Sharp bends ahead

Power sector reforms have not been easy, being caught between political compulsions and economic imperatives

Ranjit Bhushan

In meetings between Prime Minister’s Office’s Energy Coordination Committee and the Planning Commission since the United Progressive Alliance (UPA) government came to power, the role of private players in the power sector has increasingly come into focus. One of the commission’s key conclusions conveyed to the PMO has been that the privatisation exercise — whereby generation and distribution have been thrown open to entrepreneurs — taken by some state electricity boards (SEBs), has been a failure. In a presentation made before PMO’s Infrastructure Committee, the commission has said that the “Delhi and Orissa privatisation models are not replicable.” Instead, it has suggested setting up “a task force to develop alternative models for privatising distribution.”

The commission has suggested that the government spearhead a, policy “that would limit Central Public Sector Undertakings (CPSUs) role primarily to inter-state transmission (national grid), Regional Load Despatch Centre (RLDCs) and National Load Despatch Centre (NLDC), rural electrification, distribution reforms and facilitating public-private partnership (PPP) and conservation.” The presentation said it was important to “make all Central assistance to the sector contingent on reform and compliance with the Electricity Act, 2003.” It also called to “eliminate uncertainty about the validity of the Electricity Act by inviting a review as there was no need to be on the defensive.”

The government’s ambitious Electricity Act of 2003, now currently under review, is said to be the motor driving reforms in the sector. Notified in June 2003, it contains enabling provisions for the development of a competitive and efficient power sector, but the Act has not yet been operationalised due to delays in finalising policies and implementing regulations required under the Act.

The government admits that private sector participation has been less than enthusiastic. In a 10-year period, from 1994-1995

to 2003-2004, the private sector has generated a measly 6,397 MW of power. The contrasting positions of both parties concerned,

the government and the private sector, appear to have led to a stalemate. While the rules-regulation Raj and the multi-clearances required for any power project to get off the ground has stifled dynamism and creativity, the high costs involved as well as the penchant of private power producers to seek immediate returns in an industry where gestation period ranges from anywhere between five and 10 years, has led to slackening of enthusiasm for any private sector participation. Clearly, reforms in the power sector have not quite taken off.  

What is driving private capital away? Take the case of the UK. “British investment in India’s power sector is not likely for another few years till the reforms process under way starts showing results,” says energy expert Gordon Roberts, chairman of British Power International. The current rate of transmission and distribution losses in the Indian power sector, which is around 50 per cent in some regions, is a major deterrent for private and overseas investments, according to Roberts.

The way ahead is strewn with difficulties. Lack of reforms may not be the only thing. The UPA government has met with opposition to private sector participation in power from expected quarters — trade unions. But coupled with the onslaught on the issue that the government is facing from its Left alliance partner, the Manmohan Singh government has a tough task on hand. An eight-member delegation representing various trade unions in the power sector detailed before Prime Minister Manmohan Singh how privatisation of the power sector has only brought ‘disastrous’ consequences for the nation.

The most critical indictment of power reforms and privatisation has come from  the Tenth Plan Mid-term Appraisal of the energy sector. The appraisal admits that the power sector reforms, which were started about a decade ago in the country, have been half-hearted. The sector continues to be dominated by financially weak SEBs, especially in the distribution segment. Capacity addition during the Tenth Five Year Plan was 23.9 per cent lower than the set target. Further, SEBs remain financially sick as losses on sale of electricity have kept on rising as usual. Cost of power generation remains high as compared with other countries due to widespread AT&C losses, exceeding 40 per cent. This, in turn, makes the Indian industry non-competitive. The appraisal says that reported peaking and energy shortages are seven per cent and 11 per cent, respectively, but they do not reflect the actual shortages, as actual demand and scheduled load shedding are not accounted for. On the ambitious Accelerated Power Development and Reform Programme (APDRP) projects, the appraisal notes that they have failed to meet expectations. The total investment in APDRP projects, in other words privatization, during the last three years has been a measly Rs 4,820 crore. Actual investments in the distribution sector and utilisation of funds allocated under APDRP schemes remain low.

As against the originally envisaged Tenth Plan target of 41,110 MW of capacity addition, the likely capacity addition will at most be 31,290 MW thus registering a shortfall of at least 23.9 per cent. The likely capacity addition includes, 4293 MW of capacity that was not part of the original Tenth Plan targets. If the unplanned capacity is excluded, the shortfall would rise to 34.4 per cent.

Distribution reform and reduction of distribution losses is critical for achieving sustainability of the sector. Privatising distribution is a potential answer to tackling this issue. However, experience so far in the states of Orissa (six years) and Delhi (three years) suggests that privatisation is not a guaranteed solution. In Orissa AT&C losses remain over 45 per cent. In Delhi, even though the contracted loss reduction has been achieved, loss levels remain at an unsustainable level of 40 per cent plus. It would be naive to believe that private generation of power and distribution will speed up in the absence of real reforms at the state level. The pace of privatisation has been slow precisely because SEBs have not been able to pick up the tab for power from private power companies.

The government’s contention that review of the Electricity Act does not mean abandoning of power reform does not sound convincing enough. Rather than putting the entire Electricity Act on hold, at least, that is what a review implies, the government should have, instead, identified specific areas of review. That would have set to rest misgivings about the government’s agenda on power reforms. Right now there is reason to believe that the UPA government is holding back the Electricity Act to placate its key alliance partners. In Andhra Pradesh, run by the Congress, free power to farmers will cost the exchequer Rs 350 crore. Tamil Nadu, ruled by the Dravida Munnetra Kazhagam (DMK)-led coalition government, too, has followed suit and announced a free electricity package. If other states emulate the two southern states, it would ring the death knell for power reforms.

It is important to remember that the standards that people come to expect from the private sector are different from those they accept from the government, especially when there are visible performance benchmarks. No one complained all these years when transmission and distribution losses in Delhi’s power system, as a public sector monopoly, climbed to as high as 63 per cent in some parts of the city.  That’s because the losses were being paid by a state subsidy, which gets hidden in the budget and people don’s realise they are paying anyway.  Today, that 63 per cent has come down to 50 per cent in three years, but people are angry because in other parts of the city it is either 41 per cent (down from 52 per cent) or 33 per cent. Suddenly, everyone is conscious of these numbers.

Clearly, for public policy, there is a case for greater privatization in the infrastructure sector. First, privatisation frees the government from making promises that it cannot deliver. Instead, the politician can join the citizen and point their finger at the private sector provider and, unbelievably, demand performance! This automatically pushes the system towards greater efficiency.

Ranjit Bhushan is a freelance journalist and Consulting Editor, Energylineindia.com