THE JOURNAL OF ENERGY

AND DEVELOPMENT
Henri Atangana Ondoa and
Achille Jean Baptiste Nsoe Nkouli,

The Effects of Regulatory Agencies

of Sub-Saharan Electricity Companies
on Social Welfare,
Volume 39, Number 1

Copyright 2014

THE EFFECTS OF REGULATORY AGENCIES OF

SUB-SAHARAN ELECTRICITY COMPANIES
ON SOCIAL WELFARE
Henri Atangana Ondoa and Achille Jean Baptiste Nsoe Nkouli*

n Sub-Saharan Africa, regulation of the post-reform energy sectors is a priority

since regulatory agencies for the electricity sector have been established in

*Henri Atangana Ondoa earned his Ph.D. in economy at the University of Yaounde II (Cameroon)
in collaboration with the African Economic Research Consortium (AERC). He is a lecturer at the
Faculty of Economics and Management of the University of Yaounde II and a researcher at the
Universitys Centre of Studies and Research in Economics and Management (CEREG). His research
specializations include public economics, econometrics, impact assessments, effectiveness/efficiency, and
development economics. The author has taken part in numerous impact assessments (with the UNDP,
International Development Research Centre, Economic Commission for Africa, AFROBOTER, and Rio
Tinto Alcan) in addition to holding internships with the International Monetary Fund, UNCTAD, and
AERC. He worked with SECOR Canada on the estimation of socio-economic effects related to the
expansion of ALUCAM group activities in Cameroon and on the UNDPs capacity assessment of
Cameroonian institutions. His articles have been published in Economics Bulletin, African Development
Review, African Journal of Economic Policy, and UNCTAD Virtual Institute Quarterly Newsletter.
Achille Jean Baptiste Nsoe Nkouli obtained a masters degree in economy, mathematics, and
econometrics from the University of Yaounde II; his Ph.D. thesis was on the performance of the electricity
industry in Sub-Saharan Africa. He is an economist in Cameroons Ministry of Economy, Planning and
Regional Development, where he evaluates the power sectors investment climate, improvement factors,
and transaction costs as part of the ministrys competitiveness committee. Previously, the author was
responsible for economic and statistical studies at Cameroons power utility (AES-SONEL) and worked
as a consultant on several energy projects at the national level (Electricity Sector Development Plan in
Cameroon) as well as at the sub-regional level (the Central African Power Pool) and continent-wide. The
author was Cameroons focal point during the consolidation of the Association of Power Utilities of
Africa database. He holds professional certificates from SNC LAVALIN/Hydro QUEBEC in the field of
electricity planning and pricing and is an associate researcher at CEREG.
The Journal of Energy and Development, Vol. 39, Nos. 1 and 2
Copyright 2014 by the International Research Center for Energy and Economic Development
(ICEED). All rights reserved.

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THE JOURNAL OF ENERGY AND DEVELOPMENT

various countries. These regulatory agencies were created because it is still believed they improve performance by leading to higher investment, productivity,
and service coverage and quality. Another reason is that effective regulation, including the setting of adequate tariff levels, is the most critical enabling condition
for infrastructure reform. Through regulatory agencies the governments protect
the interests of both investors and consumers and attract the long-term private
capital needed to secure adequate, reliable infrastructure services and to gain
social support for reforms. Regulation agencies clarify and allocate property
rights, sensibly assuming that private investors would not be subject to regulatory opportunism.1 However, some authors have shown that regulation always
leads to socially sub-optimal outcomes because of inefficient bargaining between interest groups over potential utility rents.2 Regulation is also subject to
political capture; indeed, political capture may cause a much greater threat
than the capture of producer groups outside of the political system. Where political capture occurs, the regulatory goals are distorted to pursue political ends.
Under political capture, regulation becomes a tool of self-interest within government or the ruling elite.3
In the electricity market, the focus of regulation is to prevent anti-competitive
abuses of market power, i.e., to balance the interests of suppliers with those of
their captive customers.4 For instance, they should satisfy both suppliers and
customers. Indeed, prices should be set at a level that allows energy providers to
recover the long-run marginal cost of delivering the service, including a fair
return on investment.5 More specifically, regulatory agencies are expected to set
tariffs that are in line with efficient costs, to ensure that minimum quality-ofservice standards are met, and to enforce the targets for connection of new
customers imposed by the governments. According to F. Steiner, electricity
market reforms generally induced a decline in the industrial price while the price
differential between industrial customers and residential customers increased;
this indicates that industrial customers benefit more from the reform.6 Electricity
market reforms must also encourage an increase in electricity access rates in
rural areas.
Despite the reforms undertaken in the energy sector, electricity crises are one of
the main problems in Africa. For instance, Sub-Saharan Africa has an electrification rate of 30.7 percent and by far the lowest rate (66.2 percent) in urban areas.
The situation is worse in rural areas where the rate of electrification is 16 percent.
In addition, according to the World Bank, only 50 percent of the Sub-Saharan
Africa population will have access to electricity by 2030.7 The consequences of
this energy shortage on social welfare are very dramatic. Indeed, the proportion of
people in Africa still depending on inefficient traditional energy sources is higher
than in any other continent. The dominant source of fuel in low-income African
homes is wood, which women and children spend many hours searching for and
collecting. Electricity could extend study hours for these school children and free

AFRICA: ELECTRICITY REGULATORY AGENCIES

75

up time for other activities for women. Deforestation associated with land erosion
and desertification continues to worsen the desperate need for firewood.
The aim of this paper is to assess the effects of regulatory agencies on social
welfare in 17 African countries for the period 20002010. Of course, the regulator is of limited value to the users if improvements on the supply side do not
translate into improvements in the service received by the users. To track this,
we adopt the approach developed by A. Estache and M. Rossi.8 Indeed, these
authors used three dimensions of social welfare: service coverage, quality of
service (frequency of interruptions), and residential tariffs to assess the effects
of regulatory agencies on social welfare. The remainder of the paper is organized as follows: in the first section we present the literature review, next is an
overview of the methodology, and in the last section the results of the study are
offered.

