Public-Private Partnerships in Electricity Distribution Networks: International Experience and Prospects for Application

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Abstract

The development of electricity distribution networks requires substantial investment to modernise infrastructure, enhance the reliability of energy supply, and facilitate the integration of renewable energy sources. In the context of constrained public resources, many countries have adopted public-private partnership (PPP) mechanisms to attract private capital and improve the managerial efficiency of distribution system operators. This article presents a review of international experience in the implementation of PPP projects within the electricity distribution sector, examines the principal models of cooperation between the state and the private sector, conducts a comparative analysis of successful projects, and identifies the key factors determining the effectiveness of such initiatives. Particular attention is devoted to the potential application of international experience to the modernisation of distribution networks in transition economies.

 

1. Introduction

Electricity distribution networks constitute one of the critical elements of energy infrastructure, ensuring the transmission of electricity from high-voltage transmission systems to end consumers. It is at the distribution network level that the energy system interacts directly with households, industry, and the commercial sector. The operational effectiveness of distribution networks largely determines the reliability of energy supply, the quality of electricity delivered, and the overall stability of the energy system.

In the majority of countries, the electricity distribution sector faces a number of structural and institutional challenges. Among the most prevalent are elevated levels of technical electricity losses, significant commercial losses associated with unauthorised consumption, advanced deterioration of network infrastructure, insufficient investment in network modernisation, and low managerial efficiency in state-owned distribution companies.

According to international energy organisations, electricity losses in distribution networks in developed countries typically range from 5 to 8 per cent, whereas in developing countries this figure may reach 20 to 35 per cent — a disparity that has a substantial impact on the financial sustainability of distribution companies and the efficiency of the energy system as a whole.¹

In response to these challenges, many governments have initiated reforms of the electricity distribution sector aimed at enhancing managerial efficiency and attracting additional investment. One of the most widely employed instruments of such reforms has been the application of PPP mechanisms in the development of electricity distribution systems.

The involvement of the private sector in the development of distribution networks offers the potential to increase the volume of investment in infrastructure modernisation, to improve the managerial efficiency of distribution companies, and to introduce advanced metering and energy management technologies. Furthermore, the participation of private operators may contribute to the reduction of technical and commercial losses, the improvement of consumer service quality, and the enhancement of the financial sustainability of the energy sector.

Over recent decades, various PPP models have been actively employed in numerous countries across Europe, Latin America, Asia, and Africa. International experience demonstrates that, given an effective regulatory environment and a properly structured system of incentives, the participation of the private sector can substantially enhance the operational performance of distribution networks.

 

2. International Experience in the Implementation of PPP Projects

The World Bank study entitled "Rethinking Power Sector Reform in the Developing World" (2020) provides a detailed analysis of the outcomes of electricity sector reforms, including projects involving private capital in electricity distribution. The study examined reforms and distribution company jurisdictions across 17 countries, covering 24 distribution system operators (DSOs).

The findings indicate that prior to reform, distribution networks in many countries faced a range of systemic problems. In particular, electricity tariffs frequently failed to cover the actual costs of distribution services. This situation was attributable both to artificially suppressed tariffs driven by socio-political considerations and to the low operational efficiency of state-owned distribution companies.

Moreover, the activities of distribution companies frequently placed significant pressure on public finances and generated additional budgetary risks. Such financial imbalances were rarely offset by direct government subsidies. As a rule, distribution companies covered emerging deficits through the following mechanisms:

–                accumulation of debt to electricity suppliers, including transmission companies and wholesale suppliers;

–                recourse to short-term commercial bank lending.

A further characteristic of pre-reform tariff policy was the marked differentiation of tariffs across consumer categories. While this practice enabled the maintenance of affordable electricity for households through cross-subsidisation, it simultaneously undermined the financial sustainability of distribution companies and impeded the achievement of full cost recovery.

Following the introduction of reforms and the engagement of the private sector, the financial performance of distribution companies improved in the majority of countries studied. The period from 1990 to 2015 witnessed a notable increase in the level of cost recovery. One of the key factors contributing to this improvement was the reduction of electricity losses in distribution networks. According to the study, the average level of system losses declined from approximately 24 per cent in the pre-reform period to around 17 per cent during 2010–2015.

