STATE-LEVEL POWER REFORMS GET STUCK AND FACE WORLD BANK BLACK OUTS - B.S. MEEL
In a bid to attract
private investment in Power generation a framework of reforms was put in place
and states were encouraged to act upon it. MSEB was forced to pick up Dabhol
power (Enron) at Rs. 7/- a unit- the dirty task of subsidising inefficient
private players.
Reforms in the
power sector became imperative when the financial health of the SEBs collapsed
under the weight of subsidies resulting in their failure to garner the resources
to build new power plants to bridge the increasing gap between demand and
supply.
Now let us ask why
are not state-level reforms in power sector taking off? We know the solution is
to run existing establishment and investments more efficiently, cut-down on
theft, increase collection efficiency, upgrade the T&D system and the state
governments should remunerate the subsidy element. In fact most of these issues
are administrative issues well within the control of the state governments.
Experience shows that instead of tackling the problem head on, rather state
governments wait, for a restructuring exercise of the SEBs which may not result
in revenue augmentation.
But fourteen year
since 23rd October 1991 is just too long a period with power reforms
but nothing changed except replacement of existing electricity laws in the
country through enacting the Electricity Act:2003, to help the turn around the
sector by introducing competition, and privatisation. The Act: 2003 deals with
user charges and requires States to pay subsidy up front, it does not go into
how a state would raise these resources.
The need of reforms
is not in question. But to mechanically invoke the philosophy of user-charges in
the name of reform amounts to making a wrong diagnosis of the ills that plague
the sector. Higher tariffs will drive farmers to the wall without improving the
books of the power utilities.
With Maharashtra
joining Andhra Pradesh and Tamil Nadu in the list of the states giving free
power, there is bound to be a sense of outrage about costly giveaways. Andhra
Pradesh decision to supply free powers to about 23 lakh farmers will cost the
government over Rs.400 crores in addition to Rs. 1500 each year it was paying
since 1999-00 together with waiver of dues (1191 crores), the total power
subsidy bill comes to Rs.3091 crores. In Tamil Nadu SEB already carrying a
burden of about Rs.1450 crores, the government will reimburse the Board to the
extent of about Rs.300 crores, in addition to the loss of revenue on account of
lowering of the tariff for domestic conception to the level of April-2001
estimated Rs.910 crores a year will also has to be offset by the government. In
Maharashtra government decision to announce free power will benefit 24 lakh
farmers and will impose additional quarterly burden of Rs.478 crores in addition
Rs.1500 crore each year. Abandoning reforms in the power sector runs the risk of
scaring away private investors looking at generation projects. If the private
power projects do not materialize, the SEBs and the State Governments will be
under even greater pressure to raise the resources necessary to enhance power
generation.
The Economic survey
of 2003-04 suggests that the extent to which the power sector subsidies farmers
is in excess of Rs.24000 crores. Staggering as that figure seems, it may infact
be largely notional. The objective of power reform is to reduce gradually the
difference between the per unit of power cost and revenue realisation. The
figures taken into account the average cost of each unite of power. However this
is misleading for several reasons. To begin with most states power supply to
agricultural consumers only during off peak hours. In most parts of the world
that would been they are charged lower tariffs, in any case typically around 50%
of the peak tariffs. The Indian power sector operates on a “merit order
dispatch” system, that is the cheapest source of power gets first preference in
meeting demand. When demand is low, therefore the power that is being supplied
is from the generating stations with the lowest costs. In case of SEBs that
would mean old fully depreciated plants whose cost of generation would be a
fraction of newer ones. The power from fully depreciated hydro-electric plants
can come for as little as 5-10 paisa a unit. The power trading corporation
estimates that a quarter of India’s total power generation costs less than Rs.1
per unit. Therefore it appears the official figures almost certainly multiply
the cost of supplying power to farmers several fold. That is turn, means the
subsidy figure gets even more exaggerated.
The entire
transition process (from restructuring to privatisation) involves a subsidy
payment by state governments which would finance the restructuring exercise. The
stakes are too high for many state governments to make mistakes in the reform
process which can extend from three to seven years. The state governments have
no money to fund this scheme.
World Bank country
director announced last month that populist measures like free power to farmers
face the risk of loosing out on world bank loans, it would not get any power
sector aid from the bank till the policy is reversed. Even the loans already
sanctioned to the states would be scrapped if all the conditions attached to
these projects are not honoured. This is so even as the bank is preparing hike
in its lending to India following Common minimum programmes commitment to so
called pro-poor policies.
It is not easy to
reconcile the rhetoric of “reforms with human face” with the imposition of
across-the-board user charges in the power sector. Take the Andhra Pradesh which
initiated power reforms in 1999, was always treated as the model state and was
being monitored by other states and investors alike. It is all too easy to
dismiss Reddy’s largesse as pure populism. NSS data (53rd round)
suggest an increase in rural poverty from 33.7 per cent in 1999-00 to 35.5 per
cent in 1997. This backdrop perhaps explains why middle farmers in AP saddled
with rising input costs were unwilling to put up with the power tariff hike
imposed.
Hiking power
tariffs in agriculture seems particularly ill-advised at a time when the sector
is in deep systematic trouble. While input costs have escalated, support prices
have failed to keep pace. With no storage and marketing infrastructure worth the
name, the least the farmers need is some breathing space on the input front. But
what apart from power can, in the short term, provide them succour? The economy
would perhaps, be better off in a welfare sense if SEBs were to sacrifice their
farm revenues for now and allow farmers to consume and save more. SEB losses
account for at least a fourth of the total fiscal deficit of state governments.
While it is necessary for SEBs to address inefficiencies, the conventional
profit and loss framework cannot act as an accurate measure of their
performance. Their losses should be discounted against the increase in farm
output as a result of the notional subsidy.
In its annual
report for the year 2002-03 which was tabled in the Delhi Assembly on August5,
2004, the Comptroller and Auditor General (CAG) of India has raised questions on
transparency in power reforms and said “substantial modifications” in the
transfer scheme, which ‘benefiting’ the privately managed discom, put additional
financial burdan on Delhi government and the state-owned Delhi Transco. And thus
entailing 6000 crores burdan on government exchequer, without any improvement in
the security, reliability of power supply, on the contrary power cuts and supply
breakdown period has increased at alarming level.
Consumer service
has deteriorated beyond imagination and the people of Delhi had to pay through
their nose twice tariff hikes, 75% rise in power rates within a span of two
years.
Several thousand
employees (6200 Nos.) were encouraged to take voluntary retirement who were left
to starve, since their legal terminal benefits have not been provided for last
eight months. In search of their life time earning and savings, the employees
are running from pillar to post.
Meanwhile the work
is being executed by inducting contract workers and superannuated people. The
tripartite agreement between the Govt. of Delhi, private power utilities and
employees unions are honoured more by violence than by compliance.
Generally speaking
power reforms have failed to redress problems in Power sector. The Electricity
Act:2003 invites private capital in generation, transmission and distribution.
Distribution is supposed to be increasingly managed by
non-state-entities-cooperatives, Panchayats, NGO and Franchisees. The retreat of
government from distribution, phasing out of cross-subsidy and captive power
generation without license will entail heavy financial burdan upon the state
governments already reeling under heavy debts, will further push the
fiscal-deficits to un-bearable levels.
In the final
analysis, reforms should be redefined as the generation of more power through
least cost route, economically viable and environmentally sustainable, through
public sector as electricity being natural monopoly and online industry.
