Cost Recovery and Financial Viability of the Power Sector in Developing Countries

We are grateful to have had the opportunity to work with the World Bank on “Cost Recovery and Financial Viability of the Power Sector in Developing Countries: Insights from 15 Case Studies”.

The paper analyzes the determinants of success for reforms aimed at improving financial viability and cost recovery in the power sector, and the impacts of such reforms on sector performance. The case studies reveal that electricity tariffs rarely cover the full costs of service and few countries adequately manage volatile costs and maintain cost recovery levels over time. Over the past 30 years, cost recovery levels have increased on average, but progress has been uneven, with more than half of the case study jurisdictions experiencing a decline compared with the pre-reform period. Good utility governance and management are, unsurprisingly, important determinants of cost-recovery: full-cost recovery is more likely in countries with privately-owned utilities or corporatized SOEs. The existence of a statutory regulatory body (a regulatory commission) does not, in contrast, ensure better cost recovery. Instead, a variety of institutional arrangements (regulation by contract, or competitive markets) can be considered to insulate price-setting from day-to-day political pressures. The quality of economy-wide governance and overall economic performance also appears to matter, with full-cost recovery more likely in countries with higher purchasing power and better overall governance (as measured by the WB’s Worldwide Governance Indicators). Finally, the study finds that recovery of operating costs is often a better determinant of efficiency and reliability than recovery of some notion of full economic costs: Utilities that recovered higher percentages of operating costs predictably had lower transmission and distribution losses and fewer outages. The same relationship was not, however, apparent between efficiency and reliability, and recovery of full economic costs.

The findings of this report are also included as Chapter 8 of the World Bank report, “Rethinking Power Sector Reform in the Developing World”, a multiyear initiative that aims to refresh the policy debate and present new thinking on reform strategies that move beyond the Washington Consensus reforms.