Roles of the Public and Private Sectors Lessons from Worldwide Experience in the Electric Power Sector

1. The World Bank Second Workshop on Infrastructure in East Asia and the Pacific: The Way Forward Roles of the Public and Private SectorsLessons from Worldwide Experiencein the Electric Power Sector John E. Besant-Jones Bali, Indonesia June 28-29 2004 Discussion Draft representing author’s views only

2. Main Themes of the Presentation • Main challenges for developing countries in financing power sector development • Meeting the challenges with privately owned and publicly owned electricity service providers • Government policies and role for reforming power sectors This presentation covers the following three themes

3. Main Challenges for Developing Countries in Financing Power Sector Development • Their huge investment needs for power supply • Reverse the recent severe decline in investor capacity and interest following prominent bad experiences • Competition from numerous other developing countries as well as industrialised countries for the remaining investors • A challenging global environment for attracting investment • Political, financial and institutional constraints to meeting the formidable priorities for attracting investors • Business as usual in the power sector is unsustainable • But reform yields uncertain benefits in the long term for substantial unavoidable costs in the short term

4. Main Challenges for Developing Countries in Financing Power Sector Development Rise and fall in private power investments in developing countries and East Asia 1990-2002 All developing countries East Asia Investments (US$ billions) Source: PPI Database World Bank

5. Main Challenges for Developing Countries in Financing Power Sector Development Developing countries face a challenging global environment for attracting investment Backlash against liberalization post-California Power Crisis The Millenium Development Goals Electri-city Devaluation concerns post-Argentina Crisis Climate Change: UNFCC, Kyoto protocol World Commission on Dams Report Greater concern about risk post-September 11 Withdrawal of energy investors from developing world (post-Enron)

6. Main Challenges for Developing Countries in Financing Power Sector Development • Legal framework for private investors • Consumer payment discipline and enforcement • Regulatory predictability - consider regulation by contract if regulatory independence not real • Administrative efficiency for approvals/licenses • Credible arbitration available for investors • Investment grade (country) credit rating for forex debt • Positive view of private investment by civil society • Commitment to new sector structure by key stakeholders • Good country ranking in Transparency Inter. Corruption Index Many formidable priorities for reviving power investor interest in developing countries Source: World Bank Survey of International Investors in the Power Sector (2002)

7. Meeting the challenges with private and public electricity service providers • Many countries have already brought some private investment into their power sectors • The private sector can deliver efficient investments and improved services under the right business incentives But: • Starting conditions in the sector are important for selecting roles of public and private sectors • Installing a predictable incentive framework for private service provision is challenging for many developing countries • Public financing is needed to leverage private risk capital in weak investment climates • Consequently, public-private partnerships may be the practical solution for these countries

8. Meeting the challenges with private and public electricity service providers Some developing countries have restructured, some haven’t Reform High Low

9. Meeting the challenges with private and public electricity service providers Latin American Model Divestiture plus structural reform with greenfield investment e.g. Argentina, Chile, Bolivia Two main approaches used by developing countries to bring in private investment • Increases sector investment • Improves sector performance • Spreads impact of shocks Asian Model Greenfield investment without structural reform e.g. Pakistan, Indonesia, Thailand • Increases sector investment • No performance improvement • Concentrates impact of shocks

10. Meeting the challenges with private and public electricity service providers Typical starting conditions under traditional power supply arrangements in developing countries • Electricity prices are below costs – politically sensitive • Poor governance of power suppliers – political interference in management, theft of electricity and property • Poor power supply - unreliable and inadequate for meeting the rapidly growing demand for electricity • Many households lack access to electricity – especially in countries with low per-capita incomes • State-owned power suppliers perform poorly both technically and financially -require credit support to raise finance

11. Meeting the challenges with private and public electricity service providers Private investors seek predictability and control of risks In power generation: • No serious distortions to market prices • Viable power purchasers • Ability to manage uncertainty in market price In power distribution and supply: • Predictably regulated electricity tariffs (multi-year tariff formula for transition period) • Purchased power costs beyond supplier’s control are passed through to retail tariffs • Allowed to disconnect non-payers • Regulated open access to transmission network

12. Meeting the challenges with private and public electricity service providers Main options for privateparticipation

13. Government Policies and Roles for Reforming Power Sectors Government policies and roles are important for reforming power sectors • Many critical policy issues for reforming power sectors • Valuable policy lessons learnt from experience with reforming power sectors to date • A key role in compensating for market failure in the power sector • Reforms need to be sequenced over a transition period that is full of short term political and economic risks

14. Government Policies and Roles for Reforming Power Sectors Governments face many critical policy issues for reforming power sectors • What business-enabling environment will be created in terms of legal, regulatory, and competitive frameworks? • What markets are being created? • What are the respective roles of private and public service providers? • Who will be responsible for network planning and selecting investments in unbundled sectors with public and private participation? • Who will finance investments, and how will their property rights be protected? • Whattransition path will be taken to the new governance arrangements? • Who will mitigate risks and manage trade-offs during the transition? • Who will be responsible for designing and implementing the reforms? • Howwill the resources needed to carry out reforms be mobilized? • Whenand how will stakeholders be consulted?

15. Government Policies and Roles for Reforming Power Sectors Valuable policy lessons learnt from experience with reforming power sectors to date • “Cookbook” solutions to reform should be avoided because starting conditions vary among countries • Competition, restructuring and privatisation are means to achieving reform goals, not ends in themselves • Competition in the power market is difficult to develop in the public interest. Best to start with limited forms • The form of the regulatory framework should produce predictability for private investors and operators • Sequencing of power sector reforms requires careful consideration to manage risks during the reform transition period • Need policy for post-reform long-term development of the sector in terms of industry and market structure, energy security, forex exposure, etc

16. Government Policies and Roles for Reforming Power Sectors Governments have a key role in compensating for market failure in the power sector • Regulate power markets where competition not developed as well as the networks (natural monopolies) • Mobilize financing of access costs to modern energy for the poor • Reduce barriers to market penetration for energy service providers and for promising new technologies (including some renewables) • Mitigate risks beyond the control of private investors and private risk insurers in supplying electricityservices: • Provide or arrange guarantees to mitigate political risks for investors • Provide limited performance undertakings on behalf of state-controlled enterprises for privately financed investments and concessions • Consider regulation by contract where regulatory independence is not credible, with multi-year tariff framework & ring-fencing of specific risks

17. Government Policies and Roles for Reforming Power Sectors Reforms need to be sequenced over a transition period that is full of short-term risks for government • Unanticipated events that can derail reform programmes • Opposition from losers under reform (subsidised consumers, utility employees, beneficiaries of corrupt procurement) • Opposition by society at large to privatizing an essential public service, especially to foreign parties • Difficulty in improving service quality needed to gain public acceptance for tariff increases needed for reform, and vice-versa • Mobilising the financing for the heavy costs of reform (debt restructuring, investments essential for restructuring) under strained public budgets • Expanding supply capacity to keep up with growing demand until the reformed sector can attract substantial risk capital • Maintaining political consensus through successive phases of the reform process over one or more electoral cycles

18. Lessons from Worldwide Experiencein the Electric Power Sector Thank You