having specific projects awarded to a company from their country, versus their support for reforms that open the market to unbiased competition (Dubash 2002).

**A fundamental question is how well donors and borrowers work within countries’ circumstances, given different ideas of what is in a country’s interests.** Externally-driven policies may not be fit for purpose if the experts who devise them face a pressure to conform with international expectations. In response to the prevalence of conditional aid in the 1990s, among other factors, the international community committed to greater “country ownership” in the 2005 Paris Declaration on Aid Effectiveness and the 2008 Accra Agenda for Action. Yet the idea of country ownership is open to divergent interpretations (WatsonGrant & others 2016). One concern is that by receiving foreign aid, government agencies may increase their influence relative to other actors in the country, and thereby reduce accountability. This increases the stakes for any conditions associated with aid to be both credible as well as aligned with the expectations of country stakeholders beyond the government. Managing the tension of enforcement versus flexibility of conditions is a long-standing challenge in development partnerships. Evaluations of World Bank operations, for example, find mixed results of programs specifically designed to support power sector reforms.<sup>38</sup> These issues go well beyond the power sector and are the subject of broader literature on the political economy of development, as touched on in Section 2.3.

# 3.2   The process of reforms involves a delicate balancing of competing interests

- _<mark>Structural factors such as small power systems and low income levels may reduce the feasibility of</mark> reforms, due to the high transaction costs of regulating separate utilities and market competition._

- _<mark>Implementation of reforms depends on institutions that balance public and private interests and address</mark> corruption, but does not generally correlate with political freedoms, or political leaders’ length of tenure._

- _<mark>Incremental and inclusive processes involving various stakeholders may be better than ‘quick and stealthy’ reforms that sidestep important actors’ concerns.</mark>_

**In countries with small systems or low per capita income, the transaction costs of establishing regulators, unbundling utilities, and creating markets, may exceed potential benefits.** Foster & others (2017) observe that a regulator, unbundling, competition, and private sector participation, are each significantly correlated with income level. Each of these elements, except establishing a regulator, is also more prevalent in countries with large power systems.<sup>39</sup> Domah & others (2002) find that lower-income countries face high fixed costs relative to market size in establishing independent regulatory agencies. One explanation is technical: other things being equal, small systems would have fewer plants to compete. In

> 38 IEG (2016a) note that short time horizons for expected results from donor assistance do not always match the time frame of reforms, which can take 5 to 10 years to occur. Even so, long-term government commitment to reform is “often fragile and can be eroded by...changes in government, macroeconomic crises and external shocks, or an abating sense of urgency after a severe crisis was weathered, and after having acquired sizable financial support from the Bank” (p.55). A long program series in Vietnam was “essentially ineffective in preventing a serious, recent deterioration of sector finances” in part because “the World Bank often took too accommodating a stance on noncompliance with the commitments for improving financial performance” (p.23). An equivalent criticism, from independent evaluation of World Bank power sector operations in the 1960s and ‘70s, is what motivated increased use of conditional aid in the 1990s (World Bank 1993).

> 39 This is consistent with Besant-Jones (2006), and Erdogdu’s (2013) findings that the extent of 1990s model reforms generally correlates with electricity consumption, population size, and income. A factor that deserves greater consideration on this point is whether system size is small due to population, or unmet demand including from low access rates.

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