Thursday, December 8, 2016
BRIBERY, CORRUPTION AND BLACKOUTS
The institutional framework against which investment decisions have to be made is critical to capital intensive sectors such as power, and in consequence to promoting low carbon economies, which in relative terms will often tend to be even more capital-intensive than conventional thermal generation. Sound regulatory and market frameworks are therefore a central concern for energy and GHG reduction policies. In the UK, for example, one of the biggest single issues is getting infrastructure investment against a background of policy uncertainty, one of the themes I have explored previously in discussing low carbon power.
But worldwide there are also some prior and even more pressing set of problems that can impact on the viability and sustainability of the power sector. These relate to fundamentals of law and good governance, and go to the heart of national political structures. The corrosive nature of corruption and clientelism (sometimes defined in terms of widespread patronage and the exchange of favours for votes) is a major challenge for all political systems, but is perhaps particularly important when there are serious resource constraints, and in the context of successful economic development. This is therefore a big issue for many less developed economies, which are of equal or greater importance to the achievement of a global low carbon future.
Vinayak Chatterjee describes the problem in an Indian context. How to revive India's corrupt and debt-ridden power sector. (October 26, 2015)
India's electricity distribution sector is a national embarrassment, brought about by decades of turning a blind eye to the misdemeanours of this sector. The unholy trinity of the conniving State Electricity Board (SEB) employee, the unethical and self-enriching domestic and industrial consumer and the politician patronising theft, corruption, sloth and freebies has brought the power sector to its knees.
Students of past performance of many SEBs, with honourable exceptions, will be familiar with this harsh judgement, with many of these criticisms confirmed in numerous World Bank studies. High levels of illegal abstraction from distribution networks, tariffs inadequate to allow SEBs to finance new capacity, and political patronage that can view SEB management as a vehicle for distributing favours and jobs, are all rife and in many instances both well documented and publicised. Unsurprisingly many SEBs are in dire financial straits and are ill-equipped to support the high levels of investment required to improve and increase access and supply, let alone make the transformation to a low carbon economy.
The Indian power sector is an important illustration, partly because a low carbon future for India is so important to the world, partly because the power sector is intrinsically crucial to this objective, and partly because the problems of India’s state electricity boards (SEBs) have been widely acknowledged and openly discussed. India is by no means unique in its lack of effective governance. Indeed the open nature of Indian democracy means that the problems are at least recognised, a first step to a possible resolution.
A recent article by Jacquelyn Pless and Harrison Fell, “Bribes, bureaucracies, and blackouts: Towards understanding how corruption at the firm level impacts electricity reliability” offers an interesting empirical example and theoretical perspective for this discussion, pointing out that these shortcomings in governance can also lead us to comparison with some familiar problems of a common pooled resource such as fisheries. The study addressed a particular form of corruption, using data from many countries, and found empirically that firms with a propensity to bribe for electricity connections experienced 14 more power outages per month and incur 22% greater losses as a percentage of annual sales due to power outages.
Propensity to bribe is closely linked both to a perceived necessity for bribery (in order to get any power at all), ie a resource constrained system, and to weak governance where bribery is an effective, low risk and penalty-free option. Inevitably these include many systems in developing countries with limited power generation resources combined with weak governance and regulation. A simple example of the process by which the reliability of the network is degraded is given below.
Imagine you are an investor in a manufacturing plant invited to wait six months to connect a factory to the electricity grid. The temptation is to bribe an employee of the local power supplier to connect you next week. The bribe is a rational act and will benefit your company, but we can assume that many other people will be doing the same thing. Typically there is an actual or potential shortage of capacity in the system, due to a lack of investment, itself a result of failure to collect revenues that cover costs and of poor governance. This has frequently been true of State Electricity Boards (SEBs) in India, power being a competence of individual states rather than the federal government. Restricting new connections is one of the means that the SEB is obliged to use to try to restrict demand to a level that can be met with a reasonable degree of reliability. Unauthorised connections will overburden the electrical grid, leading to a more vulnerable system and less reliable power supplies for everyone.
In terms of impact, bribery to get a connection is akin to theft, equivalent in its effect to the smaller scale illegal “hook-ups” that are also commonplace. The company may subsequently pay for actual kWh consumed (by no means certain) but this does not reduce its immediate adverse impact. The fact that the SEB management is unable to control connections, obtained by bribery or other illegal methods, means that it loses control of system reliability. In other words a system that is open to corrupt practices, or indeed to simple theft, will inevitably suffer either financially or in terms of its ability to provide a reliable supply, or most likely both. It has become a common pool resource for which no-one is prepared to pay to maintain reliability.
There is an interesting and broader question of how to get to more socially efficient outcomes. Administrative rationing, giving preference to incumbent consumers, is often the starting point for electricity providers, given that they start from a position where potential demand is greatly in excess of available supply, but may also be economically inefficient. It also breaks down when subject to bribery and corrupt practices. It has sometimes been argued that corruption is a form of market pressure and can under some conditions improve social efficiency, by allocating scarce supplies (of import licences or network connections for example) to those who value them most highly.
Quite apart from any moral or ethical objections to condoning rent seeking by corrupt officials, however, bribery and corruption are by their very nature clandestine and non-transparent, and are unlikely to be organised in a technically efficient manner, eg with transparent markets or openly conducted competitive auctions. Our examples, and general experience, suggest that corruption quickly gets out of control. World Bank economists have therefore preferred to recommend solutions that focus on improving governance and enhancing the financial capability of the sector, eg through cost reflective tariffs that permit investment in increased supply.
The so-called Washington consensus on economic reforms recognised the underlying problems but assumed that the answer was markets and privatisation. In practice this approach has not lived up to expectations, in no small measure because successful privatisation is only possible when the basic elements of reform, including adequate tariff levels and structures, and the depoliticisation of power sector management, have already been achieved. Private sector management is in any case not immune from corrupt practices in environments of weak governance.
I believe these will be continuing and increasingly important issues within a global perspective on both economic development and low carbon futures. Transparency, oversight, and enforcement of high standards of sector governance will continue to be important objectives everywhere, and they are closely tied to wider questions of political economy.
 Recent papers published by the Energy Technologies Institute addressed these themes, and also related and additional elements of market failure, for the UK, and form a foundation for looking at future energy systems architecture.
 A recent Oxford Martin School blog by Jacquelyn Pless and Johanna Schiele also aims to develop and extend this analysis to other aspects of electricity networks.
 Francis Fukuyama provides a thought provoking discussion of the general issue of clientelism in Political Order and Political Decay: From the Industrial Revolution to the Globalisation of Democracy, Farrar, Straus and Giroux. He also makes useful distinctions between the closely related concepts of corruption, patronage and clientelism. The book is also particularly interesting in its criticisms of the USA, and reminds us that political systems are capable of decay as well as improvement, with the ever present risk of reversion to clientelism in both democratic and authoritarian societies