Director, Energy Transport and Water Department

1Preface

This “Dissemination Note” introduces the main messages of the Sourcebook on Governance and Anti-Corruption in the Electricity Sector, the major output of a larger program on Governance and Anti-Corruption in the sector. This program has been developed over a year of substantial research and consultation, including a review of global knowledge, two pilot studies (in Bangladesh and Tanzania), and an assessment of current World Bank practice.

The review of Bank practice in the electricity, water and sanitation, and transport sectors revealed a “missing middle” in the Bank’s effort to reduce corruption and improve governance. At the national level, it showed that the Bank is taking serious steps to help countries improve governance (increasingly through more focused Country Assistance Strategies like those developed for Indonesia, Bangladesh, and the Philippines). At the project level, the Bank has a set of safeguard policies and practices to comply with its fiduciary obligations, and the Bank is developing guidance on additional practices that can further reduce fiduciary hazard in high-risk setting. However, a review of World Bank engagements in the water, electricity, and transport sector found that, in many cases, greater attention should be given to addressing governance and corruption issues at the sector level, and in providers with which the Bank is engaged.

This Note is part of a Bank-wide effort to address sectoral dimensions of weak governance and corruption, sharing lessons from global experience.

Signed

1

Jamal Saghir,

Director, Energy Transport and Water Department

Lazlo Lovei

Director, Finance Economics and Urban Department

1

2Introduction

The World Bank’s Implementation Plan for the Governance and Anticorruption Strategy committed that “country and project teams will systematically address governance and corruption risk to development effectiveness throughout the project preparation and implementation cycle…” The Implementation Plan also indicates that “network VPUs will develop and pilot a new generation of GAC-focused diagnostic and monitoring AAA products—both sector-specific and cross-cutting—for use on a demand-driven basis by clients and by country teams…” This note helps to address the need for sectoral approaches to the challenges of governance and corruption faced by client countries.

The governance and anti-corruption agenda in the electricity sector is about improving electricity services for people and businesses. Governance work should not be treated merely as a compliance exercise in safeguarding Bank loan proceeds. Nor should supportfor good governanceconsist solely of initiatives to detect and punish corruption. Rather, efforts to strengthen governance should focus on meeting citizens’ legitimate demands for responsiveness and probity in the provision of cost effective services..

To this end, governance arrangements need to motivate politicians, bureaucrats, and utility managers to provide the services citizens want and need, in the most economical way. Since corruption increases the cost and reduces the quality of service, it follows that governance systems that lead togood electricity service will tend to reduce the magnitude and incidence of corruption as one element of improving performance.

This Note provides an overview for sector practitioners concerned with urban water and sanitation services on tools to implement the World Bank’s governance and anti-corruption strategy. It sets out a framework for thinking about governance. It then suggests ways task teams can put that thinking into practice—in situations where good governance can be designed into the Bank’s engagement from the start, and in situations where a program is already underway, or a client government is not focused on improving governance. The Note provides references to sections of the Sourcebook onDeterring Corruption and Improving Governance in the Electricity Sector, to which task teams can turn for specific approaches and practical techniques.

3Dynamics of Governance in the Electricity Sector

Governance in the electricity sector is challenging primarily because of the monopolistic elements of electricity service provision. These monopolistic elements means that customer choice is limited. In consequence, the direct route of accountability from the provider to the customer is often not effective. Responsiveness to customers is clearly limited in countries with traditional vertically integrated electricity utilities. But it is also limited in single-buyer models—while competition in generation will deliver the results the single-buyer wants, this will only correspond with citizens’ preferences if there is a mechanism that makes the single buyer responsive to citizens. Even where full retail competition has been introduced, the transmission and distribution elements of the service remain monopolies (and hence not naturally responsive to customers) while the government normally remains involved in generation and retail through interventions to ensure security of supply and to put bounds on retail pricing.

For these reasons, good governance in the electricity sector depends crucially on bodies which represent the public interest and—whether through ownership, purchase contracts, or regulation—ensure that providers act in the public interest. Put another way, electricity sector governance relies on a “long route” in which accountability of provider to citizens is mediated through government or some other supervisory body—as illustrated in Figure 1. In general, each of the numbered elements of the governance system in Figure 1 is needed for effective governance, as discussed below.

Figure 1: Governance Structure

A supervisory bodyto represent citizens’ interests …

The “supervisory body” in many countries is the Ministry responsible for electricity. In other countries it may be a single buyer, an independent regulator, or the Board of a customer cooperative. For instance, in some rural areas of Bangladesh, services are provided bycooperatives with well developed management practices, suggesting that their accountability links to customers help them to perform well[Sourcebook Box 11.10].

