

Along with international climate obligations,Bulgaria also has obligations as a candidate for EUmembership. These commitments are covered in aseries of agreements that concern nuclear safety,integration of energy markets and promotion ofcompetition, and improvement of energy efficiencyand reduction of environmental harm from thesector (Energy Charter Secretariat, 1996). In particu-lar, the EU electricity directive requires all membersto introduce competition in the sector, although itleaves open whether there must be a complementaryshift in ownership in the sector.6

In short, with the move to a market-based systemas part of a larger political and economic transition inBulgaria, several prior assumptions remained open

101

WRI: POWER POLITICS

to challenge. A market-based approach called intoquestion the state’s ability to manipulate the sectorbased on energy security concerns. A more transpar-ent fiscal system, which could send signals to marketparticipants, potentially undermined the financialweb that supported the sector. And with pressinginternational environmental obligations, the environ-mental profile of the sector stood to be altered by areform approach.

The Reform TriggerThe immediate trigger for electricity sector reformswas a dramatic escalation in the economic crisis inthe mid-1990s. Inflation grew by 552 percentbetween January and March 1997 (National Statisti-cal Institute, 1998). By late 1996, GDP was only 58percent of its 1990 levels (National StatisticalInstitute, 1994; 1999). Faced with this unsustainableposition, the socialist government resigned inFebruary 1997, creating a political crisis.

The crisis showed signs of abating in April 1997,when a new government with a majority in Parlia-ment came to power on a pro-reform platform. Thisadministration negotiated a stabilization agreementwith the IMF in May 1997 that was based on twomain conditions. First, it committed to a program offiscal discipline and austerity, with a stable macroeco-nomic policy to be anchored by a currency board.Moreover, the agreement required liquidation orprivatization of 50 percent of the long-term materialassets under control of branch ministries or munici-palities. Efforts at stabilization did have positiveshort-term results—GDP growth went from negativeto positive rates, inflation came under control, andthe budget deficit shrank between 1996 and 1999. Atthe same time, the price of stability was reducednational control over decisionmaking across a broadrange of economic and social policies. In particular,state expenditures for social policy had to be negoti-ated directly with the IMF. Another importantcondition of the IMF package was reform of theenergy sector. Hence, the financial crisis and IMFconditionality as part of a stabilization package was adirect trigger for reforms in the energy sector.

The Reform DesignUnder the proposed structure, the post-reform sectorin Bulgaria would operate along the lines of a “single-buyer” model. As a first step, the design requiredthat the property and assets of NEK be clearlydelineated among generation, transmission, anddistribution units, including a clear accountingdivision of existing credit arrangements. Based onthis allocation of property rights, several generationunits, particularly the hydro and thermal units, wereto be offered for privatization. Two of the Kozloduynuclear plant’s six units were scheduled to bedecommissioned, while others were to be upgradedto meet safety standards. The nuclear plants were notscheduled for privatization and would remain underthe control of the government.7 With regard todistribution, the three-year plan of action agreed towith the IMF envisaged that distribution companieswould be legally separated from NEK by the end of1999. This was eventually accomplished in 2000.After this unbundling of NEK, based on a clearaccounting separation, a publicly owned transmis-sion company remained, with additional responsibil-ity for planning, investment, dispatch, and powertrade functions.

The financial crisis and IMF conditionality as

part of a stabilization package was a direct

trigger for reforms in the energy sector.

Under this approach, the new public NationalElectricity Transmission Company would purchaseelectricity from the independent producers and sell itto the distribution companies, which would then sellit to consumers. In addition, the transmittioncompany would be able to sell directly to largeconsumers connected to the high-voltage transmis-sion network, and independent producers would alsobe able to sell electricity directly to “privilegedconsumers,” bypassing the transmission company.(See Figure 6.1.)

102

WRI: POWER POLITICS

FIGURE 6.1 POST-REFORM DESIGN OF THE ELECTRICITY SECTOR IN BULGARIA

In order for this approach to work, the IMF furtherrequired that prices in the sector increase to coverthe anticipated investment costs and provide a profitto private investors. Thus, by July 2001, the price forhouseholds and industries was to be equalized at 4cents per kilowatt-hour—a considerable increase forhouseholds from the then-prevailing rate of 3.5 centsper kilowatt-hour and below.

The defining moment in the reform process camein July 1999, when an “Energy and Energy EfficiencyAct” was passed in Parliament, fulfilling a key

condition of the IMF agreement. Soon thereafter, inSeptember 1999, the State Energy and EnergyResources Agency (SAEER) replaced the earlierCommittee on Energy. In addition, the State Com-mission on Energy Regulation was created asindependent from the government regulatory body. Itwould be the Commission’s task to make decisionson prices, and on the issuing of licenses and permits,and to do so in an independent fashion, free frompolitical interests (Republic of Bulgaria NationalAssembly, 1999).

POLICY LEVEL

MARKET LEVEL

Council of Ministers

Ministry of Energy andEnergy Resources

State Energy RegulatoryCommission

Independent power producers

National ElectricityTransmission Company

Distribution Enterprises

Directpurchasers

Consumers ofelectric power

Privilegedconsumers

103

WRI: POWER POLITICS

THE PROCESS OF REFORMS

Ensuring financial accountability was central to theinitial reform design, which was shaped largely bythe short-term economic crisis in the sector. Overtime, a range of different actors and interests withinand outside the government gradually asserted theirinfluence, which led to an implementation trajectorysomewhat at odds with the original design. In 2001,the election of a new government initiated a reexami-nation of the reform approach and renewed efforts towork with donor agencies. This section provides asketch of the various actors and their motivations,and concludes with an assessment of reform imple-mentation efforts thus far. A chronology of signifi-cant events is provided in Box 6.2.

Governmental ActorsIn the course of reforms, a range of governmentalactors faced contradictory incentives that influenced,at different times, the pace and trajectory of reforms.

The extra-budgetary Energy Resource Fund

provided an extremely useful political tool.

For the coalition government that came to power inMay 1997, broad sentiments were in favor of reform.The government had been voted in on a platform ofmanaging the fiscal and monetary crisis in thecountry. In the short term, this required not onlyreducing government expenditures by increasingprices and reducing subsidies, but more generallykeeping the flow of IMF money coming by comply-ing with IMF conditions, among them reform of theelectricity sector. Moreover, the privatization ofelectricity generation facilities promised to bring inrevenues. Finally, progress toward market-basedreform brought political benefits in the form ofprogress toward integration with the EU.

These political motivations for the party in powerwere considerably undermined by other, quite

different motivations for politicians and bureaucratswith direct control over the resources in the energysector. The extra-budgetary Energy Resource Fundprovided an extremely useful political tool, free ofparliamentary supervision. By allocating funds andsubsidies, politicians could create or foster politicalallies, or defuse potentially dangerous situations.Since the reform measures were aimed at introduc-ing financial transparency, reforms threatened toundermine a potent political tool.

Tariff increases carried enormous political

dangers for the government in power.

In addition, while international donors wouldreward the government for progress on reforms,many of the same measures were sure to incite thewrath of the voting population. Tariff increases, acentral component of reform efforts, carried enor-mous political dangers for the government in power.As a result, it consistently pressed the IMF to allowslower implementation of tariff increases andsubsidy removal, leading to an ongoing tension inthe reform process. In particular, the governmentaimed to manage this tension with targeted socialassistance,8 slower than planned price increases forhouseholds, and continued subsidies to the politicallyimportant district heating sector.

Moreover, several elements of the energy bureau-cracy had a strong disincentive to slow or otherwisesubvert reforms. With the implementation of re-forms, bureaucrats had to deal with layoffs. Throughmanipulation of nontransparent funds, energy sectormanagement stood to lose salaries that had beensubstantially insulated from the economic downturnsthat had damaged other sectors of the economy. Inparticular, the emergence of an independent agencycharged with overall management of the sectorthreatened their interests.

In 1999, the government passed a “NationalStrategy for Development of Energy and EnergyEfficiency until 2010.” This strategy envisaged a

104

WRI: POWER POLITICS

BOX 6.2 C H R O N O L O G Y O F E L E C T R I C I T Y S E C T O R R E F O R M I N B U L G A R I A

• October 1991 Law on Protection of the Environment.

• November 1991 Establishment of the Committee of Energy and the National Electric Company (NEK).

• December 1991 The European Energy Charter approved in The Hague.

• May 1992 Law on Transformation and Privatization of State and Municipal Enterprises.

• March 1995 Law on Ratification of UNFCCC.

• September 1996 Creation of Ministry of Energy and Energy Resources (Closing down of the Committee of Energy).

• May 1997 Three-Year Agreement with IMF creating conditions for long term financial stabilization and economic growth.

• May 1997 Creation of Committee of Energy to replace the Ministry of Energy.

• May 1997 Creation of National Agency for Energy Efficiency.

• July 1997 Implementation of Currency Board in Bulgaria as a result of agreement with IMF.

• August 1998 Approval of a Plan of Action for Restructuring, Abolishment of Subsidies, and Financial Rehabilitation of the Commercial Societies in the Energy Sector during the Period 1998−2000.

• March 1999 Decision by the National Assembly on the National Strategy for Development of the Energy Sector and Energy Efficiency until 2010.

• July 1999 Energy and Energy Efficiency Act.

• September 1999 Decree 179 of the Council of Ministers on the Transformation of the Committee of Energy into State Agency for Energy and Energy Resources.

• September 1999 Decree 180 of the Council of Ministers on the Transformation of the National Agency for Energy Efficiency into State Agency for Energy Efficiency.

• April 2000 Decree 181 of the Council of Ministers on the creation of a State Commission on Energy Regulation.

• August 2000 Restructuring of the National Electric Company and registration of independent electricity producers and distribution companies.

• July 2001 Approval of a Strategy for Development of District Heating during the period 2000-2005.

• February 2002 Election of a new Government of the National Movement Simeon II.

• February 2002 Closing of the State and Energy Resources Agency and approval of the Statutes of the Ministry of Energy and Energy Resources.

• March 2002 Transformation of the State Energy Efficiency Agency and approval of the Statutes of the Energy Efficiency Agency.

• March 2002 Release of an Energy Strategy for the Republic of Bulgaria by the Ministry of Energy and Energy Resources.

105

WRI: POWER POLITICS

considerable increase in new hydro, nuclear, andthermal supply capacity. This projection was basedon the assumption that existing industrial capacitywas being underutilized, and that demand forelectricity by both industrial and household segmentswould increase by 5 percent a year as the economyreturned to pre-1990 levels (Republic of BulgariaCouncil of Ministers, 1998b). Moreover, the strategyassumed a considerable electricity shortage in theregion. Consequently, a substantial motivation fornew generation capacity was to develop Bulgaria asan electricity exporter. This policy had considerableimplications for the reform process.

For two principal reasons, the evidence suggestedthat Bulgaria would not be well-positioned to turn aprofit from electricity sales. First, with the exceptionof Turkey, other countries in the region had only atemporary shortage of electricity. This suggested thatBulgaria would not be able to command a premiumprice.9 Second, low-price production depended on astable supply of low-cost imported fuel. This situa-tion could not be expected to continue as Bulgaria’sfuel suppliers liberalized their own energy sectors.Nonetheless, elements within the electricity bureau-cracy and the government as a whole saw a future forBulgaria in the electricity markets, and were deter-mined to forge ahead with this vision. Their mainarguments were that exports would allow the countryto retain substantial generation capacity untildomestic demand increased, and that electricity wasthe only commodity that Bulgaria could competitivelyexport, at least in the short term.

Energy sector management stood to lose

salaries that had been substantially insulated

from the economic downturns.

In 2002, there was a sharp change in direction.Following the election of a new government, thereconstituted Ministry of Energy and Energy Re-sources (formerly SAEER) drafted a new and consid-erably different “Energy Strategy of Bulgaria.” ThisStrategy emphasized that Bulgarian energy had to be

competitive on the Balkan market, placed a highpriority on energy efficiency, and emphasized theneed for a strong regulator as a precondition ofestablishing a market framework (Ministry of Energyand Energy Resources, 2002). The 2002 Strategynoted that the earlier 1999 Strategy took for grantedgrowth in household consumption, and failed toapply a proactive approach to energy efficiency. The2002 Strategy aimed to correct these shortcomings.

International Financial AgenciesWith its central role in designing a macroeconomicstabilization program, the IMF was initially the mostsignificant donor agency shaping the electricitysector in Bulgaria. The IMF advocated price in-creases; strong regulatory development to keep price-setting independent; dismantling of NEK’s mo-nopoly; privatization; and removal of subsidies. TheIMF agenda was supported by other donors such asthe World Bank (Tellam, 2000).

A substantial triumph for the IMF, and a positiveoutcome for transparency in the sector, was theabolishment of the Energy Resource Fund—theprimary mechanism for nontransparent financialmanagement. At the insistence of the IMF, the 1999Law on the State Budget abolished the numerousexisting extra-budgetary funds, and the money wasremitted to the state budget (Republic of BulgariaNational Assembly, 1998). At the same time, theIMF’s insistence on closing extra-budgetary fundsalso had unfortunate side effects. A Fund for EnergyEfficiency Projects was dismantled, cutting off theonly source of funding for energy efficiency in thecountry, with no provision made for pursuing theseprojects through more transparent means. Eliminat-ing the extra-budgetary funds, however, did noteliminate the subsidies for which they were used—primarily for district utilities.

The government and the IMF have had twosubstantial differences in implementation of thereform process. First, the IMF was very clear thatthey foresaw unbundling of NEK only after a clearlegal and regulatory framework for the sector had

106

WRI: POWER POLITICS

been put in place. 10 Based on accounts of reformelsewhere, this sequencing is necessary, and thecondition imposed by the donor agencies is a soundone. Second, the IMF was strongly opposed to thegovernment’s decision to freeze electricity and districtheating prices for households until the end of 2001.From the IMF’s perspective, the freeze in prices riskedreducing the “trust in the commitment of the Govern-ment to equalize the prices for households andindustry; it will reduce NEK’s profit and…will under-mine the governmental plan for privatization of thegeneration and distribution components of NEK”(Kahkonen, 2000). From the government’s point ofview, price increases imposed a high social cost, onethat also risked a political backlash.

While reforms were certainly undertaken at

the behest of the IMF, it had limited control

over the subsequent implementation process.

Despite these concerns, the President of SAEERhad already signed the orders for the separation ofseven electricity distribution branches and fourthermal power plants, together with the Kozloduynuclear power plant. What was left of NEK after thisunbundling was registered as a single-buyer trans-mission company. These changes occurred wellbefore regulatory arrangements were satisfactorily inplace. Hence, while reforms were certainly under-taken at the behest of the IMF, it had limited controlover the subsequent implementation process.

During the initial stages of electricity reform, theWorld Bank was a junior partner to the IMF. Morerecently, it has taken the lead in engaging thegovernment on sector reforms. The opening for theWorld Bank to re-enter the process came through anIMF condition that required the Government ofBulgaria to present a suitable law on energy sectorreform to Parliament. The World Bank offeredassistance in preparing this law—a process thatbegan in October 1998. While the governmentproved initially reluctant to accept World Bankengagement, the Parliament proved more forthcom-

ing.11 From a World Bank perspective, initial drafts ofthe law had considerable flaws, including a contin-ued supply orientation, maintenance of NEK as avertically integrated monopoly, and the continuedsubjugation of the Energy Commission to the Energyministry.12 In addition to the World Bank, USAIDplayed an important role in providing legal assistancewith drafting the law.

The World Bank has most forcefully articulated aconcern that the Bulgarian government’s efforts tobuild new capacity through Independent PowerProducers (IPPs) casts a long shadow over reform.Together with the IMF, the World Bank has expressedfears that in the case of default, the government wouldbe exposed to severe liabilities. In addition, the WorldBank has argued that the projects are unnecessary,and questioned their financial viability.

These points have been made in the context of an“Energy–Environment Review” in Bulgaria, which wasfirst reviewed by the government in November 2000and subsequently published in February 2002. This isthe first study to deal explicitly with the impact ofreforms on the environmental profile in the sector.The report develops a scenario based on energyefficiency, which envisages, among other things,preferential dispatch of “green” power. Under thisscenario, the life of nuclear units would not beextended, electricity exports would be limited, and theinvestment program of NEK would be reviewed andpotentially halted. Based on this and other suchanalyses, the most incendiary conclusion of the paperis that Bulgaria does not need new generation capacityin the coming years, in complete contradiction to thegovernment’s own original 1999 Strategy document.

The IMF agreed with the World Bank that newpower projects were undesirable. Yet, once it becameclear that the government was proceeding with newdeals, the IMF appeared to soften its disapproval.This accommodation may have been influenced bythe near conclusion of its three-year agreement withthe government, and the need to negotiate a newagreement. Thus, the government and its two majorinternational financing institutions were sendingcontradictory and confusing messages.

107

WRI: POWER POLITICS

The most incendiary conclusion of the World

Bank’s “Energy–Environment Review” is that

Bulgaria does not need new generation capacity.

The World Bank has also prepared the only studythat estimates the cost of meeting various environ-mental commitments. A draft of the study—“Envi-ronment Sector in Bulgaria: The Challenge ofPreparing for EU Accession”—was completed inMarch 2000. The results are sobering. In theelectricity sector, the study estimates price increasesbetween 240 and 300 percent to cover necessaryenvironment-related investments.

Both these studies provided useful information andanalysis. However, they came late in the reformprocess. By the time the studies were released, NEKhad already been unbundled, and the governmenthad committed to new generation capacity. Had suchconvincing studies on alternatives to new capacityand the social cost of reforms been available early inthe reform process, the information would have beenfar more likely to shape both the weight given toenergy efficiency and the role of new capacity.

With the election of a new government in 2000, theWorld Bank has taken an active role in preparation ofan ambitious $450 million “Programmatic Adjust-ment Loan” (PAL) for the electricity sector.13 Thisloan will likely focus on tariff reform, regulatorymeasures, privatization, and social protection. As theWorld Bank has taken the lead in shaping donorapproaches to the sector, the IMF has increasinglyaligned its own recommendations with World Bankprescriptions for the sector, reversing the dissonancethat characterized donor interaction with the govern-ment in the late 1990s.14

Transparency and the Scope forParticipation in the Reform ProcessThe reform process in Bulgaria has been almostentirely a government-led affair. Debate has been

conducted between government agencies and donorinstitutions, primarily the IMF. Within the govern-ment, SAEER has played a dominant role. In thelatter stages of implementation, SAEER has beenmaking decisions independent of donor agencyviews.

The government has published some informationon the reform program, but it has been incompleteand allowed few opportunities for debate. Forexample, it released a “Program for the Restructuringof NEK,” along with a calendar of achievements andregulations for implementation of the Energy andEnergy Efficiency Law. However, prior to its enact-ment, the law was not available for public viewing orcomment.

Within civil society, the most vocal actors were thetrade unions in the energy sector. The unions stoodto suffer considerable losses as a result of the reformprocess. In a letter to Parliament, the Prime Minister,and the Deputy Prime Minister, these unionscritiqued the reform model being proposed bySAEER, charging that several of the measures ranthe risk of bankrupting the sector, causing furtherloss of jobs (Pari Daily, 2000). However, the unionstook no further steps; in particular, they made noeffort to combine forces with other concernedcitizens. That such alliances are possible is demon-strated by the example of South Korea. (See Box 6.3.)

Consumer groups and other NGOs with concernslarger than those of sector employees have played afar more muted role. Some energy efficiency andenvironmental NGOs have provided technicalcomments to the initial drafting stage of the law, buthave been little engaged in the implementationprocess. From the point of view of consumer groups,the rise in energy prices is of considerable concern.Despite the significant social costs of reforms toconsumers, however, there has been little mobiliza-tion around this issue, in part because the govern-ment has postponed difficult decisions through aprice freeze. There are primarily two reasons for themodest role NGOs and other public interest groupshave played in the reform process or in mobilizingpublic opinion. First, few NGOs in Bulgaria focus on

108

WRI: POWER POLITICS

BOX 6.3 ELECTRICITY SECTOR REFORMS IN SOUTH KOREA: PROSPECTS FOR ARED-GREEN ALLIANCE?

South Korea embarked on a comprehensive programof electricity sector reform in 2000. A restructuringact created a power trading market, a new regulatorybody, and led to the unbundling of the Korea ElectricPower Corporation (KEPCO). KEPCO’s generationassets are to be sold off, with the significantexception of hydro and nuclear assets. Privatizationof distribution is tentatively expected in 2003. By2009, retail competition is envisioned.

While these changes were promoted internally as away of enhancing economic efficiency, theimmediate cause of reform was the Asian financialcrisis of 1997. Revenues from the sale of generationassets and shedding of KEPCO’s own debt wereneeded to stave off looming problems.

The reform process has unveiled some intriguingpolitical arrangements between labor unions andenvironmentalists. The Korean National ElectricalWorkers Union (KNEWU), fearing layoffs and jobinsecurity, initially opposed restructuring andprivatization, and even thwarted passage of relevantlegislation in 1999. Ultimately, however, KNEWU didstrike a compromise with KEPCO management, andtacitly agreed to the first stage of reform plans—separation of the thermal power sector from KEPCO.Workers in the generation units objected to thiscompromise, and split off into a separate union—the

Korean Power Plant Industry Union (KPPIU). KPPIUhas joined hands with unions in other industries tooppose privatization. KNEWU and KPPIU each joinedrival umbrella union organizations.

Environmentalists in South Korea have largely beensupportive of a transition from a monopoly utility toa system based on competition. In particular, theyhope that market discipline will slow prospects forthe capital-intensive nuclear power plants hithertofavored by KEPCO, environmentalists envision asystem that increases environmental protection,local participation, and energy self-reliance.

These views initially pitted labor and environmentalgroups against each other on the question ofprivatization. Over time, however, both sides havemade efforts to reconcile their differences. Anetwork of progressive intellectuals, the Council ofProfessors for Democratization (CPD), has provideda forum for dialogue between the groups. At therequest of the umbrella union to which KNEWUbelongs, CPD conducted a year-long study of theimpacts of privatization on the electricity sector.Included were academics as well as labor unions andenvironmental representatives.

The debate has brought the positions of the twosides closer. Labor unions have incorporated public

the intersection of energy and environment, andnone has the ability to support an informed publicdialogue on such a complex issue. Second, littleinformation was available to the public. There was nomechanism for public input on energy pricing, socialoutcomes and necessary safety nets; on reformobjectives and the process to achieve them; onnational goals for development of the energy sector;and on other major decisions with significantenvironmental and social outcomes.

Initial Outcomes

The reform process has proceeded more slowly thanplanned. The government’s understandable concernabout raising prices too far too fast, and the contra-dictory interests within various government agencies,including a concern that reforms be made irrevo-cable before elections, have shaped the haltingprogress of reforms. Since the initial agreement, thisunsteady progress has caused significant tension

109

WRI: POWER POLITICS

with the IMF. Despite its leverage, the IMF hasultimately accepted the government’s decisions. Twospecific interim outcomes threaten to have consider-ably negative long-term impacts on reforms.

First, NEK was dismantled well before institutionaland regulatory capacity was created and put in placein the sector. In part, this was likely because thegovernment sought to make reforms irreversiblebefore the elections in 2001. While this reverse

sequencing was in direct opposition to donorrequirements, the donor agencies ultimately chosenot to question the decision. However, the lack of aregulatory framework created an ambiguous environ-ment for operation of the newly unbundled entities,and did not provide the clear signals necessary forthem to operate on a commercialized basis. Ifprivatization proceeds under these circumstances,there is considerable potential for manipulation ofthe privatization process for both financial and

BOX 6.3 (CONTINUED)

benefits concerns such as price hikes, cutting ofpublic benefit programs, and difficulties inregulating powerful private companies post-privatization. Environmentalists have expressedsympathy for broader initiatives against theundermining of national authority by global forces,while noting that the environmental case for theelectricity sector argues for market discipline. Theyalso cautioned against a rosy view—then prevalentamong labor groups—of the past achievements ofstate-owned corporations like KEPCO.

Ultimately, agreement on a proposal forrestructuring sponsored by environmentalists failedto win agreement from labor unions over the issueof privatizing nuclear power. Environmentalistssupported it and labor groups were stronglyopposed. While the CPD-led process did not lead toa common platform, the experience led to eachadopting positions that were more sensitive to theconcerns of the other. Unions now stress the need todemocratize the governance of the sector.Environmental groups acknowledge the danger thatreform could create ungovernable private oligarchs,and have focused their efforts on decentralizedpower options and incorporation of environmentalstandards. A lesson from the Korean experiencewith a red-green alliance is that while the interestsof each group are considerably opposed, there is

certainly space to forge coalitions. At minimum,the effort has resulted in greater mutualappreciation of the broader challenge of creatinga responsible and beneficial electricity sector.

Sources:

Cho, Sung-Bong. 2000. Restructuring and Privatization ofElectric Power Industry in Korea. Korea Energy EconomicsInstitute, Euwang, Korea. (in Korean).

Jang, Youngsik. 2000. “Restructuring and PrivatizationProgram of Korea Electric Power Corporation.” A paperpresented at the Center for Energy and EnvironmentalPolicy (CEEP) Colloquium Series, Newark, Delaware.

Kim, Yun-Ja. 2000. “Problems of the Privatization of theInfrastructure Industry and an Alternative Proposal.”Presented at a Conference titled Privatization: What are theProblems, FKTU, Seoul, Korea.

