PAYING THE PRICE FOR UNRELIABLE POWER SUPPLIES: GENERATION OF ELECTRICITY BY PRIVATE FIRMS IN AFRICA size of about 500 MW.<sup>1</sup> This means that the generation of electric power may be, under some circumstances, a competitive activity, even if transmission and distribution networks are indeed natural monopolies. Moreover, separating transmission and distribution from generation and introducing competition into the generation business may increase the overall efficiency of the electric power sector.

But in no African country have the legal and institutional conditions for decentralized power generation yet reached the point where decentralization can provide an alternative to unreliable supply from monopolistic public providers or to the use of expensive generators at the firm level.<sup>2</sup> Some 20 African countries are currently initiating some form of power sector reform. Although most are still in the initial phases of privatization and restructuring, the contemplated changes reflect a profound questioning of the principles that have governed the sector since the early 1960s. Some countries, including the Arab Republic of Egypt and South Africa, have had unbundled power sectors for a long time and are now thinking of introducing private participation. Côte d’Ivoire and Ghana introduced reforms (privatization and restructuring) in the early and mid-1990s, respectively (Karekezi and Mutiso 1999).

For the time being, Africa’s firms, small and large, must cope with unreliable power supplies.

# 1   The economic literature on unreliable power

It is fairly settled in the literature that unreliable power supply results in welfare losses (see Kessides 1993 and references therein). But the empirical research on the economic costs of power outages and own generation in developing countries remains limited, owing to the lack of appropriate microeconomic panel data that could be used to infer firms’ and households’ response to poor provision of electricity supply.<sup>3</sup> Only two studies have recently been done on this subject in Africa. Adenikinju (2005) analyzed the economic cost of power outages in Nigeria. Using the revealed preference approach on business survey data (Bental and Ravid 1982; Caves, Herriges, and Windle 1992; Beenstock, Goldin, and Haitovsky 1997), Adenikinju estimated the marginal cost of power outages to be in the range of $0.94 to $3.13 per kWh of lost electricity. Given the poor state of electricity supply in Nigeria Adenikinju (2005) concluded that power outages imposed significant costs on business. Small-scale operators were found to be most heavily affected by the infrastructure failures.<sup>4</sup> 1 See, for example, Christensen and Greene (1976), Joskow (1987), and Wolak (2001).

> 2 Since 1980, when Chile began its radical program of restructuring and privatization, more than 70 countries have introduced reforms of electric power (Besant-Jones 2006). Most of the reforms have sought to promote private ownership and investment, and hence to reduce the dominance of the state-owned, vertically integrated enterprise, which up to that point had been ubiquitous in the sector. These reforms have varied greatly. Some countries have invited private investment in generation only, financed by long-term contracts with state-owned utilities (as in China, India, Indonesia, and Mexico). Some have vertically separated the industry while privatizing only part of it (as in Colombia, El Salvador, Kazakhstan, and New Zealand). Others have privatized the entire industry, creating competitive generation markets, as in Argentina, Chile, and the United Kingdom (World Bank 2004).

> 3 Cross-country aggregate data analysis, widely used in the development economics literature, cannot avoid simultaneity between poor infrastructure and welfare.

4 Lee and Anas (1992) also found that poor infrastructure had a negative effect on small enterprises in Nigeria.

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