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

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Presentation on theme: "Corruption in Electricity Sector Mohinder Gulati Lead Energy Specialist EASEG M.Y. Rao Former Chairman GRIDCO, Orissa (India) April 6, 2006."— Presentation transcript:

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 II. Vulnerabilities to corruption Section III. Strategy for combating corruption Section I. Corruption: A pervasive scourge 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/GSDP1.6% SubsidyUS$525 million Subsidy/Revenue Deficit80% Opportunity Cost of Power Subsidy (US$ million) Cost of providing: Capital Cost Annual Operating Cost Primary health care for rural areas in the state 260 22 Clean drinking water per village 0.250.01 Primary schools for all rural areas as per government norms 200200

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 Government PolicyAreas Vulnerable to Corruption Establishment of the need for capacity addition Manipulation of estimates of the required capacities (please see note below) Norms and procedure for licensing Alteration of norms and licensing criteria to suit particular interests Statutory and other clearances Dilatory and repetitive procedures, Authorities with overlapping jurisdictions. No time limit for final decision. Sale of the energy generated Stipulations regarding who may buy the energy and the price payable. Power Purchase Agreements (PPAs) Acquisition of land and rehabilitation of displaced persons Payment of compensation to land owners, payment to and resettlement of displaced persons Subsidies to specified consumer groupsAdministration of subsidy including selection of beneficiaries Selection of Regulators and top management of Utilities Manipulating selection criteria, “sale” of top positions to highest bidders NOTE: When the demand is deliberately under-assessed, an opportunity for future shortages is created which will justify “emergency” arrangements to purchase electricity from expensive sources.

9 Vulnerable Areas: Capital Projects Project FormulationProject ImplementationProject Operation  Techno-economic studies to establish feasibility and viability  Surveys and site investigations  Estimation of costs and timeframes  Statutory and other clearances  Land acquisition for the plant. Right of way for lines  Rehabilitation of persons affected by the project  Procedure for selection of Contractor  Type of contract (works, labor, turnkey etc) and contract documents  Monitoring and supervision of Contractor’s work  Purchase/supply of plant/ machinery/materials  Stage payments to contractors  Completion and commissioning  Performance of plant/machinery etc during initial guarantee stage  Execution of O&M (in-house or out-sourced)  Emergency repairs.  Purchase and utilization of materials, stores and consumables. Emergency purchases.  Payments to contractors, suppliers and vendors  Employee related issues- promotion, transfer, payment of employees’ dues etc  Adherence to relevant codes and licensing conditions

10 Vulnerable Areas: Customer Interfacing Activities ActivitiesCausesBeneficiaries of corruption Meter readingBy-passing the meter Tampering of meter Customer, Meter readers, in case of large consumers more senior utility staff. Payment of bill and correction of bill Errors in bill Collusion between utility staff and consumer. Meter readers, commercial staff. In case of large consumers, politicians and senior staff. New connection/ additional load Information on procedure not available. Harassment by utility staff Linemen, commercial staff. In case of large loads, politicians and senior staff. Repairing service, fuse call Normal wear and tear. Harassment by utility staff Linemen, electricians, maintenance staff. Restoring electricity supply after interruption Disruption of supply caused by accidents. Maintenance work. Linemen, electricians, maintenance staff. Meter installation Replacement of defective meter Harassment by utility staff. Meter tampering. Normal wear and tear. Meter readers, linemen. Electricians, maintenance staff. DisconnectionNon-payment of bill. Delay in receipt of bill. Pilferage by consumer. Free supply to consumer. Linemen, electricians, maintenance staff. In case of large consumers, politicians and senior staff. ReconnectionAfter rectification of cause of disconnection. Harassment by utility staff. Linemen, electricians, maintenance staff.

11 Vulnerable Areas: Theft of Electricity ActivitiesMode of theftBeneficiaries of corruption GenerationUnauthorized use in the colonies housing the plant staff Staff of the Plant Union leaders TransmissionTapping of overhead transmission lines by large consumers Large consumers Politicians Bureaucrats Utility managers Transmission line staff DistributionTapping distribution linesConsumers Distribution utility staff DistributionOrganized resistance to pay for electricityLabor union leaders Politicians Groups of consumers acting in concert (farmers, industries, residential colonies etc) DistributionNon-billing and under-billing of energyConsumers Billing staff DistributionTampering with or bypassing metersConsumers Linemen DistributionBilling the consumer at a lower rateConsumers Billing staff Utility managers

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 offender s

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  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 Section III: A Strategy for Combating Corruption

20  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  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 Section III: A Strategy for Combating Corruption

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