Creeping reforms in power distribution

Orissa has several unique features suited to privatisation unlikeother states. Its share in agricultural consumption is only 5 per cent as against 40 to 50 per cent in other states. It is primarily a hydro-based state with surplus peaking capacity and cheap power. The percentage of industrial consumption is also high at about 50 per cent. The Orissa model will therefore, not be applicable to other states and the policy makers should initiate action for privatisation in states like Uttar Pradesh, Madhya Pradesh and Andhra Pradesh where the agricultural consumption which constitutes the main loss of revenue is high.

Delhi is also ideally suited for privatisation as its demand of power is about 5 per cent of the total demand in the country. Fortunately, all the specialised PSUs in the power sector are also located here.

Substantial gains from privatisation have already been achieved throughout the world and in fact the power tariffs have declined in several countries by 10 to 15 per cent and plans have been prepared to reduce them further by 15 to 20 per cent in thenext five years. In the India, however, it is still to be seen whether any reduction in power tariff is practicable.

The devastating dual effect of inefficiency and corruption in the distribution of power has become the bane of the power sector. The power planners have sanctioned massive installed capacity of over 25,000 MW in the private sector apart from installed capacity cleared for the public sector. The power sector so far has been the monopoly and it is not going to be an easy task to achieve abrupt transition from public to private sector. The transition should be effected gradually, over a number of years.

There are, at present, only four recognised distribution 8212; CESC, BSES, Ahmedabad Electric Supply Company and Tatas 8212; when hundreds of such cash rich distributors need to be created. It may not be an easy task to create such organisations in the short-run and the next option is to induct foreign distributors which, of course, may not be in the overall national interest.Moreover, foreigndistributors also may feel hesitant to face hostile consumers in this country. This aspect, therefore, should be thoroughly thrashed out by the policy makers.

There are, however, a number of issues to be sorted out by the state governments before entrusting the work of distribution to the private sector. There is, at present, no clear policy to evaluate the cost of assets to be transferred to the private distributors. The costing of the assets, however, is extremely important as it is ultimately reflected in the tariff and will be the main deciding factor of being within the paying capacity of the consumers.

After the cost of assets comes the question of the method of recovery. It can be given as a loan or lease or against down payment. However, due to massive amount of funds required, the distributors might not be in a position to mobilise resources to take over the assets at market value and, therefore, other options need to be explored. Similarly, large investment is needed for strengthening theexisting distribution system.

The SEBs today carry an employee-strength of about 10 lakh, out of which 50 to 60 per cent is surplus. This surplus staff comprises mostly of unskilled and white-collar categories whereas there is a shortage of skilled labour as SEBs stopped recruitment and training of skilled staff several years back. Most of the employees are also aging. Private distributors, therefore, may be reluctant to take over the surplus, inefficient and aging staff.

China has changed its labour laws in order to encourage induction of private sector in many industries. For investments in non- state sector they have created a completely free labour market where employers do not have to adhere to any of the labour practices, particularly concerning hiring and firing of workers, which hamstrings our state enterprises. The Indian Labour Laws are perhaps the oldest one in the world and require extensive changes. The best way to reduce inefficiency in SEBs would be downsizing of the SEBs.

A distinctionhas, however, to be made between retrenchment of productive workers and removal of dead wood. In order to make the operations commercially viable, private distributors will certainly insist on uninterrupted, reliable and quality power supply with guarantees and matching penalties for non-compliance. Unfortunately, the SEBs which will be the main source of power supply to distributors may not accept such binding conditions which are in force universally.

In the West, expenditure on energy by a middle-class household varies between only 3 to 4 per cent of its income whereas in India it has already exceeded this limit due to the high cost of power on account of wrong policies. The regulator, therefore, has to safeguard the interest of the consumers as well as not overlook the interest of distributors. In any case, consumers cannot subsidise inefficiency and corruption.

The world experience confirms that before restructuring and unbundling of the power sector was undertaken, the public sector itself adoptedlatest technological improvements in order to improve the efficiency of the system and introduced fiscal reforms. This has, however, not been done so far in this country. It would, therefore, be appropriate to earmark only certain districts for privatisation and to concentrate on improving the efficiency of the other districts by the SEBs themselves.

In the entire process of changeover, however, the state government should be ready to subsidise consumer power tariff in the initial stages of privatisation. Moreover, the subsidisation of power sector will remain a key instrument of social equity for the poor for all times to come.

In the Indian context, the allergic prescription of the World Bank and western investors for any abrupt change from public to private sector cannot be implemented. A changeover may be extremely slow and time consuming. The policy makers, therefore, should strike a right balance between public and private sector on a long-term basis.

The author is the former chairman ofCEA