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p. 9 of 30 BACK | NEXT Introduction Regional Energy Context Energy Policy Issues Structural Reform Background Multilateral Coordination Power Subsector Reforms Hydrocarbon Subsector Reforms Private Sector Role Energy Efficiency Energy Pricing Energy and Environment Rural Energy Development Regional Cooperation and Energy Development Conclusions and Recommendations

Bank Policy Initiatives for the Energy Sector : Energy Policy Issues : Structural Reform

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Background

11. The Bank's energy policy during the 1970s and 1980s had focused on (i) accelerated development of indigenous energy resources and supply augmentation, (ii) adoption of least-cost considerations in energy planning, (iii) efficiency in construction and operation of energy supply facilities, (iv) adoption of energy prices based on full cost recovery, and (v) institution building. Because the priorities of the international capital markets, multinational oil, and gas companies and the DMCs had not always been congruent, DMC governments found it necessary in the early 1970s to establish state-owned coal, oil, and natural gas companies to survey, explore, and develop their hydrocarbon resources. Successive oil price shocks with a major impact on the balance of payment of DMCs lent urgency to such state intervention. During the past two decades, these companies had achieved a measure of success in terms of hydrocarbon discoveries and development. In addition, a large pool of technically qualified personnel with hands-on experience has been developed in DMCs. Nonetheless, direct state involvement as owner in the hydrocarbon subsector may be regarded as a transitory phase mainly intended to initiate the subsector activities since many governments have subsequently encouraged private sector involvement in exploration and development. Power subsector developments have been mostly within the public sector.

12. Towards the second half of the 1980s, limitations of the existing energy sector structure (dominated in most DMCs by large public sector entities fully owned by the governments¹ and functioning as monopolies) became increasingly evident. In most DMCs, the systems had become large enough so that further increases in size were not likely to result in greater economies of scale. In a number of DMCs, revenue flows were found inadequate to cover a reasonable share of investment costs after meeting debt service and operation and maintenance (O&M) expenses because energy prices were often too low, revenue collection unsatisfactory, and system losses high. Management and staff performance remained poor partly because of unattractive pay and personnel policies not conducive to motivate and retain experienced personnel. As a result, O&M tasks were often inefficiently performed, leading to frequent plant breakdowns, unreliable quality and availability of services, and eventually to further investments in new capacity additions. Revenue flows in the energy sector were inadequate despite a monopoly structure largely due to public ownership. In fact, whenever a commodity is publicly supplied at less than its true value, various consumer groups tend to organize and spend resources to capture and extend the entitlements to that commodity. Such organization by “beneficiaries” tends to make reversal of inefficient pricing policies politically difficult.

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