ghana power sector - eca uk
TRANSCRIPT
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ECONOMIC CONSULTING ASSOCIATES LIMITED41 Lonsdale Road London NW6 6RA UKtel +44 (0)20 7604 4545 / fax +44 (0)20 7604 4547www.eca-uk.com
1 (C) 2003. Economic Consulting Associates Ltd
Ghana Power Sector
Review of Reform ProgrammeRay Tomkins (ECA)
Workshop on 7 February 2003, Accra
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2 (C) 2003. Economic Consulting Associates Ltd
Aims andScope
ECA’s consulting assignment:
Assist the Government of Ghana(GoG) to take stock of the powersector reform measures to dateAdvise on further development ofinstitutional reformsScope:
analysis of power sector restricted toreview of previous documents and 1week visitWe were not required to carry out anynew analysis of performance
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3 (C) 2003. Economic Consulting Associates Ltd
DriversforChange
Increase access to electricityImprove efficiency to keep pricesas low as possible
Increase management effectiveness andaccountabilityPromote private sector investment:
to help meet financing requirement for thegrowth, including electrificationattract private investors while minimising thefuture requirement for GoG guarantees
This needs a more modern structure forthe industry, a market, and a strongregulatory framework
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4 (C) 2003. Economic Consulting Associates Ltd
Status ofreformprogramme
Create 5 distribution concessions (Distco),privatise
Not done
1997 reform proposal Indicative time
Large consumers. Rationalise and establishbasis for bilateral contracts with IPPs
EC considering newdefinition of eligibleconsumers
VRA - unbundling into 4 main activities VRA has started somework on separatingaccounts
ECG set up a holding company for 5DistCos
Not done
Establish separated activities as businessunits
Not done
Put in place performance contracts for ECGand VRA
Not done
Establish regulators and regulatoryframework
2 regulators established with2 acts, limited developmentof regulatory framework
Issue regulations and technical rules for thegrid and creation of wholesale market
Not done
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5 (C) 2003. Economic Consulting Associates Ltd
Creating a Wholesale Market
CentralMarketFunctions
Balancing Market
TSO
Disco
G IPPs G
VRA
DiscoDistCosEligible
Consumers
Eligible ConsumersFranchise
Consumers
Hydro
Imports/Exports
Regulated Market Non-Regulated Market
G
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6 (C) 2003. Economic Consulting Associates Ltd
CurrentSituation
VRA is the main producer andbuyer of electricity, as well asoperator of the transmissionsystem
VRA is a dominant market player,this is a potential barrier tocompetition and marketdevelopment
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7 (C) 2003. Economic Consulting Associates Ltd
What is aMarket?
An electricity market is defined by:
Who are the sellersWho are the buyersHow they trade
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8 (C) 2003. Economic Consulting Associates Ltd
Optionsfor Sellers
Sellers in Ghana will be VRA (hydroplant, and thermal plant), importers,new hydro and private thermal IPPsShort term competition is notpossible with current generationconfiguration
too few power plants to operate a pool
Ghana is too risky for ‘merchantpower plantsCompetition might be possible in 10years
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9 (C) 2003. Economic Consulting Associates Ltd
Optionsfor Buyers
Must be creditworthy ...... to be able to guaranteefinancing for IPP (15 yearbankable projects)The Tico project developed byCMS is reported to have a highROE due to perceived riskThree potential buyers for privatelyfinanced power :
VRALarge customersDistribution companies
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10 (C) 2003. Economic Consulting Associates Ltd
1.VRA asOfftaker
If VRA procured future thermalpower plants…VRA’s current role as singlebuyer/seller would continueindefinitelyVRA is the most creditable buyer,but investors likely to continue toseek government guaranteesThis is the single buyermarket modelNeed to kick-start the market
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11 (C) 2003. Economic Consulting Associates Ltd
2.LargeConsumersasOfftakers
Private participants should haveopen access to the transmissionnetwork at fair and cost-reflectivepricesVRA as transmission owner mustbe regulated:
Transmission charges must be cost-reflectiveNo discrimination between usersPURC should ensure transmission chargesdo not over-recover costsone option is full unbundling of VRAanother option is the accounting separationof VRA with third party access (TPA)
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12 (C) 2003. Economic Consulting Associates Ltd
Market Model: Bilateral Contracts withBalancing Market
CentralMarketFunctions Balancing
Market
TSO
Disco
G IPPs G
VRA
DiscoDistCosEligible
Consumers
Eligible Consumers
FranchiseConsumers
Hydro
Imports/Exports
Regulated Market Non-Regulated Market
G
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13 (C) 2003. Economic Consulting Associates Ltd
IsUnbundlingof VRANecessary?
