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

Calderón, Easterly, and Servén (2003b) estimate the effects of the cuts in infrastructure expenditure on public sector solvency. The findings suggest that the cutbacks have a significant effect on growth and future public revenues and, therefore, should be carefully weighted against alternative spending reductions. The estimates suggest that a permanent cut in electricity generation spending, amounting to 1 percent of GDP, impacts the annualised public net worth between 1 and 0.17 percent (for public debt/GDP ratios ranging from 0 to 0.7).

# **3.4.2 The UK electricity reform**

Few reforms have experienced such scrutiny as that in the UK. While the UK is not a developing country, the timing and characteristics of electricity sector restructuring and privatisation in the UK has provided insights into some important aspects of reform. For example, that the process of restructuring and regulation may face initial problems but, nevertheless, can continue to evolve into a workable market-oriented system (see e.g. Newbery, 1999).

In particular, the UK experience with restructuring of generation and mitigating possible market power has demonstrated the complexity and challenges involved in introducing competition into the sector. Green and Newbery (1992) show that the initial structure based on only two unequal competing generators was inefficient and that five equal competing firms would be more effective. Wolfram (1999) shows that although prices under oligopoly appear to have been above marginal costs, regulatory constraints, threat of new entry, and financial contracts may have produced lower prices than theory would suggest. At the same time, Sweeting (2001) shows that, between 1995 and 2000, generation asset divestitures and new entry did not result in lower prices.

Newbery and Pollitt (1997) estimate the costs and benefits of restructuring the stateowned Central Electricity Generation Board (CEGB), the enterprise in charge of electricity transmission and generation in England and Wales that was privatised in 1990. The study uses data for the 1989/90-1995/96 period and compares the postprivatisation performance of the CEGB relative to a counterfactual scenario without restructuring. There has been considerable improvement in labour productivity in the post-restructuring period, and the authors suggest that most of the efficiency gains came from non-fuel costs. They estimate future net efficiency gains from restructuring and privatisation of the CEGB at £9.6 billion (6% discount rate) or £5.2 billion (10% discount rate) after taking into account restructuring costs at £2.8 billion (6% discount rate) or £3.2 billion (10% discount rate).<sup>7</sup> In comparison, the proceeds from the sale of CEGB’s assets amounted to about £9.7 billion. Also, the net welfare effect of restructuring and privatisation are then estimated at £4.8 billion (6% discount rate) or £4.3 billion (10% discount rate), after accounting for consumer losses of £1.3 billion (6% discount rate) or £2.2 billion (10% discount rate) which resulted from subsequent price increases.

> 7 The estimates are for the more probable counter-factual scenario under which CEGB would have continued to behave as in the past.

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