The role of government reform and privatization in the success of investment in the electricity sector…

The role of government reform and privatization in the success of investment in the electricity sector…

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Once the Iraqi government began privatization of the electricity sector, the controversy over its feasibility was raised among the political blocs, especially after the opposition of some provinces, noting that the reform of the electricity sector is necessary to meet local needs, and attract investment alike.
One of the reasons for resorting to privatization is that the state institutions provide services with low quality at high cost.
The main obstacles to investment in the electricity sector are the lack of necessary infrastructure, the high costs that are a burden on the Iraqi economy of 3-4 billion dollars a year, the suffering of the sector from political interference, the state bureaucracy in the decision-making of state-owned facilities overcrowded with staff, low Productivity levels, and high prices.
However, some countries in the 1980s resorted to privatizing important sectors such as electricity and water as a heavy financial burden on the state. These experiences could help Iraq to strengthen its emerging privatization experience. As in consultation with the World Bank, , multi-phase strategies for reforming the electricity sector were developed urgently despite many domestic challenges.

Privatization has a positive impact on the economy, both at the level of investment and development, by reducing the budget deficit and promoting economic growth; privatization increases the resources available to the government after spending it to provide services before privatizing them. Privatization has a positive correlation with economic growth. Researchers have confirmed the positive correlation, acknowledging that “it is not the only reason for subsequent increases in growth rates as the empirical research has found that it reduces the net labor and provides the same wages to the remaining employees.
One of the successful experiences in the field of privatization is the experience of the Iraqi Ministry of Electricity to invest in the distribution of electric power applied in some areas of Baghdad within a plan covering all regions of the country.
The ministry confirmed that “the experiment proved rationalization of consumption by more than 30% of current consumption in all governorates of the country.”
The ministry pointed out that “the support provided by Prime Minister Haider Abadi, in this direction stems from the historical responsibility and the government’s directives for economic reform and preservation of wealth in Iraq, ensuring the future generations, and ensure the processing of electricity continuously, stable and sustainable.”
The ministry stressed that “the commitment of the provinces to the project of investment in the sector of distribution of electrical energy is reflected in a positive way to meet the needs of people with low income from electricity and at reasonable prices , as well as the revitalization of agricultural and industrial programs, which requires constant encouragement of this project being the only guarantor to meet these needs, and to solve the crisis of electric power, which burdened the citizen and negatively affected the economy of the country. ”
The ministry is striving to create alternatives to solve the crisis and end the waste in the national electricity system through the follow-up of the sale of energy and standardization of the payment, which is achieved by the project to invest in the distribution of energy.

The ministry pointed out that ” stories of success achieved in many areas of Baghdad after the implementation of this project were confirmed through the satisfaction of citizens for the continuity of processing and low costs and end the deal with civil generators and reduce the breakdowns and waste to achieve continuous and stable electricity .”
The government has addressed the problem of salaries of employees by obligating the investor to pay 80% of the salaries of workers in distribution offices. The government confirmed that it will not dissolve the Ministry of Electricity, as it will be responsible for regulating production, distribution, transportation and control it. The ministry of electricity confirmed that the experiences of privatization in a number of areas of Baghdad especially In Yarmouk, Harithiya, Ameriyya, Mansur, Al-Jami’a and Saidiya districts, have showed good indicators such as reduction, energy consumption by 30%, and 100% reduction of electricity waste, and 100% of fees were collected.
This is a simple example, after the investor was given shops 710, 712 and 714) in Zayouna in April 2016. The electricity consumption was reduced from 52 MW to 27 MW,
It is certain maintaining this level of performance will meet local needs, reduce budget deficits, encourage the private sector and facilitate investment. And it is certain that the Reform and provision of these basic services will certainly increase government legitimacy, reduce budget deficits and encourage investment.