It should be noted that tariff increases played a comparatively limited role in improving the financial sustainability of the sector. In many countries, electricity is regarded as a socially significant resource, and preferential tariffs are perceived by the population as an element of social policy — a situation characteristic of countries including Egypt, India, Pakistan, and Senegal. As a result, even following the implementation of reforms, full cost recovery was achieved in only a limited number of countries. According to the study's findings:

–                only two of the seventeen countries achieved full recovery of the cost of electricity distribution services;

–                in seven countries, tariffs do not even cover operating expenditure (OPEX);

–                in eight countries, operating expenditure is covered, but capital investment costs remain unrecovered.

A comparative analysis of cost recovery indicators before and after reforms reveals significant variation across countries and regions. The most pronounced improvements were recorded in Europe and Central Asia. In Ukraine, the cost recovery indicator increased by 92 percentage points, while in Tajikistan it rose by 43 percentage points.

Substantial progress was also observed in Latin America and the Caribbean, where:

–                in Colombia, the increase amounted to 49 percentage points;

–                in Peru, to 22 percentage points.

By contrast, changes in South Asia, as well as East Asia and the Pacific, were less significant relative to baseline levels. On average, the full cost recovery indicator rose from approximately 69 per cent in the early 1990s to around 79 per cent during 2010–2017. The primary contribution to improved performance came from cost-reduction and efficiency-enhancement measures rather than from tariff increases.

Additional analysis indicates that the growth in cost recovery levels is attributable to a combination of operational expenditure optimisation and moderate tariff increases. In some countries, expenditure also increased as a result of active investment in network infrastructure expansion and the development of electrification programmes. Such expenditure growth should not be interpreted as evidence of inefficiency, as it reflects the imperative of expanding population access to electricity.

Reductions in technical and commercial electricity losses were of particular significance in improving the financial sustainability of distribution companies. Post-reform loss reduction was observed in virtually all countries included in the study. For example:

–                in Colombia, losses declined from 25 per cent to 19 per cent in the first year following privatisation;

–                in Uganda, losses fell from approximately 38 per cent in the mid-2000s to around 17 per cent by 2017;

–                in the Philippines, the participation of private operators enabled the maintenance of loss levels below 10 per cent.

These examples demonstrate that the application of PPP mechanisms in conjunction with performance-based regulation can create effective incentives for loss reduction and the enhancement of operational efficiency among distribution system operators.

Table 1. Comparative Analysis of International Experience: DSO Ownership and Management Models

Nevertheless, the reform of the distribution sector does not invariably produce the anticipated results. In certain countries, privatisation and structural transformations were accompanied by only limited improvements in efficiency indicators.

In Pakistan, for instance, the unbundling of electricity companies and the privatisation of distribution operators did not result in a significant reduction of losses, owing to insufficiently robust regulatory incentives. A comparable situation was observed in the state of Odisha (India). Following the transfer of distribution companies to private operators, an initial increase in loss levels was recorded — a phenomenon attributable to the fact that pre-reform official data had substantially underreported actual performance indicators. In 1994, for example, losses were assessed at approximately 29 per cent, whereas subsequent analyses indicated that the actual level may have been in the region of 40 per cent.

The international experience thus demonstrates that the successful implementation of PPP projects in distribution networks requires the fulfilment of a number of key conditions, including:

–                the availability of reliable baseline data on the condition of network infrastructure;

–                an effective and transparent regulatory framework;

–                properly structured economic incentives designed to enhance the operational efficiency of distribution system operators.

 3. Key Success Factors of PPP Projects

An analysis of international experience indicates that the successful implementation of PPP projects in electricity distribution networks is substantially dependent on a favourable institutional and economic environment. One of the key prerequisites is a stable regulatory environment characterised by transparent market rules, predictable tariff policy, and the presence of an independent regulator capable of balancing the interests of the state, investors, and consumers.

Of equal importance is the balanced allocation of risks between the state and the private partner. PPP projects typically involve the distribution of investment, regulatory, and commercial risks — an arrangement that enhances project resilience and reduces uncertainty for investors.

The financial viability of projects is another critical factor, ensured through a tariff policy that enables full cost coverage, provides an adequate return on investment, and finances the ongoing modernisation of network infrastructure. An additional driver of enhanced distribution network efficiency is the adoption of advanced technologies, including network digitalisation, smart metering systems, and automated network management.

Notwithstanding these advantages, the implementation of PPP projects may encounter a range of challenges, including political risks, tariff policy instability, resistance to reform from vested interest groups, and the inherent complexity of regulating natural monopolies. In isolated cases, such factors have led to the renegotiation of contract terms or the termination of concession agreements.

