In developing countries, access to energy and to economic development relies heavily on state support and government commitment. It is government's responsibility to establish a clear institutional framework and to decide the role that is to be given to state-owned companies, private national capital and international investors. In the countries under review in this article, the nature of the state varies widely from one country to another. It is very difficult to establish a classification of political systems but extensive research has been conducted to measure the nature and quality of governance and its relationship with economic development. A number of other indicators have also been established. They concern democracy, transparency, corruption, country risk and business conditions. Another geopolitical approach is based upon ethnic fractionalisation. Ethnic fractionalisation can be defined as the probability that two persons randomly drawn from a given society are from the same ethnic group. Many countries of the lower income categories suffer from ethnic fractionalisation, particularly in Africa, Asia and Latin America. Sub-Saharan countries provide a large diversity of ethnic fractionalisation with very often one majority group and the rest of the population divided among quite small groups.
The effects of ethnic fractionalisation have been extensively studied. Highly fractionalised societies face a greater level of political competition between rent-seeking groups, resulting in higher transaction costs to reach an agreement on public goods like health, education and infrastructure. Economic growth and wealth from natural resources are unevenly distributed. Each ethnic group prefers targeted goods from which they get primary benefits rather than public goods whose gains are shared with other groups. All these analyses concerning the nature of the state show that the relationship between energy resources, energy policy and economic development is heavily determined by the type of political governance that is in place. To take one extreme example, the energy poverty and the economic poverty of Nigeria are directly related to the nature of governance which prevails in the country. This is a perfect illustration of the oil curse. In certain regions, there is also the danger of ‘failed states': those unable to meet their responsibilities and giving way to warlords, traffickers and terrorists. The failure to build peaceful democracies in Afghanistan or Iraq and the failure to prevent some African nations from disintegrating are examples of these obstacles to economic development. Beyond the nature of the state itself, international investors advocate a strong and stable state, even if it is a single-party (or a single individual, or a single family) government that remains in power for a long period of time. What is expected first from such governments is the creation of a clear and stable institutional framework.
The institutional framework covers many elements in the field of energy and climate change. First, there are a number of important laws (petroleum law, electricity law, energy law, fiscal regimes and rules for protecting the environment) which provide general orientations and protections. This legal framework is expected to be stable. Any unexpected change may have disastrous effects on the energy sector. In Venezuela and Bolivia, the radical changes initiated in the early 2000s were devastating for the oil and gas industries and for their future. The legal framework is particularly important for property rights and the security of contractual arrangements which are numerous in the energy industry. The efficiency of the administration is also a key concern for delivering multiple authorisations and permits, giving approvals and answering questions. Administrations are frequently burdened by bureaucracy, low standards of organisation, lack of motivation and corruption. This results in very high transaction costs and delays in projects. If the government is changed, certain projects may have to start all over again. The organisation of the energy sector is an important matter.
What should be conducted by state-owned companies? What should be left to the national and international private sector? In the energy sector the role of the public sector has generally been very strong. The typical situation is that of a state-owned vertically integrated monopoly for electricity generation, transmission and distribution. This model, which still exists in many countries of the South, was widely criticised in the early 1990s. The wind of liberalisation which blew from the United States and the United Kingdom suggested the dismantlement of the vertically integrated value chain in order to separate what was natural monopoly (the wires of power transmission and distribution) and competitive activities (power generation and power supply).
It was suggested that these principles should be applied in developing countries. The main arguments were the poor performances of state companies, states' inability to finance new investments and the need to attract international investors. Baumol and Lee (1991) wrote an innovative article which illustrated the theory of contestable markets. The purpose of the article was to demonstrate how the liberalisation of the power industry in Nigeria could improve the performance of the electrical system. The theoretical approach was new but its application proved to be difficult. After years of experimentation, the countries of the South are now more prudent about radical reforms. They accept, for the power sector, the importance of the participation of international investors. Independent power producers (IPPs) have been established in many countries. Their profitability is usually based upon long-term purchasing power agreements (PPAs) where the dominant power utility (most frequently state-owned) buys power at an agreed price. Governments are now open to private-public partnerships in order to broaden the range of financial resources. Many power systems are considered as ‘hybrid'. They are not fully liberalised, however, and state-owned companies still have an important role.
Our website is not responsible for the information contained by this article. Articleinput.com is a free articles resource thus practically any visitor can submit an article. However if you notice any copyrighted material, please contact us and we will remove the article(s) in discussion right away.
Note: This article was sent to us by: Susan Wright at 12292009
All articles are property of their respective authors. Please read our Privacy Policy!
© 2009 ArticleInput.com.