Full unbundling of VRA wouldensure ‘level playing field’ for IPPsWhy not unbundle VRAimmediately?
cost of restructuring would be highstill not certain that IPPs would come
First step should be:Accounting separation and functionalseparation of system operatorCreation of market rules and grid codeStrong regulation
If this fails, move rapidly tocomplete unbundling
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14 (C) 2003. Economic Consulting Associates Ltd
EligibleConsumers
Large consumers meeting the criteria(5 MW) for eligibility in theunregulated marketEnergy Commission is considering achange of eligible customerdefinitionWhat is most important is thepercentage share of the marketopened to competition and thenumber of customersWill the eligible customers be largeenough to support financing of nextgeneration plant?
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15 (C) 2003. Economic Consulting Associates Ltd
TradingArrangements(MarketRules)
Competition in this market is forbilateral contractsA potential new entrant must aimto deliver lower average pricesthan those from VRAIssue: VRA currently has thebenefit of the existing hydrogeneration and could under-cut anew thermal plantResult: VRA ends up building nextthermal plant even though IPP’splant could have been cheaper
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16 (C) 2003. Economic Consulting Associates Ltd
CompetitionforContractsand Cost ofGeneration
VRA currently sells at a bundled priceThe hydro is priced at financial cost - low costthermal plant is high costBut VRA’s price would be lower than IPPs
One possibility is:all contracts including hydro (other than VALCo)priced at no less than LRMChydro-based contract offered to IPPs and largecustomersoffer different wholesale tariffsthe windfall profit on hydro could be applied torural electrification or transmission investments
Problem: it could raise pricesOpportunity: but offset by recyclingthe windfall profitBenefit: IPPs can compete with VRA onequal terms
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17 (C) 2003. Economic Consulting Associates Ltd
Contracts Require Balancing
Shortfall
Spill
Shortfall
An IPP and theset of largecustomers theysupply can neverexactly matchthe generationto the load.
VRA must supplythe balancingservice andrecover its costs(part of marketrules)
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18 (C) 2003. Economic Consulting Associates Ltd
3.DistCos asOfftakers
Could DistCos to be one of theprinciple offtakers?Might not be viewed as strongcreditable counter parties by IPPs
ECG is facing major challenges , eglosses, revenue collection etcmanagement strength is key factorStrong requirement for regulation ofpower procurement at least costHorizontal unbundling into severalcompanies is more likely to weaken thedistribution companies as buyers
Market model: ‘multiple’ singlebuyers
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19 (C) 2003. Economic Consulting Associates Ltd
WayForward
Create opportunity for largeconsumers to contract with IPPsThis would require
non-discriminatory transmission pricesand fair accessprovision of balancing marketmust be able to compete against VRAon fair basis
Strengthen DistCos so theybecome credible counter-parties infutureLonger term there areopportunities in the regionalmarket (WAPP)
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20 (C) 2003. Economic Consulting Associates Ltd
GenerationIssues
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21 (C) 2003. Economic Consulting Associates Ltd
Introduction
Who willbuild thenextthermalplant?
