The power sector was in the midst of a crisis, with tariffs that were double those in other developing regions and unreliable supply throughout the continent. The AICD calculated investment requirements for the next decade in the sector in 43 countries. A subset of the countries numbering 26―which together accounted for about 85 percent of the region’s population, GDP, and infrastructure inflows―were analyzed for hidden costs of power utilities arising from underpricing and operational inefficiencies (system losses, collection inefficiencies, and overstaffing).

The AICD used two different methods. The first, as reported in Eberhard et al. (2008) and in BriceñoGarmendia, Smits, and Foster (2008), allocated hidden costs to underpricing, excess T&D losses, and incomplete bill collection. The second, as reported in Eberhard et al. (2011) and Briceño-Garmendia and Shkaratan (2011), introduced a further hidden cost, that of overstaffing. The AICD found that power utilities in SSA had large numbers of employees per customer when compared to other developing countries, suggesting that the same output might be produced with less labor.

In half the sample countries, the largest single contributor to the hidden costs was underpricing, followed by under-collection of bills (7 countries) and system losses (5 countries). Overall, these three components were more significant than overstaffing in many cases, but the latter exceeded the rest combined in Chad, underpricing in Mozambique, and T&D losses in Benin and Cape Verde, and exceeded under-collection and matched underpricing in the Republic of Congo.

Where time-series data were collected, hidden costs changed markedly over time in several countries. For example, in Ghana, the Volta River Authority’s hidden costs grew from 14 percent of the total revenue in 2004 to 117 percent in 2006, halved in 2007, and then rose to 87 percent in 2008, whereas those for the Electricity Company of Ghana varied between 42 percent and 70 percent during the same period. On average, tariffs were below the cost-recovery levels, resulting in annual forgone revenue of US$3.6 billion.

Using the most recent data available, this paper updates the analysis of hidden costs carried out by the AICD and expands country coverage. The study broadly follows the methodology used in the publication by Eberhard et al. (2011), which breaks down hidden costs into underpricing, T&D losses, undercollection of bills, and overstaffing. The study asks the following questions:

- What is the status of the financial viability of electricity sectors in SSA? What is the magnitude of electricity-sector QFDs?

- <mark>What are the priority areas in individual countries for reducing costs and increasing cost recovery?</mark>

- What is the likely magnitude of tariff increases needed to cover costs, and what is the difference in the increases between the current cost structure and the structure with benchmark performance-efficiency?

- What is the scope for reducing costs and collection losses in the power sector in SSA, and how much will such cost and collection-loss reduction increase the financial viability of utilities in the region?

- What sequence of policy measures could be considered in the short, medium and long term?

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