Lee, Pil-Ryul. 2000. “Direction of Electricity RestructuringViewed from the Standpoint of Energy Transition.”Unpublished manuscript. (in Korean).

Oh, Kun-Ho. 2001. “For Further Development of anArgument Against the Privatization of the NetworkIndustry.” Online at www.kctu.org. (in Korean).

Soh, Ju-Won. 1998. “Problems of Electricity Monopoly andBasic Principles for Electricity Restructuring.” Presented atthe Conference on the Direction of ElectricityRestructuring for Environmental Protection, LocalParticipation, and Energy Self-reliance, Korea Federation ofEnvironmental Movements, Seoul, Korea. (in Korean).

110

WRI: POWER POLITICS

political gain. In recognition of these problems, theMinistry of Energy and Energy Resources’ March2002 Strategy document explicitly recognizes theproblem of unbundling before undertaking regula-tory reform.

Second, the momentum toward new thermal powercapacity—at Maritsa-Iztok 1 and 3—prior to therestructuring of NEK is a cause for concern. Thecontract proposed would oblige NEK to purchaseelectricity on a “take or pay” basis, forcing it to bearthe risk of a downturn in demand for electricity. Theprice at which this electricity will be purchased iskept confidential. That the contract is for a 15-yearperiod contradicts the spirit of the reforms, which areintended to shift the sector toward a more competi-tive structure. The government currently anticipatesthat the electricity will be exported to Turkey. How-ever, based on estimates of generation costs and thelikely price of power exports once the market is fullyliberalized and linked to the European grid, there is ahigh likelihood that the electricity will be sold at aconsiderable loss. If this does prove to be the case,Bulgarian consumers, who are already strugglingunder a heavy price burden, will effectively subsidizecheap exports to Turkey. The reform model squarelyputs the burden on the small consumer, since“privileged” consumers such as large industrialfacilities can buy directly from producers at competi-tive prices, depriving the distribution companies oftheir most lucrative customers. Consequently, thedistribution network may have to pass on the costs ofmore expensive supply to small consumers andhouseholds. In brief, the public sector and ultimatelythe small consumers in Bulgaria bear the projectrisks, while private sector partners and the importingcountry stand to benefit.

ENVIRONMENTAL AND SOCIALCONCERNS

Until 2001, there has been little evidence in thereform process of attention to either environmentalor social outcomes. This is despite substantialinternational pressures on Bulgaria to meet environ-mental targets, and despite palpable evidence that the

reform process is extracting a considerable social coston the most vulnerable.

The design and implementation of reforms has notled to the emergence of any domestic champions forenvironmental concerns. The plans for restructuringand privatization were drawn up prior to the WorldBank studies on energy and environment completedin 2000. Consequently, reform design was drawnfrom the decade-old World Bank studies, whichconcluded that market reforms would automaticallyresult in environmental improvements. The possibil-ity that reform processes might undermine efforts atenvironmental improvements was not considered ormitigated. For example, the possibility that creatingseven separate distribution companies could substan-tially complicate implementation of end-use effi-ciency programs has not been considered. Nor wasany systematic treatment given to the scope forpursuit of renewable energy options in the reformprocess.

The reform model squarely puts the burden on

the small consumer.

If fully implemented, the government’s original1999 Strategy document, which focused on supplyexpansion, would have likely had negative environ-mental implications. The 1999 Strategy was basedon the assumption that the expected economicrecovery would lead to demand comparable to pre-1989 levels, and on a vision of Bulgaria as a majorenergy exporter. This approach placed limited efforton supply and demand efficiency. Currently, even theexisting funds for energy efficiency projects havebeen lost as part of the program of fiscal transpar-ency. As examples from other Central and EasternEuropean countries indicate, sector and macroeco-nomic reform provide incentives for energy effi-ciency in the privatized industries, but they are notequally effective in the public sector or with house-holds. Special instruments such as earmarked fundsand soft financing are needed to introduce energyefficiency measures (Regional Environmental Center

111

WRI: POWER POLITICS

for Central and Eastern Europe and the WorldResources Institute, 2001).

Late in the reform process, the World Bankemerged as a strong advocate for increased efficiency,and has demonstrated that efficient use is an alterna-tive to rampant expansion of supply potential.However, this effort has come late in the process, anduntil recently this message has had little domesticsupport. A focus on energy efficiency has been apolitically inconvenient message, since it threatens toundermine the interests of those who advocatecontinued capacity expansion. A domestic politicalconstituency for energy efficiency is necessary tocounter the influence of forces supporting enhancedsupply. Fortunately, early signs from the new govern-ment, as suggested by the emphasis on energyefficiency in the 2002 Energy Strategy, suggests thatsuch a constituency may in fact be forming.

The approach to social issues has followed a similartrajectory. Despite indications of a serious socialproblem, no assessments or forecast of the socialburden of reforms were initiated in the early stages

of reform. The early evidence suggests that reformsin the electricity sector will substantially increaseboth electricity and district heating prices for house-holds. Since the initiation of reforms, householdbudgets for energy have steadily increased, risingfrom a 7 percent share in 1996 to 11 percent in2000. (See Figure 6.2.) The burden is heaviest for thepoorest households. For example, old-age pensionerspaid an average of 14 percent of their householdbudget on energy costs, the second largest categoryof household expenditure (Dimov, 2000).

For several years, the government’s approach hasbeen to postpone seeking a solution, or to seek short-term fixes. In order to put the sector on a soundfinancial footing, the IMF has relentlessly urgedprice increases, but without providing any solution tothe social cost of price these increases. The govern-ment negotiated a freeze on electricity and districtheating prices with the IMF for two years beginningin 2000. Moreover, it has instituted a program fortargeted energy support during the cold season,which was extended to a substantial 19 percent ofhouseholds (12 percent of the population) (Dimov

FIGURE 6.2 ENERGY COSTS AS A SHARE OF HOUSEHOLD EXPENDITURES INBULGARIA

Source: National Statistical Institute, 1993–2000.

0

2

4

6

8

10

1989 1990 1991 1993 1995 1997 1999

perc

ent

12

1992 1994 1996 1998 2000

112

WRI: POWER POLITICS

2000). This is clearly a long-term problem notamenable to a short-term fix, as indicated by the factthat energy prices in Bulgaria are rising towardEurope-wide prices as the country increasingly seeksto integrate its markets, yet Bulgarian incomes arearound 30 percent of European incomes. Hence, fora large segment of the population, energy costs arelikely to be a considerable burden for some time tocome.

In the Bulgarian context, the link between socialand environmental outcomes is particularly appar-ent. End-use efficiency and household conservationefforts could bring substantial social benefits bybuffering the cost of energy price increases, evenwhile providing environmental benefits. Hence,greater efficiency provides a positive link betweenenvironmental and social outcomes. The potentialnegative linkages are also clear. For example, withrising district heating prices, many consumers havedisconnected from the system, calling its financialviability into question. Instead, customers haveswitched to electricity for heating since it allows themto control their heat use and associated expenses.The environmental cost of this switch is significant,since district heating is based on natural gas combus-tion, while a considerable share of electricity isgenerated from coal.

A domestic political constituency for energy

efficiency is necessary to counter the influence

of forces supporting enhanced supply.

More recently, the World Bank’s preparation of anadjustment loan seeks to build on its studies demon-strating the considerable benefits of energy efficiencyon both social and environmental grounds. Inaddition, the World Bank has revived earlier projectsto rehabilitate the district heating system in majorcities. Hence, there are signs that environmental andsocial factors may yet receive explicit attention.

In sum, despite the considerable environmentaland social stakes in the reform process, successive

governments throughout the 1990s made little effortto assess the implications of electricity sector reformson these broader concerns. Among donor agencies,the IMF has maintained its support for the rapidintroduction of market prices. The World Bankadvocated attention to energy efficiency and socialprotection, but only after the government’s initialround of reform design and implementation. Theslow pace of reform, combined with a new govern-ment, may yet provide an opportunity to correct theearlier inattention to public benefits in the reformprocess.

Greater efficiency provides a positive link

between environmental and social outcomes.

CONCLUSION

It took a crisis situation for reforms in the electricpower sector to be undertaken in Bulgaria. Efforts atreform funded by a range of donor agencies in theearly 1990s resulted in a series of technical studies,but few actual steps in this direction. Only pressuresfrom the IMF led the Bulgarian government to takeserious steps toward reform. However, in a crisiscontext, the Bulgarian government had limited abilityto frame the approach to reform, which was largelydictated by the IMF’s concern with financial trans-parency, introduction of commercial principles in thesector, tariff increases, and ultimately privatization.

Once in the implementation stage, domestic actorsand particularly the SAEER (the former Committeeof Energy) reasserted their authority, but not neces-sarily in the public interest. Reform implementationled to a flawed sequencing of reform, where unbun-dling was given priority over establishment of aninstitutional framework. Moreover, the government’ssupply orientation and preoccupation with develop-ing an export market for electricity continuedunabated. Despite donor leverage in the initial stages,the IMF in particular was unable to change thegovernment’s course in these two important areas.

113

WRI: POWER POLITICS

Neither the government nor donor agenciesbrought sufficient attention to bear on concerns ofpublic benefits in the design stage of the reforms. Inthe midst of a financial crisis, the IMF soughtattention to the financial dimensions of reform.While well aware of the social costs of tariff in-creases, the IMF made no attempt to examine waysof insulating the population in the long run from thesocial costs of price increases. While the World Bankhad conducted studies of environmental issues in thesector in the early 1990s, there is little evidence thatthese studies shaped the design of reforms carriedout in the late 1990s. Through subsequent studies,the World Bank did criticize the government’ssupply-oriented mindset obliquely through theavenue of environmental concern, by demonstratingthe potential of greater efficiency to obviate the needfor supply increases. By the time this and otherimportant new studies on the environmental andsocial dimensions of reform were complete, however,political momentum had increased in favor of supplyexpansion. However, the election of a new govern-ment and the preparation of a World Bank loan forstructural reform provide scope to change course,and World Bank studies on the energy-environmentlink may yet prove to be a useful tool.

The experience in Bulgaria also calls into questionthe effectiveness of coordination among the donoragencies. While the World Bank was active in thesector in the early 1990s, there is little evidence thatthis knowledge played a role in shaping IMF-ledreforms a few years later. Moreover, two years intoreforms, there was a growing wedge between thepositions of the two institutions, as the IMF acceptedthe government’s interest in developing new capacitythrough joint ventures, while the World Bankcontinued to find fault with this approach. Only in2001 did the two institutions better coordinate theirmessage to the government.

Among public benefit concerns, social issues are atthe top of the political agenda. Price increases inelectricity and in district heating are the greatestpublic concern, and also occupy the political atten-tion of the government. While environmental issuesare of significant international concern, particularly

given environmental standards necessary for EUaccession, they have not risen to an equivalent levelof political importance.

Bulgarian reforms call into question coordina-

tion among donor agencies.

Neither social nor environmental concerns havebeen articulated in open debate over reforms.Indeed, reforms have been dominated by a smallgroup of government bureaucrats and donor agen-cies, with little scope for public debate. The lack ofopen debate through the 1990s may have contrib-uted to glaring disconnects in the reform process,such as that between the goal of increasing commer-cial discipline and the government’s insistence onnew capacity addition for exports, which appeareddoomed to be loss-making. With the reform processhaving entered a new phase in 2001, there is stilltime for a supply-driven approach to reforms to giveway to one motivated by concern over the broaderpublic interest, and for more attention to be paid tothe considerable potential for social and environmen-tal gains from energy efficiency in Bulgaria’s electric-ity sector.

NOTES1. Dimitar Doukov wishes to thank colleagues at

EnEffect, in particular, Mr. Atanas Stoykov whoprovided information and advice at all stages of theproject. He also wishes to acknowledge the advice andcontribution of Mr. Lulin Radulov. This chapter drawson Dimitar Doukov, 2001, “Bulgaria Power SectorReform.” Unpublished paper, Eneffect, Sofia, Bulgaira(July). Online at http://www.wri.org/governance/iffepowercases.html.

2. The effects of this stabilization program can be tracedthrough data produced by the National StatisticalInstitute (1993-2000).

3. Calculated by Doukov from National StatisticalInstitute (1993-1997).

4. See, for example, European Parliament (1997), whichstates that “Integrated electricity undertakings shall, in

114

WRI: POWER POLITICS

their internal accounting, keep separate accountingsfor their generation, transmission and distributionactivities.”

5. Interview with former government bureaucrat, August2000. All interviews for this chapter were conductedon a not-for-attribution basis. Consequently,interviewees are identified only by their institutionalaffiliation.

6. See European Union Electricity Directives: Resolution98/C4/01 (18 December 1997); COM(97) 599;Decision 99/21/EC, Decision 96/737/EC; Decision2000/646/EC.

7. Republic of Bulgaria Council of Ministers (1998a)envisions decommissioning of Units 1 and 2 ofKozloduy nuclear power project in 2004 and 2005.According to the Memorandum signed on November29, 1999 between Bulgaria and the European Com-mission it has been agreed that the decommissioningof Nuclear Units 1 and 2 of Kozloduy NPP should becarried out by 2003.

8. For example, in 1999, targeted assistance wasextended to 19% of households, or 12% of thepopulation, indicating the large segment of thepopulation that requires assistance for basic heating.

9. Interview with World Bank official, April 14, 2000.

10. This was clearly stated in a Memorandum between theGovernment of Bulgaria and the IMF, February 2000.Also see Capital Newpaper (2000).

11. It is relevant here to note that the Chairman of theEnergy Committee in Parliament was not from theruling party.

12. Interview with World Bank staff member, April 14,2000.

13. Personal communication, World Bank staff, April2002.

14. Personal communication, World Bank staff, April2002.

115

WRI: POWER POLITICS

REFERENCES

Regional Environmental Center for Central and EasternEurope and the World Resources Institute. 2001. GoodPractices in Policies and Measures for Climate ChangeMitigation: A Central and Eastern European Perspective.Szentendre: Regional Environmental Center for Centraland Eastern Europe and the World Resources Institute.

Republic of Bulgaria Council of Ministers. 2000a. NationalClimate Change Action Plan. Sofia: Council of Ministers.

———. 2000b. Memorandum on Economic Policies of theGovernment of the Republic of Bulgaria. Online at: http://www.imf.org (March 9, 2002).

———. 1998a. National Strategy for Development of Energyand Energy Efficiency til 2010. Sofia: Republic of Bulgaria.

———. 1998b. The Strategy for Development of the EnergySector by 2010. Sofia: Republic of Bulgaria.

Republic of Bulgaria National Assembly. 1999. “Law onEnergy and Energy Efficiency.” State Gazette. (July 16):64.

———. 1998. “Law of State Budget of the Republic ofBulgaria for 1999.” State Gazette (December 29):155.Paragraph 9, Annex 4.

Todorov, Vasil. 2001. “The Economy: Will We Succeed? TheDiagnosis is Before Therapy.” Pari Daily. Issue 144(August 1): 7.

World Bank. 1992a. “Bulgaria Environment Strategy Study,Report No. 10142-BUL.” Washington, D.C.: World Bank.

———. 1992b. “Bulgaria Energy Strategy Study, Report No.10143-BUL.” Washington, D.C.: World Bank.

———. 1993a. “Bulgaria Energy Project, Report No. 11250-BUL.” Washington, D.C.: World Bank.

———. 1993b. “Bulgaria Energy Project.” Report No.11250-BUL.” Washington, D.C.: World Bank.

———. 1994. “Bulgaria Environment Strategy: Update andNext Steps, Report No. 13493-BUL.” Washington, D.C.:World Bank.

Alexandrova, Galina. 1997. “Mr. Shilyashki Messed up theEnergy Bills.” Capital Newspaper. Issue 18. (May).

———. 2000. : “The offshore company “3?” and NECbargained again unprofitable contract.” Capital Newspa-per. Issue 28 (July).

Capital. 2000. “IMF: We Postpone the Division of NEK.”The Capital. (February 7).

Center for the Study of Democracy. 1995. Energy Policy inthe Context of Bulgaria’s Accession to the European Union.Sofia: Center for the Study of Democracy.

European Parliament. Article 14, item 3., Directive 96/92/EC of the European Parliament and of the Council of 19December 1996. Official Journal of the EuropeanCommunities No L 17/20, 30. 1. 97.

Dimov, Martin. 2000. “Social Aspects of the Energy SectorReform.” Unpublished manuscript. Study contracted byEnEffect. Sofia: EnEffect.

Energoproekt and Sofia Energy Centre. 2001. Determina-tion of Market Potential for Small Boilers on Fluidized BedCombustion, Pre-feasibility Study. Sofia: Energoproektand Sofia Energy Centre.

Energy Charter Secretariat. 1996. Energy Charter Treaty andRelated Documents. Brussels: Synergy Programme of theEuropean Union.

Kahkonen, Juha. 2000. Letter from IMF representativeJuha Kahkonen to Deputy Prime Minister and Minsterof Economic Affairs Peter Zhotev, April 27, 2000.

National Electric Company. 2001. Annual Report 2000.Sofia: National Electric Company.

National Statistical Institute of the Republic of Bulgaria.1993-2000. Statistical Yearbook of the Republic ofBulgaria. Sofia: National Statistical Institute.

———. 2002. Statistical Reference Book of the Republic ofBulgaria 2001. Sofia: National Statistical Institute.

Pari Daily. 2000. “The Ideas of Shilyashki Will Overthrowthe Government.” Pari Daily (April 14):73.

117

WRI: POWER POLITICS

7

GHANA

ACHIEVING PUBLIC BENEFITS BY DEFAULT

Ishmael EdjekumheneNavroz K. Dubash1

INTRODUCTION

As with many other countries in the developingworld, the slow shift from public to private control inGhana’s electricity sector is part of a wider movetoward a market economy in the aftermath of adecade of economic turmoil. In contrast to many ofthe other cases in this study, Ghana has a relativelysmall electricity sector, consisting mainly of two largepublic corporations. Reform in Ghana has posedboth institutional and technical challenges. Ofparticular concern is expanding the population’saccess to electricity. The World Bank has historicallyplayed a dominant role in the Ghanaian electricitysector, and has been instrumental in the reformprocess. But the government of Ghana (GOG) hasbeen firm in seizing ownership of its reform pro-gram and independently directing the course ofreforms. For a profile of the electricity sector inGhana see Box 7.1.

BACKGROUND

State-Owned Enterprises Control theCommanding HeightsFrom the date of its independence in 1957 until thelate 1980s, Ghana pursued a state-led economicdevelopment strategy. Central to this vision was thecreation of strong state enterprises to developinfrastructure and public services. In the post-colonial vision of development, which Ghana sharedat the time, this strategy of publicly provided servicesformed the backbone of an industrializing nation.

BOX 7.1 PROFILE OF THEELECTRICITY SECTORIN GHANA

Population (2001)1 : 18.5 million

Population with access to electricity (2000) 2:Total: 40% Rural: 17% Urban: 77%

Installed electricity generation capacity (2001) 3

Total: 1.6 gigawatts (0.05% of total world capacity)

Thermal: 35%Hydro: 65%Nuclear: 0Geothermal and Other: 0

CO2 emissions from electricity and heat as ashare of national emissions (1999)4: 23%

Notes:

1. Ghana Statistical Service, 2002. “2000 PopulationCensus Report”. Accra.

2. Ministry of Energy, 2001. “Energy for PovertyAlleviation and Economic Growth: Policy Framework,Programmes and Projects”. November, 2001. Accra.

3. www.eia.doe.gov/pub/international/eiapdf/t06_04.pdf (February 6, 2002).

4. Computed by WRI using International Energy Agency(IEA) data. IEA, 2001. CO2 Emissions from Fossil FuelCombustion. Paris: OECD.

118

WRI: POWER POLITICS

By the early 1980s, state-owned enterprises inGhana had turned in a poor financial performancefor several consecutive years. The resultant losseswere financed through borrowing or taxes, whichimposed a debt burden and a misallocation ofresources (Edjekumhene, 2000). In 1982, state-owned enterprises racked up operating deficitsamounting to over 3 percent of GDP, an amountalmost as large as total spending on education,health, social security, and welfare (Berenschot andBosboom, 1995).

The problem was worsened by external shocks. Adownturn in the world price of cocoa—Ghana’smajor export—combined with lax fiscal and mon-etary policies led to a prolonged period of crisisaccompanied by severe inflation. Between 1980 and1983, GDP declined by 17 percent and export earn-ings by over 53 percent, while external debt rose by 17percent (Kapur et al., 1991).

This crisis led the government to negotiate an“Economic Recovery Program” with the BrettonWoods institutions in 1983, which subsequentlyevolved into a more complete structural adjustmentprogram in 1986. The adjustment program imple-mented state retrenchment, a floating exchange rate,price liberalization, and privatization of state-ownedenterprises (Partiff, 1995). As a large and economi-cally significant sector, the electricity sector was highon the list for attention (Opam and Turkson, 2000).

THE PATH TOWARD REFORM:THE PRE-REFORM STRUCTURE ANDDIAGNOSIS OF PROBLEMS

In keeping with the conventional wisdom prior to the1990s, Ghana’s electricity sector has long beenorganized around public utilities. The Volta RiverAuthority (VRA) generates almost all of Ghana’selectricity through two large hydroelectric projectsand two recently installed thermal power plants. VRAis also responsible for the transmission grid. TheElectricity Company of Ghana (ECG) is the primarydistribution utility. The sector is governed by theMinistry of Energy (formerly the Ministry of Mines

and Energy, or MOME), which has responsibility forpolicymaking and coordination. In addition, a StateEnterprises Commission was established in 1987 todevelop performance contracts for state-ownedenterprises, including VRA and ECG.

By 1993, only 24 percent of the population was

served by electricity.

However, these institutions have failed to ensurewidespread access to electricity. By 1993, only 24percent of the population was served by electricity(World Bank, 1993a). In 1989, the governmentinstituted a National Electrification Scheme aimed atexpanding access to the entire population by 2020.This ambitious goal remains a critical part of govern-ment policy in the sector.

Throughout its history, the electricity sector inGhana has received considerable financial supportfrom international donors, led by the World Bank.The World Bank provided almost half the externalloan component for the country’s first hydroelectricdam and substantial portions of subsequent projects.Between 1961 and 1995, the World Bank conductedeight lending operations aimed at the power sector.The institution has been the single most importantfinancier and a critical catalyst of additional interna-tional public support for technology development,institutional development, and management reform.In particular, the World Bank has been central inbuilding VRA and ECG—the two institutionalbuilding blocks of the sector. Understanding thegenesis of problems in the sector requires delvinginto the past record of each of these institutions. Anoverview of the pre-reform sector is provided inFigure 7.1.

Volta River Authority: The FavoredChildWith the personal and strong support of then-President Nkrumah, VRA was established in 1961. It

119

WRI: POWER POLITICS

was inspired by the example of the Tennessee ValleyAuthority in the United States. VRA, with a totalcapacity of 1,072 megawatts through most of the1980s and 90s, has operated as a public monopoly ingeneration based on two large hydroelectric projects.It controls the bulk power sales market and has amonopoly in transmission services (World Bank,1993a). It has also been the monopoly supplier ofelectricity to the distribution company, the ElectricityCorporation of Ghana. The central role of VRA, andthe conditions of its creation, has shaped recentreform efforts in several significant ways.

The government created VRA as an independententity with separate governance and legal structures.This caused both management complications andpolitical resentments (Brew-Hammond, 1994). Thesearrangements, critics have argued, crippled the forceof the Electricity Act—passed around the same timeas the creation of VRA—and the authority of whatwas then the Electricity Department under the

Ministry of Public Works, later the Ministry of Minesand Energy.2

VRA was run for a long time as an economicenclave, insulated from problems that have besetother parts of the economy. When VRA was estab-lished in 1961 with an initial capacity of 588 mega-watts (Brew-Hammond, 1994), total demand inGhana was barely 100 megawatts. To absorb thesurplus electricity, VRA agreed to supply electricity toindustrial consumers, prominent among them theprivately owned Volta Aluminum Company(VALCO). As recently as 1991, VALCO consumed 59percent of Ghana’s total power supply (Opam andTurkson, 2000).3 In later years, VRA’s customer baseexpanded to include additional industrial consumerssuch as mines, and exports of electricity to neighbor-ing countries such as Côte d’Ivoire, Togo, andBenin.4 As a result, VRA received a large share—estimated in 1990 at 70 percent—of its revenues inforeign exchange. This insulated VRA from the

FIGURE 7.1 PRE-REFORM STRUCTURE OF THE ELECTRICITY SECTOR IN GHANA

Source: Opam and Turkson, 2000.

VRA Hydro

VRA DispatchCenter

Imports

VRA Transmission— Limited Access

High Voltage Consumers Distributors

MinesLarge Industries

Export(Togo, Benin)

Valco NED ECG

120

WRI: POWER POLITICS

effects of the periodic and dramatic currency devalu-ations of the 1980s and 1990s (World Bank, 1990).

VRA has won plaudits for its strong financial trackrecord from external actors such as the World Bank,which described it as “a relatively well-run publicutility with few institutional and financial problems”(World Bank, 1995, p. 2). Yet, critics contend that itsprivileged status as an enclave, which allowed it tosell predominantly to wealthy industries that pay inforeign exchange, is a large part of the explanationfor its relative success.5 Indeed, with its emphasis oncommercial profitability, VRA had little incentive toextend its transmission network to serve the Ghana-ian people, who are both less lucrative and moredifficult customers to serve than giant industrialconsumers. If VRA has been successful, contend thecritics, it is because success has been defined interms of commercial viability rather than contribu-tion to development goals.

