The efficient, sustainable, and fair reconstruction and protection of Ukraine’s energy sector – principally its electricity sector – is essential. Russian missile attacks did significant damage to these systems through the autumn and winter of 2022–23 and seem likely to continue through 2023–24. According to the Ukrainian government’s Rapid Damage and Needs Assessment (RDNA2), US$3.3 billion is needed in 2023 alone for reconstruction in the energy sector.7030250390a3

Ensuring corruption does not undermine this process will be vital. Experience shows that corruption in energy sector reconstruction can lead to waste, failing supply, regular shortages – and ultimately, social unrest. We reviewed past energy reconstruction efforts in post-conflict settings where there has been a significant role for international partners, to look for lessons learned, with a specific focus on the management of funds.

Some of these countries, such as Afghanistan or Lebanon, are very different from Ukraine, which starts reconstruction with a far stronger institutional and economic base compared to most post-conflict settings. Yet certain common conditions – the nature of the energy sector, the scale of international involvement, institutional flux during and after conflict – can alert us to potential challenges, helping us to anticipate and get ahead of corruption.

We looked for what was done well and what went wrong in funding energy sector reconstruction in other places, to supplement ongoing thinking in Ukraine.783c9aa90494 However, we recognise that lessons learned from other settings are suggestive rather than prescriptive: they are just one strand of planning, as they must be combined with a thorough understanding of the Ukrainian context, and of general anti-corruption guidance for the energy sector.af4aa69c2b07

This U4 Brief examines the main kinds of corruption that emerge in the management of reconstruction funds in the energy sector, the main responses to these, and what could be done to enhance domestic forms of accountability.

When managing funds, be alert to procurement corruption

Energy production requires multifaceted, technical operations at scale, presenting an inherent monitoring challenge that can be exploited across the implementation cycle. Therefore, many forms of corruption can occur in the energy sector,6d5697a0734d and different sources of energy can engender different types of corruption. Of particular concern is the ability of vested interests to capture both the policymaking process and the governance of important implementation bodies, such as state-owned enterprises.

This paper focuses more narrowly on the management of funds for energy reconstruction. The evidence from reconstruction settings suggests that, within this focus area, the most enduring and damaging forms of corruption are likely to occur in procurement: the contracting processes by which public organisations purchase goods and services. So, while other forms of corruption may exist, especially more headline-grabbing grand thefts and embezzlements, it may be important to prioritise procurement processes.

Corruption in procurement is so pernicious because it is hard to detect. Corrupt actors subtly exploit blind spots in monitoring processes and gaps in anti-corruption procedures: covertly steering contracts to a particular bidder; discreetly sharing inside information; or tailoring tenders to politically connected persons in exchange for bribes.

Even small subversions in procurement processes lead to a direct price increase of between 1 and 5%.e7ace73f9755 In countries where collusion is common, these costs accumulate rapidly, making procurement fraud profoundly damaging. When electricity infrastructure programmes are rolled out quickly – and under conditions of low technical capacity – it tends to lead to an over-reliance on outsourcing. This can then be exploited by so-called ‘tenderpreneurs’, who use nepotistic relationships to secure government contracts and tenders.18747a630c2c

Indeed, given the potential spoils, procurement corruption in energy reconstruction is particularly susceptible to developing into something more systemic. Iraq offers cautionary lessons in this regard, as fraudulent public sector contracting has been the central mechanism by which corruption has become systemic.642f2e87cfad Billions of dollars of investments in the electricity sector, from both domestic and international partners, may have been lost to corruption, as the delivery of this essential public good becomes part of patronage politics.541f756b89e2 The result has been chronic electricity shortages, power cuts, and subsequent widespread rioting.db0a2817325b Accountable institutions in Iraq’s energy sector could be part of the solution, but it has been very difficult to set these up; once the rot sets in, it is difficult to stop.

