VIUs are common in countries with small markets, such as small states and island nations with populations of less than 3 million<sup>2</sup> . The small size of these markets and geographic isolation (including fragmentation in archipelagos) limits scale and interconnectivity. These factors result in high power sector costs and financial risks that may discourage entry of multiple players into the power market. In larger countries with VIU structures the VIU is typically state-owned. In some cases, this structure is in line with their statecontrolled economies (such as in the Democratic People’s Republic of Korea and the República Bolivariana de Venezuela) or due to fragility and conflict situations (as in Afghanistan and the Syrian Arab Republic) where private sector entry is too risky or politically infeasible.

Currently, 84 percent of VIUs are state-owned companies. Only 11 economies have privatized the VIU while still maintaining it as the sole company in the electricity sector providing integrated services. These are mostly small states (9 are island states and one non-island small state of Monaco). The unique context of these countries, including major sector sustainability issues, constrains the scope for private sector entry. Private ownership of the VIU is predominant in high-income island nations, where governments privatized electric utilities such as Bermuda, Cayman Islands, and French Polynesia.

Private VIUs can improve operational performance but rely on effective regulation to mitigate the abuse of market power and ensure that the private monopoly has the right incentives. Restrictions on market entry could also perpetuate market power, even when economic and technological changes support new entrants (Kiesling 2014). This structure faces risk of conflict between the private owner and the government when their priorities do not align. For example, the VIU is the main stakeholder alongside the government in driving any large-scale transition to renewables to meet the sector's sustainability objectives. However, as a private entity, it is unlikely that the VIU’s management would encourage the development of third-party renewable energy generation that would put its own market share at risk unless it felt adequately compensated or equipped to profit from generating its own renewable energy.

The technical and financial performance of VIUs has been mixed. Some markets leveraged the model to ensure that investment decisions and operations were coordinated (improving cost efficiency and lowering risks) and to achieve energy security and social objectives such as rural electrification. However, some economies with VIUs have seen investment lags, lack of competition, poor financial performance, low efficiencies, and higher losses. This is because there is typically less incentive to innovate and improve performance, especially for state-owned VIUs that have standing fiscal support available. This market structure can be subject to government interference driven by short-term political objectives that impact VIU operations such as bill collection, tariffs, and fuel procurement.

Countries that succeeded at maintaining high performance under VIU structures have done so by effectively alleviating these risks, for example, through corporatization or public listings of state utilities. The public listing of VIUs tends to improve overall performance, as it engenders more robust financial, corporate governance, and disclosure principles. The corporatization of state-owned VIUs can also be helpful as a step toward setting up a market structure with private sector participation (Box 1). Some highly advanced power market structures were launched on the back of corporatization. For example, Singapore’s corporatization of its VIU in 1995 helped the sector gradually transition into one of the world’s most liberal electricity markets.

> 2 About half (49 percent) of the World Bank Small States Forum member countries within the database use the VIU model in 2024.

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