Literature Review
Economic regulation is premised on the existence of significant market failure
resulting from economies of scale and scope in production due to information
imperfections in market transactions, the existence of incomplete markets and
externalities, and resulting income and wealth distribution effects. It has been
suggested that market failures should be more pronounced and, therefore, make
the case for stronger public regulation in developing countries.9 J.-J. Laffont has
provided a model of regulation for network industries that recognizes the particular structural and institutional characteristics of developing countries and has
highlighted the role of effective regulation in achieving equitable and sustainable
expansion of infrastructure services in the poorest countries of the world.10 More
generally, it is to be expected that both the process and outcomes of a regulatory
regime will be determined by the specific institutional context of an economy, as
reflected in its formal and informal rules of economic transacting.11 By setting the
rules of the game, institutions affect economic development.12 M. Pollitt suggests that independent incentive based regulation is the best way forward.13 For the
competitive stages of electricity production, requirements are increases in the
number of firms (perhaps up to five or more actual or potential competitors) and
reductions in entry barriers (especially via the removal of legal restrictions on
entrants and the monitoring of discrimination in entry conditions set by other
stages of production). Increased market size (e.g., through the formation of regional markets) and the creation of an independent system operator facilitate
competition by immediately increasing the number of competitors, reducing entry
barriers, and eliminating the scope for discrimination.
Effective regulation achieves the social welfare goals set down by the government for the regulatory authority. In developing countries, the social welfare

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THE JOURNAL OF ENERGY AND DEVELOPMENT

objectives of regulation are likely not to be concerned simply with the pursuit of
economic efficiency but with wider goals to promote sustainable development
and poverty reduction. Efficient regulation achieves the social welfare goals at
minimum economic costs. The economic costs of regulation can take two broad
forms: the costs of directly administering the regulatory system and the compliance costs of regulation.14 For instance, in the United Kingdom because of
regulatory agency there has been a large price reduction in regulated transmission
and distribution charges (30 percent and 50 percent, respectively, between 1993 and
2005) and a trend reduction in overall prices toward the European Union average.
Additionally, there has been significant customer switching in all market segments
but, particularly, among households where 1.5 percent of households switch per
month. The cost of regulation remains low in relation to the total electricity bill and
is subject to a revenue cap of retail price index (RPI)-3 percent for each year.15
The establishment of regulatory agencies before liberalizing the electricity
sector results in the easy influence of political powers of such bodies and
questions arise regarding the transparency of the existing regulatory framework. J. Cubbin and J. Stern show that, in those countries where an independent
agency has been set-up, generation capacity has been improved, confirming the
relationship between performance of the utility sector and the governance of
regulatory institutions.16 C. Cambini and L. Rondi find that the inception of an
independent regulation agency has a positive impact on the investment decisions of a large panel of public utilities, including energy, telecoms, transport, and water companies.17 The existing literature shows that, the diffusion of
independent regulatory agencies (IRAs) in developing countries, coinciding
with the liberalization of utilities, is a case of effective regulation. The establishment of IRAs signals the intention to implement sector reforms, while
providing the entity legitimacy with legal backing increases the regulatory
reputation of a country.18 Strong and effective regulators have control over
tariff setting, network access terms, issuing of licenses, setting of delivery
terms, and settling disputes and enforcing punishments, as opposed to having
any of these functions left to government ministers. An important element of
independence is the tenure and terms of appointment of heads of regulatory
agencies or commissioners.19
Development of economic regulation of the power market that is applied
transparently by an agency that operates independently from influence of the
government, electricity suppliers, or consumers is fundamental. In the wholesale market, the focus of regulation is to prevent anti-competitive abuses of
market power. In the retail market, the focus of regulation should be on balancing the interests of suppliers with the interests of their captive customers.20
In addition, in a sample of Latin American countries, L. Andres, V. Foster, and
J. Guasch find important increases in quality, investment, and labor productivity and a decrease in employment in electricity, telecommunications, and water