VRA had little incentive to serve the

Ghanaian people, who are less lucrative

customers than giant industrial consumers.

Backed by support from external donors, VRA’srole continued to grow. In 1987, its mandate wasamended to include distribution of electricity in thenorthern zone of the country through establishmentof a Northern Electricity Department (NED) withinVRA. Moreover, VRA was envisioned as playing acentral role in promoting opportunities for regionalcooperation in power development and exchange inWest Africa (World Bank, 1990).

Electricity Company of Ghana:The Step-ChildThe Electricity Company of Ghana (ECG), establishedas the Electricity Corporation of Ghana by a govern-ment decree in 1967, was intended to be the maindistribution entity in Ghana. ECG was charged withthe bulk purchase of electricity from VRA for

distribution to all categories of consumers, with theexception of VALCO and other large industrialconsumers supplied directly by VRA.

The establishment decree required ECG to conductits operations on a commercial basis. However, ECGhas lurched from crisis to crisis through the 1980sand early 1990s, defying several efforts to set it onthe right footing. Following the broader economiccrisis of the 1980s, the situation was worsened. Aslosses mounted, ECG developed a negative totalequity, a high debt-to-equity ratio, and a heavy debt-service burden (World Bank, 1993a).

Several efforts to improve this situation—includinga twinning arrangement with an Irish utility, a WorldBank-supported project to restructure financially, andthe discipline of performance contracts—have notmet with success. A central barrier to ECG’s viabilityis a tariff structure that is too low to ensure itsfinancial health (Opam and Turkson, 2000). Inparticular, tariffs have not kept pace with currencydepreciation, which raises ECG’s costs in loaninterest and exchange rate fluctuation charges.Attempts to change and revise upward the tariffstructure have been unable to deal with the funda-mental problem—the Government of Ghana washard pressed to politically sustain tariff hikes whenelectricity service was both unreliable and of lowquality.

A central barrier to ECG’s viability is a tariff

structure that is too low to ensure its financial

health.

Most recently, the World Bank included a substan-tial component of institutional strengthening in itsNational Electrification Project. In the words of theproject document, “VRA has been a relativelyautonomous, financially viable, and well-run entity;attention is now focused upon bringing ECG to asimilar standard” (World Bank, 1993a, p. 5). The loanagreement required the government to agree to aself-adjusting tariff formula to guarantee a minimum

121

WRI: POWER POLITICS

rate of return on assets. Even more significant, ECGwas required to create a separate Directorate ofCustomer Services for ECG, to be operated byElectricité de France under a performance-basedmanagement contract (World Bank, 1993a, p. 7).This approach partially mirrored one recentlyadopted in neighboring Côte d’Ivoire, and was alsoan indication of an emerging World Bank policyformalized in 1993 to encourage importation ofservices in the energy sector (World Bank, 1993b).(See Box 7.2.)

The Government of Ghana was hard pressed to

politically sustain tariff hikes when electricity

service was both unreliable and of low quality.

Even as these efforts were put in place, ECG wasalready slated for conversion to a public liabilitycompany as part of a commitment made to the WorldBank under the 1980s structural adjustment pro-gram. Notably, VRA was not included on this list,since it was not perceived as an underperformingenterprise (Opam and Turkson, 2000). By the mid-1990s, the future of ECG was already in doubt.

The Seeds of ReformThis thumbnail sketch of Ghana’s electricity sectorsuggests several issues that have both forced andshaped reforms in the sector. The role of VRA is asource of contention. To some, VRA is the savinggrace of the sector. To others, its enclave nature,which allows it to maintain financial viability, is anobstacle to a sensibly integrated sector. ECG’sstruggles to maintain financial viability, and thedifficulty of doing so when confronted by decliningreal tariffs (adjusted for depreciation), have left it in abind. By the early 1990s, the World Bank’s growingpreference for the importation of services and anexpansion of private sector engagement threatened toundermine support for ECG. And the situation wasfurther complicated by broader efforts by the Govern-ment of Ghana to restructure the economy in

keeping with the structural adjustment policies of the1980s. Collectively, these features of the sector werethe seeds of reform.

The need for change was brought into focus by a setof three circumstances that developed through the1980s, two of which were internal and one external toGhana. First, since the country relied on hydropowerfor 95 percent of its capacity, a severe drought in 1982-83 (and again in 1993) led to a severe electricityshortfall. By 1984, generation had reached 36 percentof its pre-drought 1982 levels, and only recovered topre-drought levels in 1989 (Opam and Turkson,2000). Adjustment to these lower levels of generationwas compounded by VRA contracts to supply itsindustrial users, notably VALCO.6

Second, between 1985 and 1993, domestic demandfor electricity rose at a substantial 10.8 percent peryear, increasing to 15 percent between 1993 and 1995(Ministry of Mines and Energy, 1996). Growth indemand was caused by an increase in economicgrowth following the economic crisis of the early1980s, as well as the requirements of the NationalElectrification Scheme. By 1994, the flow of electric-ity sales to Côte d’Ivoire had been reversed, as Ghanabecame a buyer rather than a seller of electricity. Thecountry was thus caught between growing demandand shrinking supply.

To address the shortfall, the government needed tourgently raise funds for new generation capacity tomeet contractual obligations to VALCO, exportdemands to neighboring Togo and Benin, and toservice the current and expanding projected needs ofits own consumers. The government also neededfunds to improve existing transmission and distribu-tion infrastructure.

Third, and perhaps most important, the traditionalsource of financing for the power sector was dryingup. In 1993, a new World Bank policy of “commit-ment lending” required sectoral reform as a precon-dition to further loans. The Bank said that it wouldnot finance VRA’s expansion program for a thermalpower project at Takoradi without basic structuralreforms.

122

WRI: POWER POLITICS

In sum, the growing electricity shortfall ensured thatthe broader structural problems in the sector could nolonger be ignored. However, the World Bank policy of“commitment lending” was the proximate cause thatforced action. This view was widely held among GOGofficials involved in designing the reforms. As onesenior official engaged in the reform succinctly put it,“if the World Bank had given us money, no one wouldhave talked about reform.”7

CONSTRUCTING A REFORMEDELECTRICITY SECTOR

That various actors relevant to Ghana’s electricitysector had come together on the need for reforms didnot mean that they all agreed on the direction ofthose reforms. They actually differed considerably on

the scope of the reforms and the vision of a post-reform sector. In this section, we examine how theviews espoused in the debate by the World Bank,VRA, and the government combined to shapereforms. The chronology of the reform process is laidout in Box 7.3.

Contrasting Views on ReformThe World Bank’s thinking during this period isencapsulated in a review of lending for electricity insub-Saharan Africa that was written by its OperationsEvaluation Department after the 1993 World Bankpolicy was put in place (Covarrubias, 1996). Thereview argues against the unbundling of the sector—as was carried out in Chile and the United King-dom—due to the small size of the power sector in

BOX 7.2 CÔTE D’IVOIRE: PRIVATE SECTOR PARTICIPATION IN ELECTRICITYPROVISION

In 1990, a shift in power from the ailing PresidentHouphouet-Boigny to a reform-oriented caretakerprime minister, Alassane Dramane Ouattara, led tocloser coordination with the Bretton Woodsinstitutions. The new leadership devalued thecurrency, reformed the public investment bank, andlaunched a privatization program that included theelectricity sector. Unlike many other developingcountry utilities, EECI boasted good technicaloperation, low system losses, and a high (90percent) rate of bill collection, except fromgovernment agencies. Nonetheless, in August 1990the government decided to invite in the privatesector, and by November 1990, EECI’s transmissionand distribution assets were effectively transferredto the private operator Companie Ivoirienned’Electricité (CIE).

Almost simultaneously, the government approveda contract with an independent power producer(IPP) to build and operate a thermal power plant.Approval of this plant was, in part, motivated by

Between 1960 and 1977, Côte d’Ivoire experiencedvigorous growth, fiscal and macroeconomic stability,and independence from foreign aid. However, in thelate 1970s and early 1980s, a decline in coffee andcocoa commodity prices led to a severe economicrecession. In response, the government of Côted’Ivoire turned to the Bretton Woods institutions tohelp stabilize its economy and fund economicrecovery.

In the electricity sector, external oil price risescombined with drought produced a crisis in 1983-84.The state-owned electricity company, EnergieElectrique de la Côte d’Ivoire (EECI), was buying oilon the international market for thermal generation tomake up for the loss of hydroelectric generation. Asa result, the state-owned utility’s financial situationbecame precarious. IMF and World Bank loans, ageneral economic recovery in the mid to late 1980s,and most important, the discovery and exploitation ofoil resources off the coast of Côte d’Ivoire allowedEECI to regain financial stability by the mid-1980s.

123

WRI: POWER POLITICS

most sub-Saharan countries and the inadequate andweak regulatory frameworks in place. Instead, thereport recommends maintaining a dominant genera-tor, with selective reliance on independent powerproducers (IPPs) as an interim measure untilconditions are ripe for competitive markets. Thesingle most forceful recommendation is to focus ondistribution reform as the source of problems relatedto cost recovery and service delivery. Here, pointingto the Côte d’Ivoire example (see Box 7.2), the reportsuggests the use of management contracts—poten-tially extending to outright distribution conces-sions—which would make concessionaires respon-sible for ongoing investments. It also urges theintroduction of transparent regulation, noting thatnonenforceable performance contracts have provedlargely unsuccessful; suggests consideration ofdecentralized community-based distribution; and

favors reform of purchase tariffs. Finally, the reviewnotes the political challenges in shifting away from apublic monopoly model and recognizes the centralimportance of “borrower ownership” of a reformprocess.8

The country was caught between growing

demand and shrinking supply.

These ideas were put to the test in negotiationsbetween the World Bank’s International Develop-ment Association (IDA) and MOME over a credit forthe Takoradi thermal power plant. While not specify-ing a particular reform model, the World Bankconveyed a desire to maintain VRA as an intact

short-term political interest—to avoid electricityshortages in the run-up to elections. Significantly, ina major concession to investors, the governmentdecided to provide fuel to new IPPs at no cost.

No regulatory reforms preceded privatization, butthere was a subsequent flurry of regulatory activity.A number of new institutions were set up, includingbodies to supervise EECI, address financial issues,address engineering issues, develop a nationalpolicy for electricity, and promote rural electrifica-tion. There was a simultaneous reshuffling ofresponsibilities, often with overlappingjurisdictions. As a result, regulation, planning, andpolicymaking within the sector became increasinglyduplicative and unclear. As one observer noted,“each private operator can literally pick the govern-ment body with which it is comfortable in order tosolve its problem with the lowest possible risk.”

As a result of the existing confusion, a new round ofreforms is in the cards that will aim to reorganize

the system from a vertically integrated monopoly toan unbundled system. However, the government islocked into the existing agreement with CIE, whichexpires in 2005 and poses problems for any futurereform.

Sources:

Brew-Hammond, Abeeku. 1997. “Ghana and its CCGT.”Financial Times Energy Economist. September 197 191/13.

Berg, Elliot, Patrick Guillaumont, Jacky Amprou, andJacques Pegatienan. 1999. “Côte D’Ivoire.” In Aid andReform in Africa. Edited by Shantayanan Devarajan, David R.Dollar, and Torgny Holmgren. Washington, D.C.: WorldBank. Online at: http://www.worldbank.org/research/aid/africa/cotedivoire.pdf (May 30, 2002).

N’Guessan, Etienne K. 2000. “Privatization of the PowerSector in Côte d’Ivoire.” In Power Sector Reform in Africa.Edited by John K. Turkson. London: MacMillan Press.

World Bank. African Gas Initiative: Main Report (Volume 1).Energy Sector Management Assistance Programme. ESM240. February 2001.

BOX 7.2 (CONTINUED)

124

WRI: POWER POLITICS

generation entity, to supplement generation capacitywith IPPs, and focus on reform of ECG.9 In thesubsequent phrasing of the loan document, theWorld Bank stated that “the most appropriate role forthe private sector at this time is through participationin a performance-based management contract for theproposed thermal power project” (World Bank, 1995,p. 7). A condition for the loan was that the GOG

establish a committee on power sector reform withagreed-upon terms of reference, and that thiscommittee issue recommendations for the sectorwithin a specified time. Also included in the loanagreement for the Takoradi power plant was acomponent for support of VRA’s institutionaldevelopment, suggesting that VRA would remain anintact public entity for some time to come.

BOX 7.3 C H R O N O L O G Y O F E L E C T R I C I T Y S E C T O R R E F O R M I N G H A N A

• January 1994 GOG issued a Strategic Framework for Power Sector Development Policy.

• March 1994 Ministry of Mines and Energy (MOME) engages a consultant (SYNEX of Santiago, Chile) to study the opportunities for restructuring the power sector.

• June 1994 SYNEX submits report, which proposes a new power market for the country.

• June 1994 Preparation of a sector policy letter by the MOME, which laid out sector objectives, institutional guidelines, and regulatory principles.

• September 1994 Establishment of the Power Sector Reform Committee (PSRC) by the MOME to coordinate the design and implementation of reforms.

• January 1995 World Bank approval of a loan for a thermal power project at Takoradi, with a condition for establishment of a committee on power sector reform.

• Mid-1995 Formation of two Task Forces by PSRC: Task Force I on operational technicalities of the reform program, particularly pricing and commercial organization of the power market; Task Force II on the legal implications of the proposals for the reform.

• August 1996 Stakeholders’ workshop to discuss proposals from the Task Forces.

• September 1996 Formation of Review Task Forces on distribution and customer service to address specific issues emerging from the stakeholders’ workshop.

• February 1997 Electricity Company of Ghana registered as a limited liability company to take over the assets and operation of the Electricity Corporation of Ghana.

• April 1997 PSRC submits a summary report to the government.

• May 1997 Establishment of Power Sector Reform Implementation Secretariat to coordinate implementation of the recommendations contained in the report.

• October 1997 Enactment of the Public Utilities Regulatory Commission Act, 1997 (Act 538), which establishes Public Utilities Regulatory Commission (PURC).

• December 1997 Enactment of Energy Commission Act, 1997 (Act 541), which established the Energy Commission.

• September 1998 PURC approves tariff increase for all categories of consumers.

• July 2000 MOME submits draft Electricity Regulation to Parliament for approval.

125

WRI: POWER POLITICS

The World Bank policy of “commitment

lending” was the proximate cause that forced

action.

Perhaps surprisingly, the GOG proposed a consid-erably more far-reaching set of reforms. Havingagreed with the World Bank, in principle, on theneed to reform the sector, the Minister of Mines andEnergy, and the Minister of Finance prepared a letterto the World Bank in 1994 laying out a “StrategicFramework for Ghana Power Sector DevelopmentPolicy.” This document signaled that “the Govern-ment will be introducing some fundamental reformsto establish the conditions in the electricity sector forgreater operation efficiency and competition, privatesector participation, and the development of an arm’slength approach to Government regulation of powersector entities” (Peprah and Botchwey, 1994). As thesummary in Box 7.4 suggests, the document prom-ised far-reaching change in the sector, including theintroduction of competition and a focus on limitingsovereign guarantees.

The choice of a consulting firm from Chile was

significant, since Chile was among the first

countries to introduce a market approach in

electricity.

Moreover, the GOG took the unusual step of hiringits own consultant independently from the WorldBank—SYNEX Consulting Engineers from Chile—toflesh out its reform ideas. As the World Bank reportstates, “MOME took the initiative of developing acomprehensive new policy framework” (World Bank,1995). Specifically, the GOG charged SYNEX withevaluating the key issues and examining the optionsfor applying a market-oriented approach in thesector. The choice of a consulting firm from Chilewas significant, since Chile was among the firstcountries to introduce a market approach in electric-ity. A Chilean firm could be expected to advocate a

BOX 7.4 SUMMARY OF STRATEGICFRAMEWORK FOR POWERSECTOR DEVELOPMENTPOLICY

Long-term strategic goals

• assure reliable, economically efficient, andequitable supply of electricity to meet thecountry’s growing needs for socio-economicdevelopment;

• serve as a basis for creating attractive,marketable assets; and

• develop an efficient mix of commerciallyviable public and private sector utilities.

Policy objectives

• increase management accountability in theexisting public utilities;

• move the power sector away from the existingmonopolistic structure toward a moredecentralized structure that would expose thepublic utilities to competition in bothgeneration and distribution;

• encourage private sector investment throughthe establishment of IPP schemes and theprovision of an “open access” grid to facilitatedirect sales by IPPs to consumers;

• reduce the extent to which the government iscalled upon to provide sovereign guarantees;and

• establish a transparent regulatory frameworkto enable competition in the sector.

Sources:

Ministry of Mines and Energy. 1994. “StrategicFramework for Power Sector Development Policy.” Accra,Ghana

Peprah, Kwame, and Kwesi Botchwey. 1994. “StrategicFramework for Power Sector Development Policy.” Letterto Joanne Salop. World Bank. (March 23).

126

WRI: POWER POLITICS

accountability. The core business of hydro generationwas left untouched. The PSRC also recommendedrecapitalization through public-private partnerships.Generators can sell power directly to large consumersin wholesale markets. Hence, each generator hadthree options: to trade power to other generators, tolarge consumers directly, or to distribution companies,who would then serve final consumers.

TransmissionThe transmission system was to be unbundled fromVRA and established as a separate publicly ownednational grid company on an open access or nondis-criminatory basis. Large consumers were to be givenaccess to the transmission network to participate inthe wholesale market.

DistributionThe PSRC recommended the establishment of both aderegulated wholesale market for consumers withdemand larger than 5 megawatts and a regulatedmarket for smaller consumers. Large consumerswere to contract directly with generators. For con-sumers smaller than 5 megawatts, the country wasdivided into five distribution zones. Four of thesewere based on areas formerly served by ECG, andone was based on the regions served by NED. ECGwas subsequently transformed into a limited liabilitycompany with autonomous distribution concessions.NED was to be unbundled from VRA to serve as aseparate distribution concession. These concessionswould eventually be privatized.

Market CoordinationA new Ghana Economic Load Dispatch Centre(GELDIC) would be given authority over coordinationand dispatch in the system. Essentially, GELDICwould be responsible for ensuring that physical andfinancial transactions were coordinated in a mannerthat ensured the system’s reliability, in keeping withthe principle of minimum operation cost.

similar approach for Ghana—an approach the WorldBank review had explicitly rejected as premature forsub-Saharan Africa.

Based on this study, the GOG established a PowerSector Reform Committee (PSRC) to work out thedesign and implementation of reforms. The PSRCconsisted of eight members drawn from MOME,VRA, ECG, and the private sector. It organized itswork around two task forces, on the pricing andcommercial organization of the electricity market,and the legal implications of the reform proposals.The results of the task forces were reviewed at aworkshop in August 1996. Participants at theworkshop included business representatives fromGhana and abroad; large industrial consumers suchas VALCO, the World Bank, and other donor agen-cies; and a range of resource persons, includingrepresentatives of utilities from the United Statesand Côte d’Ivoire. Three additional task forces on agrid code, electricity distribution, and customerservice were added to respond to issues raised duringthe workshop (Opam and Turkson, 2000).

The Architecture of the Post-ReformSector10

The PSRC submitted a final report to the GOG inApril 1997, with substantial recommendations totransform the electricity sector in Ghana. Theserecommendations were adopted by the Cabinet,which created an implementation secretariat toproceed with reforming the sector. The vision of thetransformed sector is described below under thegeneral categories of generation, transmission,distribution, market coordination, and regulatoryreforms and shown in Figure 7.2.

GenerationElectricity generation was opened up to generatorsother than VRA. It was not recommended that VRAitself be privatized, but that VRA, as with otherutilities, be re-organized into “strategic business units”as part of a broader effort to improve management

127

WRI: POWER POLITICS

FIGURE 7.2 PROPOSED ELECTRICITY MARKET STRUCTURE IN GHANA

Regulatory Framework

Perhaps most crucially, the PSRC recommended far-reaching regulatory reforms. The cabinet acceptedthe PSRC recommendation for an independentregulatory body, but implemented this recommenda-tion through a two-tier framework. First, in keepingwith the PSRC, they established a Public UtilitiesRegulatory Commission (PURC) in 1997. Second,they also established an Energy Commission, whosefunctions include providing advisory services to theMOME. While independent of the Ministry, thecommission is also subject to direction by theminister as necessary to ensure the public interest—

a provision based on a constitutional requirementthat key sectors should be supervised by a technicalcommission.

The PURC was given authority over tariff setting,and, in a critical departure from past practice, wasindependent of oversight from the MOME or Parlia-ment. This was perceived as central to the reformprocess. PSRC recommended that tariffs be set basedon established formulas for generation, transmis-sion, and distribution. The Energy Commission wasgiven responsibility for licensing and development ofrules for the technical operation of the sector.11

National Transmission Company — “Open Access”

De-Regulated Market(Demand > 5 megawatts)

Regulated Market(Demand < 5 megawatts)

LegendIPP—Independent Power ProducerGELDIC—Ghana Economic LoadDispatch CenterLTC—Long Term Contract

MinesLarge Industries Exports VALCO

VRA Hydro

GELDIC

IPP

LTC

CapitalConcession

SouthCentral

SouthEastern

NorthernConcession

South WesternConcession

IPP

LTC

LTC

128

WRI: POWER POLITICS

In sum, the PSRC, drawing on the SYNEX report,advocated the rapid expansion of market principlessuch as unbundling VRA’s generation capabilityfrom transmission and distribution, allowing openaccess to the transmission grid, enabling any genera-tor to directly sell electricity to large consumersthrough long-term contracts, and establishing a spotmarket for electricity. To a substantial extent, the finalreform package reflects a GOG desire for moresubstantial reforms based on the Chilean modelrather than the limited reform implicitly suggestedby the World Bank’s review.

Government of Ghana “Ownership” ofReformsThat the recommendations put forward by SYNEXdid shape the contours of the reform are made clearby the legal consultants hired by the PSRC, who state“proposals of the Committee are largely predicatedon the system of reforms that have been imple-mented in Chile and Peru, and to a lesser extent inNorway and the United Kingdom” (LaBouef, Lamb,Greene, and MacRae, 1996). What explains theGOG’s insistence on, and—through the use ofSYNEX—development of an independent path in theelectricity sector? In brief, it stems both fromdisenchantment with the past legacy of the sector,and a concern over how best to integrate the privatesector in the future.

With regard to the past, the reform architects weremotivated to more fully integrate VRA into the sectoras a whole. The reformers held to the view that VRA’shistorically privileged position had worked againstfully utilizing the benefits of cheap hydro to providebroader public benefits, particularly to serve thepopulation rather than to serve well-paying industrialconsumers. Reform afforded an opportunity toremedy this situation.

Moreover, the GOG was concerned with how bestto establish a market when the sector was dominatedby a single large hydropower producer. Since Chilehad attempted to solve a similar problem in its ownreform efforts by creating a power pool based on cost

of generation, the GOG decided to hire a Chileanconsulting firm, SYNEX, with expertise on thisapproach.12 It was anticipated that such an arrange-ment would provide opportunities for the system touse power from IPPs, and limit the extent to whichthe hydropower reservoir was drawn down.13

In addition, the GOG was wary of future arrange-ments with IPPs that potentially exposed the govern-ment to bearing risk through provision of sovereignguarantees. A more completely restructured sectorwould enable the government to require privateinvestors to bear more complete responsibility fortheir revenues through, for example, long-termcontracts for electricity sales. As one reformer put it,“the GOG did not want to be saddled with contingentliabilities.”14 Separating VRA into “strategic businessunits” and requiring competition among generatorswas part of this vision.

Reformers point out that the process was

formulated and designed by Ghanaians.

A somewhat skeptical view of the direction ofreforms pursued under World Bank direction inneighboring Côte d’Ivoire was undoubtedly influen-tial in the GOG’s view of reforms. (See Box 7.2.) ToGhanaians, the Côte d’Ivoire experience suggestedthe dangers of relying on IPPs, and concerns overinviting in the private sector without clear gover-nance arrangements. Instead of arrangements thatappeared to bestow undue authority and influenceon the private sector, Ghanaian reforms sought avision of the future that married the strengths ofexisting public sector entities with participation asappropriate by the private sector (Opam andTurkson, 2000, p. 64).

However, this vision was by no means unanimouslyaccepted in Ghana, and was strongly rejected byVRA. VRA executives harshly criticized the reformmodel as “blind copying” of the Chilean approachthat was inappropriate to Ghana’s circumstances.Since distribution and not generation is the biggest

129

WRI: POWER POLITICS

problem, they argued, why unbundle VRA? Instead,the focus should have been on tariff reform, which“has been a major bane to private investors.”15

Moreover, they note that a weakened VRA will be lessable to perform a leadership role in development of aproposed West Africa Power Pool. However, VRA lostthis battle and the MOME view prevailed.

Both sets of arguments have merit. The experience ofIPPs in Asia, and the unhappy marriage of public andprivate sectors in Côte d’Ivoire justify caution toward anapproach that invites the private sector into a countrybefore a well-functioning market system has beenestablished. On the other hand, the small size of theGhanaian power sector and its weak regulatory institu-tions do not instill confidence that it will be able toreplicate a Chilean model. That the GOG made a choicefor bold reform, even at the risk of over-reaching, mayhave been dictated at least in part by the historicaltensions over VRA’s privileged status in the sector.

