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EGI at the 14th International Anti-Corruption Conference

At a moment in which billions of dollars of financing are being sought to support developing countries to transition to low-carbon economies, relatively little attention is being paid to the ways in which decisions about expenditures are actually made. But with new technologies and new sources of financing emerging as potential drivers of an energy transformation, it is critical to understand the institutional structures and governance practices that shape sector choices. The Electricity Governance Initiative explored these issues on a panel at 14th International Anti-Corruption Conference in November 2010. Titled “Clean Energy: Conflicts of Interest and Corruption in the Electricity Sector,” the panel presented case-studies of the institutional backdrop for electricity sector planning and procurement. The panel examined how public funds for both conventional and renewable energy may serve vested interests, as well as ways in which electricity sector institutions in developing countries may be better designed to protect public interests in this capital intensive sector.

Case studies from Thailand, South Africa, Indonesia and India explored various stages of electricity sector decision making – from the power development planning stage, when decisions are taken about future electricity demand and resource mix; to the stage where contracts are negotiated with electricity producers to build new power plants to meet this demand; and right up to the stage where such projects are rolled out on the ground. The presentations demonstrated how institutional biases and lack of transparency may combine to slow transformation and distort pricing. Even in the “clean energy” sector, lack of transparency is underscoring the fact that governance challenges persist even as the fuel is changed from conventional to renewable resources.

A common theme in the session was the challenge posed in identifying and combating corruption, given the technical nature and complexities in the electricity sector, and a call for greater civil society coordination to combat corruption in the sector. A significant focus of panelists was in looking at corruption within a larger “good governance” paradigm: the creation of processes aimed at improving transparency to reduce corruption avenues and lead to better public interest outcomes in the electricity sector.

The four presenters are partners of the Electricity Governance Initiative (EGI), a global network of civil society organizations dedicated to promoting transparent, accountable, and inclusive decision making in the Electricity Sector. The World Resources Institute and Prayas Energy Group serve as the Secretariat.

Presentation summaries

Governance and Power Development Planning in Thailand

Suphakit Nuntavarakorn, Senior Researcher, Healthy Public Policy Foundation, Thailand:

In Thailand, the long term strategic plan for electricity – Power Development Plan 2010 –recommends significant new investments in gas, coal and nuclear plants by 2030, while limiting the role of renewable energy and demand-side-management. The Ministry of Energy opted not to use the End-Use Approach study which it itself had commissioned, and sidestepped its own public consultation procedures by rushing the plan through a compressed timetable. An alternate plan prepared by Thai civil society shows that a combination of demand-side management, co-generation and renewable energy and other sector efficiencies could reduce the projected need for new thermal power plants significantly: from 54,005MW to 8,535MW. Yet despite large potential savings, the official plan chooses the more expensive options with long term environment consequences.

The session discussed the challenge posed in identifying and combating corruption, given the technical nature and complexities in the electricity sector, and a call for greater civil society coordination to combat corruption in the sector. A significant focus of panelists was in looking at corruption within a larger “good governance” paradigm: the creation of processes aimed at improving transparency to reduce corruption avenues and lead to better public interest outcomes in the electricity sector.


“Using the RoI (return on investment) criteria for tariff setting provides a perverse incentive for over-investment in the electricity sector since higher investments lead to more profits for the investor, at the cost of the public.”


The four presenters are partners of the Electricity Governance Initiative (EGI), a global network of civil society organizations dedicated to promoting transparent, accountable, and inclusive decision making in the Electricity Sector. The World Resources Institute and Prayas Energy Group serve as the Secretariat.

Exploring the rationale for this decision shows how the electricity sector is designed to reward higher investments. Guaranteeing profits or “Return on Invested Capital” (ROIC) builds in a bias towards over-investment, as electricity producers earn the greatest revenues from the most intensive investments and at the same time are permitted to pass the costs of lower than expected sales (or overinvestment) on to the consumer. Therefore, there is a perverse incentive to forecast high demand for the most capital intensive power..

This incentive structure is accompanied by an institutional framework that produces serious conflicts of interests for sector actors. Government officials who serve on the boards of state-owned companies (like EGAT, the electricity generating company of Thailand) also hold positions in these companies and are paid large, additional payments and bonuses based on profits declared by the very companies that they are supposed to regulate. Although an independent regulator has recently been set up, this body does not have authority over tariffs, nor does it have the sufficient data, knowledge or human resources to provide sufficient oversight of investment plans. The rampant conflict of interest in the regulation of the sector and the perverse incentives for excess demand forecasts leads to greater environmental consequences (because more power plants are built) and higher bills for consumers.

