## PAYING THE PRICE FOR UNRELIABLE POWER SUPPLIES: GENERATION OF ELECTRICITY BY PRIVATE FIRMS IN AFRICA

Reinikka and Svensson (2002) analyzed the impact of poor provision of public capital goods on firm performance in Uganda. Using a discrete choice model on business survey data, the authors predicted that unreliable power supply causes firms to substitute complementary capital (for backup generators) for deficient public services. Estimating investment equations on the same data, they found that poor complementary public capital significantly reduced private investment.

Reconciling the results of the two studies is difficult. Both rely on limited datasets from business surveys done in a single country. Both use only a small number of factors among the many that firms might consider in choosing to generate their own power. Neither accounts for effects that may change the provision of power supply. And the estimated marginal costs of electricity and effects of unreliable power supply on firms’ investment may be biased because of the failure to address the possible endogeneity in choice of generator, provision of electricity supply, and other observed explanatory variables, such as firms’ profitability and access to finance, and the country’s industrial structure.

This paper combines the advantages of cross-country data analysis with microeconomic analysis of business survey data. Use of a cross-country dataset can help to identify the effects that affect the provision of power supply, and to some extent, changes in the industrial structure. Microeconomic data can be used to infer firms’ and households’ response to provision of electricity supply. Because our study relies on cross-sectional data, the bias in estimates cannot be fully avoided. However, cross-country comparisons will still be valid, given the one-dimensional direction of bias.

The central purpose of this study is to examine the national and firm-level costs of unreliable power supplies and own generation in Sub-Saharan Africa. Our specific objectives are:

- To describe power outages and the phenomenon of  own generation of electric power in Sub-Saharan Africa.

- To estimate the economic costs of both phenomena at the national and firm levels.

- To explore why firms decide to generate their own power.

- To evaluate the effect of improving the reliability of power supplies on firms’ in-house generation.

- To suggest how unreliable power supply might shape the economic structure of Sub-Saharan African economies.

We do not investigate whether the share of own generation is growing in Africa or compare the phenomenon as it is practiced on the continent to own-generation patterns (and their costs and benefits) elsewhere in the world.

# 2   The data on self-generated electricity

Our analysis is based on two data sources. The first is the UDI World Electric Power Plants Data Base (WEPP), a global inventory of electric power generating units.<sup>5</sup> WEPP contains design data for

> 5 WEPP is issued quarterly by the UDI Products Group of PLATTS, the energy information division of McGrawHill. For more information, see the WEPP database manual, available at <u>http://wepp.platts.com.</u>

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