An additional factor may have been a sense ofnational pride that rejected the view that Ghana wasnot yet capable of developing a sophisticated marketstructure. Indeed, the reforms were characterized bya high degree of government “ownership.” While theGOG did make use of foreign consultants, reformersare at pains to point out the extent to which theprocess was formulated and designed by Ghana-ians.16 For example, to build capacity at home,Ghanaian officials went on study tours to othercountries to understand the options available tothem. In addition, a Ghanaian national employed atthe World Bank, who subsequently worked ondeputation in Ghana on the reform process, played acentral role in helping Ghanaian officials developcontacts and in providing expert feedback.17

This ownership over the process was limited togovernment officials. There is no evidence of engage-ment with civil society groups, either to solicitopinions, advice, or even to share information. Someacademics did serve on task forces related to thePSRC, but their role is unclear, and they did notserve as a conduit to broader constituencies. Thedeliberations of the PSRC were not available to theauthors in the course of conducting this study.

PUBLIC BENEFITS IN THEPLANNING AND IMPLEMENTATIONOF ELECTRICITY SECTOR REFORMS

Did GOG ownership over reforms translate toattention to public benefits? This section examineshow social concerns of access to electricity, environ-mental issues embedded in the reforms, and thepolitically sensitive tariff issue were addressed in thereform process, and with what effects.

The Social Benefits of Access toElectricityThe GOG has stated that providing the entirepopulation with access to electricity is a long-termdevelopment priority for Ghana. In 1989, it estab-lished a National Electrification Scheme (NES) toachieve this goal by the year 2020. To what extentwas this policy objective integrated into the planningof the reforms, and will the reform process worktoward achieving this goal?

Reform and expansion of access were perceived

as two separate and unconnected components

for development of the sector.

For much of the early reform period, policies topromote universal access to electricity servicesproceeded on a parallel track to reform efforts. TheNES pre-dates the reform efforts by over five years,and put in place a two-tier scheme for electrification.First, all district capitals (110 in total) were connectedto the grid as part of a “District Capital ElectrificationProject.” Next, under the “Self-Help ElectrificationProject” (SHEP), communities within 20 kilometersfrom the grid were invited to propose electrificationprojects on the condition that they procured theirlow-voltage poles and ensured that at least 30 percentof the households in the community were wired(Ministry of Mines and Energy, 1996; 2000). Theelectrification efforts were supported by a range ofmultilateral and bilateral development assistance

130

WRI: POWER POLITICS

organizations, led by the World Bank through theNational Electrification Project initiated in 1993.

The articulated goals of the reform efforts from1994 to 1997 do not highlight providing access toelectricity. Instead, the GOG strategic frameworkemphasizes the need for a “reliable, efficient, andequitable supply of electricity” that serves as a basisfor creating marketable assets for Ghanaian andforeign investors, ultimately leading to developmentof commercially viable public and private utilities(Peprah and Botchwey, 1994). However, it does notconnect increasing supply to increasing access, nor isaccess discussed further in the details of the docu-ment. In the only mention of these issues during thereform design process, one of the reform consultantsdid discuss the difficulties of persuading privateinvestors to invest in expanding distribution. Thereasons given were the relatively open-ended finan-cial obligations involved, the volatility of electricityprices, and the likelihood of politicization and henceunpredictability of distribution efforts. Based on thisanalysis, the consultants recommended consideringmunicipal or cooperative-based distribution systems(LaBouef, Lamb, Greene, and MacRae, 1996, p. 28).However, this proposal did not appear to havereceived further consideration.

Within World Bank documents, reforms are seenas parallel and separate from electrification efforts.The World Bank project document for the Takoradithermal power plant does note the GOG’s commit-ment to extend electricity to most of its populationthrough the National Electrification Scheme (WorldBank 1993a; 1995). However, the document does notdescribe how reform efforts would be integrated withthe World Bank-financed National ElectrificationProject (a sub-component of the NES) approved onlytwo years earlier in 1993. This shortcoming suggeststhat the two efforts, reform and expansion of access,were perceived as two separate and unconnectedcomponents for development of the sector. It isnoteworthy that the emphasis in the pre-1993 WorldBank strategy document for the electricity sector onincreasing access to electricity was removed in thenew strategy of 1993, which emphasized marketreform and private sector involvement. Had the pre-

1993 strategy been in effect during preparation ofreform efforts, World Bank task managers wouldalmost certainly have had to report on the impacts ofreform on access. Without an explicit requirement todo so, the 1995 loan document was silent on thequestion.

Similarly, the reform process managed through thePSRC did not explicitly reconcile the two-tier struc-ture of electrification efforts established in 1989 withthe proposed five distribution concessions created bythe reforms. Instead, there was a vague expectationthat electrification efforts would be “dove-tailed withreforms at a later date.”18 One observer close to theprocess argues that social concerns such as access toelectricity have received only lip service that has notbeen matched by action.19

A subsequent Statement of Power Sector Develop-ment Policy from the GOG in 1999, which isintended to reiterate its commitment to reforms, isfar more explicit about the connection between thereform and efforts at expanding access. The docu-ment invokes the government’s Vision 2020 plan,which aims at full electrification and reiterates that“the overall goal of the GOG is to ensure that Ghana-ians have universal access to electricity” (Ministry ofMines and Energy, 1999). Moreover, the documentstates that “…to ensure that the GOG’s goal foruniversal access to electricity can be cost effectivelypursued even after the privatization of the distribu-tion utilities, a two-tier structure will be introducedalongside the establishment of the proposed distribu-tion areas.”

Under this approach, within each concession, thefirst tier under the NES, comprised of districtcapitals, would be classified as “commercial electric-ity zones” in which distribution licensees would havean obligation to provide service on demand. Thesecond tier of smaller communities would beclassified as “SHEP electrification zones,” where it isnot feasible to require an obligation to serve, butwhere licensees would provide services underoperations and maintenance contracts on behalf ofthe GOG. Over time, the government hopes toincrease the private sector’s role in delivery of

131

WRI: POWER POLITICS

distribution and retail service, thereby freeing publicsector resources to support expansion of coverage inSHEP areas (Ministry of Mines and Energy, 1999, p.8). The GOG also proposed establishing a “NationalElectrification Fund Board” with responsibility formobilizing funds from domestic sources (such aslevies), donors, and the private sector.

The belated attempt to integrate efforts to expandaccess and broader structural reforms may well haveboth created obstacles and missed opportunities.Obstacles include the challenge of integrating aprivate-sector-led vision of distribution concessionsbased on privatizating of existing assets with acontinuing effort to deploy public assets in electrifi-cation efforts. Moreover, by separating publiclyfunded grid extension from the rest of the reformprogram, the GOG may have lost an opportunity tocomplement its electrification program by creativelyharnessing private sector capabilities to serve ruralareas through off-grid distributed technologies. Yet,at the time there were few examples that Ghanacould draw on of public efforts to support expansionof access by facilitating private sector entry. In recentyears, efforts by Chile, Morocco (see Box 2.6 inChapter 2), and Argentina (see Chapter 3) haveshown the way toward expansion of access that is notentirely reliant on public grid expansion.

Promoting Environmental Benefitsthrough ReformThe introduction of private sector actors and marketcompetition held considerable potential to shift theenvironmental profile of the electricity sector inGhana. Was this connection between sector reformand environment recognized and internalized inreform dialogue, planning, and implementation?

A review of reform documentation shows little orno explicit attention to environmental considerationsin reform processes. The GOG’s strategic frameworkdoes not recognize reform as an opportunity toprovide incentives for a more environmentallysustainable electricity sector, with the exception ofattention to energy efficiency (Peprah and Botchwey

1994, p. 13). Moreover, environmental issues werenot discussed during PSRC deliberations.20 Indeed,written and verbal accounts of the process suggestthat environmental impact was viewed only in adamage limitation context. PSRC members assumedthat environmental outcomes would be tackled by theappropriate regulatory body, such as Ghana’s Envi-ronmental Protection Agency.21 In another example,the World Bank’s 1995 loan document only examinesenvironmental questions related to siting of theproposed Takoradi power plant and related questionsof obtaining permits (World Bank, 1995). Moreover,the terms of reference agreed to by the World Bankand the GOG for the PSRC makes no mention ofintegrating environmental objectives into the man-date of the Committee (World Bank, 1995, Annex3.2). Finally, no civil society organizations emerged tobreak this silence on environmental concerns.

A significant exception to the general lack of focuson environmental factors is an explicit commitmentby the GOG to promote energy efficiency andconservation as part of reform efforts. (See Box 7.5.)Ghana has a history of promoting energy efficiencygoing back to 1985, when an energy fund wasestablished to promote efficiency (and renewableenergy sources) as a means of coping with drought-induced shortages. The medium-term plan issued forGhana’s “Vision 2020” highlights increased conser-vation and promotion of demand side managementas an objective for the sector (Government of Ghana,1997). Moreover, tariff increases have heightenedinterest in conservation among industrial and

BOX 7.5 POTENTIAL CONSUMER SAVINGSFROM ENERGY EFFICIENCY

Refrigerator Standards – $50 millionA/C standards – $8 millionLighting standards – $6 million

Source: Lawrence Berkeley National Laboratory. 1999.“Ghana Residential Energy Use and Appliance OwnershipSurvey.” Berkeley, CA.

132

WRI: POWER POLITICS

1999, promoting the development of renewables wasa key reform objective and the EGF was the vehiclefor this objective.

Reform documentation shows little or no

explicit attention to environmental consider-

ations in reform processes.

For at least two reasons, the EGF has come to beseen by both energy practitioners in Ghana and bydonors as a potential tool for promoting of renewableenergy technologies, particularly wind and solar.First, by creating a legal space for private generationand sale of electricity on a small scale, the EGF willopen a door to all small-scale generation technologiesin Ghana. Second, the EGF will provide a furtherboost to renewable energy technologies through rate-setting guidelines. Specifically, the PURC will berequired to set EGF bulk tariffs based on avoidedcosts plus the transmission service charges saved bygenerating electricity close to the end user. Conse-quently, renewable technologies are likely to befavored by distribution licensees as a cheaperalternative to meeting their service obligations thanrelying on centrally generated electricity. Building onthis opportunity, the Danish bilateral donor agency,DANIDA, has funded a Renewable Energy Develop-ment Project to identify and remove further barriersto the promotion of renewable energy technologies inGhana. The Danish government is also fundingdevelopment of a Strategic National Energy Plan aspart of a broader program of bilateral cooperation onenergy policy (DANIDA, 1999).

Energy efficiency measures also provide politi-

cal benefits by buffering the impact of tariff

increases.

In the long run, the scope to proactively addressenvironmental concerns within a broader policy andplanning authority rests with the Energy Commis-

commercial consumers (Peprah and Botchwey,1994). It is significant that energy efficiency mea-sures also provide political benefits by buffering theimpact of tariff increases, thereby making them morepalatable. Existing studies suggest the potential costsavings are considerable. Perhaps for this reason, theGOG requested that a demand side management(DSM) component be included in the 1995 IDAcredit for the Takoradi project.22

In partnership with the Ghanaian “Private Enter-prises Foundation,” the GOG established an “EnergyFoundation” in 1997 to promote sustainable develop-ment of energy resources; educate consumers;advocate policies for sustainable development andenhanced customer service; strengthen private sectorefforts at energy efficiency and renewable energy;and undertake related research and development(Energy Foundation, 1999). To date, the EnergyFoundation has had some success, convincingindustry in particular of the viability of an energyefficiency strategy. For example, by 1999 the EnergyFoundation had installed capacitors in more than100 industrial, commercial, and public organiza-tions, freeing about 20 megavolt amperes of reactivepower into the national grid. The foundation has alsoembarked on a sustained public education campaignto raise consumer awareness about the benefits ofenergy efficiency. A survey conducted by the EnergyFoundation revealed that the program has been quiteeffective, with about 57 percent of the populationattributing savings made in their electricity bills tothe Energy Foundation’s campaigns (Energy Founda-tion, 1999).

A second exception to the general lack of attentionto environmental concerns was the provision for anEmbedded Generation Facility (EGF).23 An EGF wasdefined as a power generation facility with capacity ofless than 50 megawatts, and whose output is distrib-uted and retailed locally without use of the highvoltage transmission grid (Electricity Regulation,2000). During the electricity crisis of 1998, however,the EGF became for a time a vehicle for rapidintroduction of small-scale diesel generators to meetthe supply shortfall. According to the GOG’s State-ment of Power Sector Development Policy released in

133

WRI: POWER POLITICS

sion, which was established in the course of reforms.There is some early indication that, just as cheaphydropower is currently used to subsidize moreexpensive thermal power, in the future the benefits ofcheap hydro may be used to promote renewableenergy technologies.24 This proposed approach is anindicator that the commission is open to a range ofideas for future planning in the sector.

Tariff Setting and Good GovernanceTariff setting has long been a controversial issue inGhana’s electricity sector. Tariffs keeping pace withcosts is an important component of financial viabilityfor the electricity sector. On the other hand, hightariffs impose a considerable burden, particularly ifthey apply to poorer sections of the population. Theresultant discontent is also politically dangerous forgovernments. The GOG’s reluctance to consistentlyraise tariffs to keep up with costs was one of thecontentious issues in negotiations over the Takoradiloan.25 A detailed tariff formula was eventuallynegotiated with the GOG and included by the Bankas a condition for the loan.

The political dangers of tariff increases werealarmingly displayed in May 1997, prior to imple-mentation of the PSRC recommendations, when theMinistry of Mines and Energy attempted to raisetariffs by approximately 300 percent in order to meetWorld Bank conditions. The tariff increase led to anational uproar. The president personally intervenedto roll back the increase, and summoned Parliamentfrom its recess to approve the then-pending draftlegislation to establish an independent regulatoryagency. The PURC became law shortly thereafter, inOctober 1997.

Interestingly, the PURC managed to successfullypass an equivalently large 300 percent increaseduring 1998 without arousing nearly the samedegree of popular discontent. PURC staffers haveattributed this success to their concerted publicoutreach and dialogue—including workshops, publicforums, and media campaigns—prior to raisingtariffs.26 According to staff, central to their argument

was persuading the population that the tariff hikeswould be used responsibly, for purposes such asincreasing access to electricity for the rural popula-tion. While this campaign may well be part of thestory, electricity sector officials also widely recognizethat a new power crisis caused by yet anotherdrought in 1997 was also instrumental in convincingthe population of the need for sacrifice in the long-term interest of the sector (Peel, 1998).

Despite these efforts, battles over tariffs continue.The tariffs for the dominant residential consumersare still not close to economic levels (even after theMay 2001 tariff increment averaging about 95percent for all categories of end user),27 and thebenefits of increased tariffs are normally eroded bydevaluation of the national currency. Consequently,the debate continues over whether tariffs should bedetermined entirely based on the financial viability ofthe utilities, and hence by technical and economiccriteria, or whether some measure of social impactsshould also be considered. In its comments, theWorld Bank has stressed the need to ensure that thePURC is governed by rules that ensure not onlyconsumer rights, but also those of suppliers(Tomlinson, 1997). For its part, the PURC has feltitself under pressure to raise tariffs, notably from theVRA and from international donor agencies, but ithas resisted on the grounds that utilities have madeinsufficient efforts to increase their efficiency, reducelosses, and improve quality of service.28 The commis-sion has decided, through a “transitional plan,” toultimately achieve economic tariffs within a three-year period for all categories of consumers. (See Box7.6.) The PURC’s objective, among other things, is tointroduce some amount of gradualism in the attain-ment of economic electricity rates to minimize theimpact of tariff increments on all classes of custom-ers (PURC, 2000).

The PURC arguably has “endeavored to steer amiddle course,” recognizing that its decisions“cannot realistically be insulated from the macro-economic, as well as the socioeconomic environmentof the country” (Opam, 1999). To ensure that itsteers this course correctly, the PURC has attemptedto incorporate several principles of good governance

134

WRI: POWER POLITICS

in its structure and functioning. These includeinstitutional representation of industry, labor, anddomestic consumers on the Commission; transpar-ent guidelines for tariff setting; publication of tariffdecisions; and mechanisms for public hearings andrepresentation before the PURC (Opam, 1999). Earlyindications suggest that these mechanisms arefunctioning well.

CONCLUSION

Ghana was forced to consider reforming its sector bya combination of demand shortfall—in part due todrought—and the drying up of its traditional sourceof financing, the World Bank. There is little doubtthat the World Bank was instrumental in urging thegovernment to seriously consider a program ofreform. All sides are agreed that without the threat ofa cut-off of World Bank funds, the government wouldnot have undertaken substantial reforms.

However, in designing the program, the govern-ment forged its own path, and one quite distinctfrom World Bank recommendations. Instead ofpursuing limited reforms and relying on manage-ment contracts to improve performance, the govern-ment embraced far-reaching reform, perhaps tomore completely integrate the giant VRA into thesector.

Did government ownership translate to an empha-sis on a public benefits agenda? Certainly, part of themotivation for integrating VRA into the sector was tospread the benefits of VRA’s cheap hydropower morebroadly through the population. But given the slowpace of the reform, whether the public will benefitfrom this approach is as yet undetermined. While thegovernment had a long-term commitment to expandaccess to electricity, for much of the reform processaccess and reform proceeded on parallel tracks. In itssupport for both reforms and for electrificationprograms, the World Bank also pursued both asseparate projects. Only in 1999 did the governmentmake explicit attempts to relate access to the reformprocess.

BOX 7.6 PURC’S TRANSITIONAL PLAN(2000-2002)

The transitional period has been defined by thePublic Utilities Regulatory Commission (PURC)as the period from 2000 until the end of 2002,when it is expected that natural gas will beavailable for power generation in Ghana via theWest African Gas Pipeline Project (althoughmany expect the project will only be completed in2004-5). Thus, the transitional plan has beenlinked to the availability of natural gas in Ghana,which is expected to translate into lower end usertariffs under a natural gas-fired thermal plantregime. The plan has been couched in a mannerthat will afford the PURC the opportunity totransit current electricity tariffs—with respect togeneration, transmission, and distribution—toeconomic rates without imposing unduefinancial burdens on all classes of customers.The plan is also expected to give ample time tocustomers to gradually adjust to the economictariffs and simultaneously enable the utilityproviders to cover their operating andmaintenance costs and make a reasonable rate ofreturn on their average revalued net fixed assets.

The Commission’s strategy is to ensure thatcharges that pass through to consumers do notcontain inefficiencies on the part of the utility. Inthat regard, PURC’s end user tariffs during thetransition period will be adjusted, takingcognizance of efficiency improvements and othercost-reduction measures that the utilities shouldadapt.

Source: Public Utilities Regulatory Commission. 2000.“Ghana’s Energy Pricing.” Paper presented at 5th KumasiInternational College on Energy conference, Kumasi,Ghana, March 27-April 2.

135

WRI: POWER POLITICS

On the environmental front, the government hasproactively pursued energy efficiency measures,partly because it enables them to blunt the effect oftariff increases. With funding from the Energy Fundduring the late 1980s and the more recent assistanceof donor agencies, particularly the Danish govern-ment, it has also pursued an active program ofpromoting small-scale renewable energy sources.Indeed, the promotion of renewable energy byprivate developers has been made possible mainly bythe reform program’s initiative in creating a legalspace of private generation and sale of electricity.

The Energy Foundation has convinced indus-

try of the viability of an energy efficiency

strategy.

Despite these advances, electricity sector reform inGhana has proceeded slowly, in no small partbecause of the difficulties of making decisions thatwould impact harshly on the general populace. Atroot is a problem of tariffs that are low when viewedthrough the eyes of utilities or investors seeking torecover their costs, but very high when viewedthrough the eyes of Ghanaian consumers. The tariffproblem is worsened by periodic devaluations of thecurrency. Indeed, the Ghanaian problem with tariffsin a climate of macroeconomic uncertainty may be anearly intractable obstacle to applying a profit-making model to a sector in a poor country.

NOTES

1. The authors wish to acknowledge the considerablecontribution of Abeeku Brew-Hammond and MartinBawa Amadu to this chapter, which draws on IshmaelEdjekumhene, Martin Bawa Amada, and Abeeku Bew-Hammond, “Power Sector Reform in Ghana: TheUntold Story,” unpublished paper submitted to theWorld Resources Institute. February 2001, available athttp://www.wri.org/governance/iffepowercases.html.

2. Interview with World Bank official, September 22,2000. All interviews for this chapter were conductedon a not-for-attribution basis. Consequently,interviewees are identified only by their institutionalaffiliation.

3. VALCO’s consumption decreased to 39 percent ofgeneration by the late 1990s due to diminished hydrocapacity following a drought season. By 1996,industrial consumers accounted for 68 percent ofsales, the residential sector 26 percent, and commer-cial consumers 5-6 percent (Opam and Turkson,2000).

4. Since 1994, power flows have reversed, with Ghanaimporting power from Côte d’Ivoire (Opam andTurkson, 2000).

5. Interview with former power sector official, September22, 2000.

6. VRA had a contractual agreement with VALCO tosupply the latter with not less than 2,760 gigawatt-hour of power annually. VALCO suffered a 95 percentcut in supply during the 1982-83 drought (Brew-Hammond, 1994). An attempt by VRA to curtail powersupply to VALCO during the 1994 crisis resulted inthe latter taking VRA to court for breach of contract(Daily Graphic, 1994). In February 2002, VALCO tookthe GOG to court because the latter asked it to shutdown two of its pot lines. The GOG said this wouldenable the system to have a reserve capacity of 150megawatt. The court ordered the parties to negotiate acompromise, which led to the shutting down of onlyone pot line instead of two. The GOG negotiating teamhas also indicated that VALCO should be prepared topay higher tariffs. Currently VALCO pays 1.7 cents perkilowatt-hour compared to 3.99 cents per kilowatt-hour paid by residential consumers. (Daily Graphic,2002a; 2002b).

7. Interview with senior GOG official, December 6,2000.

8. While this was a majority view at the time, it was by nomeans the only view within the Bank. Indeed, therewere other voices from within, as we discuss later, thatwere in favor of a more comprehensive market-basedreform.

9. This impression is based on interviews with membersof the Power Sector Reform Committee (PSRC),December 6, 2000, and January 11, 2001.

10. This description is drawn from Opam and Turkson(2000).

136

WRI: POWER POLITICS

11. For example, generation tariffs for the regulatedmarket were set on the basis of short run marginalcost. Distribution tariffs would be based on long runmarginal cost and distribution value added, the lattercomputed using an average reference level to providean incentive for efficiency improvements.

12. Personal communication with World Bank staff,March 21, 2002.

13. Large swings in reservoir levels brought environmen-tal problems and difficulties for the communities thatlived along the reservoir.

14. Personal communication with World Bank staff,January 2000.

15. Interview with VRA official, September 12, 2000.

16. Interview with members of the PSRC, September 13,2000, and September 15, 2000.

17. Interview with PSRC member, December 6, 2000.

18. Interview with PSRC member, December 6, 2000.

19. Interview with member of the Energy Commission,September 14, 2000.

20. Interview with PSRC member, September 13, 2000.

21. Interview with PSRC member, September 13, 2000.

22. The World Bank provided an IDA credit of $4 milliontoward a total cost of $8.5 million for this component(World Bank, 1995).

23. The Energy Commission Act of 1997 mandated thepreparation of electricity regulations, which wereprepared in 2000. These regulations explicitlymention the EGF.

24. Interview with member of the PSRC, September 15,2000.

25. Interview with reform official, September 22, 2000.

26. Interview with PURC member, December 6, 2000,and reform official, September 22, 2000.

27. Currently, residential consumers pay 3.99 cents perkilowatt-hour as opposed to the indicative economicrate of 7.43 cents per kilowatt-hour. Meanwhile, intheir proposal for review of tariffs submitted to thePURC in March 2001, the utilities asked for 10.05cents per kilowatt-hour.

28. Interview with PURC member, September 15, 2000.

137

WRI: POWER POLITICS

REFERENCES

———. 2000. Electricity Regulation. Accra.

Opam, M. 1999. “Post Reform Issues: The Experience ofGhana.” Paper presented at Power Sector Reform andRegulatory Strategy conference, Kampala, Uganda,October 20-21.

Opam, M. and J.K. Turkson. 2000. “Power Sector Restruc-turing in Ghana.” In Power Sector Reform in sub-SaharanAfrica. J.K. Turkson ed. London: Macmillan Press Ltd.

Partiff, T.W. 1995.“Adjustment for Stability or Growth?Ghana and Gambia.” Review of African Political Economy.No. 63:55-72.

Peel, Quentin. 1998. “Return to the IMF Embrace.”Financial Times. Survey on Ghana. (June 22).

Peprah, Kwame, and Kwesi Botchwey. 1994. “StrategicFramework for Power Sector Development Policy.”Letter to Joanne Salop, Acting Director, Western AfricaOperations Division, World Bank. (March 23).

Public Utilities Regulatory Commission. 2000 “Ghana’sEnergy Pricing.” Paper presented at 5th Kumasi Interna-tional College on Energy conference, Kumasi, Ghana,March 27-April 2.

Tomlinson, Mark D. 1997. “Public Utilities RegulatoryCommission Bill.” Memo to Mr. Fred Ohene-Kena,Minister, Ministry of Mines and Energy. (September26).

World Bank. 1993a. “Staff Appraisal Report, Republic ofGhana, National Electrification Project.” Washington,D.C.

World Bank. 1993b. The World Bank’s Role in the ElectricPower Sector. Washington, D.C.

World Bank. 1995. “Staff Appraisal Report, Republic ofGhana, Thermal Power Project.” Washington, D.C.