 

4. Prospects for the Application of International Experience in Uzbekistan

International experience in the reform of electricity distribution networks and the implementation of PPP projects demonstrates that private sector participation can substantially enhance the operational efficiency of distribution companies, reduce electricity losses, and attract investment in infrastructure modernisation. For Uzbekistan — where distribution networks are characterised by high levels of equipment deterioration, significant technical and commercial electricity losses, and growing demand for electricity — the application of international best practices may serve as an important instrument for the modernisation of energy infrastructure.

In recent years, the Government of Uzbekistan has pursued a consistent programme of electricity sector reform aimed at improving managerial efficiency, introducing market mechanisms, and attracting private investment. Within the framework of this reform, various models of private sector participation in distribution networks are under consideration, including PPPs, concession agreements, and partial privatisation of distribution companies.

One of the most pressing priorities in the reform of distribution networks in Uzbekistan is the reduction of electricity losses. International experience demonstrates that private sector participation and the introduction of performance-based regulation can significantly reduce both technical and commercial loss levels. In countries such as India, Colombia, and Uganda, for instance, the transfer of distribution networks to private operators resulted in loss reductions of several tens of percentage points.

In Uzbekistan, loss reduction may be achieved through the following measures:

–                modernisation of distribution networks;

–                implementation of smart metering systems;

–                digitalisation of network management processes;

–                improvement of commercial metering and billing efficiency.

Distribution networks require substantial investment for infrastructure modernisation, replacement of ageing equipment, and network expansion in the context of rising electricity consumption. Public resources are frequently insufficient to meet these demands, making the attraction of private capital a critical element of sector development.

International experience demonstrates that PPP and privatisation models can facilitate an influx of investment into distribution networks. Private operators have an inherent interest in enhancing the operational efficiency of networks, since loss reduction and improvements in service quality directly affect their financial performance.

One of the priority directions in reforming the distribution sector in Uzbekistan is the phased transfer of DSO management under PPP arrangements. This approach is consistent with international practice as applied in Turkey, Brazil, and the United Kingdom, where the privatisation of distribution networks attracted substantial investment and improved managerial efficiency.

As part of Uzbekistan's energy sector reform, the possibility of transferring the management of individual regional distribution companies to private investors is under active consideration. One of the pilot projects in this area concerns the PPP-based transfer of management of the Samarkand Oblast distribution company.

This project envisages the engagement of a strategic investor for the management and modernisation of the regional distribution network. The primary objectives of the project include:

–                reduction of technical and commercial electricity losses;

–                modernisation of distribution infrastructure;

–                introduction of advanced metering and network management systems;

–                enhancement of the reliability and quality of electricity supply.

The implementation of the pilot DSO privatisation project in Samarkand Oblast may represent a significant step in the development of a competitive management model for distribution networks in Uzbekistan. Successful execution of this project would:

–                demonstrate the effectiveness of private management in the distribution sector;

–                attract additional investment in network modernisation;

–                create a foundation for the scaling of similar projects in other regions of the country.

 

5. Conclusion

International experience demonstrates that the PPP mechanism can serve as an effective instrument for the modernisation of electricity distribution networks. The engagement of the private sector facilitates improvements in managerial efficiency, attracts investment, and promotes the adoption of advanced technologies. However, the successful implementation of such projects requires a stable regulatory environment, transparent contractual arrangements, and an effective allocation of risks between the state and the private sector.

 

References

Public-Private Partnerships in Power Distribution: Trends, Lessons, and Future Directions. Washington, DC: World Bank, 2020.

Electricity Market Reform: An IEA Handbook. Paris: International Energy Agency, 2016.

Public–Private Partnerships in Power Sector Infrastructure. Manila: Asian Development Bank, 2019.

Infrastructure Financing and Public-Private Partnerships. Paris: OECD Publishing, 2018.

Electricity Distribution Reform and Utility Performance. Washington, DC: World Bank Group, 2020.

The first PPP project in electricity distribution is planned for Samarkand Oblast. 29 January 2024. Available at: https://www.spot.uz/ru/2024/01/29/electricty-ppp/

 

¹ International Energy Agency (IEA); World Bank. Electric power transmission and distribution losses (% of output) // World Development Indicators Database. Washington, DC: World Bank.