Private Sector Participation (PSP) In Power Distribution

In recent months, a phrase has been at the center of the Ghanaian debate regarding energy policy: private sector participation in electricity distribution" (PSP). The technical committee tasked with advising the government on modalities for private-sector participation in electricity distribution in Ghana has recommended three models to inform the government’s decision on the effective implementation of the strategy. It is expected to commence by early 2027 as part of ongoing energy sector reforms. This article explores the need for private-sector participation in energy distribution, the available models, and lessons Ghana can learn from countries that have implemented PSP in this sector. We will also do a deep dive into Ghana’s chosen model, the multiple-lease model, and offer recommendations as we take this journey.

The Ghana power sector consists of a series of steps or stages within a "value-chain" model- generation, transmission and distribution, each involving various institutions, technologies and types of risks. It is imperative to understand the nature of the respective stages, as the manner in which private participation in the power sector can be pursued differs significantly at each stage.

Ghana's Energy Sector Value Chain: From Generation to Your Home

“Ghana's energy system is not a single entity but a chain of interdependent institutions. A failure at any link in that chain - generation shortfalls, transmission bottlenecks, distribution losses and reverberates across the whole.”

Electricity Distribution in Ghana: The Weakest Link?

In Ghana’s energy value chain, there are three major areas: performance has been consistently weak in distribution, a sector that requires much more investment. Historically, ECG has been responsible for electricity distribution in Southern Ghana and has experienced average annual technical and commercial losses of 28%–31% of all electricity it receives from GRIDCo. Technical losses occur due to inherent features of the distribution networks: the age of cables, overloaded transformers(s), inadequate substation capacity, and poor-quality equipment, among others.

The best international practice for technical and commercial losses is generally around 8%. Ghana is significantly above that best-practice level at 28-31%, representing a large economic opportunity cost for the power sector each year, estimated at millions of Ghana cedis. The International Monetary Fund (IMF) and energy analysts estimate the total annual financial shortfall from these commercial and technical losses, alongside currency fluctuations, at around $2.2 billion. These massive inefficiencies stem from power theft, illegal connections, and outdated distribution infrastructure. Together with poor collection rates, these system losses are the primary drivers of Ghana's recurring energy sector debt.

Losses represent more than just lost electricity. These losses constitute the largest financial burden on the sustainability of Ghana’s electricity distribution business model. When ECG fails to generate sufficient revenue to cover the costs of purchasing power from generators, paying GRIDCo for transmission, and accumulating operating deficits, it leads to a sector-wide chronic debt burden and unreliable supply for Ghanaian residential and commercial consumers. NEDCo operates similarly to ECG in northern Ghana, albeit with fewer customers per unit of service, higher per-unit delivery costs, and a less developed distribution infrastructure. Several challenges impede the distribution of electricity, including management malaise, procurement problems, tariff gaps, high losses and widespread customer dissatisfaction with the services offered by the Electricity Company of Ghana (ECG), among others

A Concession That Never Was
The call for private sector participation in electricity distribution was driven by Ghana's Second Compact with the U.S. Millennium Challenge Account (MCA) - a $498 M grant entered into with U.S. assistance to finance various elements of power sector reforms, which included private involvement in the distribution segment of ECG's operations as a prerequisite to receiving full funding. In 2018, after a competitive bidding process, the Government of Ghana contracted Power Distribution Service Ltd (PDS). (a joint venture between various private equity firms) to operate the ECG's distribution systems for 20 years. The concession was designed to allow PDS to manage/operate ECG's existing networks while the Government retained title to those assets. The concession collapsed before meaningful operational activities were initiated. The Government claimed that PDS had misrepresented certain aspects of the insurance and performance bonds it submitted as justification for terminating the concession. While not indicative of whether private-sector participation can work in Ghana, this failure has a broad negative impact on other stakeholders involved. Specifically, MCC's Board determined that the Government's actions in resolving this matter constituted a breach of the Compact and subsequently terminated remaining funding, effectively eliminating potential support for substations, metering and grid upgrades. This experience serves as a cautionary example that private-sector participation in Ghana's energy sector is affected by both local politics and Ghana's reputation among its development partners, and that poorly managed processes can have broader consequences beyond simply failing to achieve desired results.

"The ECG concession collapse proves nothing about private sector participation in Ghana. It shows that private sector participation cannot succeed without proper preparation, true governmental commitment, clear regulations and open communication about exactly what reform entails."

Ghana Is Not Alone
Ghana is certainly not alone in seeking private participation in electricity distribution on the continent. There are multiple models which could be studied as positive and negative examples. Côte d’Ivoire’s Compagnie Ivoirienne d’Electricité (CIE) has operated under a private concession agreement since 1990 and has long been considered one of West Africa’s more stable agreements. Similarly, Uganda’s Umeme began managing distribution functions for Uganda Electric Supply Company (UESC) in 2005 and has successfully reduced technical and commercial losses over the course of its concession, although concerns remain regarding how such concessions should ultimately be valued and concluded. Conversely, Nigeria’s decision to privatize its entire distribution industry in 2013 serves as a cautionary example. Despite the transfer of ownership, many of Nigeria’s new private distributors were unable to attract investment and experienced numerous reliability and loss challenges for many years following privatization.

What connects these experiences is that while there exists a binary distinction between public and private ownership, it is largely irrelevant compared to how risks are apportioned, how tariffs are established and how thoroughly applicants are vetted.

As we continue this exploratory journey of Private participation in Electricity Distribution in Ghana, we will provide answers to the following questions;

What does private sector participation mean for Ghana’s electricity consumers?

• What doesn’t it mean?
• What specific design choices, particularly with respect to risk allocation, tariff setting, and applicant vetting, would afford a future PSP arrangement a greater likelihood of success than the previous one?

Prof. Ernest Ofori Asamoah
Email: eoforiasamoah@gmail.com
"A chain is only as strong as its weakest link,” An African Proverb

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