Why it Matters
WHY DOES GETTING ELECTRICITY MATTER?
Infrastructure services (or lack thereof) are a major concern for businesses around the world. Unreliable electricity supply and high tariffs, in particular, can be hurdles to entrepreneurial activity. According to 2017 World Bank Enterprise Survey data for 136 economies, business owners find electricity services as the fourth biggest obstacles to their activities (1). Obstacles to getting electricity, however, vary. For example, obtaining a new electricity connection may be difficult due to a burdensome connection process. Moreover, once connected to the grid, firms may face blackouts that undermine production or force businesses to resort to self-supply through generators, at a significant cost (2).
Whether electricity supply is reliable or not, the first step for customers is to get a new connection. Analysis of data for 190 economies suggests that the getting electricity indicators can serve as a useful proxy for the broader performance of the electricity sector (3). Not surprisingly, greater time and cost to get an electricity connection are associated with lower electrification rates. A cumbersome connection process, consisting of numerous procedures, is more likely to occur in economies with an unreliable electricity supply, as they are plagued by inadequate electricity generation, coupled with high losses in the transmission and distribution systems. According to Doing Business data, the region with the highest amount of procedures is South Asia, averaging an estimated 6 procedures. According to the International Energy Agency, South Asia also experiences the highest amount of electricity distribution and generation losses - averaging 19% of the total electric generation in 2016 (4).
The connection process is governed by numerous laws and regulations covering quality of service, general safety, technical standards, procurement practices and internal wiring installations. The process also involves several entities including utilities, municipalities, testing agencies, regulatory agencies and safety controls agencies. Doing Business provides insight into the regulatory environment concerning electricity connections and measures how regulations and institutions affect businesses getting a new connection. Doing Business can thus help identify the bottlenecks and help policy makers improve the process of getting a new electricity connection through the introduction of more conducive legislation and regulations.
While the efficiency of the connection process in each economy is important for businesses - as measured by the procedures, times and cost to get a new connection - it relates to only a small part of the overall power sector’s performance. Outages, for example, severely hamper business activity as well as the economy as a whole – from small households to large industrial factories. In Cameroon, businesses reported 9.9% value loss as a percentage of total sales due to power outages in 2016, according to the World Bank's Enterprise Survey. Studies have also shown that poor electricity supply adversely affects the firm productivity and their investments productive capacity (5). Further research shows that capital (domestic and foreign) tends to go to countries that are able to offer a reliable and competitively priced supply of electricity (6). In light of such challenges, and to capture the adverse effects of frequent and lengthy power interruptions, the reliability of electricity supply and transparency of tariffs was added during Doing Business 2016's cycle in order to quantify the reliability of of electric supply and the safeguards in place that help moderate outages and the risk of outages.
In most cases, a long-term approach is required to mitigate the adverse consequences of unreliable power infrastructure, through considerable capital investments in power system. The Doing Business findings also suggest that there is a wide array of practical actions that governments can take to ensure more reliable electricity service, having a robust regulatory framework with the right oversight and incentives, establishing minimum quality standards on service continuity, ensuring timely investments in power system infrastructure are done, including investment in automated systems to identify network faults and restore service more efficiently, etc. The Governments role is instrumental for the majority of measures that can improve the reliability of electricity supply to customers.
Electricity services are among the most regulated areas of economic activity, and research has shown that sector performance is linked to the quality of regulatory institutions. A study covering 28 developing economies found that high quality regulatory governance is associated with higher per capita electricity generation (7). Energy regulators play various roles across economies, going from the supervision of electricity supply quality, through setting maximum thresholds for duration and number of power outages, to the setting of electricity tariffs for final consumers. In this sense, an independent energy regulatory agency can be essential for Governments to promote an efficient and reliable energy sector operation.
Finally, transparency of electricity tariffs is important for customers to be able to plan their expenses, better understand the utility billing system, and contest the charges when needed. Businesses need to know in advance of any change in expenditure to enable them to adjust their allocation of financial resources accordingly and properly forecast overhead costs. In some economies, the regulation requires utilities to announce changes several billing cycles ahead. In others, the regulator helps ensure that tariffs are published through different media outlets and that adequate information and details are provided so that customers can calculate their electricity cost.
1. World Bank Enterprise Surveys (2002–16). The data sample includes 139 economies.
2. Foster, V., and J. Steinbuks. 2010. “When do Firms Generate? Evidence on In-House Electricity Supply in Africa.” Energy Economics 32(2010): 505-514.
3. Geginat and Ramalho 2015. “Connecting Businesses to the Electrical Grid in 183 Economies"
4. International Energy Agency Statistics (1960-2014).
5. Calderon, César, and Luis Servén. 2003. “The Output Cost of Latin America’s Infrastructure Gap.” In The Limits of Stabilization: Infrastructure, Public Deficits, and Growth in Latin America, ed. William R. Easterly and Luis Servén. Washington, DC: World Bank; Dollar, David, Mary Hallward-Driemeier and Taye Mengistae. 2005. “Investment Climate and International Integration.” Policy Research Working Paper 3323, World Bank, Washington, DC; Reinikka, Ritva, and Jakob Svensson. 1999. “Confronting Competition: Investment Response and Constraints in Uganda.” Policy Research Working Paper 2242, World Bank, Washington, DC; Eifert, Benjamin. 2007. “Infrastructure and Market Structure in Least-Developed Countries.” Department of Economics, University of California, Berkeley; Limi, Atsushi. 2008. “Effects of Improving Infrastructure Quality on Business Costs: Evidence from Firm-Level Data.” Policy Research Working Paper 4581, World Bank, Washington, DC.
6. Audinet, Perre: Rodriguez Pardina, Martin, 2010. “Managing an Electricity Shortfall: A guide for policy makers”, The World Bank, Washington, D.C.
7. Cubbin, John, and Jon Stern. 2006. “The Impact of Regulatory Governance and Privatization on Electricity Industry Generation Capacity in Developing Economies.” World Bank Economic Review 20 (1): 115–41.