GODBOLE COMMITTEE REPORT PART II

BY CITU, MAHARASHTRA COMMITTEE

The report claims to present a new “Maharashtra Model” for the success of the reforms in the electricity sector. A careful study of the report discloses nothing “Maharshtraian” about the measures proposed by the Committee. The proposals are just the old and by now discredited World Bank prescription for privatisation of the electricity sector in India, with additional concessions thrown in for the benefit of the private vested interests. The Energy Review Committee has seriously eroded its own credibility with its present recommendations. The Report is full of flaws so serious as to be fatal. Some of these are outlined below:

1. The main recommendation of the committee is to privatize distribution according to the principle of “Privatise the profits and realizable assets, retain the losses and liabilities in the public sector.”
This is contained in the following recommendations:
a. “The Committee recommends that distribution companies should be configured on the broad principles of Concentrated Zones, in order to achieve a faster pace of privatisation…”
b. “In order to retain the concentrated characteristics of the zone, care should be taken to ensure that the percentage of estimated consumption (an approximate measure of agricultural load) to total energy input remains below a specified limit, of say 10%.”
c. It recommends that the following liabilities and assets of MSEB should be retained by the state government:
? The total liabilities of MSEB, excluding equity and reserves and surplus after deducting a portion of these liabilities pertaining to financing of either capital expenditure and working capital requirements.
? The reported receivables, except those for which a definite and credible plan for repayment has been established.
d. The committee…… also examined various methods that are generally employed for business valuation. Based on his the Committee recommends that DISCOMs should be valued on this basis of their earnings potential, i.e., the Discounted Cash Flow Method.. the government should be prepared to expect, and accept, even a negative valuation for some of the zones…

2. What the above means is that the private bidders may have to be paid to take over the prime assets of MSEB, which have been so packaged so as to separate all loss making areas and operations. This is nothing but a shameless recommendation for looting the public sector of its most profitable operations by the multinations, NRIs (Hinduja, Mittal) and Indian monopoly capitals (Ambanis, Tata, Birla) who are trying to hijack the entire energy sector in India Today. It is interesting that while recommending DCF method of evaluation for the public sector DISCOMs, a similar recommendation was not made in respect of the Enron project, for which the committee had recommended an entirely different method of valuation for the purpose of tariff determination.

3. The above recommendations will be a short cut and fast track to complete bankruptcy of MSEB (within one year of implementing the recommendations). This is contrary to the terms of reference of the Committee. The committee was enjoined ‘to suggest measures to improve the financial position of MSEB’. It was also mandated to ‘suggest appropriate measures to ensure the interests o the State, Maharashtra State Electricity Board and electricity consumers..’ What the committee has recommended is completely opposite to its terms of reference. The committee has only looked after the interests of vested interests who want to take over the cream of the electricity sector, to the detriment of both MSEB as well as the bulk of the consumers.

4. The Chapter on “Reforms Experience in Other states and countries” (Chapter 5) of Part II of the report is especially weak. This appears to be the outcome of deliberate choice. A sober and serious analysis of the experience at Orissa, Andhra Pradesh, Haryana etc, where the World Bank prescriptions were first introduced will show comprehensive and complete failure of the so-called reforms to achieve any and all of their objectives. T & D losses remain high. Subsidies have actually increased, in the form of conversion of debt into bonds. Receivables of the private entities are as high as the worst SEB. Services have not improved, and have actually deteriorated in Orissa. Tariff have become unaffordable leading to widespread protests and law and order problems. Even in California, which was being held as the role model for privatisation, the electricity sector is in shambles. It was the duty of the Committee to analyse why this is happening. Instead they have tried to conceal the failure and paint a rosy picture, wherever possible.

5. It is a basic tenet of market economics that competition is possible and can act to reduce prices and spur efficiency only where there is an excess of supply over demand. In shortage situations, market economics invariably leads to black marketeering and some form of price rigging. Shortage situations require regulations. The terms of reference of the Committee required it to examine strictly what are the requirements of least cost electricity in the State of Maharashtra. The committee lost sight of both simple economics as well as its terms of reference in its zeal to privatize.

6. Through some of the quantitative analysis presented in the report is very useful and valuable, there are also some crucial flaws in the methodology. The figures presented in Table 2F are misleading, showing a cost of supply which is far lower than actual. In the interpretation of the committee, T & D lossed so not affect the cost of supply. (The cost of supply should be worked out by dividing the total costs by the total units supplied and accounted for. The committee divides instead by the total units generated, and therefore arrives at an erroneous figure.)

7. This has the consequence of showing projected tariff increases, which are lower than what is realistic and likely (Table 4A). There appears to be deliberate underestimation of “tariff shock”, with the purpose of rendering the recommendations more palatable.

8. The important question of subsidies is treated in a cavaliar and non-serious manner. Subsidies will be politically necessary in the foreseeable future. This aspect should have been analysed more thoroughly and various options evaluated.

9. The ECR report has estimated the growth of demand in Maharashtra. This is only half of the problem, the easier half. The second more important half of the problem is “What are the prospects of growth of economic demand for power in Maharashtra? “. In all discussions on economics, demand means economic demand, demand which can be paid for. It is a mystery why this simple principle seems to have been given the go bye when discussing power markets. IT is not easy to estimate the prospects for growth of the economic demand, which will require billing and collections data for different sectors. This is a critical analysis without which any discussion will not be credible or realistic. The committee has not looked at this aspect at all. As a result the report is fundamentally weak and unreliable.

In the light of the above, the CITU calls upon the government to reject the Part II of the Report of the Energy Review Committee.

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