AFRICA: ELECTRICITY REGULATORY AGENCIES

77

distribution services.21 Some studies find that the quality of governance and
institutions is important in explaining rates of investment, suggesting that one
way in which better governance can improve economic performance is by
improving the climate for capital creation.22 M. Olson et al. find that productivity growth is higher in countries with better institutions and quality of
governance.23
However, regulation of markets may not result in a welfare improvement
as compared to the economic outcome under imperfect market conditions. Information asymmetries, in particular, can contribute to imperfect regulation. The
regulated agent holds the information that the regulator needs to regulate optimally
and the regulator must establish rules and incentive mechanisms to coax this information from the private sector. Given that it is highly unlikely that the regulator
will receive all of the information required to regulate optimally to maximize social
welfare, the results of regulationin terms of outputs and pricesremain second
best to those of a competitive market, which centers attention on barriers to entry.24 C. Shapiro and R. Willig argue that state ownership provides more information to regulators than private ownership.25 So that contracting should be less
problematic when the state both owns and regulates. Welfare-improving regulation assumes that the regulatory authoritys actions are motivated by the
public interest. This has been criticized by public choice theorists who argue
that individuals are essentially self-interested in or out of the public arena and
it is necessary, therefore, to analyze the regulatory process as the product of
relationships between different groups.26 This has been refined in the concept
of regulatory capture, which involves the regulatory process becoming biased in favor of particular interests. L. Andres, V. Foster, and J. Guasch find an
ambiguous effect of privatization and regulation on prices.27 This result is
along the lines of theoretical predictions, which point to two effects of reforms:
a reduction in price due to an improvement in efficiency and an increase in
price due to the elimination of explicit and implicit subsidies and cross-subsidies
often present in the sectors analyzed. Which of these two effects will dominate
depends on the initial situation and the regulatory environment. Y. Zhang et al.
demonstrate that in developing countries privatization and regulation do not
necessarily result in any enhancement of performance without competition.28
Generally, privatization is associated with greater access to services and lower prices;
although, it is sometimes coupled with an increase in competition and in the presence
of independent regulation. C. Fink et al., using International Telecommunication
Union (ITU) data for 86 developing countries from 19851999, again found
that the largest increases in quality appear when privatization is coupled with
independent regulation.29
Concerning the effects of regulation on prices, F. Steiner found that regulation
is not associated with lower prices but is associated with a lower industrial to
residential price ratio and higher capacity utilization rates and lower reserve

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margins.30 T. Hattori and M. Tsutsui found that, first, certain reforms like regulations are likely to lower the industrial price, meanwhile they increase the price
differential between industrial and household customers.31 They also concluded
that the unbundling of generation did not necessarily lower the price and may have
possibly resulted in higher prices. According to these authors, a large share of
private ownership lowers the industrial price but may not alter the price ratio between industrial and household customers. In addition, although liberalization as
a form of regulation lowers prices, costs, price-cost margins, and provides reliable
and secure supply, liberalized markets increase price volatility.32 Other factors, not
properly accounted for, such as fossil fuel price movements, technological innovations, and changes to regulatory practices are more likely to lead to price
reductions than if reforms had not taken place.33 C. Fiorio et al. rejected the prediction that privatization and regulation lead to lower prices or to increased consumer satisfaction.34 They also found that country specific features tend to have
a high explanatory power and the progress toward the reform paradigm is not
systematically associated with lower prices and higher consumer satisfaction.
Furthermore, state ownership is associated with inadequate incentives to gather and
use this information to maximize economic welfare. In other words, there tends to
be a tradeoff between state ownership reducing the information asymmetries and,
hence, transaction costs of regulation plus the relative incentives under state
control and private ownership for agents to maximize economic efficiency.35
In the context of Africa, it was found that regulation is being examined as part
of individual sector initiatives, but these efforts are uncoordinated, and implementation is being left to follow privatization instead of being put in place concurrently.36 A similar pattern of regulatory weaknesses can obviously be discerned
for individual countries. South Africas proliferation of regulatory bodies is associated with a lack of clarity about roles and responsibilities and with the
adoption of policy-making roles independent of government.37 In Malawi, the
electricity industry regulator remains closely connected to the state electricity
industry, compromising any notion of real regulatory independence and encouraging capture. Furthermore, in many countries and especially in Africa,
incumbent firms remain dominant for both generation and supply markets and
further structural reform seems necessary if the theoretical conditions upon
which successful reform is based are to be achieved in electricity markets.38
A. Estache and M. Rossi analyzed the impact of change in ownership on labor
productivity and prices in Latin America.39 They also evaluated how the different
regulatory environments affected these outcomes. They found that private firms
use significantly less labor to produce a given bundle of output than public firms in
the region. Using similar data, M. Rossi also analyzed the firms operating and
maintenance expenses.40 He found that these costs did not change significantly
after the reform and argued that outsourcing, in part, might bias the results for the
decrease in labor usage and labor productivity.