VRA is facing almost no reservesIn 2000, system has 1250 MW ofcapacity with generating capabilityof 7960 GWh compared to arequirement of 1380 MW and8340 GWh of energyEven after building of T2 energywill still be constrained by waterGoG wants private sectorparticipation, however problemshave occurred with CMS projectThe AES project has notprogressed
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22 (C) 2003. Economic Consulting Associates Ltd
Competitionin ElectricityMarkets
3 arenas:between existing generators fordispatch in the short term (‘pool’)for long term contracts betweengenerators and large customersfor new entry between investors
Short term - difficult due to smallnumber of plants and highlypredictable merit orderLong term bilateral marketrequires competing wholesalesuppliers and eligible customers
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23 (C) 2003. Economic Consulting Associates Ltd
Competitionin a ‘pool’
Now:not possible
in 10 years:maybepossible
Average cost c/kWh
2
1
0
1
2
3
4
5
6
7
8
9
0 200 400 600 800 1000 1200 1400 1600
Akosombo
Kpong
Nangbeto
Tako
Tico
Load
Average cost c/kWh
2
1
0
1
2
3
4
5
6
7
8
9
0 500 1000 1500 2000 2500 3000
AkosomboKpongNangbetoNew 1New 2New 3New 4TakoNew 5New 6New 7TicoNew 8Load
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24 (C) 2003. Economic Consulting Associates Ltd
Options forCreatingCompetitionfor BilateralContracts
Privatisation of Takodari 1New ImportsNew thermal power plantscontracted to parties other thanVRAVRA required to contract some oftheir capacity to independentwholesale suppliers (VIPPs)
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25 (C) 2003. Economic Consulting Associates Ltd
NewGeneration
Preferred option is newIPPs/eligible customersRequires effective TPA (access)Single buyer model has failed inseveral countriesIf VRA procures an IPP, shouldpursue an open competitivetender approachWhy should VRA be the ‘producerof last resort’?… because it is dominantgenerator
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26 (C) 2003. Economic Consulting Associates Ltd
TransmissionIssues
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27 (C) 2003. Economic Consulting Associates Ltd
Transmission Open Access is criticalBilateral contract market is thepreferred option, therefore TPA isessentialMust establish an independentSystem Operator (functionalunbundling)Transmission (wires business) canstay with generationAccounting separation is difficultto achieve, therefore toughregulation is essential
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28 (C) 2003. Economic Consulting Associates Ltd
TransmissionPrices
High transmission charges woulddiscourage new IPPsIn other countries, integratedutilities try to load their costs ontotransmission chargesVRA benchmark of 0.9c/kWh ishigh (but not highest) compared toother countriesPURC should approve majorinvestments in advanceWheeling charge is only half butcustomer pays total 0.9Calculation must be transparent
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29 (C) 2003. Economic Consulting Associates Ltd
TransmissionAccess
Conditions for fair open access:
Legal access rightPlanning (intentions of thirdparties to be considered)Congestion management rulesSystem operation and ancillaryservicesPublic announcement of networkcapacities and availabilityIndependent governance of rules(technical and market rules)
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30 (C) 2003. Economic Consulting Associates Ltd
Responsibilityfor planning
VRA currently has responsibilityIndicative planning must be donecentrally even in a marketThe SO should assumeresponsibility
security of supplyregular and transparent planningtransmission investments subject toapprovalRegulator/GoG to instruct VRA to carryout investment if there is a shortage ofIPP capacity
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31 (C) 2003. Economic Consulting Associates Ltd
VRA’s Role inthe NewMarketArrangements
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32 (C) 2003. Economic Consulting Associates Ltd
CurrentSituation
VRA is the main producer andsingle buyer of electricity
VRA owns the hydro capacity andTakoradi 1 thermal power plantVRA buys power from Takoradi 2 undera PPA with CMS EnergyVRA buys imports from CIEVRA owns the transmission system andoffers bulk electricity for sale at bundledpricesVRA has a small distribution activityVRA has non-core activities
VRA is the dominant playerIn the medium term, VRA will befully unbundled
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33 (C) 2003. Economic Consulting Associates Ltd
Generation Short term:Focus on hydro investmentsRole in thermal generation shouldbe restricted:
support development of markets byproviding balancing servicesprevented from under-pricing hydro
Principal buyer for competitivelytendered thermal power projects(only if instructed by government)Act as supplier of last resortLonger term: divest thermal plant
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34 (C) 2003. Economic Consulting Associates Ltd
Transmissionand SystemOperation
Implement accounting separationFunctional separation of SOTransmission assets continue to beowned by VRAVRA’s transmission function shouldthen be strongly regulated
pricesaccess
SO should operate systemaccording to technical and marketrulesLong term: could divesttransmission
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35 (C) 2003. Economic Consulting Associates Ltd
Distribution There is no strong reason for VRAto retain a role in distribution(through NED)The future of NED should beconsidered along with therestructuring of ECG
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36 (C) 2003. Economic Consulting Associates Ltd
Gas VRA has taken a role indevelopment of WAGPAs a principal buyer of gas it islikely to be involved in theguaranteeing of the gas purchaseNo strong justification for VRA tobe involved in gas supplyMust fully separate gas activitiesfrom power generationPURC to ensure IPPs are offeredgas on non-discriminatory terms
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37 (C) 2003. Economic Consulting Associates Ltd
DistributionIssues:DistributionRestructuring,Tariffs andElectrification
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38 (C) 2003. Economic Consulting Associates Ltd
CurrentSituation
Two entities, ECG and NEDLarge customers can, in theory,choose supplierSome management areas toimprove: losses, collections etcShortage of investmentWhat is agreed?PSP can help improve:
management performancecapital for network expansionestablish distcos as creditworthy buyers
Some re-organisation of ECGneeded
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39 (C) 2003. Economic Consulting Associates Ltd
How ManyCompanies?
