Financial Viability of Electricity Sectors in Sub-Saharan ...

Public Disclosure Authorized

Public Disclosure Authorized

Policy Research Working Paper

WPS7788 7788

Financial Viability of Electricity Sectors in Sub-Saharan Africa

Quasi-Fiscal Deficits and Hidden Costs

Chris Trimble Masami Kojima Ines Perez Arroyo Farah Mohammadzadeh

Public Disclosure Authorized

Public Disclosure Authorized

Energy and Extractives Global Practice Group August 2016

Policy Research Working Paper 7788

Abstract

This paper studies the financial viability of electricity sectors in 39 countries in Sub-Saharan Africa using an approach similar to that in an earlier study, the Africa Infrastructure Country Diagnostic. The quasi-fiscal deficit in each country is calculated under two scenarios: existing utility performance and benchmark utility performance. In the first scenario, only two countries have a financially viable electricity sector (the Seychelles and Uganda). Only 19 countries cover operating expenditures, while several countries lose in excess of US$0.25 per kilowatt-hour sold. Quasi-fiscal deficits average 1.5 percent of gross domestic product, and exceed 5 percent of gross domestic product in several countries. In this context, it will be difficult for utilities to maintain existing assets let alone facilitate the expansion needed to reach universal access goals. The

number of countries with a quasi-fiscal deficit below zero increases to 13 under the second scenario, and to 21 when oil price impacts are considered, indicating tariff increases may not be needed at benchmark performance in these cases. Combined network and collection losses on average represent a larger hidden cost and are less politically sensitive to address than underpricing, so could be a smart area for policy focus to reduce quasi-fiscal deficits. Underpricing remains an issue to address over the medium term, as service quality improves. With no changes in power mix, tariffs would need to increase by a median value of US$0.04 per kilowatt-hour sold at benchmark performance, representing a 24 percent increase on existing tariffs. Most countries have improved or maintained performance, and relatively few countries have had declining financial viability.

This paper is a product of the Energy and Extractives Global Practice Group. It is part of a larger effort by the World Bank to provide open access to its research and make a contribution to development policy discussions around the world. Policy Research Working Papers are also posted on the Web at . The authors may be contacted at ctrimble@.

The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent.

Produced by the Research Support Team

Financial Viability of Electricity Sectors in Sub-Saharan Africa

Quasi-Fiscal Deficits and Hidden Costs Chris Trimble, Masami Kojima,

Ines Perez Arroyo, and Farah Mohammadzadeh

Key words: cost of electricity service, electricity utilities, electricity tariffs, quasi-fiscal deficit, subsidies, reform, Sub-Saharan Africa JEL codes: H20, Q48, L94 Sector Board: Energy and Mining

Acknowledgements This study was authored by a team comprising Chris Trimble, Masami Kojima, Ines Perez Arroyo, Farah Mohammadzadeh, David Ganske, Rafael Ben, Jace Jeesun Han, and Robert Bacon. The work was carried out under the guidance of Lucio Monari and Meike van Ginneken. The team gratefully acknowledges peer review comments received from Vivien Foster, Pedro Antmann, Vladislav Vucetic, Mustafa Zakir Hussain, and Dany Vardi, all of the World Bank Group. Substantive advice was received from World Bank specialists providing input on capex model assumptions: Frederic Louis, Nicolas Sans, Atsumasa Sakai, and Debabrata Chattopadhyay. World Bank colleagues who provided input materials and data and helped review and validate the analysis are gratefully acknowledged: Alassane Agalassou, Sudeshna Banerjee, Manuel Berlengiero, Fabrice Bertholet, Lara Born, Daniel Camos Daurella, Moez Cherif, Issa Diaw, Raihan Elahi, Nash Fiifi Eyison, Erik Fernstrom, Stephan Garnier, Franklin Koffi S.W. Gbedey, Mbuso Gwafila, Mustafa Zakir Hussain, Joseph Mwelwa Kapika, Jan Friedrich Kappen, Rahul Kitchlu, Paivi Koljonen, Nataliya Kulichenko, Carol A. Litwin, Manuel Luengo, Alexis Lucien Emmanuel Madelain, Sunil W. Mathrani, Florentina Mutafungwa, Elvira Morella, Isabel Neto, Laurencia Karimi Njagi, Vonjy Miarintsoa Rakotondramanana, Silvia Martinez Romero, Kyran O'Sullivan, Jose Francisco Perez Caceres, Pedro Sanchez, Christopher Saunders, Gregory Scopelitis, Leopold Sedogo, Greshom Sichinga, Clemencia Torres de Mastle, Kenta Usui, Yussuf Uwamahoro, David Vilar, Vladislav Vucetic, Muhammad Abba Wakil, Amadou Mamadou Watt, and Samantha Witte. This work could not have been possible without financial support from the Africa Renewable Energy and Access Program (AFREA), part of the Energy Sector Management Assistance Program (ESMAP), which is gratefully acknowledged.

2

Contents

Abbreviations ................................................................................................................................................ 6 1 Context.................................................................................................................................................. 7 2 Approach and Methodology ............................................................................................................... 11

2.1 Approach..................................................................................................................................... 11 2.2 Methodology in the present study ............................................................................................. 12 2.3 Data sources and coverage ......................................................................................................... 14 2.4 Limitations due to approach and data gaps ............................................................................... 19 3 Characteristics of Electricity Sectors in Sub-Saharan Africa ............................................................... 23 3.1 Access.......................................................................................................................................... 23 3.2 Installed capacity and power mix ............................................................................................... 23 3.3 Power purchases......................................................................................................................... 24 3.4 Availability factors and reserve margins ..................................................................................... 25 3.5 Consumption............................................................................................................................... 25 3.6 Quality of service ........................................................................................................................ 26 4 Current cost of service, tariffs, and revenue ...................................................................................... 28 4.1 Current cost of electricity service ............................................................................................... 28 4.2 Comparison of costs and cash collected ..................................................................................... 29 4.3 Average electricity tariffs ............................................................................................................ 31 5 Quasi-fiscal deficits ............................................................................................................................. 35 5.1 Quasi-fiscal deficits under current performance ........................................................................ 35 5.2 Distribution of quasi-fiscal deficit between consumer categories ............................................. 37 5.3 Quasi-fiscal deficits under benchmark performance.................................................................. 38 6 Breakdown of quasi-fiscal deficits into hidden costs.......................................................................... 42 6.1 T&D losses................................................................................................................................... 43 6.2 Bill collection losses .................................................................................................................... 44 6.3 Utility staffing.............................................................................................................................. 45 6.4 Underpricing ............................................................................................................................... 48 6.5 Breakdown of regional quasi-fiscal deficits into hidden costs.................................................... 49 6.6 Other hidden costs...................................................................................................................... 50 7 Trend analysis ..................................................................................................................................... 52 7.1 Robustness of results in reference year ..................................................................................... 52 7.2 Comparison with AICD ................................................................................................................ 53 8 Sensitivity Analyses ............................................................................................................................. 56 8.1 Oil product prices........................................................................................................................ 56 8.2 Hydrology risk ............................................................................................................................. 58 8.3 Exchange rate risk ....................................................................................................................... 60 8.4 Discount rate............................................................................................................................... 62 9 Conclusions ......................................................................................................................................... 65 Annex 1: Notes on methodology ................................................................................................................ 69 A1.1 Methodology used in the AICD....................................................................................................... 69 A1.2 Financial statement data ................................................................................................................ 70

3

 ................
................

In order to avoid copyright disputes, this page is only a partial summary.

Google Online Preview   Download