AFRICA: ELECTRICITY REGULATORY AGENCIES

79

Methodology
Two main strategies have emerged for estimating the effect of regulation on
social welfare. For the first strategy, W. Megginson et al. used differences in
means and medians before and after reforms and then tested the statistical significance of those differences.41 This strategy attempts to isolate the effect of
reform over time using panel data techniques.42 These studies correct for omittedvariable bias and consider initial conditions of companies. These authors analyzed several partial measures of social welfare: employment, output, and
coverage.43 The strategy stems from the treatment literature.44 This method
uses a dummy variable equal to 1 for the post reform period and then tests the
statistical significance of the coefficient on the dummy variable as well as that
of different interaction terms that include the dummy variable. In the context of
a panel, most impact studies use a difference-in-differences technique to account simultaneously for the difference between periods before and after an
event and for one between treatment and control groups.45 The second strategy
is the general method of moments that uses lagged levels of the dependent and
predetermined variables as instruments for the differenced equation because
certain independent variables are endogenous. For this reason, we will use the
second approach in this study.
Data Source and Descriptive Analysis: Data used in this study come from the
Association of Power Utilities of Africa (APUA) and the World Bank. The APUA
dataset provides statistics on the main variables used in this study for 17 African
countries for the 20002010 period: Angola, Benin, Botswana, Cameroon, Republic
of Congo, Cote dIvoire, Ethiopia, Gabon, Ghana, Kenya, Mozambique, Nigeria,
Senegal, Sudan, Togo, Zambia, and Zimbabwe. Table 1 provides an overview of the
electricity situation in these nations as of 2010, along with a comparison to their
North African neighbors. One can see the challenges facing many nations, particularly in regard to their low levels of rural electrification.
We will now be presenting the descriptive statistics of the situation for our panel
of countries (see table 2). The estimates show important improvements in the service
quality. In fact, although the growth rate of the number of service interruptions per
month has increased (0.4 percent), the growth rate of waiting times to be connected has decreased (69 percent). The descriptive statistics also show the
expansion of the network (6 percent) but the operational installed capacity has
decreased (2 percent). The consequences of the network extension on energy produced are very positive since the growth of energy losses is 14 percent and 6 percent
for energy sold. The consequences of the growth of energy produced on social welfare
are also positive since the net increase in the number of connections is approximately
6 percent and the average annual increase of electrification rate in rural areas is
8 percent during the period 20002010. It is also important to note that the average

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Table 1
RATE OF ELECTRIFICATION IN SELECTED AFRICAN COUNTRIES IN 2010

Angola
Benin
Botswana
Cameron
Congo, Rep.
Cote dIvoire
Ethiopia
Gabon
Ghana
Kenya
Mozambique
Nigeria
Senegal
Sudan
Togo
Zambia
Zimbabwe
Total/mean (sample)
Sub-Saharan Africa
North Africa
Algeria
Egypt
Libya
Morocco
Tunisia
Africa

Population
without
Electricity (in
millions)

Electrification
Rate (in
percent)

Urban
Electrification
Rate (in
percent)

Rural
Electrification
Rate (in
percent)

11
7
1.1
10
2.4
9
65
0.6
10
34
20
79
6
28
5
11
8
Total = 307
589
1
0.2
0.3
0
0.4
0.1
589

40
28
45
49
37
59
23
60
61
18
15
50
54
36
28
19
37
Mean = 38.7
31.8
99.4
99.3
99.6
99.8
98.9
99.5
42.9

63
57
68
73
54
85
85
64
85
65
36
78
83
48
54
48
79
Mean = 66.2
64.2
100
100
100
100
100
100
72.1

8
7
10
14
10
32
11
34
35
5
2
23
32
28
8
2
11
Mean = 16
12.9
98.7
98
99
99
97
99
23.6

Source: World Bank, Africa Electrification Initiative (Washington, D.C.: World Bank, 2012).

level of tariffs is estimated at U.S. $814 due to the country of Zimbabwe, which had an
average level of tariffs estimated at U.S. $39,454 during the period 20002010.
In table 3, we compare the effects of regulatory agencies on certain indicators
of performance and social welfare. Concerning the indicators of performance, our
estimations show that the effects of independent regulatory agencies on the performance of electricity firms are positive. When compared to self-regulation or
controlled by a ministry, a regulatory agency does a better job at monitoring
electricity distribution companies and takes remedial action. Our study shows that
the effects of independent regulatory agencies on network extension and operational installed capacity are positive. The growth rate of network extension and the

AFRICA: ELECTRICITY REGULATORY AGENCIES

Table 2
DESCRIPTIVE STATISTICS FOR 17 AFRICAN NATIONS, 20002010

81
a

Variable

Obs.

Mean

Std. Dev.

Minimum

Maximum

Energy losses

187

1.01e+09

1.31e+09

7.45e+07

8.09e+09

Operational installed
capacity

187

689,024.7

637,124.6

7,191.8

2,981,849

Length of distribution network

(in kilometers)

187

294,027.9

320,014

3,500

1,687,972

Number of employees

187

3,399.6

5,570.7

147

30,642

Number of customers

187

9,204,519

1.57e+07

557,022

8.06e+08

Total electricity sold (in kilowatt

hours)

187

5.13e+09

4.40e+09

5.00e+08

2.16e+10

Average residential tariff

(in U.S. dollars?)

187

814.17

4,934.72

1.41

39,454.28

Number of interruptions per

month

187

20.77

12.21

3.24

56.46

Waiting time to be connected

(in days)

187

111.74

53.26

55

270

Pools

187

0.59

0.49

Tax rate on energy sold

187

56.47

61.31

14.4

339.7

% of electricity produced by
petroleum (EP)

187

0.42

0.34

0.08

100

% of electricity produced by
hydropower (EH)

187

0.60

0.34

99.92

GDP per capita (in U.S. dollars)

187

1,419.16

1,966.67

104.81

10,021.87

Independent regulatory agencies

(IRAs)

187

0.53

0.50

IRAs for electrification in rural

areas

187

0.41

0.49

Privatized companies

187

0.53

0.50

Electrification rate in rural area

187

10.39

10.18

51

Number of energy sources

187

2.29

0.96

5
(continued)

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Table 2 (continued)

DESCRIPTIVE STATISTICS FOR 17 AFRICAN NATIONS, 20002010

Variable

Obs.

Mean

Std. Dev.

