Business News of Mon, 17 Jul 20179
ECG privatisation useful - IMANI
This study seeks to measure the success of reforms in electricity distribution for Ghana, Uganda and India and then extrapolate based on the findings, potential gains to Ghana from incorporating private participation into the distribution of electricity.
The general assumption is that, the long term concession model that Ghana purports to adopt in the reform of electricity distribution has been applied by Uganda and India (Delhi). Therefore, the successes or otherwise of this reform strategy as observed in these countries may be similar to what Ghana may experience. The study is in three main parts;
Measuring the current success of reforms in electricity distribution for Ghana, Uganda and India
Analysis and discussion of findings
Further, the concentration of ownership gives rise to market power which could potentially erode efficiency therefore the smaller the market share of each player, the better for the realization of efficiency gains. To foster competition, other key requirements are to open up access to transmission and distribution networks either through regulated or negotiated third party access and to ensure that rules for allocation of transmission charges, congestion pricing and arrangements for financing of transmission network are well laid out.
Degree of marginal cost based tariff: A key to efficiency in the electricity sector is that tariffs must reflect the true cost of power generation and must tend to marginal costs in the long run where there are no supernormal profits. However in most developing countries, government offers generous subsidies to make electricity affordable which causes tariffs to deviate from marginal costs. The greater the degree of subsidies, the more difficult it is for reforms to work in the short term. In view of this, reforms must target the removal of subsidies since welfare gains by those who benefit from removal of subsidy is usually greater than the welfare loss to consumers who would have enjoyed subsidy (Joskow, 2004). The ratio of actual tariff and marginal cost could be an important indicator for measuring reforms (Newbery, 2002).
Degree of sustainability of reforms: Bhattacharyya (2007) develops a framework for measuring the sustainability of reforms. This framework hinges on political acceptability of the reform process, social desirability, ability to implement, being environmentally benign, economically efficient and financially viable.
Degree of technical efficiency: The focus here is to ascertain the efficiency of operating capital assets which have a direct impact on the costs of power generation and distribution. This can be done using parameters such as plant load factor, capacity factor, fuel efficiency, labour productivity and in the case of distribution the Pivotal Supply Index (PSI).
This indicator revealed that, significant improvement is required by Ghana in terms of private ownership, operation and maintenance of distribution infrastructure/assets.
To curb the problems of low operational efficiency, poor reliability, high transmission and distribution losses and poor financial & commercial performance, electricity distribution in Uganda was ceded on concession to Umeme, a private company, for 20 years.
After 11 years, Umeme reports that it has cumulatively invested over US$500 million in electricity distribution infrastructure and succeeded in doubling the infrastructure. This has improved electricity supply infrastructure in Uganda doubling the capacity from approximately 38.60MW in 2008 to 76.20MW in 2016.
Although the overall private ownership of distribution in India requires improvement, Delhi stands out as a success story in electricity distribution. Private distribution improved electricity supply in Delhi of India whose electricity distribution was formerly highly inefficient and of poor quality. After restructuring of the sector, three privately owned companies, specifically Tata Power Delhi Distribution Limited (TPDDL) took over electricity distribution via a 25 year Renew Operate and Transfer (ROT) concession and investment in infrastructure increased by approximately 350% between 2002 and 2016.
Ghana performed poorly on this indicator and requires significant improvement.
It has been noted that concentration of ownership gives rise to market power which has the potential to erode efficiency gains to be derived from introducing competition and presents the opportunity to impact and manipulate tariffs.
The situation is exacerbated when this ownership of the distribution market is wholly placed under a single company such as ECG. As proceeds from Jamasb (2004) that the smaller the market share of each player the better the efficiency, it is in the interest of the country that ECG be broken into smaller companies in order to introduce competition which would result in increased operational inefficiencies.
Further, by splitting the company into smaller units, the market power of ECG would be significantly reduced and hence the power to impact & manipulate tariff will be reduced. This will help in reducing the pass-through of unacceptable operational inefficiencies to consumers as high tariffs. Private participation may further be introduced into the divided entities formed out of ECG.
Ghana may increase labor productivity by continuous capacity building via training and skills development. India offers online courses (https://indiaskills.nsdcindia.org/) for skills development along with certifications for its people interested in employment in the electricity distribution sector. Regulated private sector institutions may be set-up for skills development courses in Ghana to reach out to its citizens either through online courses or through training centers across Ghana including for courses in electricity distribution.
Recommendations & Conclusions
This study sought to measure the success of reforms in electricity distribution for Ghana, Uganda and India and to extrapolate based on the findings the perceived successes and benefits that may accrue to Ghana in the pursuit of privatization of electricity distribution.
It finds that India has been most successful in reforming electricity distribution and both India and Uganda have enjoyed efficiency gains from introducing private participation into distribution. Given that the intended PSP for Ghana takes a similar form as that adopted in Uganda and India (Delhi), the study extrapolates that Ghana stands to enjoy chiefly efficiency gains proceeding from increased capital investments in electricity distribution, reduction in energy losses (technical and commercial) and system reliability, revenue growth, improvements in revenue collection rate, and improvements in labor productivity.
The study makes the following recommendations:
To improve electricity access to rural areas, it may be useful to further open up distribution to private sector players able and willing to supply electricity to rural areas
To improve distribution efficiency, tariffs must tend to marginal costs. The government must critically consider the formulation and implementation of a strategic plan to progressively remove subsidies to foster efficiency in electricity distribution
One of the things that greatly facilitated the turnaround of the electricity distribution sector in Delhi was the governmental support the private companies enjoyed including:
A five year transitional period where government provided data and ensured appropriate market conditions Capping of the serviceable liabilities transferred from the predecessor utility (Delhi Vidyut Board, DVB) to the private companies such that the private companies started business with a clean balance sheet
The extension of a 14-year, 14% (with 4 years’ moratorium on interest and principal repayment) loan to each private company
A government guaranteed return on equity of 16% for the private party so that the private companies were able to preclude tariff shocks during the transition period The government of Ghana may consider lending such support to the PSP process
It is interesting to note that in the reform of electricity distribution in Delhi, a tri-partite agreement involving the Government, the predecessor utility (DVB) and the Workers’ Union ensured that;
No employee of the predecessor utility will be retrenched on account of being declared redundant or on account of restructuring
All existing employees will be absorbed by the successor companies
The terms and conditions of service upon transfer to the private entities to succeed the predecessor utility (DVB) will be guaranteed to continue without change and warranted modification will only be undertaken after negotiations and settlement with recognized unions and associations without reduction to existing benefits.
To assuage the fears of the employees of the Electricity Company of Ghana and thereby create buy in for the introduction of PSP into electricity distribution, the government of Ghana may consider structuring a similar agreement. It may also consider establishing a program for continuous capacity development for the workers of ECG.
This report was authored by IMANI’s Barbara Maame Esi Andoh and draws inspiration from a study tour report of India and Uganda by IMANI’s Maud Martei in 2014. For interviews, please call Barbara Andoh on 0302 972 939 or 0554 309 966.
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