Whatever its form, the supervisory body’s jobis (or should be) to understand the wishes of the citizens, and translate these into a coherent set of choices on coverage, security of supply, service levels, tariffs, and subsidies. This set of choices can be thought of as a collective “purchase contract”—these are the services citizens want to buy from their provider. The supervisory body’s job then is to make sure that the provider does indeed deliver those services, sustainably and at reasonable cost[Sourcebook Section 12.3]. In some cases, supervisory responsibilities will be spread across several bodies—as for example in Uganda, where the Ministry of Finance, Planning, and Economic Development is responsible for ensuring the adequacy of generation and transmission availability, while the Electricity Regulatory Authority (ERA, the regulator) sets service levels and tariffs for distribution companies.

…accountable to citizens,

To work well, the supervisory body needs not only the capacity to effectively carry out its functions, but crucially, to be accountable to citizens[SourcebookSection 12].Governance problems in manyelectricity sectors can be traced to supervisory bodies that are not genuinely accountable to citizens—for example, ministries that are more interested in getting kickbacks from awarding IPP or construction contracts than they are in serving citizens needs.

Ways to make the supervisory body more accountable might include: giving citizens more information and opportunities to participate in sector decisions.Options include publishing report cards, benchmarking, or public disclosure of performance against agreed targets. Freedom of information laws (or similar codes at the sector level) could help. Public participation could be introduced in planning and regulatory hearings [Sourcebook Box 10.4].Separating the function of supervision from that of provision may help, as many countries have done by establishing regulatory agencies, or single buyers, or both, and privatizing or commercializing state-owned power providers. Accountability could in some cases be improved by devolving responsibilities, or creating an elected customer representative board, like the cooperatives in Bangladesh. [SourcebookSection 12.3].

…holding the provider accountable through a performance agreement

If the supervisory body and citizens are to hold the electricity provider accountable, there needs to be a clear and public agreement on the service levels to be provided. This agreement should generally specify targets (for instance, for coverage or hours of service). To be realistic and coherent, the agreement also needs to provide adequate resources—from a mix of tariffs and subsidies—to cover the cost of meeting those targets. In vertically integrated sectors, this agreement will cover the entirety of service provision. In disaggregated sectors, there may be multiple agreements, covering generation, transmission and distribution separately.

Performance agreements can be complete and legally binding contracts (like the concession contract for TRANSCO in the Philippines [Sourcebook Box 12.7]or the lease contract inCote D’Ivoire).Other performance agreements can be useful and public without being legally binding—for example power sector development plans that set out service targets and resource requirements for a vertically integrated, government-owned system. What may matter most is that the performance agreement is realistic and clear, and that the supervisory body checks and publishes progress against the agreement[Sourcebook Section 12.3].

Provider autonomy, incentives, and systems

To deliver against a performance agreement, utility managers need the autonomy to manage, and incentives to manage well. Performance contracts with managers of a public electricity utilitycan increase accountability, incentives, and ultimately the efficiency of the utility [SourcebookBox 12.8]. Ways to strengthen provider autonomy and incentives may include corporatization, cooperative ownership of utilities or, where feasible, private participation [Sourcebook Section 12.3.2].

Many electricity providers are micro-managed by their supervisory bodies—typically energy Ministries. This can be an understandable response to sluggish management at the utility level, but micro-management can in some cases allow powerful decision-makers to benefit from the corruption and patronage opportunities that a utility offers. Furthermore, a micro-managed provider cannot be held accountable for failure[Sourcebook Section 12.3].

Well-run providers have established systems for preventing misuse of company funds and property. The spine of these systems is an accrual accounting and auditing process. The accounting system keeps track of income, expenditure, and assets. This system should be linked to various aspects of the utility’s operation, includingrevenue and receivables, inventories, payroll, and capital projects.Accounting systems should be complemented by clear delegations of authority to incur costs and approve payments, as well as processes governing human resources, procurement, and the like. Whether a provider is a vertically integrated utility or performs only one function—for example, transmission or distribution—financial probity is generally only possible when such systems are in place.

In many public electricity providers, these systems are in disarray. As a result, waste and corruption may flourish in “hot-spots” such as commercial systems (connections, billing, and collection), human resources (where ghost workers collect pay-checks, and positions are bought and sold), and procurement of fuel and capital works and equipment. Some providers need assistance to overcome this disarray and install quality processes that would increase the integrity of their operations[Sourcebook Section11].

Project procurement and supervision

At the project level, bribes and kickbacks to influence contract award, specifications, andsupervision result in projects that are low quality, high-cost, and of dubious sustainability. Bribe-seeking officials may bias project choice toward excessively costly or technically complex projects. Poor planning may lead to power crises—with consequent emergency measures that override normal procedures, as well as overbuilding. Both shortages and overbuilding are not only economically inefficient, but often provide avenues for corruption. The Philippines and Pakistan experiences illustrate the problems of poor planning that other countries will wish to avoid [Sourcebook Boxes 10.2 and 10.16].

