subsidies and state-owned utilities, which mean that efficiency improvements cannot be achieved using the same set of incentives that were designed in the UK under completely different circumstances. Without the introduction of commercial principles for the operation of utilities, including accountability and a hard budget constraint, regulation cannot be expected to dramatically change sector performance.

In view of these concerns, performance contracts are often put forward as an alternative regulatory mechanism adapted to SOEs. Performance contracts are “ _negotiated, written agreements that clarify objectives of governments and motivate managers_ ”, which typically include approval of a business plan and specify a number of key performance indicators. These contracts, by introducing ex post evaluated targets, can reduce ex ante controls and provide incentives to managers to do what is necessary to achieve targets. Nevertheless, the targets are often hard for outsiders to evaluate because of the information advantage that managers enjoy over owners, nor easy for utility managers to achieve due to the constraints of operating in a public-sector environment.

Performance contracts are widely used for state-owned electric utilities in Africa. For example, Eskom (South Africa) annually aligns its performance objectives and indicators with treasury regulations under the Public Finance Management Act, in consultation with its shareholder, the Minister of Public Enterprises. In 2008, about half of the key performance indicators were not met, due to below-target financial performance and investment efficiency, both in capital and operational expenditure (Khanna 2013).

A broader review of the experience of performance contracts with state-owned utilities in Africa found that performance contracts with incentives and independent external audits have become dominant features of the governance reform process in the African electricity sector. While the application of a performance contract was not found to have any significant impact on a range of performance indicators including distribution losses, labor productivity and electricity access; the use of independent audits of those contracts did appear to make a significant difference (Vagliasindi and Nellis 2009) and The World Bank, 2010) (Table 5).

**Table 5: Links between governance and performance indicators**

|**Reform**|**Technic**<br>|**al losses**<br>|**Connect**<br>**empl**<br>|**ion per**<br>**oyee**<br>|**Acc**<br>|**ess**<br>|
|---|---|---|---|---|---|---|
||**Yes**|**No**|**Yes**|**No**|**Yes**|**No**|
|**Independent audit**|**22.9%**|**28.3%**|**164.3**|**92.7**|**22.0%**|**9.6%**|
|**Performance contracts**|**24.2%**|**23.3%**|**176.8**|**103**|**14.6%**|**28.1%**|

Source: Based on The World Bank (2010). Table 4.4 When it comes to SOE performance, potentially more significant than any regulatory agency are the oversight arrangements within the government. Three different approaches are widely in use: the decentralized (or traditional) model, where stateowned enterprises are under the responsibility of relevant sector ministries; the dual model, where responsibility is shared between the sector ministry and a central ministry 17