Reforms in India’s power sector have been talked about for many years but, as I M Sahai explains, plans have often been interrupted

In this decade India’s power sector has been progressively opened to private participation. But IPPs have complained about difficulties in project approval, over-centralisation of government authority, outdated procedures and, at times, decisions being based on the wrong considerations.

At the state level, IPPs had to deal with monolithic state electricity boards (SEBs). These were owned and controlled by the state government; they had no real autonomy, and thanks to unrealistic tariff structures imposed by government their financial condition was slowly degenerating.

The first remedial steps were taken in the early 1990s, at the behest of the (also government-owned) Power Finance Corporation (PFC), and were intended to improve the operational and financial condition of the SEBs. It was soon felt that in due course more drastic action was required: restructuring the SEB and progressive privatisation of the state power sector. These measures have been initiated in many states, but progress has been slow and painful.

Structural reforms, backed by the Indian government and multilateral agencies such as the World Bank, have had some common features: separating the functions of generation, transmission and distribution; setting up an independent regulatory commission to fix tariffs and license projects; and inviting private participation in transmission and distribution, as well as generation.

These reforms could have multiple benefits. IPPs could have their projects considered on merit by an independent authority, delays in obtaining government clearances could be reduced, and the whole project-approval process could be smoothed. Splitting the SEBs could allow greater attention to be paid to neglected aspects of Indian power — increasing hydro generation (including small hydro), uprating generators, upgrading transmission and revamping distribution. For the SEBs, more efficient operation and a rational tariff structure determined by the regulatory commission would make them more attractive to private investors. In the hydro sector, where the SEBs have only been able to develop about 25% of 84,000MW potential, reforms could go a long way towards attracting IPP participation. Up to now, this has been minimal: only two private hydro projects — 700MW — have received final approval.

These measures are based on reports from international consultants funded by the World Bank, which has been actively promoting power sector reforms in India. The need for such reforms was re-emphasised in a series of meetings between the Ministry of Power and state governments in 1996, which led to a ‘National Action Plan for Power’ in December 1996. The plan called for autonomy for SEBs, which were to be restructured, corporatised and run on commercial lines, provision of independent regulatory commissions, rationalisation of retail tariffs, and private-sector participation in transmission and distribution (as well as generation). However, action on reform has been slow. State governments find it uncomfortable to let go of their absolute authority (through the SEBs), particularly in relation to tariff, which is a politically sensitive issue.

There is often not enough political will to push through drastic structural reform and dismantling the existing SEB. Rajasthan, for example, wants separate entities but still wants to retain the SEB as a holding company.

A factor which could inhibit reform is the recent (February-March 1998) elections to the country’s lower house of parliament. These elections not only swept away the ruling 14-party coalition at the centre, but also showed up an ‘anti-incumbency’ factor at state level. Parties in power fared poorly. Gujarat, Himachal Pradesh and Meghalaya, whose legislative assemblies went to the polls along with national elections, saw the erstwhile ruling parties losing power. The other state assemblies are due for elections in the next couple of years and governments will be loath to take steps which would be controversial.

State reports

The first state to take up reform in earnest was Orissa, which passed legislation in November 1995 and began implementing it in April 1996. The existing SEB was broken up into separate public sector entities:

•Thermal generation is operated by Orissa Power Generation Corporation (OPGC), which already existed and is wholly-owned by state government. Up to 49% of its equity will now be offered to private investors.

•Hydro generation, which was in the hands of the state irrigation department, is now owned by a separate entity called Orissa Hydro Power Corporation (OHPC). The Corporation plans to use all the state’s 2000MW potential, through partly or wholly private projects.

•Transmission and distribution functions are now operated by a new entity called Gridco. Gridco has called for bids to privatise the entire power distribution network in the state, and is presently evaluating offers. Gridco’s equity may also be offered to private parties, once federal legislation permitting the operation of private-owned transmission companies is enacted.

•An independent electricity regulatory commission has been set up.

The Orissa pattern has also been adopted in Haryana, with modifications, and the latter may implement it this year.

In Maharashtra, a government-appointed committee two years ago recommended dismantling the power board and setting up an independent regulatory commission to oversee tariffs, licensing etc. While state government expressed broad agreement with the recommendations, it has done nothing to implement them. The ruling right-wing coalition suffered a debacle in the national elections, and the general feeling is that power sector reforms in Maharashtra may take a back seat.

Tamil Nadu and Karnataka now have a number of private projects, but the state governments have made no concrete moves towards power reforms. A policy statement made in Karnataka in 1997 has not been implemented.

