addarrow-downarrow-outlinearrow-outline-downarrow-outline-leftarrow-outline-uparrow-upclosedownloadformat-pdfhelpinfoinfo-outlinelink-external-outlinesearchsource-handshakesource-klsource-web

Distribution

The last step in power delivery, distributing electricity from the transmission system into consumers’ homes, schools and businesses, is often cited as the weakest link in the power sector given its high susceptibility to disruptions and technical and commercial losses. As generation capacity and demand rise, electricity distribution will be further challenged, putting at risk the financially sustainability of the electricity utility and hampering economic development.

Distribution systems, especially those in developing countries, often require substantial investment to upgrade and extend current networks. Much of the assets to transfer electricity (overhead lines, cables, switchgear, transformers, control systems and meters) have long economic lives but require timely maintenance and upgrading in order to ensure long-term reliability and expansion of service.

Under the right circumstances, private investment and management in power distribution has proven to be effective in limiting power outages, reducing technical and commercial losses, and fostering expansion of coverage. Public-private partnerships (PPPs) can be an attractive option as they not only mobilize capital but use the private sector as an agent to modernize, improve efficiency and transfer technology.

PPPs in distribution frequently operate through a concession framework, encompassing all functions and obligations relating to distribution of electricity in a license area. The concessionaire is responsible for maintenance, operation and upgradation of the distribution network and for the supply of electricity to the regulated consumers. Under a typical distribution concession, the private entity takes over management of a power distribution utility, rehabilitates and extends the assets, manages the distribution of power to customers, and recoups its investments via user fees.  

Distribution PPPs run under concession have proven challenging to implement in developing countries with underperforming or financially unsustainable utilities. Such utilities are often too dysfunctional to structure any type of transaction where the private sector assumes investment risk. Under these circumstances, performance-based management contracts are an option to rehabilitate the utility and provide the necessary capacity building and skills and technology transfer. This, however, is contingent on strong support from the donor community to finance the initial investments and political commitment from governments to adhere by a set of good governance rules and strengthen the regulatory environment.

An example of this kind of contract would be a management contract, under which a private entity would manage (but not invest in) a government-owned power distribution company in exchange for compensation through annual payments from the government (rather than by selling power to customers). These management contracts can also serve as a mechanism to have the private manager implement a capital investment program funded by a third party (e.g. donor).

 

Issues

  • Regulation

    A successful distribution PPP requires a clear and stable regulatory framework that defines how investors in the network are going to receive remuneration, establishes a process for tariff setting, typically through an independent regulator,...

    A successful distribution PPP requires a clear and stable regulatory framework that defines how investors in the network are going to receive remuneration, establishes a process for tariff setting, typically through an independent regulator, and presents mechanisms to mitigate commercial losses. Distribution concessions that are viewed as successful by both public and private stakeholders will ultimately require cost-reflective tariffs, enforceable rights to disconnect non-paying customers, connection subsidies for the poor (and likely some form of cross-subsidization of tariffs), visible improvements in the quality and quantity of service, and some degree of protection for existing employees. Structuring concessions to deal with all of these issues requires a host of complex and sometimes expensive risk mitigation features.  

     

  • Political leadership

    While a solid regulatory framework is essential for the success of a distribution PPP, it means little without strong political leadership willing to adopt and enforce it. The inability or unwillingness of end-users to pay any tariff, let alone...

    While a solid regulatory framework is essential for the success of a distribution PPP, it means little without strong political leadership willing to adopt and enforce it. The inability or unwillingness of end-users to pay any tariff, let alone a cost-reflective tariff for these services, combined with the reluctance of regulators to allow such tariffs, poses a real challenge to fee enforcement and collection.

    Strong political support is required to enforce existing laws and, if necessary, approve new laws preventing theft. The government must be committed to enforce collections, disconnections (particularly for non-payment by government consumers), regulate tariff setting and create an environment conducive to run the utilities’ operations as a best practice regulated public service business. A good relationship between utilities and consumers is a powerful tool, and combined with broader, government led initiatives aimed at altering entrenched cultural perceptions of user fees, is key to reducing ongoing commercial losses.

    With regards to management contracts, strong political leadership and commitment in the government is needed to establish a properly functioning company board and to delegate full management authority to the management contract operator. There must be a firm commitment from the government to provide budgetary support to cover operating costs when utilities do not break-even through increasing revenues and reducing costs.

     
  • Asset quality

    Electricity distribution concessions in developing countries are challenging because the concessionaire must rehabilitate and extend distribution networks that are typically in poor condition due to lack of maintenance and/or upgrading. This...

    Electricity distribution concessions in developing countries are challenging because the concessionaire must rehabilitate and extend distribution networks that are typically in poor condition due to lack of maintenance and/or upgrading. This risk is often compounded by the lack of reliable information about the condition of assets and the nature of the customer base (who the customers are, where they are located, which ones pay their bills, etc.). In some cases, private partners sign concession contracts and agree to restore distribution assets to good working condition, only to find that the deterioration was much worse than originally estimated. As a result, rehabilitation can become so expensive that these costs cannot be recovered during the operation of the facility over the normal concession contract lifespan.  

    To guard against these risks, contracts can include mechanisms to ensure that private partners are compensated for undepreciated asset values at the end of the concession period. That said, however, in many developing countries, potential private partners often question the willingness or ability of governments to make good on such long-term commitments.  

