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The state of energy-sector reforms in the MENA region

First person by Roudi Baroudi

Introduction

What is energy sector reform and what is its purpose? Reform of the energy sector is to bring about change of the form of the sector through structural, institutional, legal and regulatory transformations to enable and promote efficient development and operations of the sector. The main outcome is to maximize the benefits of the sector through its contribution to economic growth and improvement in well-being of the population.

Reform of the energy sector is critical to minimize monopolistic behavior and tendencies, promote efficient use of energy and of productive resources, enable market-determined prices through competitive pressures, to bring about order instead of chaos and enable the freedom of choice for all the actors in the energy sector.

The success of reform requires basic prerequisites: (i) a sound national energy sector policy sets out the government's intentions in the sector aimed at ensuring that the sector's potential to drive economic growth and improvements in welfare is fully harnessed. It defines the role of government as the policy maker and the roles of the operators in the sector, including the private sector, as well as those of the regulatory agencies. In brief, the basic political, economic and regulatory principles, and the institutional structures necessary to achieve sustained efficient operations and development of the energy sector; (ii) formulation of a medium- to long-term strategy, which translates the policy principles into concrete actions and programs, to be implemented over time and associated financing requirements, public institutional structures necessary for the strategy implementation; and (iii) the formulation and adoption of the legal and regulatory framework based on the energy policy principles, which provide the rules of the "game," ensuring fair and equal treatment of all actors in the sector. The legal and regulatory framework provides the "rule of law and democracy in the energy market place," without which the proper functioning of energy market for maximization of benefits become illusive.

The reform agenda

The agenda for reform must fit with the long-term objectives of the sector as explained above, and, therefore, the kinds of transformations that must be instituted. In most countries, the energy sector comprises of two main sub-sectors, the electric power sub-sector, and the oil and gas sub-sector. The transformations that must take place concern mainly the following areas:

Sector and market structure: unbundling large vertically integrated monopolistic utilities into smaller, independent - legally and functionally independent - companies along lines of technical and business operations to create the environment for competition. In the electric power sector, such unbundling will be for generation, transmission and distribution. Generation and distribution can comprises multiple independent companies, but transmission, in most cases, would remain a natural monopoly to provide, ultimately, open-access under clear and transparent regulations to all producers, distributors and other large illegible consumers. While such unbundling would enable competition and efficiency improvements in large power systems, such as in Egypt, competition through unbundling is not achievable in small markets, such as in Lebanon. However, in a regional power pool, with an open-access transmission regime, under clear and transparent pricing and operational rules, unbundling of all monopolistic structures, large and small, would assure maximum benefits from trade. On the other hand, in small power systems, such as in Lebanon, where efficiency, quality of service and viability have become major concerns, the unbundling of Electricite du Liban into strategic business units of generation, transmission and distribution - with trading arrangements among them - could foster better accountability and responsibility, as well as enable efficiency and viability improvements.

Legal and regulatory instruments: these define the codes, rules, guidelines, licenses and permits, performance criteria and monitoring indicators, tariffs and price setting, consumer protection and consumer rights. The instruments should also clearly define the role of the private sector, as well as those of the public institutions in the sector. They must be transparent and predictable and provide for equal treatment of all the actors to enable easy entry, exit and freedom of choice. Thus the legal and regulatory instruments provide for the "rule of law and democracy" in the energy marketplace.

Institutional reform: the government should remain the policy maker, and relations between the government and public entities must be at arm's length to minimize political interference in the day-to-day operations of the sector. Similarly, regulatory agencies must not be or be perceived to be interfered with politically and must assure to a large extent the independence of the regulatory agencies. The legal instrument should provide for these, and the operating budget of the agencies should be based on levies on the operators in the sector through issuance of licenses, and levies.

Pricing reform and sector viability: prices should meet objectives of economic efficiency, financial viability and equity. Viability of entities through cost-effective pricing that enables adequate return on investments eliminates the need for government subsidies and improves the attractiveness of the sector to private investors. To address equity concerns, a special life-line rate tied to specified level of consumption could be designed to protect poor-household consumers.

The same reform agenda would apply, in principle, to the oil and gas sub-sectors to create the necessary conditions to attract private investments, which are critical for the sub-sector, because of the large investment needs, as well as the needs for modern technology and expertise. However, the absence of a comprehensive and transparent hydrocarbons law in most countries in the region has become a major constraint to attracting private investments in a significant manner.