Three responses to energy sector corruption during reconstruction

Among a wide array of risks, a special alertness is needed for (possibly systemic) procurement corruption in the reconstruction of the energy sector. In reconstruction contexts, there are three main responses to such risks.

1. ‘Existing institutions’ approach

The first approach is to rely on the standard domestic institutions to manage the influx of funds. However, in most cases these institutions are deemed not up to the task, because state capacity can be hollowed out during conflicts. So governments and international partners have often responded with two alternative approaches: the ‘specialist institutions’ approach and the ‘internationalising risk management’ approach. We examine lessons from both.

2. ‘Specialist institutions’ approach

This involves taking risk management functions away from individual ministries, such as the energy ministry and respective implementing agencies, and placing them in a specialist unit that is detached from the standard bureaucratic order. This approach – bypassing the implementation chain – has been used in various settings.

Mahmalat et al describe what happened with the Lebanon Council for Development and Reconstruction (CDR), which was set up to oversee reconstruction of infrastructure, including energy, after the Lebanese civil war (1975–1990).a176d18ed0dd As public institutions were weak and riddled with corruption, the CDR was set up to be a reliable interlocutor with donors, as a so-called ‘island of efficiency’. This specialised reconstruction body was elevated politically, reporting directly to the Council of Ministers, and was given special prerogatives. For example, it was not subject to civil service staffing rules and was independent of existing supervisory and audit institutions.

Yet, despite being set up specifically to sidestep the corruption in the broader public sector, the CDR incrementally ended up reproducing it, especially elite-level graft, becoming an institution where political connections mattered more than due process. Mahmalat et al reviewed all CDR contracts between 2008 and 2018, to show that firms politically connected to a board member of CDR won more than 40% of contracts and captured 63.5% of the total value of contracts. Over time, it had become too monopolistic and unaccountable, and so hard to dislodge: the board of the CDR, whose members technically had a mandate of five years, had in fact remained almost unchanged for 15 years.fe59a93d359a

Where an influx of new and sizeable resources happens, there may always be political actors who seek to influence and exploit new institutional setups. To avoid this centralising of corruption, a similar bypass model – the Afghan Assistance Coordination Authority (AACA) – was set up in Afghanistan in 2002 as a special unit within the then Interim Afghan Administration. Its role was to expedite reconstruction project procurement and had a temporary mandate only: after two-and-a-half years its procurement functions were moved to relevant ministries. McKechnie found that placing a time limit on this special procurement institution was wise for it provided a clear incentive for local capacities to develop.7253bbd9ca3f

3. ‘Internationalising risk management’ approach

The final approach in energy reconstruction has been for international partners to take on – partly, mostly, or completely – the responsibility for risk management and procurement. This can take different forms.

One form is multi-partner funds (MPFs, also known as multi-donor trust funds or MDTFs). These can be set up in various ways.

Country-specific MPFs are often managed by mutlilateral agencies, such as the World Bank or the UN, who act as the main trustee and chair the decision-making bodies.

Funds are distributed either as direct budget support for line ministries (eg, to pay for salaries) or as project funding to be managed by domestic ministries or outsourced to contractors, such as civil society organisations or UN agencies. Accountability and performance management are generally led by the international administrators, who deploy third-party monitors to check on compliance and verify that the funds have been spent appropriately. Verification is weighed against a mix of international and local standards and procedures.c68da5bcce0e

MPFs have become common in vulnerable settings because they have built a reputation for professional management, tried and tested procedures, and often an ability to secure local political access and legitimacy. They can also be regarded as the ‘best in class’ model when it comes to transparency and accountability, making them an attractive option for reconstruction projects.11516741b868

A stated aim of many MPFs is to strengthen the national public systems with which they collaborate. However, evidence suggests that this has been hard to achieve in practice. Disch and Natvig, for example, found that in some countries relying on national ministries ‘hampers more than supports successful implementation.’2fcc063e3e3c

