International Experience with Distribution Ownership Options in Developing Countries

Executive Summary 

India’s electricity distribution companies (or discoms) are grappling with significant challenges, plagued by high losses and operational inefficiencies, resulting in poor financial health requiring frequent bailouts. Most of India’s discoms are under state-ownership. To enhance their efficiency, there have been policy changes encouraging private sector involvement. Other countries have encountered similar issues and have devised a variety of solutions. Studying these international experiences can provide valuable insights and strategies for addressing the ongoing challenges faced by the Indian electricity distribution sector as well as those in other countries. 

This paper analyses the performance of the electricity distribution sector in developing countries under different ownership models. The rationale behind this study is to identify key lessons and effective strategies that could be applied to the Indian electricity distribution sector in addressing ongoing challenges such as inefficiencies, losses, and the need for significant sectoral reforms. 

The countries chosen for this study are distributed across three geographical regions: four in Africa (Uganda, Tanzania, Kenya, and South Africa), and two each in Latin America (Brazil and Argentina), and Asia (Turkey and the Philippines). Our choice of case studies is guided by two key criteria: their ability to offer distinct ownership experiences and their relevance to India’s context. The paper is distinctive not only for focusing on the experiences of developing countries but also for viewing them not as deviations from a standard model, but as models in themselves that can offer potential strategies and ideas. 

The paper used a case study approach to analyse the performance of electricity distribution sectors in the selected countries involving a detailed examination of each country’s specific context, ownership models, regulatory frameworks, and performance outcomes. This approach allows for a comprehensive understanding of the complexities and nuances associated with different approaches to managing electricity distribution. Publicly available information in the form of policy briefs and documents as well as secondary literature were used for the case studies. 

The study examines four different ownership options: public ownership, management contracts, concessions, and private ownership. Public ownership typically involves government-run departments or state-owned companies. Management contracts are agreements where a private company manages the distribution for a period, under specific terms and conditions, but the assets remain with the government. Concessions are licences to operate the distribution business, with assets returning to the government at the end of the term. Private ownership entails complete control by a private entity, often resulting from the divestiture of state-owned assets. 

We find that the motivation for reforms in the selected countries varied, often influenced by factors such as World Bank funding requirements or the need for investment. Participation in reform efforts also differs, with foreign companies often playing a substantial role. In the African case studies, for both privatisation and management contracts, it has mostly been foreign companies from outside Africa and/or South Africa’s Eskom, which have participated and won contracts and concessions. Brazil and Argentina saw investment from several foreign firms as well as local firms. This is similar to the experience in the Philippines. In Turkey, however, it was primarily Turkish private companies that invested in the privatisation effort. 

We found that in the African case studies, management contracts and concessions have generally been good at increasing collection efficiency and bringing down commercial losses. Incentives in the contracts and the government’s support for loss reduction facilitated the meeting of these two objectives. In many countries, this was accompanied by the dismantling of cross-subsidies and an increase in tariffs to more cost-reflective tariffs. However, with few exceptions, the contractors and lessees were not able to improve the reliability of the grid or make sufficient investments into the grid to improve access. 

Our analysis holds lessons for countries, such as India, looking to undertake reforms. 

• Contract Design: The experience in Africa shows that it is possible to design contracts that reduce losses. However, these contracts must be designed so that the incentives are aligned with the targets. Government support and clear performance measurement parameters are also necessary. 8 International Experience with Distribution Ownership Options in Developing Countries 

• Unbundling and Ownership Separation: Stricter unbundling requirements promote competition and a level playing field among market players. In India, where unbundling of vertically integrated utilities has been a requirement, the result has often been unsatisfactory with the resulting entities behaving as divisions of the same company. To promote competition in the industry and ensure a level playing field, India could look at examples from Brazil and Argentina on implementing stricter unbundling requirements.  

• Energy Mix Diversification: The study has also highlighted the importance of diversification of the energy mix for generating electricity. Avoiding overreliance on specific energy sources is crucial for resilience, as seen in cases of drought-related challenges in Africa and Latin America. Kenya has been successful in diversification by investing in geothermal energy and moving away from excessive reliance on hydropower. 

• Power Procurement Planning: Long-term planning minimises risks associated with hastily contracted generation capacity. Kenya’s use of a multi-stakeholder Least Cost Power Development Planning (LCPDP) since 2009 could provide a model for such planning exercises and the resulting benefits. 

• Electrification and Access: Across our case studies, government-led programmes with sustained financing were key to increasing access, with private companies as potential partners. 

• Regulatory Independence: Ensuring regulatory independence through legislative safeguards and financial autonomy enhances credibility. Brazil’s Agencia Nacional de Energia Eléctrica (ANEEL) could serve as an example. 

• Independent Utility Boards: Our findings suggest that creating independent boards can enhance transparency and operational autonomy, though challenges of political interference persist. 

• Competition in Distribution: There has been a gradual introduction of competition in our case study countries, with a separation of wires and supply, and mandatory open access. This contrasts with India where, in the absence of legislation separating wires and supply, multiple electricity distribution licences are being contemplated, which could result in duplication of network assets. 

• Political Influence: A sobering finding from these case studies was that none of the countries managed to isolate their electricity sector from politics. While the problems with such intertwining of politics and the electricity sector are wellknown in India, we found that it also presents opportunities. When governments are committed to reforming the electricity sector, it is possible to address the problems of the sector comprehensively, including setting up institutions which are buffered from the government. For example, in the Philippines and Turkey, the governments backed the implementation of reforms leading to their successful implementation.  

• Comprehensive Sector Structure: The most important finding from this study is the need to think of the structure of the entire sector before any changes are made. As the eight case studies illustrate, trying to reform a single segment of the electricity sector without addressing the weaknesses of the other segments is unlikely to lead to sustained improvement in the sector. This is particularly true for electricity distribution where the end-of-line entities, the distribution companies, are affected by the accumulated problems of the upstream segments.