Berenschot, Moret, and Bosboom. 1985. “Study of thePublic Enterprise Sector in Ghana, Final Report Vol. 1-A,The SOE Sector in Ghana.” Management ConsultancyReport.

Brew-Hammond, A. 1994. “Finance and Markets forElectric Power Development in Ghana.” Science inAfrica: Energy for Development Beyond 2000. Paperpresented at a conference organized by the AAS sub-Saharan Africa Program, Washington, D.C.

Daily Graphic. 1994. “VALCO Takes VRA to Court.” No.13613 (September 6):1.

———. 2002a. “Pay More for Power Supply, Says Govern-ment Team.” No. 148439 (February 4):1.

———. 2002b. “Power Crisis: VALCO Ordered to Close 2Pot Lines.” No. 148453 (February 20):1.

DANIDA. 1999. “Energy Sector Program Support forGhana: Elaboration of a Strategic National Energy Plan,2000-2020.”

Edjekumhene, I. 2000. “Privatization in Ghana.” Unpub-lished MSc. Thesis. University of Hull. United King-dom.

Energy Foundation. 1999. Annual Report. Accra.

Government of Ghana. 1997. “Ghana-Vision 2020: TheFirst Medium-term Development Plan (1997-2000).”National Development Planning Commission. Govern-ment of Ghana. (July).

Kapur, I., Hadjimichael, M.T., Hilber P., and Szymczak, P.1996. “Ghana: Adjustment and Growth–1983-1991.”Occasional Paper No. 86 (September). Washington,D.C.: International Monetary Fund.

Ministry of Mines and Energy. 1996. “Energy SectorDevelopment Programme (1996-2000).” Accra.

———. 1999. “Statement of Power Sector DevelopmentPolicy.” (April) Accra.

139

WRI: POWER POLITICS

8SOUTH AFRICA

ELECTRICITY REFORM WITH A HUMAN FACE?

Julia PhilpottAlix Clark1

INTRODUCTION

South Africa’s unique colonial history, apartheidlegacy, and ongoing transition to democratic gover-nance drive the country’s determination to attain itsdevelopment objectives. Embedded in that determi-nation is a broad social and environmental publicbenefits agenda—that is, a sustainable developmentagenda. Public benefits include energy access, gridand off-grid electrification, black economic empower-ment, renewable energy, and energy efficiency. SouthAfrica’s determination is not an automatic guaranteethat public benefits can or will be incorporated intothe electricity sector reform process. Nor is it aguarantee that the value of public benefits willmaterialize and be tangible in the daily lives of SouthAfricans. The reform process is nascent in SouthAfrica in comparison to many other countries, andthere is an ongoing debate over the electricity sector’sultimate governance structure. This debate reflects abroader, national debate about how South Africa willattain its sustainable development agenda. At its coreis a choice between two very different approaches:centralized/government-directed versus decentral-ized/market-driven. Nevertheless, that the govern-ment has begun framing reform around develop-ment objectives, such as black economic empower-ment and electrification, distinguishes South Africa’sprocess as unique among others. That the process isstill in its early stages presents opportunities tocontour it further to have a human face—one whosecharacteristics include a suite of public benefits—representative of all South Africans.

BOX 8.1 PROFILE OF THE ELECTRICITYSECTOR IN SOUTH AFRICA

Population (2001): 40.3 million 1

Percentage with access to electricity (1999)2: 66%Rural: 46% Urban: 79%

Installed electricity generation capacity (1999)3: 48 gigawatts (1.19% of total world capacity)

Coal: 91%Nuclear: 7%Other: 2%

CO2 emissions from electricity and heat as a share of national emissions (1999)4: 61%

Notes:

1. World Resources Institute. 2000. People and Ecosystems:The Fraying Web of Life. Washington, D.C.: WorldResources Institute.

2. National Electricity Regulator. 2000. South Africa.

3. www.eia.doe.gov/pub/international/ieapdf/t06_04.pdf(February 6, 2002).

4. Computed by WRI using International Energy Agency(IEA) data. IEA, 2001. CO2 Emissions from Fossil FuelCombustion. Paris: OECD.

ND_Power-ch8-SouthAfrica.pmd 6/18/2002, 3:12 PM139

140

WRI: POWER POLITICS

BACKGROUND

Apartheid Era InfluencesDuring the apartheid era, South Africa’s nationalenergy policy called for the nation to be self-sufficientthrough its own domestic energy production.2 Inaccordance with national policy, South Africa’s state-owned utility, Eskom, generated almost all of thecountry’s electricity. Eskom fueled its central-stationpower plants with cheap coal from South Africa’sabundant reserves. 3 For a profile of the sector, seeBox 8.1.

Throughout the 1970s, armed conflict escalatedwithin South Africa due to the ruling National Party’s(NP) apartheid policies. By the early 1980s, theinternational community imposed economic sanc-tions on South Africa—including an oil embargo—tosignal the country’s deepening status worldwide as apariah state. At the same time, the NP-led govern-ment continued to invest millions of Rand in theelectricity sector in the form of new coal-fired,central-station power plants. Despite insufficientelectricity demand to warrant new power plants,Eskom also spent millions of Rand to build theKoeberg nuclear power plant near Cape Town.

Access to electricity became a symbol of social

and economic equity in South Africa.

Domestic and international pressures eventuallyhad an impact on South Africa’s top political leader-ship. In 1990, former President and NP leader F.W.de Klerk released African National Congress (ANC)leader Nelson Mandela from prison. In 1994,Mandela ran in South Africa’s presidential electionand won with the Reconstruction and DevelopmentProgramme (RDP) as his political platform.4 At thestart of Mandela’s presidency, 40 percent of thepopulation had electricity (Wamukonya, 2001). Inurban black municipalities, approximately two thirdsof the population had electricity. In rural black

municipalities, the majority of the population had noelectricity. Those who had were subject to unreliable,poor-quality service from a decaying electricityinfrastructure.

Development and Energy: Priorities fora New South AfricaThe RDP established South Africa’s social andeconomic development priorities: economic growth,job creation, and access to services that meet basichuman needs among others—including energy. Withregard to the electricity sector, the RDP mandatedthat during the 1994–2000 period the governmenthad the responsibility to oversee 2.5 million house-hold connections to the electricity grid. The govern-ment via Eskom surpassed its own electrificationtarget, which was set at 350,000 connections peryear. The percentage of the population with access toelectricity rose from 40 percent in 1994 to 66percent in 2002 (Wamukonya, 2001). By 2002, 79percent of the population in urban areas and 46percent in rural areas had access to electricity (NER,2000). Eskom financed the electrification programand paid for it through a cross-subsidy tariff.5

The Department of Minerals and Energy (DME),under the current leadership of Minister PhumzileMlambo-Ncguka, sets the vision for South Africa’snational energy policy broadly and by sector. UnderDME’s guidance, the electricity sector’s policy focuson universal electrification and greater energy accessfor the poor increased at apartheid’s end. At the sametime, the policy emphasis on domestic energy self-sufficiency decreased. Universal access to electricitybecame a symbol in the “new” South Africa of socialand economic equity. In 1998, DME published itsWhite Paper on the Energy Policy of the Republic ofSouth Africa 1998. 6 The document spelled out thegovernment’s energy policy and its major objectives:(1) increasing access to affordable energy services; (2)improving energy governance; (3) stimulatingeconomic development; (4) managing energy-relatedenvironmental impacts; and (5) securing energysupply through a diversity of sources. In a speech at

ND_Power-ch8-SouthAfrica.pmd 6/18/2002, 3:12 PM140

141

WRI: POWER POLITICS

the Africa Energy Forum, the DME minister gave thefollowing description of reform’s relationship toSouth Africa’s social and economic development:

“The energy sector is being restructured in orderto ensure that we reduce the cost of energy,improve economic efficiency, attract local andforeign direct investment, diversify energyresources for environmental reasons, and ensuresecurity of energy supply. This will ensure thedelicate balance between State’s imperative tospur on economic growth and its socialresponsibilities…[In] order to limit the expectedupward pressure on electricity prices due toEskom’s new dividend and tax payments status,there is a need to build new generating capacity,to encompass environmental considerations, andto reform the [sector]. Government will ensurethat these price increases will be kept as low aspossible, so that South Africa maintains itscompetitiveness, cross subsidies for the poor,and free basic services to bring relief to the poor”(Mlambo-Ncguka, 2001).7

CONTEXT FOR SOUTH AFRICA’SELECTRICITY SECTOR REFORM

South Africa is still experiencing a historic transitionfrom apartheid to democratic governance. Gover-nance expresses the notion that, as part of thenational political process, the government deter-mines—with broad stakeholder participation—theforms of utility ownership and sector management ina transparent, open, and participatory manner. Thegovernment makes this determination based on itssocial and economic policies and ideological leanings(Steyn, 1995). The debate in South Africa over theelectricity sector’s ultimate governance structurereflects in some measure a broader, ongoing nationaldebate about how the country will attain its socialand economic development objectives (Galen, 1998).The following is a brief description of Eskom, therole of municipal governments in the reform pro-cess, and an overview of the opposing positions ofnational government and labor interests.

The national government frames reform

around development objectives.

Eskom: South Africa’s State-ownedUtilityEskom is South Africa’s state-owned electric utilitythat has been a vertically integrated monopoly sinceits inception.8 It currently owns and operates 24 ofthe country’s 53 central-station power plants. Munici-palities own 22 power plants and private interestsown the remaining 7. South Africa has a totallicensed capacity of 48,124 megawatts.9 Eskom holdsa licensed capacity of 44,852 megawatts (93 percentof the total), and 368 municipalities hold 2,436megawatts (5 percent). A handful of private interestshold 836 megawatts (2 percent) of licensed capacity(NER, 1999). In 1999, South Africa’s national peakdemand was 29,398 megawatts, and its total surpluselectricity generation capacity was 18,726 megawatts(NER, 2000). Eskom also owns and operates thecountry’s transmission system, which connects thepower stations to large urban and industrial areaswithin South Africa and to its neighboring countries.

Municipal Governments: Key Actors inElectricity DistributionIn South Africa, municipalities are responsible bylaw for providing infrastructure and public access tosuch services as water, sanitation, telecommunica-tions, and electricity. As distributors of electricitywhose function is to sell the commodity to house-holds, businesses, and other customers they haveconstituted historically an influential group. Thegovernment’s political and financial commitments touniversal electricity access increased their standingas a large and influential political constituencygroup. While few municipal distributors generate theelectricity they sell, the majority purchase it atwholesale prices from Eskom. In 1999, there were6.6 million electricity customers in South Africa.

ND_Power-ch8-SouthAfrica.pmd 6/18/2002, 3:12 PM141

142

WRI: POWER POLITICS

Municipal distributors and private interests serviced49 percent of this group, and sold 41 percent of thetotal electricity consumed by them. Eskom serviced50 percent of these customers, and sold 59 percent ofthe electricity they consumed (NER, 2000).

Government Favors a Decentralized/Market-driven Development ApproachOn a macroeconomic level, the government appearsto support a market-driven approach. For instance,the market-oriented approach in the Growth, Em-ployment, and Redistribution (GEAR) program hascomplemented—if not superseded—the RDP asSouth Africa’s macroeconomic strategy.10 In anotherexample, the government announced plans in 1994to restructure South Africa’s four largest state-ownedenterprises (SOEs), including Eskom. The Depart-ment of Public Enterprise (DPE), headed at presentby Minister Jeff Radebe, guides the SOE restructur-ing process. In 2000, DPE articulated its vision forthe ownership of South Africa’s SOEs—whichincluded Eskom—in the framework document AnAccelerated Agenda Towards the Restructuring ofState Owned Enterprises: Policy Framework (DPE,2000). The following statement by Minister Radebecaptures the rationale for SOE restructuring:

“[Our] interest in restructuring as an instrumentof public policy emanates from the very real needto ensure that our people as a whole live better,engage with one another with greater humanityand justice, are exposed to the opportunities andchances that come with greater social wealth, sothat they can take their place proudly as citizensin every sense of the word, of South Africa, ofAfrica and of the world. This is our emancipat-ing vision and one that drives our thinking. Assuch, restructuring is not driven by cold dogmaor rampant ideology. As a tool it has certaindimensions, but many applications. It is ourtask, nay, responsibility, to work out the particu-lar job to be done for the greater benefit of thepeople of our country” (Radebe, 2000).

Restructuring as an instrument of public

policy emanates from the need to ensure people

live better.

Labor Interests Favor a Centralized/Government-driven DevelopmentApproachNot all stakeholders agree the electricity sector needsreform. Despite reform’s focus on black economicempowerment, some labor interests do not agree thatEskom’s restructuring, and SOE restructuring ingeneral, will automatically lead to an improvement inpeoples’ lives and livelihoods. The Eskom ConversionBill, put forth by DPE last year, became a rallyingpoint for labor interest’s opposition to SOE restruc-turing.11 The Congress on South African TradeUnions (COSATU)—one of South Africa’s largestand most influential trade unions—called for DPE towithdraw the bill immediately. COSATU’s greatestconcern about the restructuring was potential joblosses. In a May 2001 press release, the trade unionexpressed its discontent with the process andannounced the severance of its relations with DPE.12

On August 29 and 30, 2001, COSATU called apolitical strike—it was one of the first strikes aimedexplicitly at the government’s SOE restructuringpolicy (Winkler and Mavhungu, 2001). Privatizationwas one of the focal points for the strike.13

The focus on empowerment as part of a reformprocess finds echoes in other countries. Box 8.2describes an effort in Bolivia at privatization throughbroad capitalization of a state-owned utility aimed atserving social equity goals.

ELECTRICITY SECTOR REFORMDRIVERS IN SOUTH AFRICAReform in South Africa is really two processesunfolding simultaneously and separately. First, thereis the electricity distribution industry (EDI) reform

ND_Power-ch8-SouthAfrica.pmd 6/18/2002, 3:12 PM142

143

WRI: POWER POLITICS

BOX 8.2 BOLIVIA’S CAPITALIZATION PROGRAM: PRIVATIZATION THATSERVES SOCIAL EQUITY GOALS

The idea for a modified privatization program thatwould serve larger equity and social developmentgoals originated with former Bolivian PresidentSanchez de Lozada, and drew from his “Plan for All”political platform. This “capitalization plan” resultedfrom a compromise among important interestgroups, including members of the president’s socialdemocratic political party (MNR), labor unions(Central Obrera Boliviana), constituencies concernedwith the sale of strategic assets to foreign investors(Comité de Defensa del Patrimonio Nacional),Bolivian business networks, policymakers, anddonors advancing market-oriented proposals.

The capitalization plan, which included but was notlimited to the electricity sector, involved selling 50percent ownership of state-owned enterprises instrategic sectors to private investors in a transparentbidding process. The other 50 percent wastransferred in the form of shares to Bolivia’sworking-age population. In the capitalizationscheme, the price paid by the private buyer for thestate asset is reinvested in the enterprise to improveits performance and upgrade infrastructure. Thebidding process requires companies to submitinvestment plans, and bids are evaluated in part onthe strength of the investment plan.

The capitalization program combined severalstructural reform efforts, including a wholesalereform of the social security and pension system.The shares transferred to citizens at large weredistributed in two ways. About 70 percent of shareswere credited to individual retirement accountsopened under Bolivia’s pay-as-you-go pension fundsystem. This new system was created as part of awholesale transformation of Bolivia’s social securityprograms at the same time that the capitalizationprocess gained momentum (1997). Private pensionfund companies manage pension accounts, andaccount holders are free to trade the sharestransferred to them. The remaining 30 percent ofshares were deposited into a fund (the Capitalization

Fund) that is also managed by private pensioncompanies. The earnings generated by this fund aredistributed as annuities, called the “bonosol.”Beginning December 31, 1995, Bolivians betweenthe ages of 21 and 50 are eligible to receive thebonosol upon retirement.

The compromise that resulted in the capitalizationproposal acknowledged the interests of powerfulnational constituencies, but it also reflected Sanchezde Lozada’s interest in the preservation of Bolivia’scollective social traditions, particularly traditionalindigenous forms of economic organization.Capitalization was not exclusive to the electricitysector. Other reforms strictly tied to the sectorreceived considerable support from the World Bank.In 1993, de Lozada’s government solicited supportfrom the World Bank’s Energy Sector Managementand Assistance Programme (ESMAP), andsubsequently received technical assistance from theBank (a total of $156 million from IDA).Consultants from Chile, Argentina, and Peru werehired with these funds to help define a newstructure for the electricity sector. According toESMAP, there was strong Bolivian leadership in thedesign of electricity reforms.

Sources:

Griffin, Paul. 1999. “Privatization in Bolivia.” CadwaladerNewsletter on Global Project Finance & Privatization.(Summer).

Kritzer, Barbara E. No date. “Social Security Privatization inLatin America.” Policy paper produced for the U.S. SocialSecurity Administration.

Rufin, Carlos. No date. “Institutional Change in theElectricity Industry: A Comparison of Four Latin AmericanCases.” Unpublished manuscript. John F. Kennedy School ofGovernment. Harvard University.

World Bank. 2000. “Introducing Competition in theElectricity Supply Industry in Developing Countries: Lessonsfrom Bolivia.” World Bank ESMAP Report No. 233/00.Washington, D.C.: ESMAP. (August).

ND_Power-ch8-SouthAfrica.pmd 6/18/2002, 3:12 PM143

144

WRI: POWER POLITICS

process, which began in 1992. The EDI is comprisedof Eskom, 368 municipalities, and a few privateinterests. Second, there is the electricity supplyindustry (ESI) reform process, which started in1993.14 The ESI includes Eskom, which undertakestransmission and is a large player in generation, anda handful of municipalities and private interests thatgenerate electricity. Together, the EDI and the ESIcomprise the electricity sector as a whole in SouthAfrica. The government coordinates both reformprocesses, but has not yet fully integrated them. Thefollowing section describes the reform drivers in theEDI and ESI.

Financial Difficulty Drives EDI ReformMany of South Africa’s municipal electricity distribu-tors have struggled financially for years. About onethird of them continue to be in severe financialstraits. The problem is that some municipalitiesgenerate surplus revenue, but most operate routinelyat a financial loss. By international standards, most ofthe distribution businesses are extremely small. In1994, just four municipal distributors earned 50percent of all revenues; 22 distributors earned 75percent, and 100 distributors earned 99 percent ofall revenues. The remaining 300 or more collectivelyearned less than 1 percent of the total electricityrevenues earned by all municipal distributors (Galen,1998). Many rely heavily on revenue from electricitysales to pay for wholesale electricity purchases fromEskom. Some also rely on cross-subsidies to provideother legally required public services.

A reason that many municipal distributors cannotoperate without losing funds is because a stableeconomic base in the townships they serve does notexist or is insufficient. Apartheid policies preventedblack municipalities (termed townships) fromdeveloping a legitimate economic base that wouldhave created jobs, entrepreneurial opportunities, andsome degree of economic stability. Compared to thewhite municipalities, the black municipalities usuallyhad larger populations, most of whom were poor.Consequently, a tax base that could generate a steadystream of tax revenue could not develop (Galen,

1998).15 At apartheid’s end, the consolidation ofwhite and black municipalities as part of the democ-ratization process merged the economies and taxbases of areas that were formerly separate. Manymunicipal distributors have had to contend for yearswith periodic boycotts in which households refusedto pay their electricity bills. Boycotts remain a meansfor the electorate to register periodically their disap-proval of current policies.

Labor’s greatest concern is potential job losses.

EDI’s financial difficulties produce three negativeimpacts. First, distributors cannot consistentlyprovide reliable, adequate, high quality service totheir customers. Second, some distributors areunable to pay Eskom for the wholesale electricity theyhave purchased. Third, many administrative andtechnical functions are duplicated across adjacentdistributors in rural, urban, and industrial areas.Consequently, costs and prices in the electricitysector are unnecessarily high. These negativeimpacts spurred the government, Eskom, and somemunicipal distributors to begin grappling with EDIreform in the late 1980s.

Concerns about Future Demand forElectricity Drive ESI Reform

South Africa’s vision for its electricity sector, likemany other countries around the world, has gonefrom one of exclusive state ownership and control toone of partial private ownership and control. Thereare typically three main drivers motivating a movetoward competition and private ownership in theelectricity sector. They are desired changes in: (1)electricity prices; (2) service quality and adequacy;and (3) supply/generation capacity. Not all threedrivers are relevant ESI reform motivators in SouthAfrica. In the short term, lower electricity prices arenot a strong driver, since South Africa’s electricityprices are among the lowest in the world.16 Theaverage sales price is R0.1629 (US$ 0.0148 in 2002

ND_Power-ch8-SouthAfrica.pmd 6/18/2002, 3:12 PM144

145

WRI: POWER POLITICS

prices) per kilowatt-hour (NER, 2000). Electricityservice in terms of quality, reliability, and adequacy isgenerally sufficient for those who have it. Improvedservice, therefore, is not a strong driver. The driverthat is strong and motivates ESI reform is thecountry’s need for greater capacity to generateelectricity in the future.17

In 1999, South Africa had 18,726 megawatts ofsurplus electricity generation capacity (NER, 1999).Sometime between the years 2007 and 2011, itssurplus capacity will be depleted (Eberhard, 2001).Projections suggest that over the next 20 to 25 yearsthe amount of new generation capacity needed mightbe anywhere from 24,000 megawatts to 54,000megawatts (Galen, 1998). Some estimates suggest thelevel of new investment needed will be between R100billion and R648 billion (US$9.1 billion to US$58.9billion in 2002 prices) (Eberhard, 2001; Galen, 1998).At present, the government is the sole shareholder inEskom, meaning it bears all the financial risk.

The sector may need US$9.1 billion to

US$58.9 billion of new investment.

Two questions for South Africa become even morepressing to answer in the reform process: How andfrom where will the government choose to amass theinvestment funds needed to meet the nation’s future,long-term electricity demand? The massive invest-ment required inevitably will affect other competingdevelopment priorities—including a broad publicbenefits agenda—making the choice that much moredifficult. The government has begun to answer thesequestions. It is currently restructuring Eskom inorder to allow partial private investment and owner-ship in the generation business. As the followingpassage in DME’s White Paper on Energy Policy(DME, 1998) conveys, the need to address the sectorgovernance/investment question is an importantdriver behind ESI reform in South Africa:

“[t]he rapid changes in the political and eco-nomic context of the electricity supply industry

worldwide in recent years raise questions aboutthe continued ability of South Africa’s monopo-listic electricity industry to meet customers’electricity services needs in future.”

THE DESIGN PROCESS FOR REFORM

Despite all the “right” political signals made by thegovernment in favor of a public benefits agenda, theagenda continues to receive uneven attention in thereform process. Politicians have played a leading rolein focusing the reform process on some publicbenefits concerns. The DME and DPE ministers,particularly the former, appear to have been respon-sible for ensuring that such social and economicpublic benefits as electrification, energy access, andblack economic empowerment are on the reformagenda and discussed actively. Whether and howissues relating to end user energy efficiency andrenewable energy have also had their place ensuredon the reform agenda is less certain.18

Environmental benefits have not been prominenton the agenda. It is not obvious why this is the case,given that the RDP and White Paper on the EnergyPolicy of the Republic of South Africa 1998 support anenvironmental focus. One reason might be SouthAfrica’s abundance of coal and its intention to use itas stated in its national energy policy. Or it could bethat groups in civil society linked traditionally toenvironmental activism have not yet participated inthe ESI reform process. Yet another reason might bethat the South African government is already dealingwith too many core development issues. Renewableenergy’s lack of prominence on the reform agendamay soon change. In a parliamentary media briefingin February 2002, the DME minister announced thather department would table at cabinet the draft WhitePaper on the Energy Policy of the Republic of SouthAfrica 1998 by mid-year. She underscored thedocument’s importance for positioning South Africa“[to] participate and influence the agenda of theWorld Summit on Sustainable Development.19 [TheWhite Paper on the Energy Policy of the Republic ofSouth Africa 1998] is based on the premise thatrenewable energy could play a small but important

ND_Power-ch8-SouthAfrica.pmd 6/18/2002, 3:12 PM145

146

WRI: POWER POLITICS

BOX 8.3 C H R O N O L O G Y O F E L E C T R I C I T Y S E C T O R R E F O R M I N S O U T H A F R I C A

• 1993–94 National Electrification Forum (NELF) is established and identifies ESI reform as a priority.

• 1994–95 National Electricity Regulator (NER) is established.

• 1995 NER establishes the Electricity Working Group.

• 1996 NER establishes an Electricity Market Task Team to investigate options for ESI reform.

• 1996–97 Electricity Restructuring Interdepartmental Committee (ERIC) Report is released, cabinet approves recommendation, and appoints ERIC to guide the EDI reform process.

• December 1998 The Department of Minerals and Energy (DME) releases the White Paper on the Energy Policy for the Republic of South Africa 1998.

• June 1999 Cabinet approves the end state of EDI restructuring to be a number of financially viable Regional Electricity Distributors (REDs).

• 1999 Eskom is split into core Eskom operations and Eskom Enterprises.

• November 1999 Inter-ministerial Cabinet Committee on the Restructuring of State Assets gives go-ahead for development of full policy framework.

• Early 2000 First public workshops on EDI underway.

role in the development of a sustainable energysystem, and in ensuring a resource base for futuregenerations” (Mlambo-Ncguka, 2002).