Thai civil society organizations recommend shifting the incentive structure and adhering to more transparent processes for developing long term power plans. They have developed not only an alternative power development plan but an alternative 10-step process which includes transparent assumptions and opportunities for public scrutiny.

Corruption and Procurement in South Africa: A Case-Study from Eskom

Gary Pienaar, Senior Analyst, IDASA, South Africa

In South Africa, similar conflicts of interest are prevalent. Despite signing and ratifying various anti-corruption international treaties, in practice, anti-corruption agencies are not independent and this is reflected in their recruitment and operations. To begin with, the ruling political party, the African National Congress (ANC), tasked its National Working Committee with deploying ANC cadres to all state institutions. These individuals today occupy various posts in government but are informed by and are accountable to the ANC, irrespective of their Constitutional or statutory obligations. The case study relating to decision making by ESKOM (the state-owned national electricity utility) shows how subtle and deeply ingrained corruption is in the electricity sector in South Africa. The Chair of the ESKOM Board of Directors was a high ranking official of the ANC and was on the National Executive Committee that controls the party’s investments when he was deployed to the Chairmanship. During the period of his chairmanship, ESKOM awarded a contract to Hitachi Power Africa – a consortium in which the ANC had a 25% stake – to provide boilers for the coal-fired Medupi power plant. In doing so, ESKOM side-stepped its own procurement process, in which Hitachi had been a second choice to win the contract.

Despite public and media outcry and legal prosecution, action against these contracts and the conflict of interest did not succeed because of the lack of evidence of corruption. The Public Prosecutor found no law or policy prohibiting the awarding of a contract to an entity in which a governing party has an interest. Despite the fact that, in the opinion of the Prosecutor, there was no doubt that the official owed a duty to the ANC to act in its best financial interests, even while, as Chairperson of the Eskom Board, it was expected of him to act in the best financial interests of Eskom – there was no evidence to prove that the ANC had exerted pressure.

Subsequent efforts by various agencies to tighten these loopholes have failed, pointing to serious gaps in the governance of the electricity sector in South Africa. On the contrary, the Protection of Information Bill, 2010 may exacerbate the situation by classifying all procurement processes as commercial information provided to the State. The potential for further corruption in South Africa’s electricity sector is massive, as the country is on the verge of approving a one trillion rand Integrated Resource Plan that specifies that 30% of its new generation capacity will be procured from independent power producers.

IPPs and Corruption in Indonesia

Fabby Tumiwa, Executive Director, Institute for Essential Services Reform, Indonesia

In Indonesia, one of the predominant concerns is how power purchase agreements (PPAs) with independent power plants (IPPs) can be scrutinized and monitored to ensure that corrupt practices are not prevalent. PPAs are long-term contractual commitments (20-30 years) made by the utility promising to buy power produced by the IPPs. The utility expects to receive the electricity from the IPP over the period of the contract. 25 PPAs for coal and hydropower were negotiated in Indonesia between 2004-2007. However, many of the projects did not evidence sufficient financial viability to attract bank financing, resulting in delays in construction and commissioning. These delays in turn meant that IPPs became the victim of the rapidly rising construction costs that have affected the sector since 2008 and were unable to fulfill their commitments to supply power. The contracts that had been negotiated appropriately allocated this risk to the power producers, and the state-owned utility was legally entitled to opt out. And yet, instead of opting out of these contracts, the state-owned utility in Indonesia, Perusahaan Listrik Negara (PLN), frequently renegotiates these contracts with IPPs. Very little is known about the nature and scope of these renegotiations since they take place outside of the public domain. However, if the 2 renegotiated PPAs (completed in September 2010) are to provide guidance on what is taking place within closed doors, then the news is not good. The renegotiated PPAs now include a price escalation of 30-40% which PLN has agreed to pay.


“Corruption in the electricity sector is subtle and difficult to detect in the absence of regulatory and civil society oversight.”


The tinge of corruption is subtle here. The absence of an independent regulatory institution to scrutinize either the basis for awarding the contracts or their renegotiation provides grounds for skepticism. Higher prices are fixed and private contracts (MoUs) are chosen behind closed doors instead of through competitive bidding processes. In the context of these closed processes, it is hard to say how these IPPs were selected despite their poor equity positions, or whether renegotiation was the best option. Given that Indonesia is on a development trajectory where new power plants using both renewable and conventional forms of fuel are likely to be used, there is an urgent need for a strong independent regulatory body to review IPPs.

