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ASSESSING REGULATORY PERFORMANCE

IN SUB-SAHRAN AFRICAPerspectives from the African Electricity Regulator

Peer Review and Learning Network


Joseph KapikaManagement Program in Infrastructure Reform and Regulation

University of Cape Town

South African Economic Regulators ConferenceJohannesburg, 21 – 22August 2012


Presentation Outline

1. Context

2. African Electricity Regulator Peer Review

and Learning Network

(Peer Learning Network)

3. Insights from the Peer Learning Network

4. Conclusion


1. Sub-Saharan Africa Power Crisis

Technical

• Blackouts

• High tx and dx losses

Financial

• Low debt cover

• Low ROR

• Low creditworthiness

• Low self-financing ratios

• High employee to customer

ratios

• Under investment

Low access rates

• Below cost tariffs

• Low collections

• Lack of investment

• Poor governance arrangements

• Growing state budget deficits

• Poverty/affordability

• Politicisation

• Exogenous factors: oil prices, restricted

access to foreign capital, high interest

rates, high inflation

A result of…….

Adapted from Gratwick & Eberhard, 2008


1. Standard Model for Reform

• Corporatisation / commercialisation

• Enabling legislation

• Independent regulator

• Restructuring (unbundling)

• Divestiture (distribution / transmission)

• Competition (wholesale / retail)


1. Context - Hybrid Power Markets

Own

Gx IPPIPP

SINGLE BUYER

DISTRIBUTION

Cust Cust


1. Significant Challenges Remain

Challenges

• Power sector under

developed

• Electricity supply is often

unreliable

• Power costs are high

• Access to electricity is

low and unequal

(approx. 30% on

average)

Daunting figures!

• 7,000MW/annum

additional generation

capacity required

– Suppressed demand,

economic growth,

increasing access

• Investment needs

– $15Billion/annum (new

GX)

– $5Billion/annum (rehab.)

– $6Billion/annum (new DX)

Source: Eberhard, Rosnes et. al, 2011


Objectives

• Immediate

– To enhance leadership and management capability

among African electricity regulators

(Leading to increased credibility, transparency and

robustness of regulatory decisions)

• Medium term

– To enhance overall investment and development

outcomes through improved performance of

continent’s electricity infrastructure industry

2. African electricity regulator peer review & learning network


2. Peer Learning Network - Approach

Learning from peers in a collegial environment through the review of each others regulatory systems– Not a benchmarking or scorecard process. Emphasis is

on learning what works, what can be improved and what can be adapted

“…one way flow of information …replaced with fluid conversations amongst the members of the network. Questions refined issues reframed, solutions drawn and new directions charted from the advice of all the members of the network.”


2. Peer Learning Network – Experiential Learning

Testing implications

of concepts in new

situations

Formation of

abstract concepts

and generalisations

Observations and

reflections

Concrete experience

Adapted from Kolb and Kolb (2005)


2. Peer Learning Network – Participants

(Phase I)

Ghana

Kenya

Uganda

TanzaniaZambia

Namibia


2. Typical review process

• 5 CEOs visit 6th institution with support from MIR

• One week review

• In-depth discussions with– Minister

– Regulator Commissioners

– Regulator management & staff

– Utilities

– Private producers / investors

– Consumer groups

– Media practitioners

• Initial findings & recommendations presented to Commissioners, CEO and regulator management & staff

• Opportunity for subsequent institutional response & agreement on areas that could be improved

• Forthcoming book (January 2013)

• Follow-up actions from MIR (research, training, etc)


2. Evaluating Regulatory Systems

REGULATORY GOVERNANCE

Clarity of roles and functions

Legislative / legal design and

institutional arrangements of

regulatory system and

processes of decision making

REGULATORY SUBSTANCE

Content of regulation

-tariff setting methodologies and

practices

-technical and commercial

quality of service standards

-Pro-poor and increasing access

issues

Credibility, legitimacy and

transparency of regulatory

decisions

Quality and robustness of

regulatory decisions

Cost-effective, reliable infrastructure services, financial viability of utilities, attraction of new investments

REGULATORY IMPACT


3. Independence

• Decision making independence

– Enshrined in the legislation for all the six

regulators

– However, incidents of dismissals of

commissioners before their terms end

• Determined govts. can find legal means

• Law should be backed by commitment

• Financial and management independence

– Levy on sales

– Terms and conditions for staff


3. Transparency and Participation

• The Tanzanian example

– Government Consultative Council

– Consumer Consultative Council

• Sustained engagement with the public on

key regulatory matters

• Publication of decisions

• Open board meetings? Publication of

minutes?


3. Accountability

• Who regulates the regulator?

• Annual reporting

• Performance reviews by parliamentary

committee

• Regulatory impact assessments

• Appeals

– Specialised courts in East Africa


3. Planning and Procurement

• Has “fallen through the cracks”

• Who is in charge of

– Planning, allocation of new build between

SOEs and IPPs

– Timely procurement, negotiation, contracting

• Useful examples of legislating some of

these responsibilities – Kenya, Tanzania


3. Power Purchase Agreements

• At which stage should there be regulatory

involvement?

• Does project size matter?

• Regulator as observer at PPA

negotiations?

• Whatever the case regulatory role should

be meaningful in the approval process


3. Tariffs

• Most challenging (important) of all regulatory

matters

• Widespread use of rate-of-return

• Yet

– Utilities argue that awarded rates of return

insufficient

– Post award calculations even lower in some cases

• Asset values and depreciation

– Historical costs, replacement costs, modern

equivalent assets


3. Quality of Service and Reliability

• Generally remains unsatisfactory

• Technical standards developed and

publishsed

– But oversight and enforcement lacklustre

• Pointless to publish standards that cannot

be adhered to by utilities nor monitored

and enforced by regulators

• Most regulators unaware of extent to

which quality is poor or whether improving

or deteriorating


3. Pro-poor Regulation

• Regulators can do more

– Universal service obligations on utilities

– Connection targets

– Encourage provision of credit for new

connections

– Allow for new connections to be subsidised

– Incentivise utilities to use fit-for-purpose

technologies


4. Has Regulation Made a Difference?

• A cursory viewpoint

– Quality and reliability remains poor

– Prices uncompetitive and not cost related

– Financial viability of sector questionable

– Countries failing to attract IPPs

• But encouraging signs of progress

– Bold tariff decisions

– IPP developments in some countries (should be

emulated elsewhere)

– Impact of non-OECD countries on investment


4. Conclusion

• Power sector regulation in Sub-Saharan

Africa still in its formative stages

• Regulation has to be adapted to the reality

of the African context

• Peer Learning Network(s) provides one

avenue for achieving this


Research, training courses, consultancy

University of Cape Town

The Management Programme in Infrastructure

Reform & Regulation (MIR) is an emerging centre

of excellence and expertise in Africa. It is

committed to enhancing knowledge and capacity to

manage the reform and regulation of the electricity,

gas, telecommunications, water and transport

industries in support of sustainable development.


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