Experience in other reconstruction efforts shows that MPFs are not anti-corruption panaceas and may only bring control and accountability to a limited extent.f65693391715 For example, the Zimbabwe MPF (‘Zimfund’), procurement system has been criticised for its weak accountability structures, inadequate reporting on accountability issues, and monitoring systems that are too ‘detached’ from government systems.ee91be27426a

The risk is that these funds become too delinked from domestic forms of accountability and so oversight weakens as resources flow down the chain. So, while first-order disbursements from funds usually are tightly controlled, the subsequent use of funds through the delivery chain – for local purchases, construction, hiring, and so on – is vulnerable to abuse. A 2019 publication by U4 argues that MPF administrators face both policy and practical issues in addressing the misuse of funds down the chain.879c01f8ff4f

The second model of shifting most of the responsibility to international partners involves working through government but via donor-driven units housed in energy ministries or relevant implementation bodies. These are sometimes called programme implementation units (PIUs) and are often ‘owned’ by international partners, or at least sponsored by them. They have been used in post-conflict settings such as Bosnia and Herzegovina and Afghanistan.

These can be effective in driving accountable spending because they centralise procurement management and can be staffed with experts. However, as they work separately from domestic institutions, over the long term they may risk skewing accountability. In Afghanistan, these PIUs proliferated across ministries which inhibited the development of effective domestic checks and balances. PIUs also risk prompting a brain-drain away from government institutions due to higher salaries. This can be particularly damaging in highly specialised or technical sectors, like energy.

One analyst argues that it was only when the Afghan government took more control of these specialist units – placing them under the accountability of a minister while at the same time retaining international input, sponsorship, and advice – that procurement processes became much stronger.99ab4549f1e2

Internationalising responsibility can have advantages, but again, it is not a panacea. At worst, it can tempt international partners to work increasingly independently of domestic institutions, which in post-conflict settings ‘is a short-term approach which has often proved ineffective.’423a419c59d7 It is also at odds with commitments to localisation, which are commonly espoused in international aid. Indeed, a strong and consistent message from a literature review on MPFs is that they operate better where there is a ‘strong recipient government’.f2d1598ed183

Building domestic capacity: A central strategy

Specialist institutions or internationalising approaches may mitigate corruption, but they bring their own risks. The central lesson from the evidence base is that the outcomes for both approaches will tend to depend on the broader quality of domestic institutions.4b7f5d0c31fb

There is a risk that a false binary emerges: that there is a choice between relying on domestic institutions or setting up alternatives. Instead, the evidence suggests that the most important pathway for accountability in energy reconstruction, either as a complement or more significantly as a goal in itself, is to invest in domestic capacity.

In the long run, capacity building can pay off, not only because economic returns to energy sector investments are likely to be very high.744860dc5469 Enhancing the credibility of domestic management can also create a virtuous circle of investment in the electricity sector. The absence of such credibility threatens sustainability: in the reconstruction of the electricity sector in Bosnia and Herzegovina, for example, an overly complex structure undermined incentives for international financing to continue.dde2f7f9708e

The types of capacity building that may be important

Investment could cover improving administrative mechanics, such as how to conduct due diligence, strategic planning, programme design, financial management, internal control and audit; and results monitoring, evaluation, and reporting. It could also focus on raising the quality of leadership, ‘the single most important ingredient in terms of the impact of national programmes,’ according to the World Bank. Investment in improved IT and technological capacity has been shown to help in other reconstruction settings, especially around transparency and information sharing.

