Reform of the Power Sector, Orissa, India

Transcription

1 Advance Copy Reform of the Power Sector, Orissa, India Paper Prepared for the Civil Society Consultation on the 2003 Commonwealth Finance Ministers Meeting Bandar Seri Begawan, Brunei Darussalam July 2003 N. Sreekumar Prayas Energy Group, India The published version of this report will be available in 2004 and may be subject to final editing.

2 Abstract This paper reviews the reform of the power sector in the State of Orissa, India. Reforms were initiated in 1993 in Orissa, one of the poorest states in India, under World Bank guidelines. The state-owned Orissa State Electricity Board, which had a monopoly in the sector, was unbundled into 7 corporations. Two of them handled generation, one was a transmission company and four were distributors. The Thermal Generation Company and the four distribution companies were subsequently privatised. A separate Regulatory Commission was set up. World Bank and other Financial Institutions organised a funding of US$997 million to carry out extensive reforms over a 5-year period, This reform process was hailed as a pioneer effort and a model for power reform in India. It was expected to turn around the loss-making sector. It has now become clear that the results are far from this. All the utilities (private or public) continue to make losses with the state-owned Transmission Company being the worst hit. Private distribution companies have not improved the quality or efficiency of operation. Rural electrification has been neglected. There have been regular tariff hikes with maximum impact on the poorer consumers. The review committee set up by the state government in 2001 has severely criticised the whole reform process for being non-participatory and unscientific. This paper explains the reform process and concludes that only a consultative process can arrive at the right diagnostics of the sector s problems and suggest reforms which would improve it. Democratisation of governance is the key to the solution. 1

3 1. BACKGROUND With an area of 156,000 km 2 and a population of nearly 37 million, Orissa is one of the poorest states in India. On most development indicators, Orissa is far below the national average, whether for its per capita income (US$131 vs. national average of US$260) or its share of the population below the poverty line (48 per cent vs. the national average of 26 per cent). The economy is largely agriculture-based, with nearly 75 per cent of the population dependent on it. The state is rich in mineral resources and has nearly 25 per cent of India's coal reserves. Orissa has the misfortune to be ravaged by natural calamities - droughts during summer and cyclones during the rainy season. Orissa is the 'pioneer' in power sector reforms in India. From the early 90s, Orissa was the focus of attention among power policy watchers. Expectations were high. Things started going wrong in A government-appointed committee pointed out the many shortcomings of the reform programme. With very few positive outcomes after 8 years and millions of rupees spent, today there are many critics of the Orissa reform programme. A study of what happened in Orissa provides insight into what is wrong with the power sector, what could be the remedies and what are the changes that may make things worse. Section 1 gives a brief overview of the Indian power sector and captures the changes that led to the Orissa reforms. Sections 2 and 3 give the outline of the reform process and a report card on the programme. Section 4 summarises the major learnings from the Orissa reforms and Section 5 identifies the lessons for the Indian power sector. We have conducted this study from a perspective of policy analysis and relied on reports, interactions with power sector personnel and our own insights. Detailed field studies involving data collection and interaction with consumers would be useful to gain more insights into the reform process. We have given some ideas for conducting such studies. 1.1 The Institutional Set-up According to the Constitution of India, electricity is a concurrent subject handled by both the central and state governments. In post-independence India, State Electricity Boards (SEBs) were created at the state level. These boards, owned by the respective state governments, were autonomous bodies. They were entrusted with electricity generation and its supply to consumers in the state. At the national level, an autonomous institution called the Central Electricity Authority (CEA) was created to provide financial and technical expertise to the SEBs. 1.2 Major Policies The commendable growth of the Indian electricity sector was the result of four broad policies. The first was government ownership and supply of capital from central and state budgets. For many years, about one fourth to one fifth of the total plan allocation from the central and state governments budgets was directed to the electricity sector. The second major policy was developing a centralised electricity supply system and regional and national electricity grids. The third major policy was the thrust toward self-reliance in 2