The following section describes the ways in whichpublic benefits have or have not been included in theprocess so far. It provides a snapshot of the EDI andESI design processes, highlights the role of the WorldBank in the reform process and the role of foreignconsultants in EDI reform. This section also providesexamples of how Eskom’s influence and municipalelectricity distributor perspective have helped shapethe contours of electricity sector reform and theinclusion of a public benefits agenda.

The EDI Design Process and PublicBenefits

The government is seeking a structure to improve theperformance and financial health of the electricitydistribution industry (EDI). The current plan is toconsolidate the municipal electricity distributors andEskom into six regional electricity distribution compa-nies, or REDs. Such consolidation allows financiallyweaker municipalities to benefit potentially from amerger with stronger ones. Additionally, consolidationwill decrease duplication of administrative andtechnical functions, thereby allowing for economies ofscale. Figure 8.1 is a schematic of the government’s

ND_Power-ch8-SouthAfrica.pmd 6/18/2002, 3:12 PM146

147

WRI: POWER POLITICS

BOX 8.3 (CONTINUED)

• April 2000 DME, the Department of Public Enterprises (DPE), and the World Bank conduct a workshop on ESI reform.

• Mid 2000 “Stage 1 Blueprint” report for EDI reform finalised and reviewed by business and unions.

• August 2000 DPE minister releases Accelerated Agenda Towards the Restructuring of State-Owned Enterprises.

• Late 2000 DPE initiates study to make recommendations on new market structure for ESI, and cabinet requests DME to submit a strategy for ESI reform.

• Early 2001 On directive of DME minister, a team of international and local electricity sector specialists reviews the “Stage 1 Blueprint” for EDI reform.

• May 2001 Parliament enacts the Eskom Conversion Act.

• 2001 Cabinet adopts the “Stage 1 Blueprint” for EDI reform.

• May 2001 On directive of the DME minister, a team of international and local electricity specialists reviews the Norwegian-supported study on ESI reform.

• Mid 2001 NER grants new licenses to independent power producers to build new capacity.

• Late 2001 National EDI Holdings Company established.

• 2001 Eskom generation units are clustered into competing businesses.

• 2002 REDs established.

proposed, near-term structure for South Africa’selectricity sector as a whole. The section followingprovides examples of different viewpoints and posi-tions of different EDI stakeholders.

Foreign Consultants: PricewaterhouseCoopers

In early 2000, the Department of Minerals andEnergy (DME) hired the U.K.-based consulting firmPricewaterhouseCoopers (PwC) as its technicaladvisor on EDI design and strategy. DME proceededto organize and work with PwC on a series ofconsultative meetings with business and laborinterests to discuss EDI reform. By June 2000, PwC

had published a series of six working papers forDME that outlined a possible “blueprint” for EDIreform.20 The six papers focus on the definition ofthe REDs; ownership, governance and legal status;asset valuation and transfer; regulation and commer-cial arrangements; tariffs and financial transactions;and organization and human resources. Thesediscussion documents made little mention of theprovision of public benefits—such as universal gridand off-grid electrification, energy access, energyefficiency, renewable energy, and black economicempowerment.

ND_Power-ch8-SouthAfrica.pmd 6/18/2002, 3:12 PM147

148

WRI: POWER POLITICS

FIGURE 8.1 A N E A R - T E R M S C E N A R I O F O R E S K O M ’ S S T R U C T U R E A N DR O L E

Source: Adapted from Hunt and Shuttleworth, 1996.

Despite the “right” political signals, attention

to public benefits is uneven.

In late June, PwC published a seventh workingpaper entitled “Working Paper 7: ConsolidatedEmerging Views” (PwC, 2000). This paper “consoli-dates the key elements of the six working papers and,in some areas, indicates how [the] thinking hasdeveloped since the workshops” (PwC, 2000). Thegovernment relied on and used much of the substan-tive content of this PwC paper as the basis for its“Stage 1 Blueprint” report for EDI reform.21 InNovember 2000, DME submitted to cabinet—afterstakeholder scrutiny and comment—the “Stage 1Blueprint” report. After reviewing the report, thecabinet remanded a series of questions to DMEprimarily about whether, how, and to what degree theblueprint addressed the needs of poor South Africans(Clark, 2001). At the behest of the government, therevised “Stage 1 Blueprint” described South Africa’s

electrification program as an important element ofthe EDI reform agenda.

Despite existing political will at the highest levels ofgovernment to include a public benefits agenda, theinitial “Stage 1 Blueprint” did not provide for electrifi-cation and energy access programs until late in thedocument’s development process. The reasons forthis omission are not easily understandable. It mightbe that the PwC team and its expertise were orientedprimarily toward the business and financial details ofEDI consolidation. Another reason for the omissioncould be the government did not request a publicbenefits focus in its initial tender for EDI technicaladvisors to which PwC responded. One longtimeobserver of South Africa’s reform process notes that:

“The public benefits issue was relegated to asecondary role. I am not sure that the PwC teamitself had the available expertise to understandhow rural electrification, in support of economicdevelopment, would be crucial to the success ofthe REDs model and the attainment of SouthAfrica’s RDP objectives.”22

ND_Power-ch8-SouthAfrica.pmd 6/18/2002, 3:12 PM148

149

WRI: POWER POLITICS

Local GovernmentsThe South Africa Local Governments Association(SALGA), comprised of municipal governments, hasnot always supported consolidation into the sixREDs. From their point of view, consolidation wouldcause the loss of financial and political leverage bythe municipality. It would also infringe upon thestatus of SALGA’s members as Service Authorities(as guaranteed by South Africa’s constitution) todeliver electricity services. By the mid-1990s, themunicipal distributors realized that most of them didnot have the resources to deliver electricity servicesproperly and they agreed that a mechanism forsharing resources was required. The agreement didnot allay concerns about the costs associated with theconsolidation process.

The bottom line for many distributors is day-

to-day financial survival.

For most distributors the bottom line is more aboutday-to-day survival and less about delivering publicbenefits programs to their customers (Clark, 2001).23

Many argue that the basis upon which they arecurrently operating is too fragile and too uncertain toconsider public benefits programs. When asked whyno DSM programs existed in his municipality, oneemployee of the distribution business replied “youare asking me to run before I can walk!”24 Thedirection that electricity sector reform followsultimately will have significant impact on the futurerole of environmental benefits such as renewableenergy and energy efficiency (Winkler andMavhungu, 2001). Private investors will likely reduceinvestment in public-benefit energy efficiency, forexample, as there is little incentive to invest inmeasures that reduce revenue (Clark and Mavhungu,2000).

Box 8.4 summarizes some of the key actors in theEDI reform process and describes their specificinterests and issues of concern.

The ESI Design Process and PublicBenefitsUntil now, most discussions have occurred on ahigh-level basis, generally between the DME andDPE ministers and Eskom executives. A wider rangeof supply-industry stakeholders has not yet partici-pated in the ESI design process. The government hasnot yet provided a forum for public participationprobably due to the nascent state of ESI reformplans, at least compared to EDI reform plans. Thegovernment is still developing its own policy in thisarea (Clark, 2001). To some other stakeholders it isnot clear that Eskom is sufficiently “broken” towarrant a complete restructuring (Clark, 2001). Thefollowing provides a sample of different ESI stake-holder viewpoints and positions.

National GovernmentIn Johannesburg in early 2000, a World Bank-sponsored workshop convened for the first time allthe important government stakeholders required fora serious discussion about ESI reform.25 Workshopparticipants focused primarily on mainstream reformissues, although some also called for attention topublic benefits in their final statements. In particular,the DPE and DME ministers called for (1) electrifica-tion; (2) energy access; (3) energy efficiency andDSM; and (4) protection for research and develop-ment. DME Minister Mlambo-Ncguka consistentlyraised concerns about the broad goals of electricitysector reform. She expressed particular concernabout the effect that reform might have on the ruralelectrification program and black economic empow-erment. Not discussed was a mechanism to supportpublic benefits simultaneously with a move toward acompetitive, privatized market.

Eskom has resisted reform plans, asserting the

utility is well-equipped to deliver public benefits.

On May 30, 2001, the government demonstrated itsdesire to have some partial private domestic andsome foreign equity investment in Eskom’s genera-

ND_Power-ch8-SouthAfrica.pmd 6/18/2002, 3:12 PM149

150

WRI: POWER POLITICS

tion business. In a move to restructure Eskom, theParliamentary Portfolio Committee on PublicEnterprises instituted the Eskom Conversion Act.This legal process transformed Eskom into a publiccompany—termed “corporatization”—in which theState is the sole shareholder. In early 2002, DPEannounced plans to make 10 percent of Eskom’sgeneration capacity available to black economicempowerment actors. DPE also stated that thegovernment would sell an additional 20 percent to a

strategic equity partner to secure foreign directinvestment in Eskom (Business Day, 2002). Eskomwill no longer be the sole shareholder. According tonews reports, Eskom will retain a “dominant” role inthe electricity generation industry for the foreseeablefuture. Dominant means that Eskom, a public sectorenterprise, holds 70 percent of the generationbusiness, and thus retains primary ownership andoperational control.

BOX 8.4 I N T E R E S T S A N D I S S U E S O F S E L E C T E D E D I R E F O R M S T A K E H O L D E R S

Actors Interests/Issues

End users Customers Low electricity prices, improved services, reliable, and

high quality power supplies.

Labor/COSATU Low electricity prices, no job losses, competitive wages/salaries, a national distribution company.

Environmental Advocacy Groups Limited environmental impact, sustainable development.

Distribution industry Municipal Electricity Distributors Favorable asset transfer and shareholding (control) in

new REDs structure, limited job losses, municipal levy, continued Service Authority status.

Eskom Executive Management Continued natural monopoly status, no impact on Eskom credit rating, shareholding in distribution companies.

South Africa Local Government Association (SALGA) Smooth transition, municipal levy, fair stake in RED structure.

Government Department of Minerals and Energy (DME) Low electricity prices, financially viable distribution

industry, ongoing electrification programs and other programs aimed at achieving rural development objectives.

Department of Public Enterprises (DPE) Maximizing returns from Eskom distribution shares.

Department of Finance/National Treasury (DOF) Financially viable distribution industry, transparent fiscal impact.

National Electricity Regulator (NER) Financially viable distribution industry that is easier to regulate, rationalized tariff structures.

Source: Clark, 2001.

ND_Power-ch8-SouthAfrica.pmd 6/18/2002, 3:12 PM150

151

WRI: POWER POLITICS

Eskom ManagementEskom management has been very vocal about ESIreforms, and its statements have contributed to thegovernment’s indecisive stance on this issue (Clark,2001). Eskom has resisted electricity sector reformplans asserting that it is well-equipped to deliverpublic benefits. For instance, the utility has noted itsown success with electrification, and raised theconcern that the goal of electrification may not be aswell-served in a restructured sector. These assertionscontribute to a continuing government concern that

moves to introduce competition into the ESI couldhave seriously detrimental effects on black economicempowerment and electrification. Similarly, Eskomhas argued in the past against issuing licenses to newindependent power producers (IPPs) on the basisthat the utility itself can meet additional electricitydemand through its DSM program.

Box 8.5 summarizes some of the key actors in theESI reform process and describes their specificinterests and issues of concern.

BOX 8.5 I N T E R E S T S A N D I S S U E S O F S E L E C T E D E S I R E F O R M S T A K E H O L D E R S

Actors Interests/Issues

End users Customers Low electricity prices.

Labor/COSATU No privatisation, no job losses, competitive wages.

Environmental Advocacy Groups Clean generation of electricity, positive social and environmental impact.

Supply industry Eskom Executive Management/Electricity Council Limited reform, transmission to be transferred to

Eskom Enterprises, limited competition.

Prospective and Existing Independent Power Producers (IPPs)

Fair access to transmission system, cost reflective tariffs, transparent regulatory framework.

South Africa Local Government Association (SALGA) Unknown – not yet consulted.

Government Department of Public Enterprises (DPE) Restructuring of state-owned assets to maximize

returns to the state.

Department of Minerals and Energy (DME) Efficient and competitive electricity supply industry, electrification program, opportunities for black economic empowerment.

Department of Finance/National Treasury (DOF) Efficient and competitive electricity supply industry.

National Electricity Regulator (NER) Efficient and competitive electricity supply industry, opportunity to develop new regulatory framework.

Source: Clark, 2001.

ND_Power-ch8-SouthAfrica.pmd 6/18/2002, 3:12 PM151

152

WRI: POWER POLITICS

CONCLUSION

South Africa’s choice to move slowly and test a moremarket-oriented approach for its electricity sector isrooted in its commitment to determine for itself whatis in the nation’s best interest. The country’s ap-proach to electricity sector reform is “homegrown”—rather than a product of financial pressures andpolitical influences from other governments, interna-tional investors, donors and development agencies,and foreign consultants—with a preference forcompetition and privatization.26 As evidence,consider South Africa’s stance toward the WorldBank. Unlike many other countries in Africa andaround the world, the World Bank’s involvement inSouth Africa’s reform process has been and willlikely continue to be minimal. Its only role to datehas been to provide funds for research and work-shops. South Africa’s attitude is likely the product ofa reactive response by South African stakeholders toprevious negative experiences with the Bank withinboth the country and elsewhere in Africa (Clark,2001).27 At the same time, the World Bank displays atendency to suggest privatization as the solution tosector management problems. It tends not to explorean array of alternatives to revise and adapt currentpractices (Steyn, 1995). This tendency likely adds toSouth Africa’s attitude toward the Bank.

The government’s rationale for a more market-oriented approach appears based more on its aver-sion to financial risk in the electricity sector than oninfluences and pressures from such internationalfinancial institutions as the World Bank (Galen,1998). The risks it would rather avoid are twofold.First, in the case of a state-owned utility such asEskom, the investor is the state. Therefore, govern-ment alone is the bearer of the financial risk associ-ated with an investment of billions of Rand in newelectricity generation capacity. Second, the amount ofinvestment needed over the next 20 years is substan-tial. Accordingly, it represents a significant degree offinancial risk to the investor. The government cannotafford to be the sole investor. A critical decision the

government faces is whether Eskom should build thenext power plant or encourage competing investorssuch as IPPs to enter the market (Eberhard, 1999).

South Africa’s social and economic developmentpriorities—and its self-assessment of the need forelectricity sector reform—bode well for a broadpublic benefits agenda. At the same time, the reformprocess is nascent in South Africa in comparison tomany other countries. The country’s experience withits foreign consultants and the “Stage 1 Blueprint”reflects that despite political will, public benefitsadvocates still have to convince some key stakehold-ers of the link between social and environmentalconcerns and the need to implement concreteprograms to address those concerns. It is too soon toevaluate whether and how the reform process hasserved individual public benefits so far—particularlyenvironmental benefits. Yet, there is tangibleprogress toward the inclusion of such benefits in thereform process.

South Africa’s reform experience suggests a reasonto affirm the centrality of good governance—in theform of implementing institutions with well-definedroles, the rule of law and effective regulation, a stableand enabling market structure, and transparent,participatory public policy at the national and locallevels—to the future success of a public benefitsagenda. South Africa is grappling with concerns andquestions about public benefits early in the EDI andESI reform processes. The country has taken steps toaddress stakeholder questions in policy statementsand to reflect stakeholder concerns in local gover-nance structures. The DME minister has been vocaland effective in bringing social concerns—particu-larly concerns about access to electricity—on to thereform agenda, with the DPE minister also playing aconstructive role. The cabinet’s intervention in the“Stage 1 Blueprint” resulted in an additional empha-sis on various public benefits programs. The interven-tion illustrates political will translated into action inSouth Africa. These are hopeful signs that futuresector reform in South Africa will have a human face.

ND_Power-ch8-SouthAfrica.pmd 6/18/2002, 3:12 PM152

153

WRI: POWER POLITICS

NOTES

1. This chapter draws on Alex Clark, 2001, “Power SectorReform and the Public Benefits Imperative: A SouthAfrican Case Study.” Unpublished paper, EnergyDevelopment Research Centre, Capetown, SouthAfrica (July). Online at http://www.wri.org/gover-nance/iffe/powercases.html. This paper was written aspart of a collaborative project on power sector reformand public benefits in developing and transitioneconomies coordinated by the World ResourcesInstitute.

2. Apartheid was a policy that called for the separation ofpeople on the basis of race, codified into law.

3. Eskom is the fourth largest electric utility in the world,generates 95 percent of South Africa’s electricity, andproduces half of all the electricity consumed on theAfrican continent (NER, 1999).

4. The RDP is a 150-page document outlining the ANC’smacroeconomic strategy, including its plans to createjobs through public works; build a million new houseswith electricity and plumbing; extend primary healthcare; provide 10 years of free access to education andredistribute land.

5. This tariff prompted some large, industrial customersto call for market liberalization, which would increasethe pressure to remove such subsidies (Galen, 2002).

6. The White Paper on the Energy Policy of the Republic ofSouth Africa 1998 is the product of widespread publicparticipation in the formulation of South Africanenergy policy.

7. The government has been discussing instituting apoverty tariff and providing between 20 to 60kilowatt-hours of free electricity per month to approxi-mately 1.4 million poor households.

8. Meaning that generation, transmission, and distribu-tion—the basic functions of a central-station, publicutility—are not subject to competition in a market-place for their services.

9. This includes 3,556 megawatts of mothballed capacity;and 1,429 megawatts of capacity under construction.

10. The RDP remains as the government’s statement onSouth Africa’s social and economic development goals.

11. The four SOEs are: Eskom (electricity utility); Denel(arms); Transnet (transport); and Telkom (telecommu-nications).

12. COSATU’s press release is online at: http://www.cosatu.org.za/press/2001/eskom_Conversion_Bill (June 11, 2002).

13. An important point to consider is that corporatizationis not the same as, and does not necessarily lead to,privatization. Our conjecture on Eskom’s position isthat it does want to attract additional equity bybecoming a company with shares to sell. It is lesslikely, however, that Eskom wants to lose operationalcontrol to private investors or the market.

14. In 1993 the National Electricity Forum (NELF), amulti-stakeholder group, began to review electricitysector reform issues and practices, including anexploration of ESI reform issues.

15. Personal communication with Michael Eckhart, SolarInternational Management, Inc., Washington, D.C.(April, 2002).

16. South Africa’s low electricity prices do not take intoaccount external costs.

17. In the medium- to long term, more capacity willinevitably translate into higher prices. In the future,price considerations may become an important ESIreform driver.

18. Government is in the process, however, of developinga White Paper on Renewable Energy due in spring2002.

19. South Africa will host the WSSD in September 2002.

20. The PwC developed the paper series under theElectricity Distribution Restructuring Project. Thepaper series is online at: http://www.dme.gov.za/energy/edi.htm (June 11, 2002).

21. The government did not publish the final documentknown as the “Stage 1 Blueprint,” a government reporton EDI reform. The PwC “Working Paper 7: Consoli-dated Emerging Views” served as the public documentfor stakeholder scrutiny and comment. Much of thecontent of “Working Paper 7” formed the basis of thegovernment’s “Stage 1 Blueprint.” Cabinet adopted thePwC’s recommended model of EDI reform in thefinal, revised “Stage 1 Blueprint” which reflected theelectrification program’s importance in the reformprocess.

22. Quote from a U.S.-based expert on electricity sectorreform and rural electrification, April 2, 2002. Allinterviews for this chapter were conducted on a not-for-attribution basis. Consequently, interviewees areidentified only by their institutional affiliation.

23. Personal communication with Michael Eckhart, SolarInternational Management, Inc., Washington, D.C.(April, 2002).

ND_Power-ch8-SouthAfrica.pmd 6/18/2002, 3:12 PM153

154

WRI: POWER POLITICS

24. Interview with staff of a distribution utility in SouthAfrica, 2000.

25. The workshop was attended by the DPE Minister, theDME Minister and Deputy Minister, NER ExecutiveManagement, Eskom Executive Management, andsenior staff of various government departmentsincluding DME, DPE, and Finance (now calledTreasury). Union officials were invited but, apart froma South African Mining Workers’ Union representa-tive, did not attend. Invited were internationalelectricity sector experts to give presentations on theexperiences of Argentina, Australia, Columbia, Chile,France, Hungary, New Zealand, Norway, and theUnited Kingdom.

26. Personal communication with Michael Eckhart, SolarInternational Management, Inc., Washington, D.C.(April, 2002).

27. In its South Africa Country Assistance Strategy, theWorld Bank itself noted the following:“Since re-engaging in South Africa in the early 1990s,the Bank has played an active role. At the outset, theBank had a strongly negative image, particularlyamong ANC cadres who viewed the Bank through thelens of their experience in other African countriesundergoing structural adjustment. The Bank re-sponded by adapting its focus…and pursuing aninclusive dialogue with all segments of society, insideand outside of government. Establishment of a moreproductive relationship with government and othergroups has improved the perception of the Bank inSouth Africa, although distrust and ambivalence aboutthe Bank’s motives and agenda persist with certaingroups.” Online at: http://www.worldbank.org (June10, 2002).

ND_Power-ch8-SouthAfrica.pmd 6/18/2002, 3:12 PM154

155

WRI: POWER POLITICS

REFERENCES

Chalmers, Robyn. 2002. “Who Will Come to Power Party?”Business Day. (March 1).

Clark, Alix. 2001. “Power Sector Reform and the PublicBenefits Imperative: A South African Case Study.”Unpublished manuscript. Energy and DevelopmentResearch Centre. University of Cape Town, Cape Town,South Africa.

Clark, Alix and J. Mavhungu. 2000. “Promoting PublicBenefit Energy Efficiency Investment in New PowerContexts in South Africa.” Energy and DevelopmentResearch Centre. Cape Town: The University of CapeTown.

Department of Minerals and Energy (DME). 1998. WhitePaper on the Energy Policy of the Republic of South Africa1998. Pretoria. Online at: http://www.dme.gov.za/publications/wp_ene/whitepaper1998.htm#Ministerialforward (June 10, 2002).

———. 2000. Renewable Energy Strategy 2000. Pretoria.Online at: http://www.dme.gov.za/energy/restrategy_part3.htm (June 10, 2002).

Department of Public Enterprises (DPE). 2000. AnAccelerated Agenda Towards the Restructuring of StateOwned Enterprises. Hatfield: Republic of South Africa.

Eberhard, A. 1999. “Competitive Jolt Good for Consum-ers.” Business Day. (November 11):15.

———. 2001. “Planning the Future of Eskom.” BusinessDay. (October 24). Online at: http://www.bday.co.za/bday/content/direct/1,3523,953756-6078-0,00.html(May 20, 2002).

Galen, P. 1998. “Grappling with Change: The SouthAfrican Electricity Supply Industry.” Report No. NREL/TP-260-25454. Golden, Colorado: The U.S. NationalRenewable Energy Laboratory.

Hunt, S. and G. Shuttleworth. 1996. Competition andChoice in Electricity. New York: Wiley and Sons.

Mlambo-Ngcuka, P. 2001. Speech presented to the AfricaEnergy Forum: Power and Gas 21, Lyons, France, June24-26, 2001. Online At: http://www.dme.gov.za/newscentre/speeches/speecheshistory (June 10, 2002).

———. 2002. Parliamentary media briefing, Pretoria,South Africa. Online at: http://www.dme.gov.za/speeches (February 15, 2002).

National Electricity Regulator (NER). 1999. StatisticalOverview of the Electricity Supply Industry of South Africa1998. Sandton, South Africa. Online at: http://www.ner.org.za/stats.htm (May 3, 2002).

———. 2000. “Competition in Electricity Markets.”Electricity Regulatory Journal. (September): 1-6. Online at:http://www.ner.org.za/publications/erj/sep2000.pdf(May 3, 2002).

PricewaterhouseCoopers (PwC). 2000. “Working Paper 7:Consolidated Emerging Views.” Electricity DistributionIndustry Restructuring Project. Online at:http://www.dme.gov.za/energy/Stage%20I%20emerging%20views.pdf (June 10, 2002).

Radebe, J. 2000. “Restructuring for Development: Ensur-ing Benefits for the People.” Address presented to thePrivatisation Africa 2000 Conference, Sandton, SouthAfrica. (May). Online at: http://www.dpe.gov.za/docs/sp/2000/sp0516.html (June 10, 2002).

Steyn, G. 1995. “Restructuring the South African ElectricitySupply Industry: Appropriate Governance in a NewlyDemocratized South Africa.” Utilities Policy, Vol. 5(2):95-108.

Wamukonya, N. 2001. “The Uneven Road for the Non-gridProgramme in South Africa.” Energy for SustainableDevelopment. Vol. 5 (3):41-46.

Winkler, H. and J. Mavhungu. 2001. “Green Power, PublicBenefits and Electricity Industry Restructuring.” Finalreport prepared for the Sustainable Energy and ClimateChange Partnership: A Project of Earthlife AfricaJohannesburg and WWF Denmark. Cape Town: TheUniversity of Cape Town.

ND_Power-ch8-SouthAfrica.pmd 6/18/2002, 3:12 PM155

157

WRI: POWER POLITICS

9

services in an environmentally sustainable manner,proved central to the conceptualization and imple-mentation of reforms.

Several countries undertook reform against thebackdrop of severe macroeconomic crises, whichcontributed to the emphasis on financial health.Argentina was grappling with a heavy debt burden andsaw privatization of its debt-laden utilities as one wayout. Bulgaria was faced with massive inflation and adeclining standard of living. The East Asian crisisplunged the dominant Indonesian public utility intobankruptcy, forcing consideration of a sell-off of assetsto raise capital. And in Ghana, a recommendation toprivatize the distribution utility was part and parcel ofa decade of structural adjustment of the Ghanaianeconomy. Even where reforms did not take place in thecontext of a systemic macroeconomic crisis,staunching the sector’s drain on public finances was atthe center of a larger financial reform package, as wasthe case with state-level reforms in India.

