ISSUES & INSIGHTS :
STOPPING SHORT OF PRIVATISATION
INVESTOR APPETITE FOR
PRIVATISING ELECTRICITY IS POOR. CONSULTANTS SUGGEST THE “DISTRIBUTION MARGINS”
APPROACH, EXPLAINS V RANGANATHAN
A recent realisation has been that starting
electricity reforms with generation has been a
non-starter. In fact, two senior World Bank officers compared it to “trying to
build a house by starting with the roof”. Given that it’s the World Bank’s
prescriptions that lead independent power producers to sell power to bankrupt
state electricity boards (SEBs) by negotiating shady power-purchase agreements,
they must be complimented for learning quickly from past mistakes. The
Government turned to privatisation of electricity distribution – first in Orissa,
then Delhi and some time soon, Karnataka. In Orissa, it paid about Rs 305 crore
to consultants for guidance on privatization and capacity-building- that is, to
teach the still public sector but corporatised entities how to act commercially.
Then in no time it realised that capacity- building was a waste of time and
money, and did away with it in Delhi’s privatisation process.
As competition from
Indian consultants emerged, the Delhi transaction was awarded to SBI Caps for a
mere Rs. 3.5 crore. But somehow Karnataka did not learn this lesson and paid
about Rs. 54 lakhs to the Administrative Staff College – whose members, under a
government committee, had done a similar study for Andhra Pradesh for free. The
study, rather predictably, suggested unbundling and corporatisation of the
Karnataka Electricity Board into Karnataka Power Transmission Corporation
Limited and four to five distribution companies (discoms) but stopped short of
privatisation.
The strategy here
was to show the World Bank some semblance of progress so that the government
becomes eligible for loan installments under the adjustable lending programme,
while at the same time maintaining status quo vis-avis the issue of
privatisation. However, inevitably the privatisation issue had to be addressed
and the government engaged two multinational consultants –one for privatisation
and the other for capacity building – spending about Rs.14 crore on each.
In doing so, the
government ignored the lessons from Delhi’s case that capacity-building in
public sector discoms is a waste of money. In Delhi the trick was that
electricity was never corporatised – the government opted for privatisation
straight away. The added advantage of this is that you need not write down the
liabilities twice.
The privatization
consultant found that investor appetite was poor and suggested a new concept
called the “distribution approach”. In this scheme the revenue from customers
will be first taken by the discom, corresponding to its cost of distribution
with a relatively low but guaranteed return on its investment, all distribution
costs being covered – unlike for public sector discoms – at the current
transmission and distribution loss level. If any additional revenue is collected
consequent to its efforts to reduce losses, the discom can keep 50 percent of
this and also cover the costs incurred for loss reduction, with due regulatory
approval. The residual from the revenue, after meeting these charges for the
discom, will go to the power generators and transmitters, with any differences
being met as a subsidy from the government.
The main idea
behind this scheme is that instead of the government subsidising the SEB year
after year, it now needs to subsidise the private discoms only for a certain
number of transition years by which time it will have become viable.
It now appears that
even this scheme is not friendly enough for investors, for they fear that the
regulator by having a say on the allowable costs and insisting on regulating on
a year –to-year basis, will prove to be a fly in the ointment. The current
thinking – evolved by the consultant and getting authoritative support from a
recent discussion paper from the World Bank on evaluating Delhi electricity
discom privatisation – urges the state governments to embed a multi-year tariff
(MYT) for the first tariff period into the government’s privatisation agreement
(or licence) with the investor. It also suggests giving directives to the
regulator for a smooth transition in the second tariff period so that “the
investor is not pushed over the regulatory precipice” at the end of the first
tariff period.
The arguments of
the authors are:
-
It is government
that has to deliver finally on the reform and not the regulator, which any way
has lacked teeth in enforcing orders on public sector SEBs.
-
State governments
have now realised to their embarrassment that “the existing tariff policies of
their state regulatory commission are an impediment of privatisation.”
-
“The state
government will be in ongoing discussion with the investor and, therefore, is
in a better position than the regulator to know the elements of the tariff
regime that are necessary for a successful privatisation”.The authors also
suggest embedding the MYT system and treatment of costs and all other rules as
part of the licence to the discom before privatisation so that investors are
rid of the regulatory uncertainty. To effect this they see two options:
-
To incorporate it
under the Electricity Act: 2003, through the provision left for National
Tariff Policy. They suggest that the power ministry can come out with a
non-bonding “model discom licence” that gives an enabling provision for the
state governments.
-
For the state
governments to create some or all the elements of the regulatory system
through a policy directive. This runs the risk that the next government may
reverse these policy directives, and so is less preferred
The authors realise that the suggestion to short circuit the
regulator the regulator may come as a shock to many since the commissions were
set up in the first place to disconnect the government from populist tariff
making. But they say this one-time disengagement of the regulator is the only
thing that will satisfy potential investors unless, of course, the regulators
voluntarily switched to the MYT scheme and follow the same practices as the
government would suggest. They cite some early adopters like the Andhra Pradesh
and Orissa regulators, which considered the MYT scheme on their own initiative.
The Karnataka Electricity Regulatory Commission has opined that
this is equivalent to giving the regulator a 10 year garden leave. It has also,
like many other regulators, expressed opposition to the MYT scheme, citing lack
of information.
The most provocative recommendation is their assertion that “it
is probably neither feasible nor desirable to have public consultations on the
terms and conditions of the privatisation deal during the period of bidding and
negotiations”. The above suggestion implies that inspite of doing all this to
generate investor interest; the authors do not expect large number of investors
and aggressive bidding. So they envisage secret parleys of negotiations with a
single investor whose interest the government has to engage. There is an under
current in the article that India is like any other banana republic where deals
can be made out the public purview. Unfortunately, it is not being proved wrong.
(The writer is RBI chair professor and professor of economics and
energy, Indian Institute of Management, Bangalore) Courtesy: Business Standard :
23/02/04
