TIME TO GO BACK TO BASICS
Privatisation coupled with structured reforms in the power sector is the way
forward, says Urjit R Patel
There is increasing
recognition that ushering in the private sector in power distribution is the
only credible alternative to turn the sector around. However, in order to
achieve this goal, state governments should first credibly address inter alia
the vexed issue of huge unfunded liabilities from the past (debt, unpaid bills
of suppliers, employee pensions etc.) and the continuing losses during the
transition. According to the report of the Ministry of Power’s Expert Committee
on State-specific Reforms, transition financing for State Electricity Boards (SEBs)
to over losses during 2—1-07 is projected at Rs. 72,000 crore. Clearly, the
financially challenged state governments could do with some assistance in this
regard. Against this backdrop, this article evaluators recent `reform’
initiatives that have been proffered to state governments, and highlights
apposite measures that could catalyze self-sustained growth for the sector.
First, the
Accelerated power Development and Reform Programme (APDRP): The two distinct
streams of support under this significant window of assistance (Rs.3,500 crore/annum)
are directed towards facilitating investments and providing ex-post incentives
for better financial performance. However, this Programme does little to enhance
a state’s capability to undertake comprehensive financial restructuring by
paring down unfunded past liabilities (legacy cost). It is only fair to mention
that APDRP seems to have had some success in catalysing states to improve the
power sector financials; seven states have reported reduced cash losses in
2002-03, and eleven states increased average revenue realisation. However, it is
unclear whether and how such gains would be sustained in the future, especially
after the cessation of incentives.
Second,
multilateral agencies – yet another source of cheap finance – are willing to
extend financing only to `investment’ projects and not to financial workouts
which entails refinancing of past unfunded liabilities.
Third, the central
government is reportedly pursuing various avenues for attracting private
generation in the interim period, i.e., until the State Electricity Boards
become creditworthy. In this context, in consultation with some financial
institutions a payment security mechanism has been established wherein states
agree to a milestone based reform package comprising restructuring of SEBs,
establishing regulatory commissions, 100 per cent metering, energy audit, etc.
While these measures are unexceptionable, they are unlikely to change the
underlying incentive structure of either the SEBs or their owners, the state
governments. Accordingly, it remains to be seen whether finance is actually
going to be forthcoming on the strength of this security mechanism and, if at
all, how such decisions would pass the test of (unencumbered) commercial due
diligence. Furthermore, a proposal has been mooted whereby National Thermal
Power Corporation (NTPC) and National Hydel Power Corporation (NHPC) would buy
power generated by large private power plants so as to alleviate the latter’s
worry regarding payment defaults (by SEBs). This arrangement should carry a
strong warning for the central government. If states revert to their old ways of
defaulting on payments to central Power Sector Undertakings (CPSUs),, the
financial deficit would shift from states to the centre (the problem is `socialised’
at the national level). Even if the Union government manages to impose payment
discipline by dipping in to its devolutions to the defaulting state, the price
for the power sector’s profligacy would ultimately be `paid’ by curtailing
others sectors in that state.
Fourth, the
Electricity act 2003 includes an impressive array of pro-reform features
comprising liberalization of captive generation, introduction of open access in
transmission and subsequently in distribution, and the provision for issuing
multiple distribution licences in a given area. These features are welcome as,
inter alia, they increase choice to consumers and producers. The question,
however, is when will the sector be ready to implement and sustain these
measures. Presently, the sector does not seem to be prepared for introduction of
open access at the retail level. For starters, a major portion of consumption is
not metered and the balance is measured mostly in terms of total energy flows
and not by time-of-use; buyers and sellers would be hard put to even reconcile
electricity supply and consumption follows. Also, it is not clear how those
opting for open access would be compensated in case their supply is interrupted
on account of distribution utilities’ decisions such as, for example,
administered load shedding in a given area. This becomes even more problematic
in cases involving government distribution utilities since, going by their track
record, they are unlikely to either conform to market discipline or fully comply
with regulatory directives. Regulator determination of the level and pace of
reduction of cross-subsidies is yet another source of uncertainty.
There is genuine
apprehension, not entirely unjustified, that haphazard pursuit of some of these
initiatives will work at cross purposes. For instance, competitive supply of
power envisaged in the Electricity Act is undermined by mega IPPs selling power
to CPSUs for onward sale to states. In a similar vein, encouraging investment
through artificial props such as untested `alternate payment security
mechanisms’ is not only likely to exacerbate moral hazard but also vitiate
remnants of a hard budget constraint and consequently dilute the resolve of
state governments to undertake the more arduous but necessary elements of
reform.
Faced with the prospect of a higher subsidy burden on account of
losing remunerative customers, state governments may take a myopic view and
thwart the liberalization of captive generation and open access arrangements.
They could impose additional levies on such transactions or exert pressure on
the regulators whose remit includes determining wheeling and cross-subsidy
charges (payable to government-owned utilities).
In light of the above, it is imperative that reforms should be
structured in a manner that is incentive compatible, especially for the state
governments. Towards this end, the central government could consider providing
additional support to states that offer urban and industrial areas with
concentrated loads for expeditious privatisation (it is estimated that 83 urban
areas account for 87 per cent of power consumption). In this regard, measures by
the Centre (for reforming states) that merit consideration include: (a) an
ex-ante grant to set off a portion of the past liabilities; (b) further
write-downs in the dues to CPSUs; (c) concessional pricing of power from the
CPSUs; and (d) higher assistance under APDRP. Complementary to these efforts,
some haircuts could be coaxed out of existing creditors, and multilaterals could
widen the scope of their assistance to include financial workouts.
Concomitantly, the regulatory commissions have to institutionalize a multi-year
regulatory framework and announce a timeframe for introduction on open access
(choice) at the retail level. Concerted implementation of these measures would
enable state governments to train their efforts on critical aspects, viz.,
financial restructuring, distribution privatisation and establishment of
wholesale electricity market, including associated institutions such as power
exchanges.
Lastly, a word of caution for state governments. An effective
turnaround strategy should encompass appropriate reform steps (distribution
privatisation and multi-year regulation) and credible financial restructuring
plan (FRP). Reform without a credible FRP to deal with past deficits in akin to
attempting a marathon with a millstone around one’s neck. At the same time, an
FRP that is not complemented by an appropriate reform framework is like running
on quicksand!
(The author is with
IDFC; views expressed here are personal) Courtesy: Business Standard: 19.3.04