Advantage of 1 Distco is:the avoidance of major restructuringfinancial strength and ability to cross-subsidise
Advantages of more than 1 Distco:presence of more than 1 investordifferentiation between urban and ruralareas (create focused RE entity)management closer to ‘problem’
ECG proposes several businessunits with management autonomyIssue: Restructure first? = delayOpportunity: Attract privatepartner to assist with restructuring
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40 (C) 2003. Economic Consulting Associates Ltd
AttractingPrivateOperators
To attract strong private sectorparticipant should be 1 or 2separate companies, ie largercompaniesPrivate sector can help, butwhich way?What form of private sectorparticipation (PSP)?
Management contractStrategic investor (eg 25% of shares)ConcessionFull privatisation
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41 (C) 2003. Economic Consulting Associates Ltd
ManagementContractsandStrategicInvestors
Opportunities for managementstrengthening - bring in privateoperator (utility, not consultant)But many well-known problemswith some management contractsDesign contract very carefully -good incentivesMany options:
Performance based incentive contractManagement contractor not allowed tobe investorFirst select Strategic Investor (SI), thenrequire them to do managementcontract for 3 years
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42 (C) 2003. Economic Consulting Associates Ltd
OnePossibleApproach
Select SI, grant option to buy 25%in 3 yearsImmediately must undertakemanagement contract, steps:
year 1, service contract to reorganiseyear 2, performance based contractyear 3, allowed to buy shares at optionprice subject to satisfactory performanceof management contract
How many DistCos? 2 DistCos:1 focused on existing urban andindustrial customers, commercialoperation, no subsidies1 on RE, focused output-based subsidiesfor investment and to cover lifeline tariff
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43 (C) 2003. Economic Consulting Associates Ltd
Tariffs Major constraint of low tariffs hasbeen substantially removed:
PURC has a transitional plan for tariffincreasesIn 2003 tariff levels will be raised byapproximately 11% and reviewedadjustment mechanism to take accountof fuel prices and inflation, but needsimprovingTariffs do not cover electrificationinvestment requirement
Lifeline block is too low to coveroperating costs in some areasNeed targeted subsidy tocompensate utility for lifeline tariff
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44 (C) 2003. Economic Consulting Associates Ltd
RuralElectrification
RE should be a key part of reformprocessRE has generally been implemented byexternal fundsRE has not been strongly supportedA benefit of stronger RE would be tomake reform more acceptableNeed focused RE entityTargeted subsidies for capital
subsidies should be transparentif necessary, also for lifeline tariff block
Issue: What form should RE entity be:an independent funda utility with RE focus
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45 (C) 2003. Economic Consulting Associates Ltd
Regulation and SectorManagement
Licensing
Board
Management Committee
Issuing licenses
Amending licences
Legal services
Tariffs
Tariff rules
Price approvals
Economic analysis
Financial analysis
Regulation
Monitoring
Enforcement
Disputes
Industry codes
Admin
Finance
Public Relations
IT, computers
Human Relations
Market supervision
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46 (C) 2003. Economic Consulting Associates Ltd
RegulatoryRisk
Strong regulatory frameworkrequired to implement a marketWhy 2 regulatory bodies? Is 2better than 1?Split of regulation between twobodies weakens rather thanstrengthens regulationMain concerns for privateinvestors:
Split of regulatory function increasesregulatory risklack of independenceinadequate dispute resolutionprocedures
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47 (C) 2003. Economic Consulting Associates Ltd
Roles ofRegulators
The differences:Energy Commission (EC) notindependent, arm of governmentPURC independentEC focuses on advice to Minister,plans, resource utilisation,technical issuesPURC focuses on fair play betweenutilities and consumers, prices andcompetition = the marketTherefore functions requiringindependent regulation andbalance between participantsshould be done by PURC
