Hidden Cost of ELECTRA108

Hidden Cost of ELECTRA¹⁰⁸

55. 
    Financial assessment of utilities falls short of capturing economic losses linked to suboptimal operations. Although embedded in cost structures, when quantified, the operational inefficiencies not only provide a lower bound of the opportunity cost of flawed administration and functioning but also give a sense of the fiscal impact of poor performance. Such operational inefficiencies are not captured in accounting reports despite the fact that in practice they represent hidden costs (HCs). In other words, they are unintended transfers from the public sector to the private sector of the economy in the form of under-pricing (transfer via price), collection inefficiencies (transfer via pending/uncollected bills), and unaccounted losses (transfer via pilferage and waste).¹⁰⁹ These HCs are estimated by comparing actual indicators of a functioning SOE against ideal norms of cost recovery, distribution losses, and collection ratios (Ebinger 2006).¹¹⁰ Annex 1 provides the details and data used in the estimation.
    
56. 
    During 2001–06, Cape Verde’s HCs amounted to annual averages of approximately 1 percent of GDP in the electricity sector and 0.3 percent of GDP. Cape Verde’s HCs are high in comparison to those of East African countries. Only Tanzania in the electricity sector, with prices recently affected by a drought-triggered power crisis, creates higher HCs. Overall, as in other international experiences, electricity HCs are significantly higher than those created by the water sector.
    

57. 
    Unaccounted losses and collection inefficiencies have been consistent sources of HCs in both the electricity and the water distribution sectors. ELECTRA’s power operations are characterized by substantial energy losses (technical and commercial––approximately 22 percent of the energy produced, but figures differ across islands. These energy losses are in general below African standards but much higher than in developed countries. Electricity revenues also are affected by collection inefficiencies ranging between 88.0 percent and 96.5 percent of total electricity billed. In recent years, efforts were made to reduce unaccounted-for water and collection inefficiencies. Nevertheless, unaccounted-for water ratios remain at 20.0 percent and collection inefficiencies at approximately 91.0 percent. These, with increased production, still create annual average HCs equivalent to 0.2 percent of GDP. Under-pricing presents a huge variability, accounting for more than 60 percent of total HCs.
    
58. 
    The HC can be interpreted as a lower boundary of the fiscal gains that ELECTRA can accrue. That is, the hidden costs in the provision of electricity and water represent fiscal savings that the company could achieve by reducing technical losses, improving collection, and eliminating under-pricing. Naturally, there is no free lunch. These fiscal gains need to be backed up by new investments in the network and by a better management and collection policy. The resultant gross fiscal gains could achieve 1.3 percent of GDP per year. This is the lower limit. These gains could be higher if cost-saving technologies in electricity and water were implemented.
    

1 Indicators based on methodology described in Measuring Financial Performance in Infrastructure by Ebinger 2006.

2 Unaccounted Losses = (End-User Consumption)*(Average Cost Recovery Price)*(Total Loss Rate-Normative Loss Rate)/(1-Normative Loss Rate).

3 Under-pricing = End-User Consumption*(Average Cost Recovery Price––Average Actual Tariff).