Energy reform in major emerging economies: new models for sustained growth:
Enacting sound policies in solid institutions
An essential element of successful energy sector reform is appropriate regulatory and governance structures. These underpinning frameworks need to be flexible and able to address fast-changing conditions, while providing long-term visibility and confidence to investors. They must be responsive to greater demand, not just increased supply, as well as support the next wave of investment and innovation, and be grounded in economic realities. Nations with responsive policy frameworks will be better placed to manage change and create competitive energy architectures. As energy reforms and transition will take several years to design – and decades to implement – the importance ofa conducive and strong institutional and regulatory framework that transcends shorter political cycles is critical.
Many countries are likely to face a gap between the desirable and the practicable. Their focus, therefore, must be on pragmatic, cost-effective solutions that produce results. Taking a step-by-step approach, by incorporating “second-best” strategies that cut a path through political-economic obstacles, will enable emerging economies to discover a suitable combination of policy instruments for their specific contexts.43 For the last three decades, economic transformation in China has followed this process of experimentation. The central government has encouraged local governments and state enterprises to innovate, selected successful solutions, and fed these back into policy-making – avoiding policy deadlock in the process.44
While pragmatism helps breed success, experience also shows that policy reforms tend not to produce lasting effects if background institutional conditions are poor. In fact, success appears to have as much to do with the ability of governments to manage the reform process effectively as with the form intervention takes; sound policies need to be embedded in solid institutions.45 The importance of a sound and fair institutional environment has become all the more apparent during the recent economic and financial crisis, and is especially crucial for further solidifying the fragile recovery.
Figure 9 highlights the scores of the E7 and leading three countries on the EAPI, and contrasts these with the institutions pillar of the World Economic Forum’s GCI46 and the WB’s measure of government effectiveness.47 Switzerland and Norway – top performers on the EAPI – score highly across all four metrics, and are among the top 10% (approximately) of nations in terms of government effectiveness. In contrast, the E7 are quite consistently below average performers. While the correlation is not direct – poor government effectiveness is not necessarily the result of poor institutional capacity – it is clear that building improved institutional capabilities will be an important area of focus if large emerging economies are to deliver effective energy reforms.
Examples of low levels of institutional capacity in the energy sectors of emerging economies abound. For example, advocacy groups have long highlighted a lack of regulatory oversight in China’s power sector.48 But attempts to address this have been scuppered by a lack of institutional capability. One such example is the short-lived State Electricity Regulatory Commission, which had the responsibility, though little authority, to approve market entry, set service obligations and standards, enforce laws, establish balancing areas and regulate safety. Another is the government’s pilot reforms to encourage more efficient electricity dispatch49, by which priority would be given to electricity supplied by more efficient and green producers. Despite the directive, grid operators continued to prioritize coal-fired plants run by SOEs.50 The electricity sector reforms under way may address some of these challenges.
As SOEs in both the oil and gas and utilities sectors play a prevalent role across the E7, they will be central to the reform process. In many cases, SOEs have successfully harnessed benefits from the energy sector and driven broader development. In other cases, however, SOEs are inefficient managers of national resources, obstacles to private investment, drains on public coffers, or sources of patronage and corruption. Their reform, therefore, lies at or near the top of the policy agenda of many emerging economies.
But what makes for good governance of enterprises in the energy sector? According to Chatham House, five principles are key:51
- Clarity of goals, roles and responsibilities: Overlaps in political and commercial decision-making can lead to a lack of clarity, duplication of effort and policy paralysis. Effective governance systems set clearly defined lines of authority, separating policy-maker, regulator and operator responsibilities.52
- Sustainable development for the benefit of future generations: Sustainable development policies aim to meet the needs of the present, without compromising future generations, by considering the sector’s long-term social and environmental impacts.
- Enablement to carry out the role assigned: For optimum performance, SOEs and their oversight bodies must have access to the capabilities necessary to meet their objectives and responsibilities. This includes financial resources, human capacity and supporting processes.
- Accountability of decision-making and performance: To avoid malpractice, accountability requires clear delegation, capable institutions and mechanisms of enforcement. The choice and empowerment of regulators are important parts of this process.
- Transparency and accuracy of information: The effectiveness of governance mechanisms depends on reliable and timely information, which is, in turn, an important means of increasing trust between society and the sector.
The two case studies that follow show how adhering to these principles may help breed success, and conversely, failure when flouted. The mixed success of the 2003 Electricity Act in India was a consequence of fragmented lines of authority and a failure to instil a culture of performance in a number of state electricity boards. In contrast, the successful growth of the oil and gas sector in Brazil was supported by the creation of an authoritative independent regulator, and the effective enablement of the National Oil Company (NOC), Petrobras.