Bank review criticises power sector performance

8 September 2003

A recent internal evaluation of the World Bank’s approach to private sector development in the electric power sector provides a sobering retrospective on a decade-long effort to re-make electricity around private ownership and the market. Initial indications are, however, that the study, which was jointly conducted by the evaluation units of the World Bank, IFC and MIGA, is being selectively interpreted by Bank management in its follow-up.

The early and mid-1990s saw a gold-rush of private power projects in the developing world and particularly Asia, a significant number of which were born of corruption and expired in bankruptcy and dispute. The mid to late 1990s witnessed the dramatic spread of privatization of electricity – often spurred by World Bank conditions – as a supposed panacea for the ills facing the sector. After the Asia crisis there was a dramatic decline in private investment into the electricity sector, which called into question the Bank’s strategy for the sector.

The new study confirms that the Bank “mostly advocated privatization” rather than the staged approach called for in its own 1993 Electric Power Lending Policy. Moreover, the Bank was muddled in its approach. It conditioned lending for power with country commitment to sector reform, without clear guidance to staff on how they were to work with countries to accomplish this reform. Finally the Bank failed to appreciate the challenging political economy of these far-reaching reforms. The resultant power sector portfolio was one of the Bank’s worst performers.

poverty reduction and environmental mainstreaming ... have not, for the most part, been intrinsic components of designing sector reform

One of the studies’ clearest findings is that the rural poor and environmental concerns were unambiguous casualities of the PSDE approach: “poverty reduction and environmental mainstreaming … have not, for the most part, been intrinsic components of designing sector reform”. It recommends far greater emphasis on poverty reduction and environmental objectives in future interventions.

The report’s conclusions about independent power producers (privatized individual power stations – IPP) are curiously schizophrenic, perhaps because the report was authored by the Bank’s public and private sector arms. The report claims that the development impact of IFC-supported IPPs was strong. It bases this finding largely on the observation that the economic rate of return of IFC projects were good. But the financial viability of IPPs was often bought at the expense of the sector as a whole. Another section of the report finds that IPPs were approved without an adequate institutional structure to manage contracts, contributed to an unbalanced demand/supply situation, and led to untenable financial commitments that ultimately led governments to demand contract renegotiations.

Based on arguments such as those above, the study does a powerful job of exposing flaws in the Bank’s approach to the electric power and its implementation during the 1990s. Unfortunately, it undercuts the force of its own critique by delivering a conclusion inconsistent with the body of its work. It says private sector electricity development “has delivered results where it was properly implemented and the WBG should continue to support such interventions.”

In its response to the evaluation Bank management has focused on this single statement, rather than on the body of evidence exposing the many problems with its 1990s approach. Having determined to forge ahead, the Bank will produce a “Guidance Note” to direct future lending for the electric power sector in the context of the Bank’s plans to increase its lending for infrastructure in general. To respond credibly to the evaluation, the Bank’s must demonstrate how it intends to move beyond a one-size-fits-all privatization agenda, and intends to emphasize poverty reduction and environmental objectives.