Electricity Sector Reform in Developing Countries: An Econometric Assessment of the Effects of Privatisation, Competition and Regulation

Over the last two decades electricity sectors in both developed and developing countries have been subject to restructuring to introduce private capital and increase competition. This has been accompanied by the introduction of new regulatory regimes. Although the effects of such reforms in a number of the developed economies are now well documented, apart from a few case studies, the experience of developing countries is much less well researched. This is important because privatisation, competition and the reform of state regulation are key themes in donor aid programmes, notably of the World Bank. This paper provides an econometric assessment of the effects of privatisation, competition and regulation on the performance of the electricity generation industry using panel data for 51 developing countries, over the period 1985 to 2000. The study identifies the impact of these reforms on generating capacity, electricity generated, labour productivity in the generating sector, capacity utilisation and industrial and residential user prices. The paper concludes that competition appears to bring about favourable results for service penetration, capacity expansion, labour efficiency and prices to industrial users. The effect of privatisation and having an independent regulator, separately, is statistically insignificant except in the case of capacity utilisation and privatisation; while the co-existence of these two reforms does seem to be correlated with greater electricity availability, more generation capacity and higher labour productivity. The main policy conclusions are that on their own privatisation and regulation do not lead to obvious gains in economic performance. When privatising electricity under conditions of monopoly, emphasis should be placed on implementing an effective regulatory framework. By contrast, introducing competition does seem to be effective in stimulating performance improvements, irrespective of changes in ownership or regulation.