Corruption in Electricity Sector

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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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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

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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
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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

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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 _at_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

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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 US525 million
• Subsidy/Revenue Deficit 80

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
0.25 0.01 Primary schools for all rural areas
as per government norms 200 200
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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

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Vulnerable Areas Government Policies
Government Policy Areas 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 groups Administration 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. 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.
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Vulnerable Areas Capital Projects
Project Formulation Project Implementation Project 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 Contractors 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 OM (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
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Vulnerable Areas Customer Interfacing Activities
Activities Causes Beneficiaries of corruption
Meter reading By-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.
Disconnection Non-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.
Reconnection After rectification of cause of disconnection. Harassment by utility staff. Linemen, electricians, maintenance staff.
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Vulnerable Areas Theft of Electricity
Activities Mode of theft Beneficiaries of corruption
Generation Unauthorized use in the colonies housing the plant staff Staff of the Plant Union leaders
Transmission Tapping of overhead transmission lines by large consumers Large consumers Politicians Bureaucrats Utility managers Transmission line staff
Distribution Tapping distribution lines Consumers Distribution utility staff
Distribution Organized resistance to pay for electricity Labor union leaders Politicians Groups of consumers acting in concert (farmers, industries, residential colonies etc)
Distribution Non-billing and under-billing of energy Consumers Billing staff
Distribution Tampering with or bypassing meters Consumers Linemen
Distribution Billing the consumer at a lower rate Consumers Billing staff Utility managers
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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

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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

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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

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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

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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

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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

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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

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Section III A Strategy for Combating Corruption

• Institutional mechanism for accountability
• (a) Legal and Regulatory Issues
• Independent regulatory regime
• Consumers Charter
• Establish norms and standards
• Ensure regular audits
• Support of judicial system

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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

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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