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Institutional rot in energy sector and how they get away with murder

Electricity workers and pylon silhouette. [Getty Images]

In the recent past, President Uhuru Kenyatta has stated that almost 30 per cent of the annual public sector budget (roughly Sh700 billion) is lost to corruption and poor governance in government.

The two leading presidential candidates in the forthcoming polls, generally agree with the state of affairs. They are perhaps also fully aware that the root cause of this vice is institutional rot in the public sector.

The seeds of mega corruption are sown at the top level when new ministries and public institutions are created or existing ones merged to suit vested interests.

Ministerial or other senior appointments are made on a political basis; new projects are initiated out of thin air; deals are cut on an ad hoc basis, and tenders awarded to the chosen few.

We discuss the genesis of the institutional rot in Kenya’s power sector. We discuss some of the problems created, and suggest fundamental reforms to reduce graft, and improve governance through institutional restructuring and fundamental reforms.

Genesis of institutional rot at Kenya Power

Up until 1982, EAPL was a private company with minority shareholding by the State. It was a single vertically integrated company responsible for the generation, transmission, and distribution of electric power in Kenya.

In 1983, EAPL was renamed Kenya Power and Lighting Company (KPLC) with majority shareholding by the government. Thus KPLC became a parastatal under the State Corporations Act with the government having wider discretionary powers in controlling the assets and management of KPLC.

In 1984, there was a major restructuring in the management of KPLC. The KPLC executive chair and CEO of the company was removed and replaced by a managing director or CEO.

The board was separated from the management of the company, and a new non-executive chairman of the newly constituted board was appointed.

In 1997, as part of the restructuring exercise, it was agreed between Kenya and World Bank to create two separate entities - KPLC and Kenyan Electricity Generating Company (KenGen).

KPLC was for transmission and distribution, while KenGen was responsible for power generation. It was also agreed to invite Independent Power Producers (IPPs) to participate in all future generation projects.

Additionally, the Electricity Regulatory Board (ERB) was set up as an independent regulator for economic and technical regulation of the power sector.

It was headed by a director general (DG) appointed by the Minister for Energy. A separate board with a non-executive chairman was appointed by the president together with a board made up of up to seven to eight members.

In 2006, Energy Act (2006) was enacted under which the Energy Regulatory Commission (ERC) was established as a successor to ERB, with the regulation of electricity, petroleum and renewable energy.

Rural Electrification Authority (REA) was also established under this Act, for the acceleration of rural electrification in the country, a task previously undertaken by KPLC.

In 2008, Geothermal Development Company (GDC), hived off KenGen, was established as a special purpose State-owned company responsible for geothermal resource development in areas outside Olkaria.

Another company, Kenya Transmission Company (Ketraco), hived off KPLC was established. It was responsible for planning, design, and construction of new transmission lines and sub-stations at 132 kV and above, in areas outside KPLC jurisdiction.

And now, in the revised Energy Act (2019), ERC was renamed as Energy and Petroleum Regulatory Authority (Epra), responsible for the regulation of both electric energy and petroleum. All the above institutions are now under the full control of the Energy ministry.

Institutional challenges

Under the existing institutional setup, the president and his deputy appoint an energy cabinet secretary (CS), principal secretary and now chief administrative secretary.

They also appoint all the non-executive chairs of the boards of various institutions under the Ministry of Energy.

The CS and his PSs, appoint managing directors (MDs) of all the institutions under their control, as well as all the non-executive board members. In addition, the PS or his representative also sits on the boards of all the institutions.

Now, all the institutions are directly under the control of the CS and PS appointed by the president and his deputy.

As such, all major decisions are now dictated by Energy minsitry.

These decisions relate to hiring and firing of senior management staff, preparation of Least-Cost-Power-Development Plans, selection of new projects, negotiation with the IPPs, award of contracts, and setting of the electricity tariff.

As such, if anything goes wrong in KPLC for example, it is very difficult to hold anybody fully responsible.