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48 (C) 2003. Economic Consulting Associates Ltd
RegulatoryFunctions
Roles of the MOE, PURC and ECneed to be clarified andrationalisedPolicy making and advice,responsibility of the MOELicensing, continue to be carriedout by the Commission for now,although PURC could assume thisrole in future
PURC may need to use licensing toenforce competition in the market
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49 (C) 2003. Economic Consulting Associates Ltd
FunctionsofRegulation
Technical standards - ECCustomer service quality standards- PURCTechnical standards ofperformance - ECTariffs - PURCPromotion of indigenous resourcesand network development - ECOversight of the development ofthe market and competition -PURCTechnical rules (‘grid code’) - ECMarket rules - PURC
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50 (C) 2003. Economic Consulting Associates Ltd
Independence Independence is necessary toprotect interest of consumers andproducersPrivate investors want to seeregulators make independentdecisionsKey conditions for sufficientmeasure of regulatoryindependence:
terms for appointment and dismissalterms for funding of the organisationPURC needs a source of independentfunding
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51 (C) 2003. Economic Consulting Associates Ltd
WeakeningofRegulatoryFramework
PURC’s functions include the setting of tariffs,the promotion of competition and themonitoring of standards of performance.Limitations include:
standards of performance overlapbetween PURC and ECPURC does not have power to setstandardsremoval or suspension of licence canonly be recommended to ECPURC must set uniform tariff but doesnot have the power to create financialmechanism to compensate loss ofrevenues to distribution areas(subsidies)
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52 (C) 2003. Economic Consulting Associates Ltd
DisputeResolution
Energy Commission Act:disputes in relation to licensing referredas a complaint to the MinisterMinister’s decision may be challengedin court
Public Utilities RegulatoryCommission Act
Complaints initially submitted to PURCPURC determines own procedures forinvestigating complaintsNo provision for appeal or disputeagainst the decisions of PURC
Need mediation and arbitrationsteps
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53 (C) 2003. Economic Consulting Associates Ltd
KeyIssues forDiscussion
Restructuring of VRAWhat criteria to apply for success (ofgradualist approach) or failure (henceneed to fully unbundle)
Restructuring of distributiontransitional management contract, thenStrategic Investor, ordirect to Strategic Investor
If more than one DistCo, how to definetheir territory, size and role
Regulationwhich steps to strengthen the regulatoryframework?
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ECONOMIC CONSULTING ASSOCIATES LIMITED41 Lonsdale Road London NW6 6RA UKtel +44 (0)20 7604 4545 / fax +44 (0)20 7604 4547www.eca-uk.com
54 (C) 2003. Economic Consulting Associates Ltd
Ghana Power Sector
Review of Reform ProgrammeRay Tomkins (ECA)
Workshop on 7 February 2003, Accra
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55 (C) 2003. Economic Consulting Associates Ltd
Privatisation Sale of all or some of the equity to aprivate investorAdvantages
kick start the reform processimprove creditworthiness of distributionclear governance situationcreates strongest incentives forefficiency improvements
Disadvantageslittle experience of privatisation in Africacurrent climate among internationalinvestors is weakno certainty that a privatisationtransaction would succeed todayprice for assets would be lower than ifdistcos were in a stronger shape
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56 (C) 2003. Economic Consulting Associates Ltd
ConcessionsConcession can be viewed asbeing positioned between amanagement contract andprivatisationAdvantages
some investment risk immediatelytransferredimprove credit-worthiness ofdistributioninnovative benefit sharing formulations
Disadvantagessimilar uncertainties to those withprivatisationhard to adjust the concession contractlaterdispute riskinsufficient interest