Indonesia needs to develop standard transparent and accountable processes that do not allow the current vested interests to continue to flourish.


Clean Energy and Regulation: Challenges of Information Asymmetry and Weak Oversight

Shantanu Dixit, Founding Member, Prayas Energy Group, India

In India, clean energy is growing in leaps and bounds. India has a current installed capacity of 18 GW, with plans to grow to 65 GW in 5 years. These investments receive significant public fund support, including direct subsidies, tax concessions and preferential tariffs. This trajectory holds positive impacts for climate and the environment, but with potential revenues of ~US$10B/yr, there are multiple avenues for corruption as well.


“There is a dirty side to clean energy. Removing information asymmetry and strengthening oversight on implementation can help clean up this dirty side of clean energy.”


For instance, the Electricity Regulatory Commission in the State of Gujarat calculated the tariff for new solar power at Rs.15 per unit for the first 12 years, and Rs. 5 per unit for the next 13 years. Soon after, the Indian Central Electricity Regulatory Commission (CERC) calculated this tariff at Rs.17 per unit for the next 25 years, based on costs provided by project developers and promoters. The Gujarat Regulatory Commission chose not to revise their tariff and was told to expect no investments as the incentives were insufficient. However, despite this lower incentive, Gujarat saw large investments in new solar power in the State – 500MW within 6 months – suggesting that even the lower tariff was high enough to attract large scale investments. The CERC tariff was clearly excessive: compare Rs. 5 in Gujarat after 13 years, with Rs.17 for the next 25. The result of the information asymmetry is evident.

Similar examples in other renewable projects in co-generation and wind power show how regulators and decision makers were providing enormous incentives without necessarily backing these numbers with adequate justification. In energy efficiency, too, such instances exist. CFL bulb programs showed huge failures. For example, in Maharashtra, of 380,000 bulbs sold, 50% failed within six months, undermining both the potential savings of 7-9MW and consumer confidence.

Experience with clean energy is demonstrating the need for strengthened regulatory oversight, with a focus on reducing information asymmetry and improved performance monitoring.


Conclusions

The case studies demonstrated large governance gaps, and multiple avenues for corruption. Thailand’s power development planning process is premised on perpetuating gains for vested interests and designed to continue providing perverse incentives to extractive and nuclear industries, though various alternatives exist. South African anti-corruption agencies are unable to take action even where conflicts of interests are visible in decision making and seek higher levels of “evidence” of corruption or undue influence. Indonesia’s government continue to sign private contracts with IPPs outside of the public domain committing to buy electricity at higher costs with virtually no public or regulatory oversight. Clean energy development and deployment in India has shown how information asymmetry, limited regulatory and public oversight and the calculation and rolling out of incentives and subsidies can cloud decision making in the sector.

Greater spaces for public debate over technology and fuel options for meeting future energy needs are needed, and opening up sector decision making to the public will reduce corruption avenues. More transparency and inclusive decision making will lead to better public interest outcomes in the electricity sector.


Recommendations

The way decisions are made in the electricity sector strongly influences the success of policies. The problem, as well as the solution, lies in how the sector is governed.

More-focused and better-resourced attention needs to be paid to promoting best practices, including transparent planning processes, competitive bidding, standardized power purchase agreements, and performance monitoring. Uptake of these practices will be likely only if incentive structures are shifted and there is a viable system of institutional checks and balances in place, including space for independent oversight and analysis.

Given the technical nature and complexities of the sector, civil society participation and oversight in the electricity sector has been limited. Anti-corruption civil society could play a key role in joining hands with others working on improving governance of the electricity sector (for instance, the Electricity Governance Initiative) in tackling the subtle, yet pervasive corruption in the sector.

Stronger civil society collaboration with sharing of tools and approaches aimed at bridging the gap between sector experts and anti-corruption / good governance sectors is one way forward.

See the presentations here:

Governance and Power Development Planning in Thailand by Suphakit Nuntavorakarn

Clean Energy – Corruption and Conflicts of Interest in the Electricity Sector by Gary Pienaar

Clean Energy and Regulation: Challenge of information asymmetry and weak oversight by Shantanu Dixit

IPP and Corruption in Indonesia By Fabby Tumiwa

For more information on the Electricity Governance Initiative, see the EGI website: http://electricitygovernance.wri.org

For more information on the 14th International AntiCorruption Conference, see the 14th IACC website

For more information, contact Davida Wood at dwood@wri.org or Bharath Jairaj at bjairaj@wri.org

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