Building consensus on concessions

On the entire continent of Africa, there is only one financially solvent utility company, says Robert Stoner, deputy director for science and technology at the MIT Energy Initiative (MITEI).

The utility, UMEME—a private company—operates in Uganda under a “concession” granted by the government. In utility concession agreements, private operators typically manage key activities—such as investing in new infrastructure, operating and maintaining existing assets to improve quality of service, and establishing more robust billing and collection systems— for a prescribed period of time, in exchange for an attractive remuneration from the beneficiaries of the service via regulated tariffs. Although utility concessions have been attempted with mixed levels of success in developing countries around the world, Stoner and other MITEI leaders see them as a promising tool to help end energy poverty.

“You’re bringing money and sound management from investors improving the quality of the system,” Stoner says. “UMEME has been a success, overall. But the remuneration is now perceived as excessive, and it was not meant to increase rural electrification in a country with a low access rate. Despite the moderate cost impact, UMEME has turned into a political problem, and the government may not renew that concession.”

Stoner co-leads the MIT-Comillas Universal Energy Access lab, a collaborative research group on power systems in developing countries. The other co-leader of the group is Ignacio Pérez-Arriaga, a visiting professor at MIT and professor at the Universidad Pontificia Comillas in Madrid, Spain. Both Stoner and Pérez-Arriaga also have leadership roles on the Global Commission to End Energy Poverty.

In March, Pérez-Arriaga took the lead in organizing the online “International Conference on Concessions in the Power Sector.” The event, hosted by the government of Ghana, brought together more than 50 speakers—and more than 300 participants—from the African School of Regulation, the World Bank, and the Rockefeller Foundation, along with MITEI and the Global Commission to End Energy Poverty.

“Sub-Saharan Africa has more than 600 million people without electricity,” Perez-Arriaga notes. “Energy poverty is a huge problem, so with the conference we are trying to draw attention to the instrument of concessions as an approach that combines business, regulatory, and financial aspects in a way that can improve the performance of utilities and attract private investment. Concessions have frequently been ignored in the current policy debate, and we wanted to reverse that trend.”

Confronting challenges

In most countries with significant levels of energy poverty, Stoner says, the major problems lie not in generation or transmission of electricity, but rather in distribution. Often, distribution utilities fail to provide reliable service, which discourages customers from connecting to the grid. Many who do connect do so illegally, drawing power without paying for it, which drives up costs for paying customers. Also, distributing electricity to rural areas is typically a losing proposition from a financial perspective, making it difficult for governments or private operators to build viable systems that provide universal access.

“The distribution system is where the rubber meets the road,” Stoner says. “It’s where all the hardware of the electrical system comes into contact with the customers.”

To solve these problems, Stoner says, governments would benefit from designing concessions in new ways. For instance, concessions can be designed with viable business models for off-grid solutions like minigrids and standalone systems, based on affordable tariffs—along with subsidies to developers. Sub-franchises can be created that carve out territories within presently unviable distribution companies, where suitable combinations of diverse customers can make possible viable business models.

Santos José Díaz Pastor, a member of the Universal Energy Access Lab, helped to organize the conference. While the ideas behind utility concessions are sound, he says, it is challenging to apply those ideas to dozens of different countries that all have their own specific features.

“There’s no framework that works everywhere,” he says. “When you analyze concessions, there are so many things you can adapt to each country. The major problem is getting the capital to make all the investments that are needed. But implementation is where the plans usually fail. You have to design business models with financing schemes that are sustainable over the long term.”

Learning from the past

Pérez-Arriaga says that governments and private operators are already applying lessons learned from previous concession agreements. For instance, he points to a concession in a flood-prone area of India. After the area was hit by a cyclone, the government held the private operator responsible for repairing the damage—only to see the company go broke and abandon the area. But in a more recent concession agreement in the same region, Pérez-Arriaga says, the government stepped in to provide funding after a natural disaster, allowing the private operator to restore service to most areas within 24 or 48 hours.

“The company has the confidence that they are supported by the government, and so they will do everything that is needed to provide good service,” he says.

Another important lesson: Governments and private operators must collaborate and ensure that their agreements will be financially viable for all parties. In one concession agreement in Senegal, Pérez-Arriaga says, the government maintained control of the more economically viable urban distribution systems, while giving over control of unprofitable rural distribution systems to a private operator, with unsatisfactory results.

“The regulated tariffs were unable to cover the cost of the service, and there were no subsidies,” Pérez-Arriaga says. “You have to create a concession business model that is viable and sustainable, and that typically requires cross-subsidization among urban and rural areas. Also, people have to learn to write sound contracts—for instance, with clear termination clauses. There are silly mistakes that people have made, because they were not thinking of the many things that could go wrong.”

Looking ahead

Grégoire Jacquot, who was a MITEI research fellow while helping organize the conference, says organizers had three main goals for the event. First, they wanted to create a platform for in-depth discussions about how utility concessions should be structured and financed. Second, they wanted to build a network of senior practitioners who could advise one another on the topic. And, finally, they wanted to pave the way for a larger, in-person conference later in the year.

“The experts were eager to share,” Jacquot says. “I could feel the enthusiasm. For the first time, they had an opportunity to talk in a structured way about their experiences.”

“We don’t want to only talk about concessions and energy poverty once a crisis appears, or when a development bank has money for a project,” Jacquot adds. “Our vision is to use concessions at a large scale and back these concessions with strong, quantified plans to reform the power sector.”

Pérez-Arriaga calls the event an “appetizer” for the work to come on concessions in the energy sector. “What we are trying to do is mobilize the governments, the development partners, the big institutions, to address the problem of access to electricity,” he says. “We are trying to mobilize billions of dollars. This is a marathon.”

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