Some glaring examples

The Last Mile Project, a State initiative, launched in 2014/15 was mainly financed by Treasury, with some financial assistance from World Bank and AfDB. Under this project, consumers of electricity within a 600-meter radius of an existing distribution transformer would be connected to the low voltage line at a subsidised rate of only Sh15,000, per connection against an average cost of about Sh40,000.

Since 2014, almost seven million new consumers (roughly five million KPLC consumers and two million rural energy consumers) have been added to the grid.

This indeed is a great success story for the country, especially from a socio-political point of view.

However, these small tail-end consumers, who use less than 20kWh per month have not contributed much to the growth in demand for electricity, nor in building up KPLC’s revenue base.

In addition, the Last Mile Project has created its own peculiar problems with regard to underhand dealings in the award of contracts to inexperienced contractors, increased technical and commercial losses - from 16 per cent to 24 per cent and increased commercial and administration costs from about Sh14 billion in 2013 to about Sh30 billion in 2021.

In addition, KPLC had to spend roughly Sh90 billion over the past eight years to connect its own five million tail-end consumers without any payments from the ministry.

This saw KPLC declared technically insolvent by the Office of Auditor General because its current liabilities far exceed its current assets.

And now in January 2022, KPLC was asked to reduce electricity tariff by about 15 per cent under a presidential directive, for which National Treasury had to chip in an estimated Sh15 billion to protect KPLC from further financial damage.

Proposed institutional structure and some fundamental reforms

Based on our international experience and borrowing from the Indian Power Act of 2003, revised in 2007 (available on their website), the following structural changes and some fundamental reforms are proposed.

The president and his deputy will only appoint the minister (CS) which is a political appointment. The PS will be appointed by the Public Service Commission since it is expected to be a Civil Service position. There would be no separate board, hence no non-executive chairmen or board members.

The Energy ministry will be headed by a minister or CS and assisted by PS who will be the CEO of the ministry. The main responsibility of the ministry will be to set up a policy, administration, and general supervision of the institutions under their control.

However, they will not be responsible for the appointment of the executive chairmen of various institutions under their jurisdiction.

Energy and Petroleum Regulatory Authority will be a totally independent regulator responsible for energy only. It will be headed by an executive chairman with three or four executive commissioners, supported by a chief operations officer and his support staff.

Central Electric Authority (CEA), a newly created supreme body, will be responsible for least-cost-planning for five years - identifying new generation and transmission projects; setting standards for all institutions and IPPs; and monitoring various major generation and transmission projects.

CEA will also take over the functions of NPEA, which should be scrapped.

The executive chairman of CEA will be assisted by four or five executive members, selected from the sector and a couple of non-executive members representing IPPs, and the Kenya Association of Manufacturers (KAM).

REREC (new name of REA), will now be only responsible for planning and funding rural electrification on grid-connected systems, and for the time being, off-grid systems awarded to small IPPs.

However, the design and construction of the grid system will be carried out by KPLC. KenGen will be responsible for the design and award of contracts for hydro and geothermal projects only. They will also take over GDC, which should be scrapped.

Ketraco will now be responsible for the design and construction of various transmission projects at 220kV and above.

The grid-connected IPP’s will now be responsible for wind, solar, thermal and other projects. The off-grid IPP’s (under 5MW) will be responsible for all projects as planned and designed by REA.

Kenya Power initially will be the only off-taker and seller of electricity. It will also be responsible for the design of all distribution and sub-transmission networks up to 132kV.

 Conclusion

The main thrust of this is to propose the creation of an executive chairman and CEO, fully responsible for the management of each institution in the public sector. He will be appointed by the Public Service Commission or such other independent body.

All the boards in each of the 200 odd public sector corporations would be scrapped. And all the non-executive board chairmen and members would be made redundant.

Unless the new administration takes bull by the horns and introduces fundamental reforms during its term as suggested above, it will not be easy to reduce corruption and wastage in the public sector and save Sh700 billion in budget losses annually.

Hindpal S Jabbal is a former chair of ERC (2007-2011), while Kwame Owino is the CEO of the Institute of Economic Affairs of Kenya, a think tank that studies and tracks regulatory developments in Kenya.

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