Well designed fiduciary safeguards can reduce these risks in Bank projects [Sourcebook Section 10]. Well run procurement processes can achieve value for money even in countries with significant governance and corruption problems, as Bangladesh’s experience with some IPP projects demonstrates [Sourcebook Box 10.14]. Good governance arrangements can help to sustain such practices and apply them across all projects in a sector [Sourcebook Sections 10, 11 and 12].

4World Bank Engagement in the Electricity Sector

Electricity sector governance is complex, and strengthening governance even more so. To be effective, Bank engagements are moving toward acknowledging that this complexity requires a comprehensive, multi-year partnership with clients. Such partnerships will typically start with analytic and advisory work that contributes to the Country Assistance Strategy (CAS). Country teams develop sector strategies which incorporate a good governance focus, and implement these through advisory services and funding to support capital works and technical assistance. Governance and corruption monitoring and evaluation should be designed into the Bank’s engagements early on, and the lessons learned applied as the engagement continues.Simplistic solutions bolted onto single investment loans and focused on detecting and deterring corruption at particular points will generally not, by themselves, be sufficient to strengthen governance and improve sectoral outcomes.

The following sections discuss promising approaches to addressing governance issues at distinct phases of the Bank’s engagement in a country’s electricity sector.

Country Assistance Strategy

Since a CAS sets out the framework for the Bank’s entire engagement with a client country, it should generally include an analysis of the governance and corruption issues in the country as a whole, as well as the ways in which the Bank will address them in each sector. Country Assistance Strategies that incorporate comprehensive anti-corruption plans include the most recent ones for Bangladesh, Indonesia, and the Philippines.

Where the Bank foresees significant engagement in the electricity sector, a sectoral assistance strategy should typically include:

• A summary of service gaps and investment needs in the electricity sector
• A high level mapping of corruption risks in the electricity sector [SourcebookSection 4.5]
• Diagnosis of strengths and weaknesses in sector governance, against the framework described in Section 2 of this Note[Sourcebook Section4].
• Guiding principles and instruments for improving governance in the sector
• Proposed Bank engagement, through investments, technical assistance, and analytic and advisory work.

Where the Bank’s country team does not have the necessary information, it may be advisable to commission analytic work, either as a component of an ongoing operation or as stand alone AAA. Analytic work may include corruption mapping and diagnostics of governance weaknesses. The findings of such analytical work should include recommended approaches for addressing governance weaknesses in the sector, and how these can be integrated into broader, country-wide programs for improved governance.

Electricitysector strategy

It will be useful for the Bank and a client government to agree on a multi-year sector assistance program for electricity. The sector strategy sets out approaches to strengthening sector governance, integrated with other aspects vital to improving sector performance, such as finance, capital works, and operations. The strategy should identify ways in which improvements in each of these areas can reinforce each other, and culminate in better services and value for money for citizens.

Preparation of the sector strategy will generally require analytic and advisory work, building on that done for the CAS, to:

• Evaluate corruption risks and governance weaknesses[Sourcebook Sections 4, 5, 6, 7, 8, and 9]
• Understand the political economy of corruption and poor governance in the sector. This should identify the winners and losers from improved governance. In many cases, the losers (beneficiaries of corruption) will be powerful and stand to lose a lot, while the winners (ordinary citizens) will be less powerful and individually gain a relatively small amount from reduced corruption [Sourcebook Section 2]. To build and sustain support for good governance in such cases, the strategy will need to generate political and popular support at each step
• Identify,where possible,“good governance champions”—individuals and institutionsthat have the interest, commitment, and influence to help make governance improvements actually materialize—alongwith ways to support and encourage these champions[Sourcebook Section13]
• Develop strategies to improve governance. These strategies should include specific, interlinked actions to strengthen the chain of accountability from providers to citizens, as well as interventions to help providers improve their systems and increase probity in capital works and oprations. Sector reforms—for example,unbundling or private participation and regulation—should be analyzed and justified in a governance framework. A key consideration in designing such reforms should be whether they will increase accountability of providers to citizens, and strengthen incentives for efficiency, including through reducing corruption[Sourcebook Sections 11, 12, and 13]
• Identify improvements in governance that are likely to lead to improvements in sector performance[Sourcebook 14].

Depending on the strategy’s level of specificity and detail, it may be useful to develop a set of indicators that could be utilized to measure improvements and establish a baseline on these indicators (including by commissioning surveys or other analytic work) and a monitoring and evaluation framework[Sourcebook Section 14].

Investmentloans

The Bank’s major engagement with most of its clients will continue to be financing physical infrastructure and related services needed for expanding and improvingelectricity services. To ensure that this money is well spent, and supports development, lending operations should generally: