Electricity sector reform and NDS 1: The good, the bad and the ugly

By Saidi Sangula and James Tsabora | Oct. 6, 2022

POWER CUTS

NCREASED load-shedding in the region, particularly in South Africa and Zimbabwe resurrects age-old questions about the integrity of the electricity sector in the region. For Zimbabwe, mid-September 2022 saw some legislative amendments to the Electricity Act which raised false hope of major changes to this key law.

However, the fact that all the amendments were mere additions of criminal offences to the Act left a bad taste.

This bad taste is nothing new; the landscape for Zimbabwe’s electricity sector has been undergoing changes since 1985 when the Electricity Act itself was promulgated. Without doubt, the sector has experienced its highs and lows ever since, and successive macro-economic policies have attempted to provide a balm to the low capacity and low generation problems. Despite all that has been done since 1985, critical electricity challenges have remained in place especially in the last decade. Successive Ministers of Energy and Power Development have battled the problems, but without much success. Why has this been the case?

As with the first republic, the current administration has prioritised increased electricity generation in order to improve access to energy supplies for industrial and domestic consumption. Importantly, the National Development Strategy 1 (NDS1) promulgated by the Second Republic in 2020 acknowledges the generational challenges militating against increased generation and improved access in this sector.

The NDS1 recognises the need to give priority to the development of reliable, adequate, low priced power in order to ensure economic stability and growth. This is very understandable — the NDS1 pointedly states that 80% of the rural population live in the dark, and national access to electricity in Zimbabwe stands at a disturbing 41%. Clearly, these are bold and damning statistics.

In the last decade, several projects and programmes have been identified for implementation to ensure and improve access to energy and increased power generation.

These include implementation of certain policies such as renewable energy policy, the clean energy access, e-mobility promotion and critically institutional capacity building. Questions have been asked on the professional capacity of the electricity generation institutions to deliver on their mandate.

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These questions have led to calls for reforms of the whole infrastructure tasked with delivering electricity in Zimbabwe.

This reform agenda is explicit and implicit in what the NDS1 calls institutional capacity building. Again, this is not a new problem; it has been the theme since 2012 when the government adopted the National Energy Policy (NEP). What is very clear is that apart from technical, infrastructural and technological challenges, governance of the electricity sector institutions has been an elephant in the room.

It must be noted that the debate on the “restructuring” of the power sector championed by the 2012 NEP is traceable to circumstances and problems that drove the 1999-2000 reforms.

Then, the most concern was, as it is now, failure to meet supply demand due to inadequate investment and the inability by Zesa Holdings to meet its operational costs, particularly those associated with the importation of power from Mozambique and South Africa.

NEP sought to “kick-start” the reform agenda by identifying four phases of reform. The first phase objective was to have a well-developed policy and regulatory framework that takes account of international best practices but with modifications to suit local idiosyncrasies.

The second phase entailed unbundling of the accounting framework in order to set up the desired electricity market structure which would then be tested. In the third phase, the objective was to proceed with physical unbundling on the basis of operational efficiency and financial viability.

The fourth and final stage targeted privatisation to expand the investor base and extract further efficiencies the privatisation processes were earmarked to be completed by 2013. Again, the governance problems strike through all these objectives. Despite rhetoric, very few tangible objectives were achieved. No milestones were recorded during the period 2013-2017, with power shortages actually increasing, affecting industrial growth and domestic access. Thus, on the eve of the Second Republic, power challenges were extremely critical and this massively damaged industrial activity.

With the coming in of the Second Republic, the reform agenda continued to have traction. In February 2019, a year into the Second Republic, the government announced plans to yet again restructure Zesa by “rebundling” companies, especially those in the electricity value chain into a unitary utility. The fundamental reason put forward was primarily to save on the high costs associated with and experienced in running the unbundled entities.

The claim was that the existing system had attendant duplication of managerial structures and general inefficiencies, resulting in high tariffs to the consumers.

The decision not only effectively countered the provisions of the Electricity Act which supported unbundling, but was a complete U-turn from pronouncements by the Robert Mugabe administration in the 2012 NEP. It became clear that the policy shifted to “rebundling” — a process of putting together the individual corporate entities under a single umbrella.

The question is whether this round promised any different outcomes from the previous reform approaches.