Minimum

Maximum

Corruption index

187

2.78

0.54

Respect of environmental index

187

5.41

9.63

63.2

Growth rate of electrification in

rural areas

170

0.08

1.57

3.93

3.47

Growth rate of electricity

produced by hydropower

170

0.02

0.16

0.71

0.52

Growth rate of electricity

produced by petroleum

170

0.01

0.44

2.88

2.70

Growth rate of GDP per capita

170

0.04

1.43

3.95

4.36

Growth rate of tax on energy sold

170

0.06

0.09

0.29

0.37

Growth rate of number of

employees

170

0.02

1.97

3.24

5.06

Growth rate of network length

170

0.06

0.31

0.02

2.47

Growth rate of installed capacity

170

0.02

0.16

0.71

0.52

Growth rate of energy losses

170

0.14

0.68

5.86

1.58

Growth rate of number of

connections

170

0.06

0.06

0.07

0.32

Growth rate of energy sold

170

0.06

0.30

1.02

2.37

Growth rate of tariffs

168

0.08

1.00

1.82

4.11

Growth rate of electricity

interruptions

170

0.004

0.308

0.991

1.482

Growth rate of waiting time to be

connected

170

0.69

4.63

0.193

30

a
The 17 countries include Angola, Benin, Botswana, Cameroon, Republic of Congo, Cote dIvoire,
Ethiopia, Gabon, Ghana, Kenya, Mozambique, Nigeria, Senegal, Sudan, Togo, Zambia, and Zimbabwe;
Obs. = number of observations; Std. Dev. = standard deviation; and GDP = gross domestic product.
Source: Authors estimations.

growth rate of installed operational capacity are estimated at 8 percent and 1.7
percent, respectively, for the electricity companies under the control of IRAs.
These two growth rates exceed those of electricity companies under the control of
ministries. But, the effects of IRAs on employment are negative: 6.8 percent of

AFRICA: ELECTRICITY REGULATORY AGENCIES

83

Table 3
THE EFFECTS OF INDEPENDENT REGULATORY AGENCIES ON CERTAIN INDICATORS
a
OF PERFORMANCE AND SOCIAL WELFARE FOR 17 AFRICAN NATIONS, 20002010
Variable

Obs.

Mean

Std. Dev. Minimum Maximum

Presence of independent regulatory agency

Growth rate of energy losses

90

0.018

0.286

1.049

1.226

Growth rate of installed capacity

90

0.017

0.166

0.465

0.503

Growth rate of network

90

0.080

0.190

0.556

0.534

Growth rate of employees

90

0.068

0.084

0.201

0.271

Growth rate of connections

90

0.046

0.033

0.024

0.129

Growth rate of energy sold

90

0.058

0.083

0.120

0.303

Growth rate of tariffs

86

0.068

1.061

1.816

2.854

Growth rate of number of interruptions

90

0.004

0.263

0.991

1.077

Growth rate of waiting time to be connected

90

0.359

3.933

17

Growth rate of electricity rate in rural areas

90

0.088

0.223

20
1.299

Absence of independent regulatory agency

Growth rate of energy losses

80

0.243

0.880

5.863

1.582

Growth rate of installed capacity

79

0.018

0.163

0.706

0.518

Growth rate of network

80

0.048

0.377

1.019

2.367

Growth rate of employees

80

0.072

0.110

0.455

0.399

Growth rate of connections

80

0.066

0.071

0.075

0.323

Growth rate of energy sold

80

0.066

0.102

0.299

0.373

Growth rate of tariffs

78

0.087

0.950

1.700

4.110

Growth rate of number of interruptions

80

0.003

0.346

0.806

1.483

Growth rate of waiting time to be connected

80

0.986

5.481

19

Growth rate of electricity rate in rural areas

80

0.073

0.142

30
0.693

a
The 17 countries include Angola, Benin, Botswana, Cameroon, Republic of Congo, Cote
dIvoire, Ethiopia, Gabon, Ghana, Kenya, Mozambique, Nigeria, Senegal, Sudan, Togo, Zambia,
and Zimbabwe; Obs. = number of observations; and Std. Dev. = standard deviation.
Source: Authors estimations.

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employment growth for the electricity companies under the control of IRAs versus
7.2 percent for the others. By having an independent monitoring of the performance
of operators, the creation of a regulatory agency increases the accountability for the
quality and quantity of service, thereby reducing the scope for inefficient employment levels. Thus, the creation of a regulatory agency allows public operators to
run employment decisions much more in line with a profit-maximizing criteria,
which leads to a reduction in labor requirements. The introduction of a regulator
would push private operators to minimize costs and, hence, to reduce employment.
However, the effects of IRAs on social welfare are negative. In fact, the electrification rates are relatively low in countries that have created IRAs. In addition,
the quality of service is improving slowly in these nations while it is improving at
higher rates in other countries. It should be noted that the price of electricity is
relatively high in nations that have an IRA. The result can be explained by the fact
that regulatory agencies are expected to set tariffs that are in line with efficient costs,
to ensure that minimum quality-of-service standards are met, and to enforce the
targets for the connection of new customers.
Econometric Analysis: In this study, our variable of interest is regulation and in
our sample certain countries (9 in 17) that have created independent regulatory
agencies. The countries with IRAs are Cameroon, Cote dIvoire, Ethiopia, Kenya,
Senegal, Sudan, Togo, Zambia, and Zimbabwe; those without are Angola, Benin,
Botswana, Democratic Republic of Congo, Gabon, Ghana, Mozambique, and
Nigeria. In this perspective, we consider that the governments choose whether to
introduce a regulatory agency and that choice may be correlated to unobservable
factors that also affect social welfare. If Yit is the natural logarithm of the outputs
of interest (an indicator of coverage, the quality of services) for firm i; Xit is a set of
regressors; Dit is a dummy variable that takes the value of one if firm i operates under
the control of a regulatory agency during period t; ai is a time-invariant firm effect;
ut is a time effect common to all firms in period t; and eit is a firm time-varying
error distributed independently across firms and time, and independently of all ai
and ut. The parameter of interest, F, is the difference-in-differences estimate of the
average effect of introducing a regulatory agency on the outputs of interest; the
relation is given in equation (1).