The Ministry of Electricity seeks to achieve the principles of economic reform in the electricity sector through the Investment Law, as it restructures the companies associated with it , implements policies and manages plans and programs related to the management of the assets of public companies that have been converted into joint stock companies during the process of restructuring companies associated with the ministry and to make adjustments to ownership, and develop models for partnership between the public-private sectors and mechanisms of its implementation .
And to work on developing methods and ways of production and distribution in accordance with technical changes and modern innovations to encourage investment in the electricity sector, and the ministry is opening investment opportunities to the private sector to build new production plants, and encourage it in the construction of modern power plants.
The Ministry of Electricity is working to organize cooperation between it and the Ministry of Oil and related parties, on contractual basis by the conclusion of equivalent contracts
As for the prices, the sale of the electrical unit commensurate with the size of the operational cost which is determined by instructions issued by the Minister after the approval of the Council of Ministers. Electricity consumption is classified into household, commercial, industrial, government, and agricultural and any other classification that is determined by the Ministry, taking into consideration the amount of consumption and the stimulation of the sectors of agriculture and Industry,
The official spokesman of the Ministry of Electricity Musab al-Mudaris pointed out that “the energy waste , which amounted to more than 65% of the amount of production is the main reason for the lack of supply ” pointing out that “the application of investment project in the distribution of electricity will eliminate this waste by urging Citizens to rationalize energy through the establishment of investment companies to follow up and maintenance and end abuses, as a result of residential slums scattered throughout the country.
Al-Mudaris added that “the ministry is in the process of implementation of the project in the rest of Baghdad from the sides of Rusafa and Karkh and other Iraqi provinces by the companies invested for the energy distribution sector after the success of the experience of the transfer of districts of Zayouna and Yarmouk for investment and supply them with power for 24 hours,” and he expected “to transfer most areas in the future for investment companies.

He pointed out “The experience of the Zayouna area has been successful, but this success may not be applied in another region,” stating “The Energy Committee follows the policy of the Ministry of Electricity, which requires significant development in terms of production.
A spokesman for Prime Minister Saad al-Hadithi said that “the application of the experience of investment in the project of collecting electricity wages proved successful in the shops of the commercial area of Zayouna in the capital Baghdad.”
He pointed to the decline in electricity consumption from 52 MW to 25 MW increased the number of hours of processing from 12 hours per day to continuous processing around the clock.
Al-Hadithi said that “the investment program in the electricity sector contributes to stopping the waste of public money represented by the amounts of collections owed by the consumer, where this sector is very slow as the debts owed to the Ministry of Electricity by the consumers who did not pay the fees of the collection amounted by two billion and 700 million dollars, and this amount equals of more than two-thirds of the total revenue of the collection of electricity, and is expected when the implementation of the program of investment in the electricity sector that the revenues of collection to reach $ 4 billion annually.
He explained that “the government is seeking to address the imbalance in the electricity sector and make every effort to provide better service to the citizen and the best way to do this is to activate the investment program where this program will provide huge amounts to be spent from the budget of Iraq on the electricity sector that will not cost the public treasury anything because the proportion of the investor, 12, 9% is deducted from the wages of collection.

He added that “the investor will bear 80% of the wages of workers in the maintenance and collection sector, which was borne by the government before the start of the investment program and this means the provision of funds for the general budget and this program will lead to ending the wastage as a result of overrun the land and property of the state and agricultural land, Areas, and exchange feeding among regions and energy consumption without meters and exceeding standards, and non-payment of consumption fees. ”

