**_Electricity Sector Reform in Developing Countries, Jamasb, Mota, Newbery, Pollitt_**

# **3.2 Efficiency studies**

A number of studies have attempted to analyse the effect of reform on productive efficiency. The methods used can be classified into three categories: econometric production or cost models, total factor productivity (TFP) indices and frontier methodologies. In general the first two methods provides measures of technical change or TFP, assuming all firms are technically efficient. In contrast, frontier methodologies do not assume that all firms are technically efficient and, by the construction of a cost or production frontier, measure efficiency as the distance to the frontier. Therefore, each individual firm is benchmarked against best practice. Frontier methodologies also make possible the distinction between technical change (frontier shift) and efficiency change (move towards the frontier).<sup>5</sup> There are two widely used methods of constructing a frontier: Data Envelopment Analysis (DEA) or Stochastic Frontier Approach (SFA). DEA uses linear programming to calculate the frontier and SFA uses econometric methods to estimate the best practice or frontier.

Plane (1999) evaluates the impact of the privatisation of Côte d’Ivorie Electricity Company (CIE) on efficiency and on the distribution of welfare. Privatisation in this case has taken the form of a ten-year lease contract. The study uses a stochastic production frontier model to measure efficiency change and, in order to assess the distributional impact, it uses the surplus accounts method. The basic production model expressed gross generation (GWh) as a function of the installed generation capacity (MW) and the number of permanent employees. Other tested models include the ratio of customers to the length of the distribution network, with a binary variable to indicate privatisation. Parametric and non-parametric tests cannot reject the hypothesis of a significant performance improvement in the post-privatisation period relative to the immediately previous period. However, technical efficiency measures have behaved irregularly since privatisation. In addition, they never reach the annual values of the 1970s when the company was under close government supervision and hard budget constraint. In terms of welfare distribution, the main beneficiaries were consumers through a substantial price decrease. At the same time quality was improved and the number of customers supplied was increased by over 16%. These results are even more striking when we consider that the private administration had a commitment to retain the existing workforce and the level of nominal wages.

Considering that there was no restructuring (the monopoly of CIE remained unchanged) and the only change in the electricity sector was the privatisation of management, it is important to investigate what the driving forces of these positive results were and whether the experience can be transferred to other low-income economies, in particular to other Sub-Saharan countries. The author argues that the benefits stem from organisation innovations, especially decentralisation, reduction of hierarchy layers and managerial incentives. However, we observe that most of the efficiency improvement occurred after 1993, when a realignment of the exchange rate permitted an economic recovery. In addition, Plane points out that the private contractor had an interest in promoting similar arrangements in other African countries. More importantly, taking into account the long-term performance of CIE, especially under close government

> 5 See Coelli et al. (1998) for a more detailed analysis on efficiency measurement.

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