Theory, application and policy of efficiency regulation : the case of the West African electricity distribution sector.

Abstract

There are narratives based on qualitative and quantitative data that describe the West African Power Sector as very inefficient. In the context of electricity distribution, companies are usually tagged inefficient with various stakeholders justifying that with various analyses, statistics and narratives. Empirical studies establishing such assertions are rather absent or lack a holistic measuring approach. In this work, the acknowledgement of the importance of bench-marking in electricity market regulation is made with the need to further estimate a baseline cost efficiency of the electricity distribution sector of West Africa demonstrated. The aim of this research is to do efficiency studies on the electricity distribution sector of West Africa to comprehend the current state of electricity distribution as well as to understand the underlying causes of inefficiency. Three themes are covered in this thesis. The first theme investigates the theoretical concepts of measuring efficiency and contributes to a longstanding debate regarding the preferred choice of statistical distribution underlying the inefficiency term in the stochastic frontier approach. In this regard, the Burr Type X stochastic frontier model is constructed and tested against other existing models including Normal-Half Normal, Normal- Exponential and Normal-Rayleigh stochastic models. The investigation presents the newly constructed Burr X stochastic frontier model as one that competes with the other models when using cross-sectional data. In the second theme, cost efficiencies are estimated from an unbalanced panel of 14 electricity distribution companies over the period of 2007-2014 using several panel data models including the pooled model, Pitt & Lee model, true random effects model and true fixed effects model. The results suggest that the EDCs in the West African region operate at an average efficiency level of 52% (pooled normal-Half normal estimate) which appears to validate the perception of many stakeholders. The Nigerian EDCs have a mean inefficiency level of 51% which is the worst among the sub groups considered. The East African comparator (KPEDC in Kenya) recorded an efficiency level of 63% and was outperformed by some West African EDCs. The results demanded an investigation into the underlying reasons for such high inefficiencies in the West African sub-region considering that the sector has experienced significant reform and investment efforts. In the third theme, using the Electricity Company of Ghana as a case, a Political Economy Analysis (PEA) framework which has the capability of discovering reform opposition and the associated political and economic incentives that unearths informal rules in the industry was employed. Our findings suggest a plethora of possibilities that are encompassed in political and cultural characteristics of consumers, management and political stakeholders who assume overwhelming powers to further influence the governance of the power industry. Perceived inefficiency drivers seem to emanate from financial mismanagement, cultural and attitudinal forces, unsatisfactory regulation, mismanagement of third party contractors, procurements lapses and others. Privatisation seems to be the way forward according to the views of many stakeholders but there are issues surrounding the fear of high cost of electricity as well as downsizing of the utility that could bring hardship to the staff who will be included in such a programme.