Further danger ahead! Legislative efforts wear thin on sector’s slide
The Financial Express — March 17, 2005

The current sorry state of the sector may best be gauged from the latest Economic Survey 2004-05, which states that the commercial losses of SEBs (read distribution) are expected to increase by 6.3% to Rs 22,013 crore in 2005-06 with a negative return on investments of 28.13%. The worrying aspect of this trend is that things appear to be getting worse after 10 years of reform. There is, therefore, a need for urgent review of our real commitment for reform and progress in the sector.

The massive FII investments and FDI in India are encouraging. The India story is rapidly unfolding on the global scene. Thus, failure to get vital infrastructure like power distribution up to global standards will either trip this story or else, the sheer environmental pressure to perform will make it happen. It is hoped that the latter will be the case.

The key issues now are the pace and methodology for successful reform of distribution. As far as the pace goes, nothing further need be said. The writing is on the wall. Either we perform soon or perish. There are a whole host of competing destinations for global investment and failure on our part to provide a supportive infrastructure will drive these elsewhere.

This, therefore, leaves us with the issue of methodology. However, before we tackle that, we need to first take stock of what has been done. A number of tentative steps have been taken since distribution reforms first began with the spinning off post-restructuring and privatisation of distribution in Orissa in 1995.

These are broadly division of reforming states into 4 or 5 large mixed rural-urban distribution zones e.g Andhra Pradesh, Uttar Pradesh, Karnataka and managed by the state; and privatisation of distribution as in Orissa (1995) and Delhi (2002).

To cut a long story short, a series of lessons have been learnt on the long road from Orissa to Delhi. Delhi is today a shining success with substantial distribution loss reduction, reliability improvement, customer satisfaction and progress towards profitability. We, thus, have both lessons learned and a successful model. These now need to be leveraged across the country.

The public-private joint venture model of Delhi is a win-win for all stakeholders and could be replicated. Experience worldwide suggests that distribution is generally handled in two modes—urban and rural. Urban may be private (post- reforms, including public-private JVs) or municipal. An urban area (along with some contiguous rural area which could get urbanised) is a much more manageable prospect than the huge mixed zones of certain restructured states like UP, AP and Karnataka.

Maharashtra alone had some 92 urban distribution licensees (excluding the 3 Mumbai licensees) prior to nationalisation post the 1948 Supply Act.

Furthermore, urban agglomerations are best suited to early privatisation, more attractive to investors and promise early gains to the state, both from the proceeds and from the outcomes of privatisation. There is also the experience of India’s integrated private licensee model and well documented results of reform the world over which suggest that eventual privatisation is by far the best option. With privatisation comes good management which in turn ushers in technology and efficiency improvements.

It is true that distribution reforms are possible with or without change in ownership. Also, improvements are possible with public ownership as in New Zealand, South Korea and nearer home, in Andhra Pradesh.

However, there is overwhelming data in support of privatisation as the preferred option. Experience in Latin America and elsewhere shows that sales proceeds of government-owned assets are increased when industry models and regulatory frameworks are implemented and fine-tuned well before privatisation. Hence the need for good, proven methodology.

Design and implementation of a privatisation programme should also be aimed at maximising aggregate social welfare. Privatisation can thus be bundled with some degree of obligation to implement rural electrification programmes and for which a one-time direct subsidy can be given to cover part of their network costs.

All this is not to suggest that we neglect the rural areas. The needs of these areas are already being addressed through appropriate policies in line with the mandate of the new Act and the NEP. Further study, however, is required to fine-tune the rural model.

Finally, it may be emphasised that distribution reforms require both political will and managerial skills.