Capacity building should not be over-centralised, but should be extended to local government, such as municipalities and urban authorities. These lower administrative levels are vital in the reconstruction of electricity supplies, and are potentially important in the longer-term energy transition.f038bb49baf0 However, in difficult conditions, capacity may be weaker at municipal levels. For instance, weak local government capacity in Puerto Rico slowed reconstruction of energy infrastructure following two hurricanes in 2017. Municipal capacity-building plans were subsequently recommended to improve infrastructure management.5a6fc83bcbe3

General lessons from reconstruction in post-conflict Sri Lanka suggest that capacity also depends on the participation of community groups.ec4242ff80f1 In Afghanistan the National Solidarity Programme (NSP) created democratically elected community development councils that selected and funded small-scale development projects, including energy schemes such as mini-grid systems powered by micro-hydro and solar installations. An experimental impact evaluation found that this programme had positive effects on a number of outcomes, including access to electricity.a3cade1e26a6 The positive role of communities could be fully recognised in programme design and implementation.

The international factor: Making capacity building more effective

International involvement in strengthening domestic accountability mechanisms around energy reconstruction will be important. International actors provide resources to develop capacity and may act as ‘principals’, monitoring the extent to which progress has been made. There are also positive examples in the literature of international support in difficult circumstances. Multi-donor support to the Liberian Electricity Corporation, which delivered an Emergency Power Programme from 2006 to 2009, was found to have enhanced capacity in the sector, resurrecting electricity supply across the country.511b43ab0baf

Yet, the presence of international experts is not a ‘silver bullet’ for building capacity. Indeed, international programming can complicate the development of local capacity, and there are some important lessons for how to make capacity building more effective.

The need for joined-up action

Evidence from reconstruction efforts suggests a possible dilemma from the political economy of international aid: international partners must act according to their own internal rules, political priorities, and incentive structures – and these may be at odds with local needs. This can lead to capacity-building efforts that are not always sensitive to, or aligned with, those needs. In Afghanistan, McKechnie reports that donors carved out investments that fitted their priorities, administrative rules, and financial resources, and rarely worked with sector ministries in a strategic or coordinated way.ba6246169cba These mismatched priorities can also lead to inefficiencies. A 2015 study of reconstruction planning in Kosovo found that donors tended to exert pressure on the implementing agencies to procure goods from the donor country – even when those goods did not match local requirements or were more costly than importing goods from neighbouring countries.5955466d8a28

Being part of the solution, not the problem

International partners, including private companies, also have their own weaknesses when it comes to corruption and accountability. According to a U4 publication, international partners may be poor at responding strategically to corruption when it surfaces.64a15272241f In Afghanistan, the US Inspector General found that the US failed to realise the nature and extent of the threat from corruption, thereby missing an opportunity to incorporate anti-corruption efforts into its general strategy.43f91ddf355a

International capacity may also be relatively weak. The UK’s Iraq Inquiry found that the donor-driven electricity reconstruction team was poorly managed, with problems of high turnover of personnel.d3fe0e1d087c A US evaluation of reconstruction in Iraq found similarly that international staff involved in initial reconstruction were under-qualified.042ddeff9ddf

Reconstruction needs to involve local companies, but also should be alert to the risks of new or old vested interests (re)establishing illicit influence and control. These vested interests may also be international, as well as local. More critical perspectives argue that international partners may seek to exploit reconstruction for the benefit of their own national firms – especially in a sector like energy.e8f20e87d401 Chwastiak argues that early reconstruction rules and processes in Iraq, for example, may have favoured US and UK firms, while Iraqi, as well as other western countries’ firms, may have been structurally disadvantaged. When problems emerged with this US and UK ‘capture’ of the reconstruction market, the response via official governmental reports was to blame local Iraqi capacity rather than own up to the conscious policy choices made by those leading the international coalition.58f83154f8ca The Iraq experience also highlights the importance of public perception: because many of the electricity reconstruction grants were awarded to US companies there was a growing sense that the ‘United States–led coalition was using Iraqi resources to enrich U.S. companies’.7233eeee6fea

Conclusion

Efforts to enhance accountability processes can collide with a legitimate pressure for speedy delivery. New institutional forms can help mitigate these tensions but are only effective if they also provide incentives for domestic capacity to develop in the long term. International actors have an important role to play, yet domestic actors need to be assertive on the need for local ownership and proceed with capacity building on their own terms.