Al-Hadithi added that “the percentage of wastage of produced electrical energy was 65% and if it is provided , it will in practice increase the amount of produced energy within the national network to twice of what it is and this will make it sufficient to meet the total consumption, which is at the peak load in the summer about 22000 MW and will lead to reduce the quantities of fuel supplied by the Ministry of Electricity to operate generating plants, which cost about one billion dollars annually saving large amounts that are spending to meet the cost of fuel subsidies provided by the government to the civil generators and the possibility of dispensing with imported electrical energy , which cost about one billion and two hundred million dollars annually. ”
Al-Hadithi added that “the government provides significant support for electricity consumption prices measured in kilowatt per hour under the system of collection started in 2016, which was implemented according to the program of investment in the sector of the distribution of electrical power gradually in Baghdad and the provinces, in which the government support was amounted by more than 90 % from the cost of production of the electric unit, especially for those with limited income where the cost of production of the electric unit is 153 dinars, while it is sold for the citizen at 10 dinars for the consumption of 10 amps continuously throughout the month, 20 dinars for those who consume 15 amperes continuously throughout the month and 40 Dinar for those who consume up to 20 amps continuously throughout the month, and thus the amounts will be specified in the collection system and in the framework of the investment program in the service, maintenance and collection sector adopted by the government . ”
He added that “the price of amps per month 1000 dinars for those who consume ten ampere or less around the clock, and 1500 dinars, per ampere price per month for those who consume between 10-15 amps around the clock, and two thousand dinars per amp price per month for those who consume 20 amps around the clock, Pointing out that “the proportion of electricity consumption prices gradually rising to match directly with the increase in consumption.”

Al-Hadithi stressed that the huge support provided by the government to the citizen in the collection of electricity within the new investment program, will be supplied with the continuous processing of electricity, which means to dispense with civil generators, which burdens the citizen with high wages imposed by their owners to subscribers, not to mention the environmental pollution and health hazards caused to the neighborhoods In addition to the noise associated with its operation. ” Al-Hadithi stressed that “the axis of the advancement of services provided to the citizen was one of the five axes included in the government reform paper adopted by Prime Minister Haider Abadi, and in the forefront of these services to supply citizens with electric power for more hours and improve the reality of the electricity sector after years of the delay, where a huge amounts were spent on it but the service provided to the citizen remained below to the level of ambition. ”
He explained that the government reform paper referred to the adoption of a package of measures to solve the problems of electricity in the fields of production, transport, distribution and collection, noting that the government program voted by the House of Representatives and within the axis of upgrading the level of service and livelihood of the citizen has included treatments to the bottlenecks of the electric power sector to provide it with continuity and reliability, And stimulating and supporting private investment in the electricity sector. “
Al-Hadithi stressed that “the government adopted the policy of increasing the production of electric power in accordance with the government program and the reform paper, in coordination with the start of a comprehensive program to reduce waste and reduce the lost and end the excesses in electric power and put forward the electricity distribution sector to the investment in the fields of service, maintenance and collection.”
In the same context, al-Hadithi pointed out that “since the government took over its responsibilities on 9 September 2014, several projects have been completed to increase the generating capacity of the electricity sector. Four investment units were entered in Basmaya station of the Mas Holding Group, located southeast of Baghdad, 25 km Of which, which was opened by the Iraqi Minister of Electricity Qasim Fahdawi and the national electricity system was provided with 1040 MW as a first stage and Mas company will continue to work to reach a capacity of 3000 MW.
Al-Fahdawi said that Baghdad will receive a large share of the national electricity system as it is within the geographical area of the capital, indicating that the most important feature of the project is that it is achieved by the investment and this is the first turn in the mechanism of work in Iraq, and contributes to the construction of its infrastructure, and most importantly it is completed by an Iraqi investor.
Al-Fahdawi stressed that if the work is done without obstacles, it will serve the industrial and agricultural sector and work to transform the oil-based Rentier economy into a productive one.

Among the successful projects in the energy sector is the Nujaibiya gas station in the province of Basra with a capacity of 500 megawatts, the gas station of Amarah with a capacity of 500 megawatts, the Diwaniyah gas station with a capacity of 500 megawatts and the al-Haydariya gas station in Najaf with a capacity of 160 megawatts.

Shatha Khalil
Economic Studies Unit
Rawabet Center for Research and Strategic Studies