Yit FDit lX it ai ut eit

Following A. Estache and M. Rossi, we use three indicators of social welfare:46

First, the quality of services are approximated here by two variables: the frequency of interruption of the electricity service (number of interruptions per
month) and the number of days spent while waiting for a connection = number of
days that elapse between the date of application for a connection and the effective
date of connection.

AFRICA: ELECTRICITY REGULATORY AGENCIES

85

Second, the access to the service is measured by the coverage rate, approximated here by three variables: total electricity sold (in kilowatt hourskWh), total
number of connections or customers, and electrification rate in rural areas.
Third, the last indicator is the average residential tariff (giving a sense of the
affordability of the service provided).
The use of energy sold as a measure of output might bias our estimates if the
presence of a regulatory agency is correlated with energy losses. Indeed, network
losses reflect the quality of the network system in terms of how much power is lost
in the transformers and during distribution and how much power is uncounted due
to other reasons, such as illegal use. Technical losses are related to the square of
the distance transmitted and, hence, our econometric model captures them. Our
main concern is related to non-technical losses associated with illegal use. In order
to address the problem of whether including network losses have any impact on
the estimated coefficients, we replace sales by sales + energy losses.
For the regressors, we use the length of distribution network in kilometers
(km), the total number of employees, the operational installed capacity, a dummy
variable that takes the value of one if the firm is under the control of a regulatory
agency, a dummy variable that takes the value of one if the firm is privatized,
a dummy variable that takes the value of one if the firm is in a pools market, and
a dummy variable for a regulatory agency for rural areas. We also have information on a set of country-level covariates including corruption, as measured by
the corruption index produced by the International Country Risk Guide, which
ranges between six (for highly clean) and zero (for highly corrupt). We include
country-level corruption and its interaction with the regulatory agency as additional controls. But even after controlling for corruption, a concern is that there
may be other country characteristics that are correlated with both labor efficiency
and the presence of a regulatory agency. To address this concern, we control for
a number of observed country-level time-varying characteristics such as the percentage of electricity produced by petroleum, the tax rate on energy sold, and the
percentage of electricity produced by hydropower sources. The summary statistics
are presented earlier in table 2.
To estimate equation (1), one can use the generalized method of moments
(GMM) of several variables (number of employees, installed capacity, length of
distribution network, and other endogenous factors). However, there are two
important points to be made about using the system GMM. First, because system
GMM uses more instruments than the difference GMM, it may not be appropriate
to use system GMM with a dataset with a small number of countries. Moreover,
one must recall that when the number of instruments is greater than the number of
countries, the Sargan test may be weak. In this study, we have only 17 countries.
Second, in a panel with fixed effects, including the equation in levels requires
a new assumption that the first-differenced instruments used for the variables
in levels should not be correlated with the unobserved country effects. Linear

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dynamic panel-data models include lags of the dependent variable as covariates

and contain unobserved panel-level effects, fixed or random. By construction, the
unobserved panel-level effects are correlated with the lagged dependent variables,
making standard estimators inconsistent. M. Arellano and S. Bond derived onestep and two-step GMM estimators using moment conditions in which lagged
levels of the dependent and predetermined variables were instruments for the
differenced equation.47 R. Blundell and S. Bond show that the lagged-level instruments in the ArellanoBond estimator become weak as the autoregressive
process becomes too persistent or the ratio of the variance of the panel-level effect
to the variance of the idiosyncratic error becomes too large.48 Building on the work
of M. Arellano and O. Bover, R. Blundell and S. Bond proposed a system estimator that uses moment conditions in which lagged differences are used as instruments for the level equation, in addition to the moment conditions of lagged
levels, as instruments for the differenced equation.49 A useful feature of Blundell
and Bond/Arellano and Bover is the ability to specify, for GMM-style instruments,
the limits on how many lags are to be included.

Results
The econometric results are presented in table 4. They do not present any
problem since the Wald statistic is high as are the Sargan test numbers; the time
dummies are statistically significant in all models.
The coefficient of the regulatory agency is negative and statistically significant.
The countries that have created an IRA connect about 12 percent fewer customers
for a given level of electricity (column I) and have 5 percent more electricity interruptions (column II). In addition, the rate of electricity in rural areas is relatively
low in countries that have created an IRA. The coefficients of privatization (an
aspect of regulation) are also negative (column I), i.e., the private participation has
a negative impact on the electrification rate. In particular, the regulatory agency
remains positively associated with high tariffs and waiting time for the first connection. Furthermore, corruption may divert managerial effort away from the
productive process, and the way for firms to meet their service obligations is to use
more inputs. Additionally, a regulatory agency might have a different impact
according to the countrys level of corruption. For instance, in column IV, the
coefficient of the interaction variable corruption and IRA is positive, indicating that
more corruption in the country is associated with poor quality of services. These
results suggest that regulatory agencies have a negative impact on social welfare,
a result that is likely to weaken improvements in cost-recovery efforts and tariff
rebalancing associated with the typical mandate assigned to independent regulators.
Several studies have justified these results. For instance, S. Wallsten showed
that privatization is associated with greater access to services and lower prices,

AFRICA: ELECTRICITY REGULATORY AGENCIES

87

Table 4
ECONOMETRIC RESULTS OF THE EFFECTS OF REGULATION ON SOCIAL WELFARE
(Dependent variables: I = number of connections; II = number of interruptions
per month; III = energy produced; IV = waiting time to be connected;
V = tariffs; and VI = electrification access in rural areas)
Variables

L.d Number of customers

0.229**
(0.122)

% of electricity produced
by hydropower

0.0031
(0.0113)

% of electricity produced
by petroleum

II

III

IV

VI

0.0381
(0.133)

0.191*
(0.108)

0.0674
(0.0866)

0.704
(0.506)

0.0827
(0.339)

0.0052
(0.0405)

0.0068
(0.0241)

0.0117
(0.0230)

0.253*
(0.136)

0.399***
(0.0852)

Gross Domestic Product

0.0103
(0.0077)

0.141*
(0.0776)

0.133***
(0.0497)

0.0356
(0.0477)

0.733***
(0.272)

0.229
(0.166)

Tax rate

0.0078
(0.0125)

0.248**
(0.102)

0.206***
(0.0423)

0.166***
(0.0629)

0.0848
(0.172)

1.162***
(0.133)

Number of employees

0.0132* 0.224*** 0.114***

(0.0068) (0.0549) (0.0253)

0.0415**
(0.0186)

0.0971
(0.109)

0.0454
(0.0773)

0.0102
(0.0270)

0.418***
(0.141)

0.119
(0.0944)

Operational installed
capacity

0.354*** 0.460***
(0.0690) (0.0286)

Pool

0.0711
(0.125)

0.0167
(0.0735)

0.183***
(0.0679)

0.321
(0.402)

1.098***
(0.271)

Corruption

0.0863
(0.218)

0.497**
(0.199)

0.783***
(0.0999)

0.192
(0.400)

1.008***
(0.228)

0.120*** 0.055***
(0.0302) (0.0306)

0.565**
(0.254)

0.388***
(0.133)

1.760** 0.360***
(0.723)
(0.101)

2.047***
(0.284)

Independent regulatory
agency (IRA)
IRA for rural areas
(IRARUA)

0.0509*
(0.0271)

0.241
(0.288)

(corruption)* (IRA)
(corruption)*
(IRARUA)

0.0282** 0.218***
(0.052)
(0.407)
0.573
(0.598)

0.417
(0.375)

0.565***
(0.115)
0.529***
(0.202)

Privatization

0.144***
(0.0484)

0.0164
(0.0276)

_Ianne_2004

0.0088
(0.0327)

0.530***
(0.128)

0.0144
(0.0256)
0.296**
(0.129)

0.979
(0.700)

1.061**
(0.435)
(continued)

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Table 4 (continued)

ECONOMETRIC RESULTS OF THE EFFECTS OF REGULATION ON SOCIAL WELFARE

(Dependent variables: I = number of connections; II = number of interruptions
per month; III = energy produced; IV = waiting time to be connected;
V = tariffs; and VI = electrification access in rural areas)
Variables

II

III

IV

VI

_Ianne_2005

0.0544*
(0.0287)

0.893***
(0.291)

0.622***
(0.131)

0.0131
(0.126)

2.210***
(0.822)

0.188
(0.479)

_Ianne_2006

0.0029
(0.0272)

1.436***
(0.293)

1.029***
(0.124)

0.153
(0.103)

2.710***
(0.809)

0.560
(0.399)

_Ianne_2007

0.0174
(0.0286)

1.176***
(0.291)

1.284***
(0.141)

0.0201
(0.112)

2.581***
(0.809)

0.176
(0.411)

0.280
(0.315)

1.039***
(0.169)

0.0757
(0.152)

1.586
(1.020)

0.0675
(0.591)

0.186
(0.139)

2.694***
(0.925)

0.137
(0.539)

_Ianne_2008
_Ianne_2009

0.0148
(0.0346)

0.244
(0.292)

0.879***
(0.155)

_Ianne_2010

0.0398
(0.0380)

0.857**
(0.371)

1.247***
(0.120)

L.d Number of
interruptions per month

6.203***
(0.712)

0.350***
(0.0844)

L.dlenergy (energy
sold+energy losses)

0.601***
(0.0631)

L.dlwaiting time to be
connected

0.460***
(0.0454)
0.206***
(0.0423)

L.ltariffs
L.dlrate of electrification
in rural areas

0.166*
(0.0853)
0.124***
(0.0400)

-0.454
(0.807)

7.977***
(2.098)

2.539***
(0.663)

10.95***
(3.692)

0.243
(2.280)

Observations

170

170

170

170

170

170

Number of pay

17

17

17

17

17

17

Constant

Wald Chis2

305(.000) 3296(0.00) 393(0.00) 1253(0.000) 255(0.000) 591(0.00)

Sargan test

40(0.016) 56(0.000)

58(0.00)

*** = p < 0.01; ** = p < 0.05; and * = p < 0.1.

Source: Authors estimations.