The case studies confirm the view that power sectorreforms are part of a broader process of economicliberalization and integration into the globaleconomy. Reforms were often driven by an immedi-ate need for capital to maintain existing generationcapacity and develop new capacity. To attract thesefunds, governments had to increase space for theprivate sector and create an environment that wouldprovide adequate returns to private capital. Donoragencies played an important role in reinforcing thistrend. The initiation of reforms in India, Indonesia,Ghana, and Bulgaria was directly tied to a withdrawal

CONCLUSION

Navroz K. Dubash

The six country studies included in this studysuggest the need for a reframing of electricity reformin much of the developing world and in transitioneconomies. Thus far, reform processes have left littlespace for articulation and promotion of a sustainabledevelopment agenda. The sector is being trans-formed to operate along commercial lines, which willlikely bring some benefits. However, longer-termenvironmental and social interests in the manage-ment and operation of the sector get little attentionfrom technocrats. Electricity reforms to date suggesta need for concern, and for action, if public benefitsare not to be swept aside in the rush toward amarket-driven vision of the electric power sector.

This conclusion draws on the country cases toidentify the factors that have motivated reforms;discuss how reforms have been shaped by the politicsin the sector; examine the role that donor agencieshave played in those politics; and detail the extent towhich public benefits concerns have been addressedin the reform process. The chapter concludes with adiscussion of the way forward toward a politics ofreform that incorporates a public benefits agenda.

THE DRIVERS OF ELECTRICITYREFORM

The case studies suggest that electricity reform wasoverwhelmingly driven by the need to establishfinancial health in the sector. This framing of theobjectives around financial health, rather thanaround, for example, the provision of electricity

158

WRI: POWER POLITICS

of international donor support for the power sector inthese countries.

However, raising money on international capitalmarkets has been a considerable challenge for mostdeveloping and transition economies. With technologi-cally run-down and institutionally flawed distributionnetworks, India and Ghana were not very attractive toprivate capital, except under the generous termsprovided to independent power producers (IPPs).Even in Argentina, where the public utility hadestablished a respectable track record, privatizationwas accomplished at fire-sale prices. Developing andtransition economies were left with a conundrum—private investment was unlikely to be forthcomingwithout an assurance of adequate returns, yet toincrease returns many countries needed an infusionof capital. Faced with this situation, concerns overfinance loomed large, and colored the entire process ofreforming the power sector.

Power sector reforms are part of a broader

process of economic liberalization and integra-

tion into the global economy.

The only partial exception to this trend is the SouthAfrican experience. While attracting foreign invest-ment has been important in South Africa, thecountry has not undertaken reforms under the cloudof a macroeconomic crisis, the public utility is inrelatively good health, and while finances are anissue, they are not as pressing as in some of the othercountries. Indeed, the additional political context forreforms—the post-apartheid transition and concernsof black empowerment—has created some space fordiscussion of reforms that support the social goals ofequity and empowerment. Most important, it hasenabled an explicit political commitment to socialissues—in particular, enhancing access to electric-ity—as central to reforms.

Using power sector reforms to attract capital hasnot had a sucessful track record. To attract private

capital, governments have paid a high price—financially unviable and politically undesirable deal-sweeteners. Moreover, a decline in available privatefinancing since 1997 calls into question whether,even with generous incentives, the electricity sector issufficiently attractive for the private sector. Structur-ing reforms only to attract finance may not be asustainable strategy.

THE POLITICS OF ELECTRICITYREFORM

With financial motivations the primary driver ofreform, other interests have not been well repre-sented, and the politics of reform in the countriesstudied have been largely exclusionary. There hasbeen little political space in reform debates to defineand articulate a public benefits perspective. Yet,reform processes have not been written on a blankslate. The legacy of past decisions, and latent butpotentially powerful political interests have alsoplayed a role in defining reform. This sectionexamines each of these themes in turn, and con-cludes with a discussion of whether and how a moreopen architecture could benefit the process ofelectricity reform.

The Actors Who Shaped Reform, andThose Who Were ExcludedThat the goal of reforms was narrowly defined asfinancial led to an orientation weighted to techno-crats. Moreover, a concern that interest groups couldpotentially hinder the smooth progress of reform leftlittle scope for the inclusion of outside voices.

In Argentina, a homegrown set of bureaucrats laidout the ground rules for reform along strict eco-nomic lines, and worked to implement this vision tothe exclusion of social factors. In India, internationalaid agencies played an important role in initiatingreform and in emphasizing privatization as a princi-pal goal. The details were worked out by internationalconsultants with technical experience in economic

159

WRI: POWER POLITICS

and institutional issues. In Bulgaria, a reconstitutedstate regulatory agency initially controlled the reformprocess, ignoring pressures from national actors andinternational donors. This situation was reversedonly with a change in government. In Ghana, controlover reforms rested with domestic bureaucrats, butChilean consultants provided key design insights.State technocrats maintained a tight focus on theproblem definition—institutional restructuring toensure financial health.

In some cases, the intervention of politiciansbroadened the scope and goals of the reform process.In South Africa, the active intervention of theMinister of Mines and Energy and the Minister ofPublic Enterprises was responsible for highlightingconcerns regarding access to electricity in reformdebates. In Indonesia, active oversight by the Minis-ter of Mines and Energy not only kept the process ontrack while he was in power, but also led to engage-ment with stakeholders through a series of regular“breakfast meetings.” In Bulgaria, the Parliament,assisted by the World Bank, raised concerns that aproposed energy law included an unjustified supplyorientation and insufficiently independent institu-tions. These few episodes suggest that the involve-ment of politicians, with a more direct finger on thenational pulse, may contribute to active considerationof public concerns.

However, the reform processes in the countrystudies were as notable for which groups were absentas for those that were present. The processes wereshaped by technocrats (and occasionally politicians)from energy agencies and finance ministries.Representatives with line authority for environmentor rural development were almost totally excluded. Itis startling that in six case studies, there was not asingle mention of a ministry of environment gettinga seat at the table. This absence is a further reflectionof the narrow focus of power sector reforms, and theperception that reforms are a technical matter withlittle scope for broader debate.

Equally, if not more startling, is that few nongovern-mental organization (NGO) voices emerged to partici-pate actively in the design of reforms, despite the

vibrant civil society in many countries studied here,and the worldwide growth in nongovernmentalorganizations. In Argentina, there was a completeabsence of civil society input during the reformprocess. In India and Indonesia, NGO activistsfocused almost exclusively on criticism of IPP projectsand the IPP policy, with only one or two groups ineach country engaged in the broader reform process.In Bulgaria, NGOs had limited success in injecting afocus on energy efficiency into reforms, until a changein political conditions created new opportunities.While international NGOs have been extremely activeand influential for over a decade in internationalenvironmental negotiations, few have made the linkbetween national reform processes and global environ-mental outcomes. The few exceptions—such as theefforts of Greenpeace to promote renewable energy inArgentina, an analysis of reforms in Indonesia by theWashington, D.C.-based NGO Bank InformationCenter, and a technical scenario analysis of theimpacts of reform on climate change by the PewCenter on Global Climate Change—have not beencentral to national reform processes.

It is startling that in six case studies, there

was not a single mention of a ministry of

environment getting a seat at the table.

This limited role of environmental or rural develop-ment interests—governmental or nongovernmental—suggests that power sector technocrats have success-fully reinforced the perception that reforms are atechnical issue, and that social and environmentalconcerns do not belong at the table. The constrainedspace for engagement has restricted efforts to changethis perception. Moreover, the limited capabilities andskills available among advocacy groups to express theirconcerns in the technical debates over reforms, or forthat matter among socially and environmentallyfocused government agencies, is an obstacle tobroadening the debate.

Finally, few private sector entities—whetherrepresenting traditional technologies or promoting

160

WRI: POWER POLITICS

renewable energy technologies—played a direct rolein shaping reforms. The one partial exception is thatof the Independent Power Producers Association ofIndia as a convening organization in the early stagesof reform. This lack of influence by corporate actorscontrasts with a direct role by energy companies,such as the part played by the Enron Corporation inthe United States, in shaping reforms to supporttheir comparative advantage (Wayne, 2000). The lackof a similar dynamic in the cases studied here maybe because there are few national corporationspositioned to benefit from reforms, and internationalcorporate actors have been inadequately placed toshape national processes.

Political Constraints in the ReformProcess

Technocrats have structured reforms as an exclusiveprocess because of a perception that the sector hasbeen prey to political capture in the past. And, indeed,the case studies offer some evidence to support thisperception. This section describes past politicalpressures in the sector and the congealed institutionalinterests around past policies. It examines how bothhave constrained current reform efforts.

In all the countries studied, the difficulty of raisingor restructuring tariffs has proven to be the singlebiggest challenge to restoring the sector to ensure itsfinancial health. Past flawed policies to providepreferential prices to vote blocs have created well-mobilized interest groups, which can be a consider-able political obstacle to tariff changes. These groupsare not the ones most in need of concessional pricesbut are comparatively well off—such as large farmersin India and middle-class urban consumers.

Market reformers have argued that withdrawingsubsidies from relatively well-off populations would besocially just and would help the financial condition ofthe sector. They have urged politicians to carry outsuch reforms. Even if political obstacles were over-come, however, there are additional and very realpublic interest concerns about raising prices. In

Ghana, the real cost of electricity is amplified by afalling currency. Rising electricity prices form analarmingly large share of the budget of one vulnerablegroup—retirees—in Bulgaria. Electricity priced at thecost of supply—as market reforms aim to do—wouldprice many low-income groups out of the market. In areflection of these pressures, tariff increases have ledto popular uprisings in Argentina, India, Indonesia,Ghana, and South Africa. Recognizing that regressivetariffs were socially unsustainable, a subsequent set ofreforms in Argentina included a more equitablerestructuring of electricity tariffs. Since financialmotivations are central to reform, the politics of tariffincreases—which include the vested interests thatobstruct them and the vulnerable communities thatare in need of support—are central to the success ofany reform approach.

The difficulty of raising or restructuring tariffs

has proven to be the single biggest challenge to

restoring the sector to ensure its financial

health.

That the electric power sector provided consider-able scope for political patronage is well supported bythe case studies. Evidence of corruption in theallocation of contracts in Indonesia; the use of a largeEnergy Resource Fund free of public oversight toallocate funds to political allies in Bulgaria; andmanipulation of prices in India to serve vote blocs alldemonstrate the entanglement of the sector in self-serving politics. The costs in terms of efficiency andthe public interest were considerable.

Political manipulations within the sector havecreated institutional interests around past policies,which in turn have been obstacles to reform. InIndia, politicians are reaping the bitter fruit of pastpopulist policies, as farmers successfully opposereversal of a long-standing policy of concessional orfree electricity for agriculture. In Ghana, a long-termcontract for power with a giant aluminum smelterhas been a sticking point for reforms.

161

WRI: POWER POLITICS

Tariff increases have led to popular uprisings

in Argentina, India, Indonesia, Ghana, and

South Africa.

A decade of preferential concessions to Indepen-dent Power Producers (IPPs), particularly throughover-generous power purchase agreements, is one ofthe most damaging legacies of past policies. In India,IPPs became a route to attract private capital withoutaddressing the politically thorny institutional prob-lems at the heart of the sector, and raised concernsover the process by which contracts were negotiated.In Indonesia, the introduction of 27 IPPs providedfertile ground for the growth of corruption and graft.In both countries, flawed IPP projects led to abroader cynicism about the role of the private sector.Subsequent privatization efforts may well be con-taminated by the taint of this decade-long debacle.IPPs have also cast a shadow over the economics ofreform. Financial sweeteners provided to attract IPPslocked public utilities into unviable contractualobligations, which have proved an obstacle to morefundamental reforms, and in particular toprivatization. While these problems were mostmanifest in Asia, the push toward increasing capacitythrough IPPs in Bulgaria and Ghana suffered fromsome of the same flaws.

Existing public utilities have exercised a consider-able drag on reform processes in several countries.In these cases, it is difficult to separate bureaucraticinterests from often credible arguments that thedeath knell has been prematurely sounded for thepublic utilities model, despite a track record ofsuccess. In Ghana, the Volta River Authority (VRA)has strenuously fought efforts at integration into apost-reform sector, arguing that it has been a profit-able utility for four decades. VRA’s critics havecountered that profits are based on its privilegedposition as a quasi-enclave, and that the generalpopulace—much of which has no access to electric-ity—has benefited little from VRA’s profitable status.By contrast, while South Africa’s dominant utility,Eskom, has also benefited from some preferential

treatment, it can point to a credible track record ofexpanding access to electricity to rural areas.Whether or not their arguments were valid, efforts toovercome resistance from existing utilities and thebureaucracies that run them have influenced thereform process.

Since public utilities have traditionally been largeemployers, labor unions have been a potent politicalforce in opposing reforms. In Indonesia, the publicutility’s union challenged reforms as unconstitu-tional. In Bulgaria, reforms were met with anorganized campaign of opposition. While the utilitiesmay indeed be inefficiently over-staffed—as in India,where employment in the sector is a means ofpatronage—labor concerns are a legitimate issue. Inboth Argentina and Bolivia, labor unions won a sharein the equity of privatized state enterprises, demon-strating the potential for political compromise. InSouth Korea, labor unions began a promisingdialogue with environmentalists. Although theyfailed to come up with a shared platform, the twogroups managed to substantially narrow theirdifferences. Whether through the need for accommo-dation, or through the creation of new alliances,organized labor will continue to shape the politicalcontext for reform.

Open versus Closed Political Process?The introduction to this study discussed the relativemerits of a quick and stealthy approach to reformversus one based on an open process aimed atbuilding a social consensus. This section revisits thisdiscussion in light of the country studies.

In most countries, there was limited public consul-tation built into the reform process. Argentina, theearliest reformer among those considered here, isalso the one that was most exclusive. In Indonesia,the Asian Development Bank sought to establish aconsultation process with civil society groups.However, this effort faced obstacles, both because ofNGO reluctance to participate in a donor fundedprogram, and because NGOs felt the consultationwould occur only after many decisions had already

162

WRI: POWER POLITICS

been made. A similar concern was reported aboutthe consultation effort in India. While bureaucratsand donors pointed to a good-faith effort at engagingconsumer organizations and NGOs during state-levelreforms, those consulted felt that they were beinginformed of decisions after the fact in an effort towin their support, rather than having their opinionssolicited. Only in South Africa have reforms arguablygone through a broad-based consultation process,with stakeholders invited to submit their views at theearly goal-defining stage. The narrow range of actorsinvolved, combined with limited consultation,suggest that most countries have followed the quickand stealthy approach to reforms.

The cases provide circumstantial evidence that

building a social consensus around reforms

may strengthen outcomes and their political

viability.

Since reforms are still underway in many of thecountries studied here, the information required toevaluate the stealthy versus the consultative approachis necessarily incomplete. In Argentina, the earliestreformer of those studied, a closed process certainlyresulted in rapid implementation of a reformblueprint. However, Argentina later had to revisitseveral decisions in an effort to address social issues;this suggests that the closed approach failed toincorporate significant public concerns. In India, aclosed approach led to a cycle of institutional reformin one state, Orissa, but the benefits and politicalviability of the model are in doubt. In Indonesia,Bulgaria, and Ghana, reform processes have beenslow to develop and have been bogged down in localpolitical processes. South Africa provides a partialexample of a more open approach, but one that is ina preliminary stage. Perhaps most intriguing is theCalifornia experience, where a broad range ofstakeholders was deeply engaged in the details of thereform process. For some, the subsequent problemswere due to unwise efforts to pander to specialinterests, while others suggest the failure was caused

by unrealistic assumptions at the outset. Hence, thecountry cases do not demonstrate the success of theclosed approach, nor do they provide sufficientevidence to fully endorse a more open politics ofreform.

While not conclusive, the cases do provide circum-stantial evidence that building a social consensusaround reforms may strengthen outcomes and theirpolitical viability. First, reforms in the power sectorare unlikely to lead to immediate and demonstrablebenefits to the public. In India, for example, reformsin the state of Orissa resulted in tariff increases, butfew immediate improvements in service. In Argen-tina, service quality did improve, but benefits wereweighted toward the well-off. For reforms to winlong-term political support, a good case can be madethat the polity must buy into a vision for the sector,which requires a consensus-driven approach.

Second, the need for political consensus is evenmore evident when tariff increases are an issue. InGhana, increases by the government led to consider-able protest and a rapid reversal of tariff hikes, whilesimilar increases by a more credible independentagency won popular acceptance. To the extent thatconsultation is an important ingredient in credibility,this example reinforces the value of a more openprocess. Finally, an exclusive process aimed atavoiding capture by past vested interests is open tocapture by the new wielders of authority. In Bulgaria,for example, the state agency charged with reform inthe late 1990s took on an increasingly authoritarianbent, defying national constituencies and interna-tional agencies alike.

Whether out of belief in its benefits, or becausepolicymakers are being subject to greater popularscrutiny, reform processes are increasingly open.Modifications to early reforms in Argentina wereinitiated in part by a wave of public dissatisfactionand because more attention was paid to the impactsof reform on the public. In India, a national electric-ity bill was circulated widely and debated morerobustly than a similar measure prepared five yearsearlier during the initial round of state-level reforms.The latest reformer, South Africa, has demonstrated

163

WRI: POWER POLITICS

far more effort at open debate and consultation thanhave countries that began earlier. Finally, this trend iscoincident with a growing normative consensus:open processes support democratic institutions,which over time are better able to represent the long-term interests of citizens.

THE ROLE OF DONOR AGENCIES

Donor agencies, led by the World Bank, have played asignificant part in reform efforts in several countries.The case study experience suggests that donors canplay a critical role in nudging countries towardmaking politically difficult decisions. At the sametime, for donors to control the direction of reforms isinappropriate and undermines creation of a nationalconsensus in support of reforms. The countryexamples also suggest that donors have made onlyhalf-hearted efforts at promoting attention to a publicbenefits agenda in the course of reforms, and havebeen hampered in their interventions in the sector bya past history that has weakened their reputation.

Multilateral donor agencies exercising their finan-cial leverage have been central to initiating reformsin a number of countries. For example, the WorldBank required India and Ghana to commit toinstitutional reform as a condition of loans for thepower sector. IMF conditionality associated with amacroeconomic crisis jump-started the reformprocess in Bulgaria and restarted a stalled process inIndonesia. In contrast, reforms in Argentina andSouth Africa were largely homegrown.

It is relevant to revisit here the distinction made inthe introduction between firmness in initiating areform process compared to the need for consensus-building around consolidation of reforms. Whiledonor agencies may have played an important role incutting through a domestic political morass ininitiating reforms, it is far less certain that a contin-ued heavy hand in consolidating reforms wasappropriate. In Ghana, the World Bank unsuccess-fully sought to impose a management contractapproach, one that it deemed most appropriate forAfrican countries at the time. This approach drew

from the experience of neighboring Cote d’Ivoire,where the World Bank urged greater involvement forthe private sector despite the lack of an appropriateregulatory framework. In Bulgaria, the IMF at-tempted to force a rigid adherence to tariff increases,without considering solutions to the resultant socialcosts and potential for political upheaval. In India,the World Bank implemented a model based onprivatization of state utilities to stem fiscal losses. Incontrast to donor intervention in Ghana and Bul-garia, intervention in India was accompanied by askillful process of building borrower ownership forthe approach advocated by the World Bank. Thisownership was limited to state bureaucrats, however,and did not extend to the broader population.However skillful the input, the current imperfectstate of knowledge of the viability of market-ledreforms, and the importance of tailoring reformprocesses to local economic and political conditions,calls for a less-directive approach by donor agencies.

Conditionality has proved effective at initiat-

ing reforms, but a more subtle strategy of

engagement with borrower countries has been

more useful in the design and consolidation

stages.

On occasion, donor agencies use their analyticcapacity to make a case for how reforms can benefitthe public. The World Bank deserves credit forsupporting demand-side management componentsin India and Ghana, but this achievement is limitedby the failure to examine the underlying institutionaldisincentives to DSM in a post-reform sector. InIndia, the World Bank conducted the only study ofthe environmental effects of restructuring, but underpressure from the Ministry of Power limited its scopeto exclude questions central to the reform process,thereby restricting its utility. Other efforts were moreproductive. In Bulgaria, the World Bank’s “Energy-Environment Review” made the case for greaterefforts at end-use efficiency, challenging thegovernment’s self-serving orientation toward new

164

WRI: POWER POLITICS

sources of supply. This and similar studies proveduseful when a new government sought to revisit thetrajectory of reforms. In Ghana, the Danish govern-ment has been a keen supporter of efforts to promoterenewable energy.

These examples suggest that while conditionality isthe most obvious and blunt tool in the donor arsenal,it is not the only one. Conditionality has provedeffective at initiating reforms, but a more subtlestrategy of engagement with borrower countries hasbeen more useful in the design and consolidationstages. In Indonesia, well-timed research wasinfluential in shaping decisions about new genera-tion capacity. In India, numerous analyses helpedframe decisions about reform efforts. In SouthAfrica, faced with considerable suspicion of donorintervention, the World Bank has limited itself toproviding technical assistance on reform experiencesin other countries, an approach that was acknowl-edged to be useful. To the extent that these effortscrystallized decisions and informed debates, theycontributed to national processes of building aconsensus.

Donor agencies’ efforts are restricted by their weakreputation in many borrower countries. Due to adecade and more of structural adjustment policies,their intervention is associated with economichardship. In Bulgaria, for example, IMF policies havebeen associated with harsh price increases. InIndonesia, the Asian Development Bank (ADB)funded a process of public awareness and engage-ment in reforms. The effort faltered due to NGOreluctance to work with the ADB, an institution theyperceived not to be working in the interest of sustain-able development in the country.

Suspicions about donors have been worsened byindustrialized country efforts to promote the inter-ests of their own corporations. For example, inIndonesia, one arm of the U.S. government sought topromote a large U.S.-funded IPP even as an advisorsupported by its aid agency, USAID, cautionedagainst the project. In India, the U.S. governmenthas interceded on behalf of the Enron Corporation ona disputed project, despite the strong reservations

expressed by both internal critics and the WorldBank.

The credibility dilemma is illustrated by donorengagement with countries regarding IPPs. In bothIndia and Indonesia, the World Bank urged caution,and on occasion denounced particular projects instrong terms—an intervention that should reflectwell on the institution’s concern for the long-termhealth of the sector and for the public interest. At thesame time, the World Bank was using its leverage topromote more space for the private sector in eachcountry despite the lack of a suitable institutionalframework, which aroused the ire of its critics. Thus,while donor institutions may intervene in positiveways on occasion, these interventions tend to beovershadowed by the public perception that they arepursuing their own agenda. In the case of the powersector, this agenda was directed at creating a sectorthat could sustain private sector profit-making andrelease the public sector from the burden of poorlyfunctioning utilities. Civil society groups perceivedthe promotion of such an approach—without anexplicit articulation of how reforms served the publicinterest—as not in the national interest.

WHAT ROLE FOR PUBLIC BENEFITSIN REFORMS?

The country studies suggest that, with the possibleexception of South Africa, reforms were driven byattention to restoring financial health in the sectorthrough institutional restructuring and greaterinvolvement of the private sector. In South Africa, thegovernment made a political commitment to pro-mote social goals through reforms. Here, we summa-rize evidence to support the theme that whilerestoring financial health does automatically contrib-ute to a measure of socially and environmentallybeneficial outcomes, a laissez-faire approach by itselfis insufficient to incorporate attention to publicbenefits. Instead, once reforms are “locked in,” it ishard to retrofit them. For this reason, a politicalcommitment to sustainable development outcomes isnecessary if reforms are to actively promote publicbenefits.

165

WRI: POWER POLITICS

Public Benefits as Secondary toImplementing Reforms

Evidence from all the case studies suggests that, forreform advocates, ensuring a financially viable sectorwas the most relevant definition of the publicinterest. Certainly this viewpoint was the explicitstarting point of studies conducted in Bulgaria andIndia prior to reforms. Of the cases studied here,only the Argentine experience provides sufficientinformation to comment on the social and environ-mental outcomes of reforms.

In Argentina, while the quality of service didimprove on average, in many other ways the socialoutcomes were largely negative. The reform processled to a decline in access to electricity for low-incomeurban groups, as aggressive measures were taken todisconnect illegal consumers, with no mitigatingsteps to soften the social impact. Efforts to connectthe 10 percent of Argentina’s population in ruralareas without access to electricity services have beenlargely unsuccessful. Moreover, changes in electricityprices have had a regressive impact. While prices felloverall, large consumers enjoyed declines of up to 71percent, while prices charged to lower-income groupsremained essentially unchanged.

With regard to environmental benefits, reformadvocates believed that a more efficiently run sectorwas likely to be less environmentally burdensome.The evidence from Argentina partially substantiatesthis view. For example, transmission and distributionlosses fell from 27 percent to below 10 percent in thefive years after reform was initiated. In addition, thepromotion of natural gas plants over older thermalpower plants led to a net increase in the efficiency ofgeneration. At the same time, the new organizationof the sector considerably eroded incentives fordistributors to invest in energy efficiency. Efforts toinvest in renewable energy sources were largelyunsuccessful, in part because of poor politicalsupport.

