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).