KEEPING THE LIGHTS ON – Workable and unworkable approaches to electricity sector reform (WWG implementation series #5)

electricity high wireTwo decades ago, when I was working on utility sector reform we knew the answer. Here (using the example of electricity) is what it was: unbundle generation, transmission and distribution; introduce an independent regulator; rebalance prices; privatize. Two decades later, we have learned the stark limits of orchestrating reforms on the basis of ‘best practice’ blueprints such as these.

What would a more ‘with the grain’ approach to electricity sector reform look like? To explore this, I asked my Johns Hopkins SAIS and University of Cape Town students to review how a variety of country efforts unfolded in practice – focusing specifically on efforts to introduce private sector participation into electricity generation. Some striking patterns emerged.  Here I contrast South Africa’s experience with those of Kenya, Peru and Lebanon. The former illustrates powerfully the hazards of ‘best practice’ reforms;  the latter point to the promise of  more  incremental, cumulative, with the grain approaches.

In 1997, an official South African report signaled that in 2008 the lights would go out if there was no new investment in electricity generation; the report proposed that the country embark on a far-reaching effort to implement the ‘best practices’ template for electricity sector reform, constraining the dominant parastatal, ESKOM, and turning to the private sector for new investment in electricity generation. In 1998, the government adopted the report’s recommendations. In her richly-researched Masters dissertation (available on the link that follows), Nchimunya Hamukoma detailed what happened next.

Contestation over the agenda among competing factions within the ruling African National Congress and its allies interacted with a hugely-ambitious reform design — one for which almost none of the requisite political, institutional, economic and organizational capabilities were in place. The result was that after six futile years of trying, the effort at restructuring and private participation was abandoned, and ESKOM was given a green light to invest in new capacity. But the six lost years – the result of futilely pursuing an unachievable ‘best practice’ chimera – had an inevitable consequence. In 2008, as predicted, the lights went out.

Kenya, Lebanon and Peru pursued very different reform paths than South Africa. And all have been able to supplement generation capacity via private investment. Here in very brief summary (with links to more detailed papers by my SAIS students) is what happened:

  • In Kenya, initial efforts in the late 1990s to introduce independent power producers were mired in the usual Kenyan controversies of corruption and insider dealing. But, as Joshua Moraczewski details restructuring also resulted in the emergence of strong technical capacity in both the Energy Regulatory Commission and the restructured Kenya Power and Light Company (KPLC). (KPLC remained state-owned, but now focused exclusively on electricity transmission and distribution.) These capabilities underpinned a series of follow-on initiatives. As of 2015, Kenya had successfully attracted 695 MW of private power (making it a leader in Africa), via a process that had come to be regarded as competitive, transparent and effective.
  • By contrast, Peru’s initial reforms were far-reaching. In response to endemic supply shortfalls and brown-outs, then President Alberto  Fujimori used dictatorial powers to undertake a comprehensive unbundling and privatization of its state-controlled utility sector. These reforms failed to attract private investment in new capacity, and in 2001 Fujimori was forced from office. But the reforms had created an island of technical capability within the electricity regulator, OSINERG. – and, as Kayla Renz shows in her paper, when subsequent democratically elected governments moved to attract new independent power producers, OSINERG had the skills that (paralleling Kenya) underpinned a transparent and competitive bid process. The result was entry and investment by over a dozen new private providers, and an additional 2,100 MW of new capacity since 2009.
  • Lebanon is hardly an obvious example of electricity success.  in a fascinating case study, one of my students noted that as of 2014 it was ranked by the World Economic Forum as the second-worst country in the world for the quality of electricity supply. But in 2014, the city of Zahle, the fourth largest city in Lebanon, had had enough – and moved to contract with a private operator to provide new electricity capacity, and integrate it seamlessly with the haphazard public supply. Private generators already on the scene strongly opposed the initiative – and communicated their views by blockading roads, issuing death threats, and vandalizing the facilities of the newly-contracted operator. But a determined coalition of local civic, political and business leaders held firm, winning the support of citizens with a skillful media campaign. As of late 2015, Zahle became the first jurisdiction in the country to provide 24 hour electricity to its residents, with prices 40 percent below those that had prevailed prior to the initiative.

For all of the very large differences between the above three reform experiences, considered together they offer a key insight into what can make ‘with the grain’ reforms successful. The underlying logic was laid out by Daniel Carpenter in his influential discussion of public entrepreneurship. Key is the interaction between two sets of variables:

BUILDING INTERNAL CAPABILITY <=>  NURTURING EXTERNAL ALLIANCES

In different ways, the Kenyan, Lebanese and Peruvian experiences all illustrate the essentials of this formula. In all cases, reform champions began early in the process of change to cultivate internal capacity around an organizational focal point of excellence with strong internal capabilities. In all cases, these capabilities increasingly were recognized beyond the organization itself. And in all cases, external allies (sometimes the private sector, sometimes donors, and sometimes political actors eager to build a reputation for effectiveness) provided a buttress of support that enabled the technically-capable leaders to consolidate their initiatives. (Interestingly, South Africa’s successful post-2011 initiative to contract for over 5,000 MW of wind and solar electricity generation from independent power providers offers a further illustration of the ‘with the grain’ formula at work.)

In sum, a with-the-grain approach directs attention to two questions for reformers of utilities and other public agencies seeking to foster change in ‘messy’ governance settings:

  • Do the proposed reforms facilitate the emergence of a focal point of strong organizational capability, committed to effective performance over the long term? And
  • Does the change process empower external allies, ready to support the organizational champion, and the process of change more broadly?

Viewed from the perspective of technocratic ‘best practice’, these questions are very much secondary to the ‘hard’ challenges of getting the engineering, economic and accountability blueprints right. But viewed from a with-the-grain perspective, they are crucial — not only as guideposts for what to prioritize in initiating change, but also for sustaining the momentum of change over the long haul.

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