In a new analysis paper, we write about how the government of PM Hayder al-Abadi in Iraq is not only facing a security threat posed by the Islamic State (ISIS), but also economic challenges on the short- and long-term, due to policies inherited from the former government and previous administrations. Restoring basic services, like electricity, to Iraqis would play a key role in shoring up the legitimacy of the federal government as it is seeking to re-establish its authority over Islamic State-controlled territories. Despite the billions of dollars spent on augmenting the power supply over the last 12 years, the country is still in deep electricity shortage— even before the Islamic State crisis— due to a lack of long-term vision and a coherent policy strategy to combat the sector’s low efficiency and poor performance.
RADICAL ECONOMIC REFORMS COULD LEAD TO POLITICAL DESTABILIZATION
Attempts to privatize the state-owned-enterprises would not be an immediate “silver bullet,” as such a move might put hundreds of thousands of public service employees out on the street, without work in a country that has already has an unemployment rate of more than 15 percent. We argue there is a general fear among the Iraqi officials that any radical economic reforms— such as the elimination of subsidies for basic necessities like kerosene and cooking gas—would be faced with strong opposition by the public and might destabilize an already-fragile political process. As a result, the electricity sector is continuing to place a serious burden on the country’s increasingly stretched budgetary resources as the government is forced to import fuel to generate electricity (with subsidized electricity only further driving up the country’s deficit). The electricity tariffs have been frozen since 2003 at less than $0.01 per kilowatt-hour (kWh), while providing that same kilowatt hour costs the ministry of electricity more than $0.10, and the price of buying electricity from private generators is more than $0.13/kWh.
KEY ROLE FOR PRIVATE SECTOR
As the electricity shortage goes deeper than ever before, there is a key role for private sector investments to meet the challenges, both from domestic companies and foreign investors— especially in the south and KRG provinces as the Islamic State threat gradually diminishes. We argue that Iraq’s long-standing electricity shortage will require a sustained, multi-year effort across a wide front of the country’s energy, institutional, legal, and regulatory institutions, with an eye towards enhancing the investment atmosphere for the private sector and improving oversight of the network with an overall goal to detract from the legacy of state-run centralization during the Saddam era. Hence, the Abadi government has to enforce difficult policy decisions to muster the massive capital investment needed for the sector given the extensive and ongoing damage to electrical infrastructure due to the military operations in the Sunni provinces. Gradual implementation in liberalization of the sector must be seen to bring improved service in the immediate term and economic dividends for Iraq and its people in the long term. Initial efforts toward the decentralization of power away from Baghdad can play a key role. An expanded role for provincial and local governments in owning and operating distribution companies within their provinces will encourage the involvement of the private sector in the long run and address the high losses associated with the country’s dilapidated distribution network, due to unreliable and old-age distribution lines, inaccurate metering and billing, un-metered supplies, and theft via illegal connections. Beyond this, it will be exceedingly difficult to resolve the shortage without utilizing the country’s natural resources more efficiently. The huge deficit in the supply of fuel feedstock has hampered the ability of power stations— a situation exacerbated by under-investment in oil and gas infrastructure aimed at domestic consumption.
SOLID DATA AND ASSESSMENTS NEEDED
Additionally, by restructuring the sector and the role of the ministry of electricity, this strategy would also address the need for greater energy reserve capacity and more efficient energy management. It should lead to a comprehensive legislative and regulatory framework, implemented through a process of parliamentary consultations with the advice and assistance of international organizations. In order for Iraq to enjoy a liberal, energy efficient regime, solid energy statistics and rigorous assessments of the country’s energy landscape are clearly needed to guide future decision-making.