The Argentine experience provides strong evidencethat social benefits, particularly equity goals, are notautomatically served by reform processes. On

environmental issues, the evidence reinforces thediscussion in Chapter 2, which suggested thatreforms may automatically lead to short-term gains,but may not signal a more sustainable long-termenergy future.

The Problem of “Lock-in”While achieving financial stability undoubtedlycontributes to the public interest, the country studiessuggest that this narrow approach also excludesconsideration of a broader definition of publicbenefits. This assessment has focused on access toelectricity services, considerations of equity, andpromotion of environmental sustainability. To theextent that these concerns were embraced in thecountries studied, they were seen as separable from,sequential to, and of lower priority than a successfulrestructuring and privatization of the sector.

A laissez-faire approach is insufficient to

incorporate attention to public benefits.

In Argentina, for example, the first round of tariffrestructuring was driven entirely by theoreticaleconomic criteria—such as requiring that pricesreflect the cost of supply—even though such rulesoften led to inequitable outcomes. Only much laterdid the Argentine government and its donors agreethat some deviation from market principles, includ-ing the possible use of cross-subsidies, was necessaryto ensure the public interest. In Ghana, despite lowlevels of access to electricity and an existing publiclyfunded effort to expand the grid, only late in thereform process was there any effort to bring privateparticipation together with a program of increasingaccess built around public funds. In Bulgaria, despitethe country’s agreement to greenhouse gas emissiontargets under the Kyoto Protocol, there was littleconsideration of this commitment while restructur-ing a sector that emitted 56 percent of the country’scarbon emissions.

166

WRI: POWER POLITICS

The case studies offer good reasons to doubt theviability of a sequential view of reforms and publicbenefits—one that argues for fixing the financialposition of the sector first and dealing with publicbenefits later. Specifically, technical, political, andinstitutional decisions are “locked in” so that currentdecisions constrain future choices. This rigidity canmake it hard to retrofit the sector to address publicbenefits once the framework for reforms is set.

Regulators approach their jobs based on the

strict separability of economic and environ-

mental decisions.

The IPP experience in Asia offers a good exampleof both technological and institutional lock-in. Inboth India and Indonesia, IPPs were invited toprovide new supply capacity, with no effort atassessing available supply options and their fullcosts. As a result, the sector was locked into tech-nologies chosen within the existing institutionalframework, which tended to favor large generatingplants. In addition, since large IPPs typically lockedpublic utilities into buying power whether it wasneeded or not, they were also a constraint on furtherinstitutional reform in the sector.

The creation of new regulatory institutions is animportant example of institutional lock-in. Theformal mandates of these regulators, the institutionalculture of regulatory agencies, and their expertise arerelevant to their approach to public benefits in thefuture. Although the evidence from the case studiesis thin, the experience in India clearly suggests thatthe enabling legislative framework does not empowerregulators to internalize environmental consider-ations. This mandate is further constricted byinternational economic consultants, who trainregulatory commissions to view their role in narrowterms as managing the tradeoff between profitabilityand short-term consumer interests. As a result,regulators approach their jobs based on the strictseparability of economic and environmental deci-sions. Moreover, regulators are trained to work

toward short-term goals. Once enshrined, these viewsare hard to change.

Finally, since reform is often the result of intensenegotiation among several interests, compromisesthat are made early in the process can constrain theopportunities for future outcomes resulting inpolitical lock-in. In the process of reforms, deals werestruck with existing utilities in South Africa andGhana, and with municipalities in South Africa. InIndia, arrangements with farmers are a likelycomponent of future reforms. If environmental andsocial interests are not at the table when thesecompromises are made, it may be difficult to renego-tiate them at a later date without jeopardizing afragile agreement. In Argentina, for example, anattempt at restructuring distribution tariffs in theinterests of equity has proved hard because ofpressure to maintain the sanctity of deals struck withprivate utilities at the time of privatization.

Social and Environmental BenefitsThe case studies provide a scattering of examples inwhich reforms have led to explicit efforts to embracea broader definition of public benefits. Where suchapproaches have been followed, they have been basedon financial motivations or a broader politicalimperative.

Efforts at promoting more efficient use of energyon the demand side were common to several coun-tries. Reformers facing severe financial constraintswere attracted to the view that greater efficiency oftenmore than pays for itself. The enormous scope forenergy efficiency uncovered by the crisis in Califor-nia, where energy is used far more efficiently than inmost developing countries, illustrates the potential ofthis approach. India, Ghana, and Bulgaria have allincluded attention to end-use energy efficiencyprograms as part of reforms, and the issue is animportant item in the South African reform debates.In Ghana, the idea that demand-side managementcould lower the impact of tariff hikes on the popula-tion and thereby dampen unrest was an importantmotivator. Similarly, in India, efforts to introduce

167

WRI: POWER POLITICS

more efficient use of electricity for agriculture werebased on expectations that if farmers could achievethe same ends with less electricity, they would be lessopposed to price increases.

Given the enormous potential benefits of end-useefficiency, substantially more focused attention tothis avenue seems warranted. Since tariff increasesare arguably the biggest stumbling block to thepolitical sustainability of reforms, countries wouldbenefit considerably from a sustained public cam-paign to increase efficiency of use across all con-sumer sectors. The programs in place do not demon-strate such a focus. Early efforts in India werelimited by an inappropriate context, and also bylimited political will from government bureaucratsand donors. In Bulgaria, where the scope for energyefficiency is enormous, progress has been slow untilrecently because greater end-use efficiency wouldhave undercut the planned program of supplyexpansion supported by the then-political leadership.

Finally, while isolated programs toward energyefficiency have been put in place, there has been littleeffort to understand how unbundling can presentchallenges to promoting demand-side manage-ment—largely due to increased transactions costs—and to taking ameliorative measures. Only in SouthAfrica has the debate been joined in consideration ofincentives and disincentives for end-use efficiency inreform design processes.

While expanding access to electricity services haslong been a focus of public policy in several countriesprior to reforms, the country studies show that thisconcern was seldom integrated into utility reform.There was little consideration of how privatizedutilities would contribute to greater access. Instead,public-led efforts at grid expansion typically contin-ued in parallel to sector reforms, as in Ghana andIndia. The lack of systematic efforts to integrateincreased electricity access with utility reform is asignificant failure of donors and governments.

The shift away from public monopoly did hold outthe possibility for involvement by a broader range ofmarket participants, and a few efforts to meet

access needs through creative decentralized solu-tions. In Ghana, a program that, in part, wasintended to stimulate short-term supply usingdiesel generators quickly became an opportunity topromote decentralized renewable energy systemsconnected to the grid. During the second phase ofreforms in Argentina, the government instituted aprogram to establish subsidized concessions forelectricity supply to dispersed populations; thesewould be auctioned based on the lowest subsidy bid.One component of the program funded by theGlobal Environment Facility and the World Bankaimed at using renewable energy technologies tomeet these needs. Despite a promising start, theproject has languished for want of political support.A similar effort in Chile to attract commercialparticipation in rural electrification has had moresuccess. This program has considerably expandedaccess, on occasion using off-grid renewable energytechnologies. Finally, Morocco’s successful experi-ence with a cooperative program between the stateutility, municipalities, and the private sector sug-gests that public monopolies can also developcreative programs for grid expansion.

The case studies suggest that social concerns

carry far more political weight in a national

context than do either local or international

environmental issues.

Donor agencies have often been in the lead inpromoting programs tied to public benefits objec-tives. Examples include the role of Danish aid inpromoting renewable energy in Ghana; GlobalEnvironment Facility support for Argentina’s ruralrenewable energy program; and USAID’s support forenergy efficiency in India. Yet, these programs haveoften been marginal to the main thrust of reforms,and have not been sufficiently knit into a broaderarticulation of the public interest. Without domesticpolitical support for the objectives that these pro-grams represent, they are prey to changes in nationalpolitical sentiment and trends in donor assistance.

168

WRI: POWER POLITICS

In all the case study countries, the shift to a moredecentralized, market-led approach has brought nobroad vision for future development of the sector, northe corresponding accountability for developing sucha vision. As the cases suggest, a post-reform sectorwill not substitute for such a vision. Problems leftinadequately addressed include several concernsrelated to the success of the reforms and the long-term public interest. Most significant is the absenceof a strategy with which to manage the tariff prob-lem—balancing the need to raise revenues againstthe need to mitigate harm to vulnerable populations.Similarly, neither the potential costs of global effortsto address climate change—such as pressures tolimit country emissions—nor opportunities, such aspossible new sources of finance, are factored intocurrent reform efforts.

TOWARD A PROGRESSIVE POLITICSOF ELECTRICITY REFORM

Integrating environmental and social benefits intopower sector reform in developing and transitioneconomies will continue to be a daunting challenge.Not only is reform technically complex, but thecombination of macroeconomic crisis, entrenchedpolitical interests, and the centrality of financescrowd out attention to environmental and socialfactors. Indeed, from among the cases discussedhere, there are few encouraging stories, and fewsuccesses on which to draw.

However, the country studies do offer insights intohow reform is currently shaped, and therefore intohow attention to the public interest can be reinsertedinto these processes. If there is one general lesson, itis that if public benefits are to receive attention, theymust be shifted closer to the mainstream of politicalconcerns that drive reform. There are several steps toachieving this objective.

1. Frame reform around the goals to beachieved in the sector.The first imperative is to widen the definition of theproblem that power sector reform is attempting tosolve. A narrow focus on institutional restructuringdriven by financial concerns is too restrictive topromote a sustainable development agenda. Admit-tedly, in a crisis context, there is little time, scope, orpatience for a wide-ranging discussion on publicpriorities. For this reason, the initiation of discussionover reform and its goals must occur well prior to theonset of a crisis. The most appropriate framing forinclusion of a public benefits agenda would beginwith an articulation of a future vision of the sectorconsistent with the services that a reformed sector isintended to provide. For example, if expandingaccess to electricity is a national priority, it is neces-sary to ensure that reforms promote and do notundermine progress toward this goal. While donoragencies often play a central role in initiating reform,they must step back during the process of defininggoals to allow a nationally driven vision of reform toemerge. This vision will likely vary to fit nationalcircumstances. To encourage a more visionaryapproach to reforms in the electric power sector:

Governments can:• reframe the goals of reform to encompass social

and environmental concerns and highlightsustainable development objectives;

• broaden participation within government toprovide a seat at the table to ministries chargedwith promoting environmental protection, ruraldevelopment, and poverty alleviation.

Donor agencies can:

• continue to provide funds conditional on evidenceof reform, but only if accompanied by domesticownership over the form and content of thosereforms;

• help governments to conduct analyses of the scopefor inclusion of public benefits concerns in areform process, recognizing that there is greaterspace for such analyses when governments are notfacing crisis situations.

169

WRI: POWER POLITICS

Civil society can:• develop a vision of a post-reform sector that

promotes sustainability, access to electricity, andequity in pricing;

• undertake a campaign of public outreach to buildsupport for a public benefits-oriented reformprocess.

2. Structure finance around reformgoals, rather than reform goals aroundfinance.Reform processes thus far have been propelled by adrive to attract capital, and reform goals have cateredto this end. Since protection of the public interest canrequire tradeoffs with opportunities for profit, reformprocesses must move beyond the imperative ofattracting capital at the expense of promoting otherobjectives. While this may seem a far-fetched notionin capital-constrained developing countries, the timemay now be opportune to change the terms on whichprivate capital enters a country.

Over the last decade, governments have attractedcapital by providing favorable terms and risk guaran-tees. Privatization, particularly of distribution, hasbeen based on the promise of tariff increases toensure a profit. These measures have not wonpopular backing, and, as a result, have not beenpolitically sustainable. The net result is that politicallyillegitimate guarantees of low risk and high returnhave not been socially sanctioned, and have provedephemeral. Indeed, overall trends in private financeto developing countries have gone down, likely inresponse to increased perceptions of risk. A broadervision of reform and a public consensus supportingthat vision could lower these risks. Private capitalmay be willing to accept more realistic financialreturns, if they are combined with less risk. Politicallegitimacy in a reform program, tied to some innova-tion in mechanisms for raising finance, may be amore promising route than tailoring reforms toshort-term profit horizons.

Moreover, some approaches to public benefits, suchas private promotion of decentralized power sources

for rural areas, can be financed through innovativefinancing models. Finally, it would be useful toexplore other avenues to bring additional resourcesto the sector to promote a public benefits agenda.The scope for exploiting flexible trading mechanismsunder the Kyoto Protocol offers one possible avenue.

While the argument above provides an alternativeroute to obtaining capital, there is no doubt thatmaintaining financial viability in the sector willcontinue to be a problem. Advocates who promotepublic benefits are likely to receive a more sympa-thetic hearing if they present their arguments infinancial terms. Specifically, it is necessary to con-front head-on the argument that revenues areinadequate to meet costs in many developing andtransition economies, and that any efforts at a publicbenefits agenda that require bearing a financialburden, while desirable, are unaffordable. Onceagain, end-use efficiency provides an importantexample of a cost-saving approach that also providessocial and environmental benefits. To encourage ashift in this direction:

Governments can:• seek to attract capital based on the lower risk

associated with a socially sanctioned and popularreform program.

Donor agencies can:

• reconsider their advocacy of reform designed toattract private capital using contractual riskmanagement instruments, in favor of reformdesigned to attract private capital on the basis ofrisk management through sound governance;

• help developing countries to complement existingfinancing by mobilizing alternative sources offinance to support sustainable development,including mitigation of global environmentalproblems.

Civil society can:

• conduct analysis that demonstrates the technicaland financial scope for incorporation of a publicbenefits agenda;

170

WRI: POWER POLITICS

• build international coalitions to influence thepolicies of external actors relevant to nationalpower sector reforms, particularly multilateraldonor agencies.

Private sector actors can:• direct investments to countries that signal a social

consensus around power sector reforms and acorresponding diminution of risk;

• develop innovative financing models to supportnational objectives for reform.

3. Support reform processes with asystem of sound governance.

An open-ended framing of reform will only reflectpublic concerns if it is supported by a robust processof debate and discussion. Hence, a third imperativeis to embed debate over power sector reforms in asound process of governance guided by transparency,openness, and participation. Such an approach ismore likely to provide the political space for articula-tion of a range of public concerns than has the closedprocess prevalent thus far. It is also more likely tobuild public consensus in support of reforms,making for a more politically sustainable process.

Technocrats who design reforms are correctlyfearful that open and transparent processes couldalso allow space for vested interests to underminethese reforms. While this is a danger, it is balancedby the likelihood that a more open process can helpbuild broader political support. While no single casestudy provides a convincing example of good gover-nance leading to inclusion of public benefits, there iscircumstantial evidence to support this link. Forexample, in India, the emergence of some open andtransparent regulatory agencies has spurred develop-ment of civil society capacity and action to participateeffectively in regulatory decisions. There is alsoevidence to suggest that lack of good governanceundermines public benefits. The opaque process bywhich IPPs were welcomed into Asia, leading to theerosion of public interest and confidence, is a case inpoint. To promote good governance in the sector:

Governments can:• design an open process of goal definition for

reform that includes space for meaningful publicconsultation and input early in the reform pro-cess;

• ensure that a post-reform sector builds in mecha-nisms for public feedback, consultation, andadjustment;

• create a legal framework for the independentoperation of electricity regulators supported byopenness to information and consultation.

Donor agencies can:• include requirements that decisionmaking be

based on practices of good governance;• support capacity building in civil society to enable

participation in reform decisions, and to play anoversight role in the governance of the sector.

Civil society can:• build advocacy strategies around a call for good

governance in the process of policy reform, tocomplement project advocacy;

• establish a long-term capacity to continuallymonitor and engage with regulatory institutions,which would ensure continued attention to publicbenefits in a post-reform sector.

4. Build political strategies to supportattention to a public benefits agenda.Finally, it is important that advocates of a sustainabledevelopment agenda strengthen political coalitions insupport of public benefits and counter those support-ing parochial interests. In particular, the case studiessuggest that social concerns carry far more politicalweight in a national context than do either local orinternational environmental issues. Efforts to exploitlinks between social and environmental agendaswould likely be a useful political approach.

For example, end-use energy efficiency promisesboth environmental and social gains, and is politi-cally resonant since it blunts the impact of tariffincreases. A campaign to place efforts at end-use

171

WRI: POWER POLITICS

efficiency at the center of reform could, therefore,win wide support from social advocates, environmen-talists, consumer groups, and industrialists. Advocat-ing a focus on access to electricity through environ-mentally sound technologies offers another example,albeit a less politically potent one. Since ruralpopulations are hard to mobilize, the scope to build abroad-based coalition for this issue is limited.Nonetheless, rural development practitioners,environmentalists, and emergent industries in therenewable energy arena could usefully join hands insupport of this approach. To achieve these outcomes:

Governments can:• emphasize attention to social and environmental

benefits as part of the mandate, capabilities, andculture of regulatory agencies, within a frameworkof goal-setting at the political level.

Donor agencies can:• be accountable for analyzing their own lending

operations for institutional reform to ensure aminimum “do-no-harm” standard, and to identifyopportunities to proactively promote publicbenefits;

• incorporate attention to public benefits as part oftheir advisory and technical work, including theuse of consultant expertise.

Civil society can:• develop national capacity to conduct advocacy

around both the politics and the technical dimen-sions of reform processes;

• use sound analysis to build national coalitions forpromotion of particular components of a publicbenefits agenda, drawing on an understanding oflocal politics;

• use international coalitions to draw links withissues of global concern, particularly globalclimate change;

• develop coalitions with private sector actors withan interest in sustainable energy futures.

Private sector actors can:• advocate policies that enable renewable energy

technologies and energy efficiency measures tocompete on a level footing with other supplyoptions;

• build coalitions with NGOs and other supportersof sustainable energy futures to win politicalsupport for these policies.

By focusing on financial health, reform in theelectric power sector has excluded a range of broaderconcerns also relevant to the public interest. In thisstudy, we have focused on the social and environ-mental concerns at stake in electricity reform. Wehave found that not only are they inadequatelyaddressed, but that socially and environmentallyundesirable trajectories can be “locked-in” throughtechnological, institutional, and financial decisionsmade now that constrain future choices. Conse-quently, social and environmental benefits need to beinternalized in reform-related decisionmaking.

To do so, the process by which reform goals aredefined, who participates in the reform process anddecisionmaking must change to embrace a moreconsensus-driven design. More complex processesbring with them greater risks of capture by specialinterests and failure due to a cacophony of voices.Yet, non-inclusive reforms of the electricity sectorthese reforms have not incorporated the breadth ofinterests that deserve a voice and have not yet shownthemselves to be sustainable—financially, socially, orenvironmentally. This study has suggested severalreasons to believe that a modified approach guidedby a vision of a socially and environmentally sustain-able electricity future may yield a more satisfyingoutcome.

REFERENCEWayne, Leslie. 2002. “Enron, Preaching Deregulation,

Worked the Statehouse Circuit.” New York Times.February 9.

173

WRI: POWER POLITICS

12

A B O U T T H E A U T H O R S

DANIEL BOUILLE is Vice President and Senior Researcher at the Institute for Energy Economics at theBariloche Foundation in Argentina, and an advisor to the Environmental Directorate at the Argentine ForeignAffairs Ministry. He is also a professor at the University of Buenos Aires, the Argentine Catholic University,and is involved with other degree granting programs. He has published on energy planning, sustainable energypolicies, greenhouse mitigation, and other environment and development related issues. He was the leadauthor of the Third Assessment Report of the Intergovernmental Panel on Climate Change working group onstabilizing greenhouse gases. Mr. Bouille received his postgraduate degree in Energy Economics from theUniversity of Cologne, Germany.

ALIX CLARK is an independent researcher on energy issues. Her work focuses on public energy research andoutreach and specifically on improving energy services for poor people. She coordinates a project on powersector reform and the public benefits imperative for the International Energy Initiative. She was previouslyprogramme leader for the markets and governance programme at the Energy Development Research Centre inCapetown, South Africa. She holds a masters degree in Economics from the University of Capetown.

DIMITAR DOUKOV is a Financial Analyst at the Center for Energy Efficiency—a non-governmental organiza-tion established in 1992. He was previously a Research Associate at the National Center for Regional Develop-ment & Housing Policy, Program Coordinator with ICMA/USAID and Head of Department at the BulgarianForeign Investment Agency. Mr. Doukov holds a Master’s Degree in Economics and Management of Industryfrom the University for National and World Economy, Sofia, Bulgaria.

NAVROZ K. DUBASH is a Senior Associate in the Institutions and Governance Program at the World Re-sources Institute. His work explores the impact of financial globalization on problems of environment anddevelopment as part of WRI’s International Financial Flows and the Environment (IFFE) project. He alsoworks on mechanisms for democratic global governance, and on local institutions for natural resource man-agement. Dr. Dubash holds Ph.D. and M.A. degrees in Energy and Resources from the University of Califor-nia, Berkeley.

HILDA DUBROVSKY is a Researcher at the Institute for Energy Economics at the Bariloche Foundation inArgentina. She is a Professor in the Economics of Electricity, and has participated in technical assistanceprojects related to the economic, regulatory, institutional and environmental aspects of the energy sector. Shebrings an international perspective to her work, both through her academic training and her experiencecoordinating the Electric Integration of South America Project (European Union and CIER). She holds apostgraduate degree in Economy and Energy Planning.

ISHMAEL EDJEKUMHENE is a Senior Projects Officer of the Kumasi Institute of Technology and environ-ment. His research interests focus on power sector reform, particularly the socio-economic impact of electricityprivatization; policy options for removing barriers to renewable energy technologies; and the Clean Develop-ment Mechanism. He has a Masters in Economics (Public Policy) from the University of Hull, UK.

ND_Power-back.pmd 6/18/2002, 10:37 AM173

174

WRI: POWER POLITICS

CRESCENCIA MAURER is a Senior Associate in the Institutions and Governance Program at the WorldResources Institute. Her areas of research include financial flows and the environment, public participation inenvironmental decision-making, and urban environmental problems in Latin America. Ms. Maurer holds amaster’s degree in environmental management from Duke University.

ELENA PETKOVA is a Senior Associate in the Institutions and Governance Program at the World ResourcesInstitute. Her work focuses on opening the political space for independent contribution to policy and publicaccess to information and participation in environmental decision-making. She directs the “Access Initiative” acollaborative project on environmental governance, and has also worked on climate change issues, decentrali-zation of natural resource management and local environmental action planning in Central and EasternEurope. She has a Ph.D. in the History of International Relations.

JULIA A. PHILPOTT is a Senior Associate in the Climate, Energy, and Pollution Program at the WorldResources Institute. Her research explores the implications of energy-related policies, private investment, andgovernance structures on sustainable development in developing countries. She also analyzes the globalclimate implications of private investment patterns in electricity and transport sectors worldwide. She holds aMaster of Science in Urban and Regional Planning from the University of Wisconsin, Madison.

SUDHIR CHELLA RAJAN is a Senior Scientist at Tellus Institute. His work focuses on the interactions amongsocial, political and technological issues relating to sustainable energy. He has a research background inmeteorology and air quality modeling, transportation and mobile sources, the technical and environmentalcharacteristics of energy technologies, rural energy systems, and power sector reform. Dr. Rajan holds a Ph.D.in Environmental Science and Engineering from the University of California, Los Angeles.

AGUS SARI is Executive Director of Pelangi, a non-profit, independent environmental think tank based inJakarta, Indonesia. He is also a member of the Electricity Restructuring Working Group, a roster member ofthe Asian Development Bank Inspection Panel, a member of the Scientific Steering Committee of the Institu-tional Dimension on Global Environmental Change Project of the International Human Dimension Program,and an Advisor to the Indonesian Delegation to Climate Change Negotiations and the Preparatory Committeefor the World Summit on Sustainable Development. He obtained his post-graduate degree in Energy andResources from the University of California, Berkeley.

FRANCES SEYMOUR is the Director of the Institutions and Governance Program at the World ResourcesInstitute. She directs projects on international financial flows and the environment, and sustainable develop-ment challenges in Southeast Asia. She also currently guides the Access Initiative, a global collaboration topromote respect for environmental procedural rights. She serves on the board of the International NGO Forumon Indonesian Development as well as on advisory committees for Human Rights Watch—Asia and theUniversity of North Carolina’s University Center for International Studies. She holds a masters degree fromthe Woodrow Wilson School at Princeton University, and a B.S. in Zoology from the University of NorthCarolina at Chapel Hill.

ND_Power-back.pmd 6/18/2002, 10:37 AM174

175

WRI: POWER POLITICS

World Resources Institute

The World Resources Institute is an environmental think tankthat goes beyond research to create practical ways to protect theEarth and improve people’s lives. Our mission is to movehuman society to live in ways that protect Earth’s environmentfor current and future generations.

Our program meets global challenges by using knowledge tocatalyze public and private action:

• To reverse damage to ecosystems. We protect the capacity ofecosystems to sustain life and prosperity.

• To expand participation in environmental decisions. Wecollaborate with partners worldwide to increase people’saccess to information and influence over decisions aboutnatural resources.

• To avert dangerous climate change. We promote public andprivate action to ensure a safe climate and sound worldeconomy.

• To increase prosperity while improving the environment. Wechallenge the private sector to grow by improving environ-mental and community well-being.

In all of its policy research and work with institutions, WRI triesto build bridges between ideas and action, meshing the insightsof scientific research, economic and institutional analyses, andpractical experience with the need for open and participatorydecision-making.

ND_Power-back.pmd 6/18/2002, 10:37 AM175