68(0.000)

51(0.01)

60(0.000)

AFRICA: ELECTRICITY REGULATORY AGENCIES

89

although only when privatization is coupled with an increase in competition and in

the presence of independent regulation.50 In Africa, certain countries have IRAs,
but the electricity market is open to competition. Additionally, in the electricity
sector, operational control is transferred to private operators in certain countries
while ownership of the assets remains with the state. One reason for the lack of
divestitures in the electricity sector may be that selling public energy assets to
the private sector is politically sensitive. Another is that energy, in particular, is
underpriced relative to the marginal cost of supply; investors may well be aware
of this and, therefore, be reluctant to take on the full risk of ownership, given the
historic reluctance of governments to pay or to allow cost-recovery tariffs.51 The
quality of IRAs is also questioned in Africa since R. Bacon and J. Besant-Jones
find few good agencies in this continent.52 Furthermore, only a few countries
(South Africa, Ghana, Cameroon, and Nigeria) introduced a substantial reform
program in their electricity industries.
Concerning the control variables, our estimations show that GDP per capita
is positively associated with energy produced and the number of electricity
interruptions but negatively associated with tariffs. There are two possible
explanations for these results. First, the positive correlation between GDP per
capita and interruptions of electricity can be explained by the fact that countries with higher levels of GDP per capita are relatively industrialized and
these industries exert a significant pressure on the network. Second, in certain
African countries, where below-cost pricing of essential utility services is well
documented, higher tariffs for all but the poorest households are often recommended as part of reform, to give a utility adequate resources to address shortfalls
in service. The result may point to the economic and political difficulties of
aligning tariffs with the costs of service provision. Its implications for revenue
streams call into question the sustainability of private involvement unless there are
explicit subsidy payments.
Operational capacity increases tariffs and energy sold but the frequency of
interruptions decreases with operational capacity. One possible explanation is
that services are initially so underpriced that even significant efficiency gains
do not produce a financial equilibrium or justify lower prices for certain private
electricity companies. Instead, the efficiency gains translate into better operational performance, such as reductions in distribution losses, and the government spends less subsidizing its utilities. Another explanation may be that
the private operator reaps all the gains through profits. Given the young regulatory environments in developing countrieswhich often lack sufficient
capacity for supervising public-private contractsthis possibility needs to be
considered.
In this study, it is shown that the electrification rate in rural areas is positively associated with regional integration and the percentage of electricity
produced by petroleum. Indeed, in African rural areas, electricity is mainly

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THE JOURNAL OF ENERGY AND DEVELOPMENT

produced by thermal power plants that use oil as the main source of electricity.
This mode of production is more expensive. This justifies why tariffs increase
with the percentage of electricity produced by petroleum compared to wind
energy. However, despite the positive trends and Africas potential supply of
wind energy, installed capacity of wind-based electricity in Africa was only
about 1.1 gigawatts in 2010, which does not exceed 0.5 percent of global
capacity. The disparity between the potential and the extent of exploitation
raises questions about constraints to development of wind energy on the
continent.53
Regional integration via the creation of an integrated market of electricity
should reduce tariffs and increase the rate of electrification in rural areas. Indeed,
regional integration is capable of bringing about additional benefits in terms of
reduced capital expenditures, lower electricity supply costs, and the enhancement
of the systems reliability compared to the autarkical strategy.54 Nonetheless, H.
Nagayama suggests that neither unbundling nor the introduction of a wholesale
pool market on their own necessarily reduces electricity prices.55 In fact, contrary
to expectations, there was a tendency for the prices to rise. He argued, however,
coexistent with an independent regulator, unbundling may work to reduce electricity prices.

Conclusion
In this study, we assess the effects of regulatory agencies on social welfare in 17
African countries for the period 20002010, with the data of the Association of
Power Utilities of Africa (APUA) and the World Bank. Two main methods have
been used: descriptive analysis and econometric analysis. The results show that the
effects of regulatory agencies on social welfare are negative because regulation is
not coupled with an increase in competition. But reforms like regional integration
and control of corruption can improve social welfare in the electricity sector. For
these reasons, it is important to note that liberalized markets need regulators, whose
central task is to make certain that market actors can operate on a level playing
field, have non-discriminatory access to the market, and that abuse of market power
is prevented. Regulatory bodies should be free from governmental and political
interference as well as the avoidance of capture-seeking behavior by market actors.
In this context, transparency is certainly a central aspect. Mobilizing private-sector
investment in Africas power sector will strengthen supply conditions in the industry. African authorities need to undertake reforms to dismantle obstacles that
constrain private investment in the electricity sector. In particular, the regulatory
bodies should reform the tariff structure and remove the subsidies to public power
utilities to allow for competitive price setting in the market. Regional integration
can also be beneficial. Indeed, regional integration creates economies of scale,

AFRICA: ELECTRICITY REGULATORY AGENCIES

91

permitting lower costs across all aspects of infrastructure, including the power
sector. Finally, African governments should collaborate with their development
partners in order to build a reliable power sector.
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