Supervivencia Global (SG) y Supervivencia Libre de Enfermedad (SLE)

Africa has the highest percentage of state- owned infrastructure utilities of any developing

118 AFRICA’S INFRASTRUCTURE: A TIME FOR TRANSFORMATION

region. Given the mixed record; the absence of investor appetite; and the antipathy of African offi cials, nongovernmental organizations, and many observers of development toward private participation—and the resulting increasing reluctance of the donor community to push for privatization in infrastructure—state own- ership is likely to be the norm for some time.

The track record so far in governance reforms is not encouraging and varies sub- stantially across sectors and countries. One must start with the recognition that a few African state-owned infrastructure fi rms have sustained good performance in the absence of private participation. Botswana and Uganda show that fully state-owned African utilities can deliver high-quality performance (see box 4.4 and box 4.5, respectively).

The cost of inaction implies high hidden costs. The estimated hidden cost of ineffi ciency coming from mispricing, unaccounted losses, and collection ineffi ciency is on average equal to 0.6 percent of GDP in the water sector and 1.9 percent of GDP in the power sector. The ineffi ciency of SOEs can also be measured by excessive employment. In the telecommu- nication sector, the hidden cost of excessive employment is on average equal to 0.1 percent of GDP.

Only limited success in achieving full cor- poratization, including establishing limited liabilities and introducing rate of return and dividend policies, has been recorded in Africa. The telecommunication sector alone can be reported as a success story, with electricity and water lagging, proving that even coun- tries with high scores compare poorly with other regions.

More limited corporate governance reforms have been started more evenly across all sec- tors and are becoming a dominant feature in electricity and water. These changes include the introduction of boards of directors (even if the size tends to be either too large or too small compared with international standards), selec- tion of board members according to a com- petitive process rather than direct appoint- ments by line ministries, and the introduction of independent directors (fi gure 4.11).

Performance contracts with incentives and independent external audits have become dominant features of the governance reform pro- cess for both electricity and water (fi gure 4.12). Independent audits have also been good for effi ciency in both cases.

Of governance reforms that appear to be the most important drivers of higher performance, two appear especially promising: performance contracts with incentives and independent external audits (table 4.4). Uganda has had good experience with a performance contract in its water company, providing the utility with incentives for good performance and produc- ing greater accountability (see box 4.5). The introduction of independent audits has also positively affected effi ciency for both electric- ity and water utilities.

What can such cases teach? First, recast and reapply the performance contract approach to SOE reform. Initial attempts to improve African SOEs using this device were mini- mally effective, but recent efforts have had a stronger and much more positive effect. The more recent performance contracts applied with some success in Uganda (and, reportedly, in Kenya) should be studied and modifi ed for broader application to African utilities across sectors.

Second, renew efforts to strengthen the fi nancial and operational monitoring of SOEs.

B O X 4 . 4

Lessons from Successful SOE Reforms in Botswana Power Corporation

The state-owned and -operated Botswana Power Corporation has long provided reliable, high-quality service. Over the years, Botswana Power has expanded its network in both urban and rural areas, covered its costs, posed no burden on the government bud- get, minimized system losses (10 percent), and earned a decent return on assets. Although the availability of cheap imported power from South Africa (now severely threatened) is part of the expla- nation for good performance, analysts give fi ve institutional factors equal weight in explaining this success: (a) a strong, stable economy, (b) cost-refl ective tariffs, (c) lack of government interference in mana- gerial decisions, (d) good internal governance, and (e) competent, well-motivated staff and management.

Building Sound Institutions 119

Some of the structures implied in the Organi- sation for Economic Co-operation and Devel- opment’s Principles of Corporate Governance for SOEs (favoring a centralized ownership

function through an independent agency ver- sus a decentralized structure) have not yet been suffi ciently “tested” in practice and may not suit all developing countries. A centralized

0 20 40 60 80 100 water electricity % of utilities % of utilities

a. Ownership and shareholder quality b. Managerial and board autonomy

telecommunications telecommunications electricity water 0 10 20 30 40 50 60 70 80 90 100

corporatization limited liability rate-of-return policy dividend policy

size of the board

presence of independent directors

selection of board members

Figure 4.11 Prevalence of Good Governance Practices among State-Owned Enterprises for Infrastructure

Source: Vagliasindi and Nellis 2009.

Note: See box 4.1 for definitions of institutional indicators.

B O X 4 . 5

Between 1998 and 2004, the National Water and Sewer- age Corporation (NWSC) system operated under two man- agement contracts with private providers. By the end of the second contract, neither party had an interest in continuing. After 2004, public managers, operating under performance contracts, were responsible for the service. A review of per- formance during the entire period concluded that the targets set for the private management contracts were fulfi lled but that the public management team furnished similarly good performance. The main stages in the enterprise reform pro- cess are described below.

From February 1999 onward, the management of the NWSC in Uganda has sequentially implemented a number of reform programs. First, local offi cials, called area service providers (areas), negotiated with central authorities a set of tightly defi ned performance targets. Second, area manag- ers were given control over running the process. Third, they were held strictly accountable for specifi c results.

A number of measures including the 100-day program and the service and revenue enhancement programs resulted in better specifi cation of targets for the areas. The programs

also increased the head offi ce’s commitment to provide fi nancial and material resources to enable different areas to implement rehabilitation and investment programs.

In 2002, automatic tariff indexation was introduced. In addition, the Stretch-Out Program increased staff com- mitment by improving internal communication and setting tougher performance targets and corresponding incentives. A one-minute management system was introduced to further enhance individual staff members’ accountability for targets.

The government introduced a three-year performance contract in 2000. The NWSC’s debt service obligations were suspended in return for a commitment to operational and fi nancial improvements and an increase in coverage.

In 2003, a second performance contract continued the suspension of debt service and specifi ed that NWSC’s debt would be restructured to a sustainable level. A review com- mittee monitored implementation of the agreement. The main incentives of the agreements are bonuses for manag- ers and staff, if performance targets are achieved.

Sources: Baietti, Kingdom, and van Ginneken 2006; Vagliasindi 2008a.

120 AFRICA’S INFRASTRUCTURE: A TIME FOR TRANSFORMATION

Figure 4.12 Prevalence of Performance Contracts in Electricity and Water

Source: Vagliasindi and Nellis 2009.

% of utilities 0 20 40 80 60 100 water electricity performance contracts

performance contracts with incentives penalties for poor performance

Table 4.4 Links between Governance and Performance Indicators for Electricity and Water

Technical losses per employeeConnections Access

Reform/sector Yes No Yes No Yes No

Performance contracts Electricity 24.2a _23.3a _{176.8** 103.0 14.6}a _28.1a Water 36.2 33.6 13.6 6.2 28.1 14.6 Independent audit Electricity 22.9 28.3 164.3** 92.7 22.0 9.6 Water 35.2 35.7 7.6 6.0 9.6a 22.0a

Source: Vagliasindi and Nellis 2009.

Note: **Performance differential is statistically significant at the 5 percent level. a. The sign of the links between the variables is not as expected.

structure, where the owner is the ministry of fi nance rather than an independent agency, is more suited to the limited physical and human resource bases of most African countries. Moreover, it has been implemented relatively successfully in several developing countries. Under a decentralized or dual model—where the owner is the sectoral ministry or both a central authority (the ministry of fi nance or treasury) and the sectoral ministry—the cen- tral authority can collect and monitor infor- mation about the state-owned enterprises and

their economic performance, including the detailed structure of subsidies and intersec- toral arrears (Vagliasindi 2008b).

Do Independent Regulators Make