In Andhra Pradesh, where two IPP projects have started up in the last two years, the state government drafted a power reform law but got cold feet after widespread agitation by power board staff. In Uttar Pradesh, successive state governments have sat tight over the 1995 report of a World Bank-financed consultant, which recommended radical restructuring. Similarly, in Madhya Pradesh, a study of the power sector, completed two years ago by a government-appointed committee, has not been acted on.

International influence

Multilateral financial agencies, pressing for decisions on reform, have now begun to take a hand. The World Bank, which offered a $600M loan to Haryana SEB, decided ultimately to sanction it in tranches, each tranche linked to a mutually-agreed programme of reform action.

The first tranche of $60M was negotiated in November 1997, and subsequent activities of the SEB are being monitored by the Bank in New Delhi.

In Rajasthan the World Bank is withholding aid, because reform legislation planned for September has not been passed or scheduled. Similarly, in Uttar Pradesh, the World Bank bemoaned the lack of action towards sector reforms and has held back aid until the situation progresses.

The Bank is concentrating its efforts on Andhra Pradesh, where the draft reforms bill is ready but held up for political reasons, and Karnataka, where the statement of policy on power reforms is waiting for action. Karnataka has taken a first step by creating a separate entity for power generation (Karnataka Power Corporation), and is now planning an independent regulatory commission. In the meantime, Karnataka called for bids from private companies to set up a transmission company to take power from new IPPs. Without waiting for federal legislation to privatise transmission, the state government finalised a contract with the UK’s National Grid.

The Asian Development Bank has also actively promoted sectoral reforms in Gujarat and Madhya Pradesh. In Gujarat, ADB negotiated a $500M loan to the state government to support public sector reforms including the SEB. Gujarat has attracted private investment in power and is undertaking the big Sardar Sarovar irrigation/power project. Madhya Pradesh was one beneficiary of a $265M power-efficiency loan granted by the World Bank to PFC. The Bank hoped that the state would take concrete steps towards reforms, but was disappointed. Now the ADB has agreed to fund Madhya Pradesh SEB so it can implement the reform recommendations. The SEB Chairman said in March that reform would take two years or so.

All this activity leaves a number of states with no sign of movement towards power-sector reforms. Many of these have considerable hydro power potential (largely unrealised).

West Bengal, where a left wing coalition has actively courted foreign investment, merely set up a committee to suggest power reforms. In neighbouring Bihar, even that has not been done, even though it is suffering from power shortage and has an ailing power board. In Uttar Pradesh, political uncertainties and frequent changes in government have led to the reform report being put on the back-burner.

Punjab has still to take the first steps to meet its increasing energy demand.

The centre

Under the Indian Constitution, power is one sector where responsibility is shared between the central and state governments. Central government should play an active role in power sector reforms. However, recent central governments have been multi-party coalitions, depending on regional political parties which are in power at the state level and have their own economic agenda. If a political party ruling a state does not push for power reforms there, it is hardly likely to support action by central government (of which it is part) to persuade or coerce the states to do so.

Subsidised rural tariffs, for example, are a contentious issue between central and state governments. The states are expected to reimburse the power board for this subsidy, but do not do so because they are short of money.

Since taking charge Indian Power Minister Kumaramangalam has taken a ‘pragmatic’ view of the situation. While a state regulatory commission would fix tariffs, the state government would have the freedom to set lower rates for preferred categories such as rural consumers — but the state government would have to provide a cash subsidy to the SEB to cover the deficit. Experience shows that in such a case the state government makes inadequate payment, or simply refuses to pay the SEB, which is its own agency. This pragmatic view could well negate the whole purpose of tariffs being determined by an independent regulatory body.

The consensus approach adopted by recent central governments in their relationship with the states hides the inherent weakness of the central authority. This partly explains why the Indian government itself has been halting in its own power reforms. The 1996 Action Plan included actions such as:

•Delegation of authority to state governments.

•Reduce the role of central agencies in project approval.

•Set up regulatory commissions at central and state levels.

•Privatise transmission.

•Produce a new hydro power policy.

Steps have been taken in regard to the first two, but much more is required to eliminate the bureaucratic hurdles in the Indian power sector. Of the others, the regulatory commission legislation was introduced after much delay, and lapsed with the dissolution of the Lower House. The new Indian Power Minister has called it one of his priority items. Also to be passed is the federal bill to privatise transmission, which went through parliament’s standing committee on energy last year for detailed examination. A new hydro power policy has still to be announced.

Once the central government takes these steps, it may find itself with grounds to ask the state governments to push through with their respective sectoral reforms. Otherwise IPPs, preferring to go to reformist states and ignoring others, will indirectly set the pace.