Corruption in Electricity Sector

1. Corruption in Electricity Sector Mohinder Gulati Lead Energy Specialist EASEG M.Y. Rao Former Chairman GRIDCO, Orissa (India) April 6, 2006

2. Conclusions • Petty corruption is anything but petty • In electricity sector corruption and inefficiency are closely intertwined • Public participation is a key element of ensuring transparency and accountability • Corruption is often pervasive; therefore, struggle to reduce it would be long and hard; there is no magic bullet • Strategy to reduce corruption must include transition finance • There is hope: some success stories

3. Structure of the Presentation Section I. Corruption: A pervasive scourge Section II. Vulnerabilities to corruption Section III. Strategy for combating corruption Case Studies – AP, India; Bangladesh

4. Section I: The Scourge of Corruption • Petty corruption is anything but petty • Corruption cuts across countries and cultures • Corruption and inefficiency are linked to weak governance • The poor bear the brunt of corruption

5. Petty corruption is anything but petty • Rough estimate for developing countries: Corruption in Capital Expenditure $8 billion per annum; in theft of electricity $33 billion per annum. • A 1000 MW generation plant: Grand larceny $60-80 million (one time); theft of generated electricity @30% $180 million every year. • India: Rough estimate of electricity theft $6-7 billion: may be enough to eliminate supply shortages. • Amounts involved are large enough to drive a utility and sometimes governments to near bankruptcy. • Recurring burden unlike Investment • Erodes the work culture of the utility • A Major source of harassment of consumers

6. Poor Bear the Brunt of Corruption • Double whammy for the poor: low access to electricity; power sector subsidies crowd out social sector expenditure- critical for the poor • Bangladesh: light bulbs do not last long due to poor quality supply; low income household may spend as much on electric bulbs as on electricity • Andhra Pradesh (2002): Subsidy/GSDP 1.6% Subsidy US$525 million Subsidy/Revenue Deficit 80% Opportunity Cost of Power Subsidy (US$ million) Cost of providing: Capital CostAnnual Operating Cost Primary health care for rural areas in the state 260 22 Clean drinking water per village 0.25 0.01 Primary schools for all rural areas as per government norms 200 200

7. Section II: Diagnosis, Areas of Vulnerability Areas Vulnerable to Corruption: • Government: • Policies • Utilities: • Investment Decisions • Customer interfacing activities • Commercial operations - Theft of electricity • Procurement • Human Resources

8. Vulnerable Areas: Government Policies

9. Vulnerable Areas: Capital Projects

10. Vulnerable Areas: Customer Interfacing Activities

11. Vulnerable Areas: Theft of Electricity

12. Theft of Electricity - Causes • Absence of accountability • Weak internal controls: inefficient business process (no reconciliation: energy received- energy billed-amount collected from customers-amount remitted) • Political protection to employees and influential customers • Inadequate and ineffective enforcement of law • Customer attitude: “Immoral to steal from neighbor but legitimate to steal from the State”

13. Vulnerable Areas: Human Resources • Recruitment • Transfer of staff • Senior level appointments • No disciplinary action taken for corruption A nexus develops between politicians, bureaucrats, and Utility staff

14. Vulnerable Areas: Procurement • Ambiguous/biased technical specifications • Non-transparent qualification criteria for bidders • Non-competitive process • Less transparent evaluation criteria • Collusion • Negotiation on non-price factors • Quality-control • Quantity of materials delivered

15. Section II: Diagnosis • Transparency and access to information are key to good governance • Weak governance and supply shortages create a fertile ground for corruption • Grand larceny gets media attention, but petty corruption causes more damage

16. Design Variables for an Anti-Corruption Strategy • Governance Variables • Public Governance • Civil Society Participation • Institutional and Policy Variables • Legal Framework • Regulatory Institutions • Corporate Governance • Hard Budget Constraints for State Owned Enterprises • Market Structure • Process Variables • Transparency • Accountability • Utility Management Variables • Investment Decisions • Financing • Procurement • Human Resources • Internal Controls

17. Section III: A Strategy for Combating Corruption Focus on Petty Corruption: “take back the streets” approach • Political commitment • Quality, commitment of senior managers • Communication campaign and political visibility of actions • Commitment of adequate resources • No interference in favor of influential offenders

18. Section III: A Strategy for Combating Corruption • Improve Utility business processes and use modern technology • Simplify procedures, transparency in application of procedures • Use of technology • Transparency in procurement process • Outsourcing performance-based contracts • Utility management buy-in, employee incentives (rewards and penalties) • Protection to honest staff • Penalty for collusion with consumer • In addition to labor unions, direct communication with employees

19. Section III: A Strategy for Combating Corruption • Institutional mechanism for accountability (a) Legal and Regulatory Issues • Independent regulatory regime • Consumer’s Charter • Establish norms and standards • Ensure regular audits • Support of judicial system

20. Section III: A Strategy for Combating Corruption • Institutional mechanism for accountability (b) Institutional Arrangements • Engender accountability by regular energy audits • Institutionalize user surveys • Customer grievance redressal system • Strengthen Integrity Unit • Independent Monitoring

21. Section III: A Strategy for Combating Corruption • Encourage public participation • Institute mechanisms for public participation • Right to information enacted and enforced • Role of donors • Focus on improving governance, accountability, and management of utilities • Cost of implementing necessary measures is not high • Reduce political cost of reforms: gradual approach, empower consumers and civil society, • Finance transition costs so that efficiency improvement and cost-recovery move in tandem