     

Tools & Guidance

    • 2005
    • PA Government Services Inc.

    Improving Power Distribution Company Operations to Accelerate Power Sector Reform

    This handbook is targeted to help emerging market utility managers plan for improving overall operational performance. Given the potentially limitless scope of such a topic, for practicality we have narrowed the discussion to two primary areas 1) organizational and planning frameworks for operational reform and 2) concrete actions utilities can take in four interrelated operational areas. 

    • 2011
    • Ministry of Finance, Government of India
    • Government of India

    PPP Toolkit for Improving PPP Decision-Making Processes: Bhiwandi Electricity Distribution Franchisee

    The worsening power deficit scenario in Maharashtra warranted immediate action on the part of the Maharashtra State Electricity Distribution Company Limited (MSEDCL). Since the gestation period for addition of generation capacity is long, MSEDCL decided to focus on load-side energy management and utilise the savings thereof to curtail the growing deficit to some extent. MSEDCL also decided to bring in private sector expertise for increasing efficiencies in the distribution system in certain selected circles (networks) through a distribution franchising arrangement. The Electricity Act 2003 allows the holder of a distribution licence to contract out some or all of the distribution activities to a franchisee. The distribution franchise...

    • 2001
    • Asian Development Bank (ADB)

    Developing Best Practices for Promoting Private Sector Investment in Infrastructure: Power

    This five-volume set presents the findings of an ADB regional technical assistance study which developed sector-specific best practices for promoting private sector participation in key infrastructure sectors in ADB's developing member countries. The best practices cover the role of government, institutional reform, strategic planning, legal and regulatory frameworks, unbundling and competition, contractual arrangements, sources of financing, and the allocation of risk. This volume examines the optimum approaches for achieving benefits for consumers of electricity through power sector restructuring, unbundling, the introduction of competition, and privatization.  

Projects & Case Studies

    • 2009
    • World Bank Group (WBG), International Finance Corporation (IFC)

    Albania: Privatization of Electricity Distribution

    In March 2009 IFC concluded its second infrastructure transaction in Albania: the privatization of Kesh, the national electricity company. The Czech Republic’s Cez Group was selected as the winning bidder for the acquisition of 76 percent of the shares of the electricity distribution business for an equivalent of US$125 million.

    • 2012
    • Leonardo Mendonça Oliveira de Queiroz
    • George Washington University

    Assessing the Overall Performance of Brazilian Electric Distribution Companies

    This paper explores the possibility of developing an overall performance index to assess the performance of power distribution companies. In this paper, performance is seen as a broader concept than the traditional quality of supply, embracing the requirements of consumers and Brazilian legislation in relation to the service provided by power distribution companies. The main goal of this study is to provide useful information and to start a discussion about the possibilities of developing an overall index. Thus, further work would certainly be necessary to complete the development of such index. A secondary goal is to present the Brazilian regulation related to the performance of companies in terms of service.

    • 2013
    • USAID

    Engaging the Private Sector in Liberia's Electricity Future

    With the assistance of the International Finance Corporation (IFC), the Government of Liberia awarded a five-year management contract for the Liberia Electricity Corporation (LEC) to Manitoba Hydro International (MHI) of Canada in 2010. With the support of donors, including USAID, Norway, the World Bank and the European Union, the contract aims to rebuild the electricity system in Monrovia and significantly expand access to electricity while improving the operational and financial performance of LEC. One boost to improving collections and increasing connections is the introduction of pre-paid metering. As many literate, educated people fled the country during the war, an ongoing challenge is building the local capacity necessary to...

    • 2013
    • International Finance Corporation (IFC)

    Kosovo: Electricity Distribution

    Brief on IFC's PPP advisory support to the government of Kosovo in the privatization of KEDS, the state-owned power distribution company.

Lessons & Analysis

    • 2009
    • Katharina Gassner, Alexander Popov, Nataliya Pushak
    • World Bank Group (WBG), PPIAF

    Does Private Sector Participation Improve Performance in Electricity and Water Distribution?

    • 2003
    • Tonci Bakovic, Bernard Tenenbaum and Fiona Woolf
    • World Bank Group (WBG)

    Regulation by Contract: A New Way to Privatize Electricity Distribution?

    In many developing countries, both governments and investors have expressed disappointment with the performance of recently privatized electricity distribution companies. This paper examines whether regulation by contract or a combination of regulation by contract and regulatory independence would provide a better regulatory system for developing countries that wish to privatize some or all of their distribution systems. It compares and contrasts some recent regulatory experiences of distribution companies in Latin America and India.

    • 2014
    • International Finance Corporation (IFC)

    Handshake Issue #13: Power & PPPs

    Handshake Issue #13, Power PPPs focuses on public-private partnerships in the power sector and brings diverse expert voices together to discuss how to increase access to energy in emerging markets. Features on hydropower and renewables, alongside in-depth looks at Africa and Latin America, provide a fresh analysis of one of today's most important and rapidly evolving sectors.

    • 2010
    • IFC
    • International Finance Corporation (IFC)

    Liberia Electricity Corp.

    Infrastructure Advisory Success Stories

    For the first time after almost 20 years of almost no electricity, the 1.5 million citizens of Monrovia will be able to look forward to increasingly available commercial power services thanks to a management-contract set up with the assistance of IFC and a group of international donors.

Explore Sectors