Financial viability of the electricity sector is one of the key drivers of performance toward universal electricity access. Countries that transitioned from low-medium to high-universal access performed better in securing the financial viability of electricity companies by adopting rational electricity tariffs complemented by appropriate subsidy policies. A vicious cycle of poor financial performance has long captured many national electricity sectors and utilities. The cycle continues from structural financial weakness to underinvestment and poor maintenance practices; to poor service quality; to blackouts, to weak payment discipline (non-payment), theft, and insufficient government transfers; to low net revenues and internal cash generation, financial losses, low self-financing levels, and growing indebtedness to structural financial weakness.
Evolution of World Bank Group Approach
A significant number of investment projects – especially in the 1990’s and 2000’s – used components and covenants covering financial recovery plans, utility debt restructuring, payment collection improvement, tariff methodology and adjustment, and operations performance improvement. In recent years, DPOs were used more often to support financial performance improvements in the electricity sector. Generally, DPOs provided untied, quick-disbursing direct budget financing to governments for policy and institutional reforms aimed at achieving a set of sector-specific development results.
This study’s analysis shows that most investment loans with financial components and covenants for the electricity sector show a moderately satisfactory or better performance regarding their financial performance objectives. However, IEG rated most DPOs moderately unsatisfactory or lower for their electricity sector financial viability objectives. Several factors explain these findings. For investment loans, it is likely that the relatively long implementation periods allow more time for the gradual realization of politically sensitive financial reforms and measures while the World Bank’s phased loan disbursements provide some leverage. DPOs are more likely to be concerned with deep sector reforms, which often evolve along different time lines than DPOs. The mismatch between the time horizon of sector reform programs and the usually short period for effective government action in the DPO context may contribute to reducing the efficacy of these interventions.
Summary of Findings
Addressing the Political Economy of Sector Financial Viability
- The DPO program’s timeline requires alignment with that of a government reform program.
- There is a need for matching the scale of World Bank support to the scope of reforms and political risk.
- The window of political economy opportunity can be balanced with achievable targets.
Steering Clear of Complex Project Design
- Overambitious agendas and excessive conditionalities impact the performance of sector financial objectives.
- Retaining focus on the underlying structural causes of sector financial viability is key.
- Overall, programmatic DPOs showed better outcomes than multi-tranche and one-off DPOs.
Sustaining Improvements in Sector Financial Performance
- Deep-rooted structural problems have no quick fix.
- Leveraging investment operations and DPOs with technical assistance and analytical work will yield better and more sustainable results.