The status of energy-sector reforms in the Middle East and North Africa (MENA):

Most countries in the MENA region have national energy policies. However, there are a few such as Lebanon, where a national energy policy appears to be nonexistent. As such, there is no vision or national strategy to address the issues confronting the sector and to set the right platform for future development. In a number of other countries, energy policies are rooted in state control and monopolistic institutional structures that constrain competitive and efficient performance and development of the sector. In a few cases, the policies promote some degree of market liberalization - including the role of the private sector - and even-handed regulatory oversight that provides for, to a large extent, a level playing field for all the actors in the sector.

The reform scorecard

Jordan appears to be the lead in the few cases described above. The government has adopted a comprehensive set of energy-sector policies that clearly lays out the vision of government for the efficient operation and development of the sector over the medium to long-term. The Electricity Law establishes and defines the role of the Electricity Regulation Board and its independence, as well as the other actors in the electricity sector. The secondary regulations, based on the electricity law, are transparent and enable for private sector participation and competition for efficiency. A competitive power-sector structure has been established with legally and functionally independent companies for generation, transmission and distribution. In view of the advanced stage of the reform, including the enabling legal and regulatory environment, Jordan has been able to attract private sector independent power producers to expand the power-generating capacity. The public-sector role in power generation has been curtailed to focus on bulk power transmission, system operation and rural electrification. Most power distribution has always been a private-sector venture. The petroleum sector is liberalized with several actors engaged in products distribution, with light-handed regulation of the distribution market provided by the Energy Ministry. Oil-refining activity is a monopolistic activity, and as such regulation by the Energy Ministry is heavy-handed.

For most of the other countries, the state of reform is mixed. In North Africa, the power sector is dominated mostly by monopolistic, state-owned companies, and regulatory oversight is provided by energy ministries. A similar situation prevails in Lebanon and Syria. In Egypt, although power-sector reform has seen much progress, further reform of the regulatory environment is needed to enhance efficiency of the sector and to attract private sector investments to assist in meeting the large investment needs to expand the power supply infrastructure to meet the rapidly growing demand. In most countries, the upstream oil and gas sectors remain firmly under state ownership and control, because of the significant role of these sectors in the economies of the countries.

Why MENA is behind other developed countries in energy-sector reform

The main reason is that most countries are energy-resource-rich countries, with the exceptions of Lebanon, Jordan and Tunisia, and therefore see very little need and justification for reforms. Efficiency of energy use is of little concern, and consumption is heavily subsidized. Private-sector arrangements are made through contracts for mostly upstream oil and gas exploration and development. Since oil and gas are the mainstays of the some of the economies, contributing significant proportions of the gross national product, the states have taken commanding heights of the activities in the sector. Even where power interconnections exist, most are utilized only as emergency stand-bys. Jordan and Egypt appear to be the only two countries in the region that have harmonized their power interconnection to operate in synchronism under common-frequency regulation and the sharing of common spinning reserve. Political differences and mistrust among countries has been a contributing constraining factor to the formation of a regional power pool and the associated market structure that would reduce overall energy cost in the region, enable conservation of natural resources and promote the industrial competitiveness of the region.

The economic benefits of energy sector reform

The reforms of the energy sector is mainly an attempt to bring the functioning of the energy markets in line with the guiding principles of free, competitive markets. As such, the benefits that accrue to free markets could apply to energy markets subject to the degree of reform. However, due to the constraints of natural rigidities characteristic of energy-supply systems and social dimension of energy use, competitiveness for efficiency and the benefits that accrue from such situations are limited. However, the benefits of reform can be seen through lower cost in production, consumer prices that reflect economic costs, efficiency of consumption that in turn induces efficiency of investments, the participation of the private sector in the development of the supply infrastructure and thus the freeing of public resources for improvement of social welfare. Even though all these aspects are well known by governments, the political and social considerations have been the predominant constraints to moving to achieve the levels of reforms to fully maximize the contributions that the energy sector can make to economic growth and improvements in welfare and to promote producer and consumer choices in a competitive market environment.


Roudi Baroudi is an energy and privatization expert.

Beirut,04 16 2008
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