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[1].
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.[2]
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.[3]
………….
[1] 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.
[2] 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.
[3] 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
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