Posted by Saltanat Berdikeeva | Mar 10, 2019
The summer of 2018 culminated in one of the major protests in southern Iraq over poor living conditions, unemployment, political gridlock, corruption, and chronic shortages of water and electricity in central and southern Shia areas of the country. Electricity shortages threaten economic development and fragile social stability in this war-torn country. Power cuts by Iran (which provides about 1,000 megawatts (MW) per year of electricity to Iraq) during the 2018 heat wave ignited the public anger that ended in violent clashes between the protestors and the police.
The oil-rich but economically distressed southern Basra region has complained about neglect and corruption for years.
The oil-rich but economically distressed southern Basra region has complained about neglect and corruption for years. The emergence of the Islamic State in Iraq and Syria (ISIS) both set back any progress that was achieved in providing reliable electricity and stalled efforts to reform the power sector. The new Iraqi government, formed in 2018, faces a huge challenge to deliver reliable power to people, particularly, under the added pressure by the U.S. on Baghdad to cut energy dependence on Iran.
Reforming the electricity sector has been largely ineffective since the fall of Saddam Hussein’s regime. Now, it is at the forefront of the government’s agenda. Modernization is needed in the entire chain of electricity supply: generation, transmission, and distribution. According to Iraq’s electricity ministry, the government needs to rehabilitate the country’s grid that generates about 15,000 megawatts, although peak demand can reach around 24,000 MW. In the summer, electricity demand can shoot up to 30,000 MW when the mercury soars to 50 degrees Celsius (122 degrees Fahrenheit).
The war has destroyed most of the country’s electric generation units and power lines. Replacing generators and electrical equipment continues to present security challenges. Transmission lines have been subject to attacks and looters. Between 30 to 50 percent of electricity is wasted due to poor transmission infrastructure. Although some progress has been made in reforming the electricity distribution system, such as reducing consumption and cutting waste, it remains largely inefficient and run down. For example, distribution lines are antiquated and unreliable, metering and billing are inaccurate, electricity theft through illegal connections is rampant, and often electricity supplies are unmetered.
Because of these inefficiencies, only one-third of the electricity is paid for by customers, which contributes to major financial losses by power generation and distribution sectors. The Iraqi authorities bemoan that they lose 60 percent of the state revenue to people who do not pay for power use. According to the World Bank, the Iraqi electricity distribution system “is the most problematic with adverse effects on the entire electricity sector in terms of financial sustainability, compromising the economic sustainability of the upstream generation and transmission business.”
Due to U.S. pressure to stop natural gas and electricity imports from Iran, the Iraqi authorities are eyeing power imports from Jordan, Kuwait, and Turkey, in addition to solar energy from Saudi Arabia. However, these supplies will not be enough to keep the lights on in Iraq. Demand remains high and will continue to exceed supply as the country rebuilds itself from war. While Iraq has until mid-March to discontinue energy imports from Iran, it will be a challenge for the war-torn nation to find alternative sources. Iraqi Prime Minister Adil Abdul-Mahdi openly said this February that his country was not party to the U.S. sanctions on Iran, potentially triggering tensions with Washington.
The new government has pledged to reform the electricity sector. One of its goals is privatization of electricity services, which has been a divisive issue in the country for years. On the one hand, there is a positive economic impact of privatization: reducing the budget deficit and stimulating economic growth. On the other hand, there is a negative public perception about privatization in Iraq. It is seen as a way to seize assets by a small group of wealthy individuals at the expense of the poor masses, particularly, in the environment of corruption.
While a majority of the country’s provinces rejected the Iraqi government’s proposal to partially privatize the electricity sector a few years ago, the same proposal re-emerged after the May 2018 parliamentary elections. Prominent Shia leader Muqtada al-Sadr, whose political bloc emerged victorious at the elections, stressed his support for privatization of the power sector with a caveat that “the measures should be taken to protect the people.” He has not provided details on how he would carry out such privatization. According to al-Sadr, “foreign, non-occupying companies” should help restore electricity infrastructure and services.
The country’s major step to begin rehabilitating the electricity supply system last year was the signing of a multi-billion dollar agreement with multinational corporations General Electric (GE) and Siemens. In October 2018, both companies committed to modernizing energy infrastructure and supplying nearly 24 gigawatts of electricity production within the next five years, as well as providing vocational training and creating jobs for Iraqis. Under a new “Roadmap for the Electrification of New Iraq,” the Iraqi government and Siemens seek to achieve eight goals: “reducing energy losses, introducing smart grids, strengthening the transmission grid, modernizing existing power plants, adding new generation capacities in deprived areas, connecting Iraq to the Arab Gulf region, putting Iraq’s national resources to work, and investing in its people.”
Furthermore, both GE and Siemens, among other multinational companies, are building gas processing infrastructure in Iraq to capture associated natural gas, produced as a byproduct of crude oil extraction, and use it to generate electricity. Iraq loses about $2.5 billion in flared gas. The World Bank estimated that the capture and use of associated gas as a fuel would be sufficient to cover the country’s total electricity demand. Attracting foreign investment would be central to rebuilding the electricity infrastructure of the country. However, keeping investors heavily invested depends on security, which remains fragile and is one of the major hindrances to reforming the power sector.
While the Iraqi government is seeking additional investments and funding to improve electricity services, the new, largest-ever, annual national budget signed into law in January 2019 may not bring meaningful changes to the country. The spending on rebuilding and new infrastructure incorporated in the budget is inadequate. This year’s budget, with a 45 percent spending increase compared to 2018 and the second-highest increase since 2003, leaves large areas of the country that were destroyed by ISIS still cash strapped.
Iraq would need over $88 billion for reconstruction and infrastructure. Only $28 billion from the national budget will be allocated to investments, while half of this year’s spending will go to paying salaries of civil servants.
According to the International Monetary Fund and Iraqi government estimates, Iraq would need over $88 billion for reconstruction and infrastructure. Only $28 billion from the national budget will be allocated to investments, while half of this year’s spending will go to paying salaries of civil servants. This is significant: the Iraqi electricity ministry itself remains bloated and corrupt. Local observers lament the lack of long-term economic vision and reforms. With oil income constituting about 90 percent of its budget, planning the national economy and budget around a single commodity and its price is a dangerous strategy for a country just emerging from war.
This moment is an important window of opportunity for the Iraqi government to begin rebuilding the country and introducing economic reforms. Lack of improvement in living standards will erode the fragile legitimacy of the government and democracy, especially, if more protests erupt due to shortages of electricity and water. Another restless summer may be in the offing in Iraq given the sluggish pace of progress in ensuring basic services and infrastructure to its people.