Was the government prepared to avoid notorious, but familiar pitfalls that had hamstrung the achievement of the intended objectives? The government needed to confront a raging bull in order to plug continued wastage of taxpayers’ money and creating increased costs to the consumer.

Does the rebundling of Zesa alone provide solutions to these perceived problems, and can it introduce organisational efficiency, competition and reduction of the cost of power generation?

The approach to reform

As highlighted above, rebundling followed from the unbundling exercise.

Unbundling entailed granting semi-autonomous corporate existence to the utility’s separate entities in the electricity value chain and the establishment of an independent regulator. It further meant the privatisation of the business entities then created through sale of assets with the aim of attracting investment in the sector.

The utility was unbundled through the Electricity Act in 2003 when the regulator, the Zimbabwe Electricity Regulatory Commission (ZERC) (later to become Zimbabwe Energy Regulatory Authority (Zera)) was also established, albeit as independent of the unbundled entities and sector players.

The Act, therefore, unbundled and corporatized the successor companies wholly owned by government through Zesa Holdings (Private) Limited, to take over generation, transmission and distribution and supply. This led to the creation of the Zimbabwe Electricity Transmission Company (Private) Limited (ZETC) and Zimbabwe Electricity Distribution Company (Private) Limited (ZEDC) in 2004 and the Zimbabwe Power Company (Private) Limited (ZPC) for electricity generation in 2006.

Later in 2009, the ZEDC and ZETC were then amalgamated into the Zimbabwe Electricity Transmission & Distribution Company (Private) Limited (ZETDC) which was supposed to be unbundled in 2013 to allow for competition in the distribution of electricity. To this date, this further unbundling was never implemented.

It has to be remarked that even in the unbundled state, these entities continued to be collectively referred to as Zesa and effectively regarded as one vertically integrated entity. The Zimbabwean reform cycles are nothing strange; most power sector reform programmes in Africa have transformed State-owned monopolies into vertically and horizontally unbundled entities owned and operated by private players.

Despite many African nations embarking on reform programmes of one nature or another, no African country completely transitioned to a fully unbundled, competitive private sector-led industry. The reforms have been piece-meal and in fact very little of competition has been introduced as originally envisioned.

In fact, in many countries the power utilities have largely remained monopolies, as has happened with Zesa.

However, monopolies have meant a lengthy period of State ownership in the absence of market forces or the incentives of the profit motive to increase performance and this has given birth to inefficiencies, excessive costs, poor investment decisions and low service quality.

These crushing ills have not been easily solved by private ownership either — some observers have said privatisation approaches do not necessarily translate into efficiency because the private sector managers are prepared to sacrifice the pursuit of affordable and accessible service delivery for profit. The fundamental question, therefore, is not whether ownership is private or public, but the sort of conditions that must exist for ownership to act in the public interest.

For Zimbabwe, the revolving doors of reforms have not left a lasting good taste. For instance, it is unclear how, other than seeking to remove the duplication in managerial roles (and reducing costs associated with managerial perks), the rebundling will bring about the envisaged efficiencies.

Electricity is invariably a political matter, and it is unclear whether institutional capacity building can work in environments where politics is likely to set in and affect the way managers execute their duties.

In this context, the confusion between the roles of the regulator and that of the minister in the regulation of the sector must be dealt with. The conflation of roles in practice, unless clarified and cleared, simply adds to the operational challenges particularly as they relate to cost reflective tariffs and the collection of bills required for Zesa to operate effectively. There is, therefore, a greater need for role clarity of several institutions, particularly the government, the regulator and the utility.

Conclusion

It matters not whether the electricity industry is publicly or privately run. The key issue is under what conditions is the chosen mode of ownership most likely to further the public interest?

It is clear that restructuring as proposed will not lead to any substantial change of either the organisation or its administrative nature. For things to work, government will have to cease direct interference in Zesa’s operational affairs and also institute fundamental changes in the way the organisation is managed, including bill collection and ensuring the limitation of the executive directives, exposing corruption, removing the sense of entitlement and opportunities for rent seeking.

Further, tariffs must be set at levels that are capable of financing both existing operations as well as encourage capital investment both by Zesa and potential new entrants. The independence of the regulator will need to be enhanced through independent mechanisms of board and executive appointments. The government should consider putting Zera and Zesa under different departments to enhance independence. Hopefully these measures will contribute significantly to a successful reform programme with tangible benefits to the consumer.