4 technology and fuels. Finally, the policy of cross-subsidy was adopted. Those who could afford higher rates of electricity were charged more than the average cost of supplying electricity and the surplus thus created was used to provide electricity at lower rates than the average to the deprived sections of the society. However, growth was only one side of the coin. There were problems too in terms of limited access to electricity (46 per cent of households in 2000), high Transmission and Distribution (T&D) losses, financial losses of SEBs etc which started becoming significant in the 80s. The root causes of the various problems in the sector can be traced to the functional failures of the same institutions and policies which created this growth. Gradually these problems developed into a crisis-like situation, pushing the electricity sector to the brink of bankruptcy and disorder. 1.3 Crisis in the Power Sector SEBs performed their function quite well until the 80s. From then onwards there has been a deterioration of performance which could be traced to failures on four fronts: Techno-economic; Policy; Planning and Governance. The distortions caused by these failures led the sector into a crisis in the early 90s. However, the main preoccupation of the mainstream leaders in the sector remained the financial crisis. This lopsided understanding has been largely responsible for further aggravating the crisis. 1.4 Beginning of Economic Reform As a solution, sector leaders suddenly found the magic wand of privatisation. This approach was actively promoted by the International Financial Institutions (IFIs) led by the World Bank. Except for some unions, a few analysts and the left-leaning political parties, all the political parties and the government machinery welcomed the reform. Many fundamental and comprehensive changes were made in the laws governing the electricity sector, in the institutional structure and in major policies and procedures. These included changes made in the Electricity Supply Act of 1948 to allow entry of private capital, curtailing the role of the Central Electricity Authority (CEA), and changes in the fuel policy to allow the import of oil and gas. 1.5 Entry of the Independent Power Producers (IPPs) The first step in the reform of the electricity sector was to allow electricity-generating plants owned by private parties. Fundamental changes in various crucial aspects of governance were made. Obstacles such as permits and quotas were removed. SEBs and state governments were allowed to seek and sanction generation projects by dealing directly with private firms. Those private firms owning power-generation plants are known as Independent Power Producers (IPPs). State governments and SEBs signed agreements with the private parties that gave guarantees of high levels of fixed revenue (corresponding to fixed costs) to the private firms, while they kept 3

5 shouldering almost the entire burden of various risks 1. The central government started providing different types of assistance for these efforts by SEBs. For example, the central government gave the special status of fast-track projects' to eight IPP projects in different states. This implied giving the central government's counter-guarantee (apart from the state government guarantee) in the event of non-payments by the state governments and SEBs. Other favourable treatments, such as the constitution of a special ministerial group at the central level to ensure that projects were cleared in a speedy manner, were provided. Tax concessions (local as well as central) were given, foreign investment allowed and a debt equity ratio of 80:20 permitted. Not surprisingly, these overtures from the state governments and SEBs received tremendous response from private firms. Within the first three years, different state governments signed Memoranda of Understanding (MoUs) for creating capacity of approximately 90,000 Mega Watts (MW). At that time, generation capacity in the entire country was only 80,000 MW! MoUs in these three years were being signed at the rate of 90 MW of capacity on every working day! As a result, in the initial period of reforms, instead of seriously trying to improve the functioning of the SEBs, all the attention, time, and resources were invested in attracting the IPPs. This only resulted in the continued deterioration of the SEBs. It is to be noted that as late as 2003, only a few projects have started generating power. The total generation capacity added through this process is just about 5,000 MW. Two important preconditions for the smooth running of these projects remained neglected by the IPP policy: (a) uninterrupted supply of fuel and (b) getting timely payment from the SEBs for the electricity supplied to them. As a result, the IPP project financiers did not find the state government guarantees adequate security against non-payment by SEBs. Often the amounts involved in these guarantees were much higher than what the state government could handle and the credit rating of state government guarantees was not very healthy. In addition, because of the undue secrecy maintained during the sanctioning of these projects, an atmosphere of distrust and suspicion had been created, sparking off political and legal actions and controversies. The IPP process opened the way for the weakening of the Indian institutions, increasing the role of private players and providing a critical role to the International Financial Institutions. Multinational and international lending institutions like the World Bank and DFID (Department for International Development of the UK) gradually gained a position of strategic advantage in the Indian power sector. 1.6 Increasing Influence of the World Bank As the SEBs continued to deteriorate (see section 1.4), the World Bank started demanding stiff targets for improvement in their functioning as a condition for loans. When this strategy failed, the World Bank resorted to the extreme measure of cancelling six loans given to SEBs in the early 90s. This did not bring about any improvement in the situation, so the World Bank reached 1 These agreements (Power Purchase Agreements-PPAs) are year long-term contracts detailing the payment and contractual terms which are biased heavily in favour of the IPP. For example: assured purchase of generated power or compensating for the cost; utility agreeing to take up risks related to fuel (cost, supply), currency exchange rate etc.; agreeing to very high capital costs - thus jacking up the fixed cost component; provision of incentives etc. 4

6 its current rigid position: privatisation would be the precondition for any financial assistance to SEBs. It is in this context that reform of the Orissa power sector was initiated by the World Bank. The stated idea was to overhaul the loss-making sector, bring in massive capital investment and privatise operations so that over a period of few years, the sector would make profits. 2. REFORMS IN ORISSA 2 Orissa is the 'pioneer' state in power sector reforms in India. Reforms were initiated in A few years later the World Bank said: "Orissa, as a pioneer among the states in India, has decided to restructure and substantially privatise its power sector. The Orissa government's ultimate objective is to withdraw from the power sector as an operator of utilities and to have competing privately managed utilities operating in an appropriately regulated power market. The power sector industry and market structures established under this reform programme have been defined to reach this objective with no further institutional restructuring, and significant private participation will be required Orissa s Power Sector Before restructuring, OSEB controlled all the generation and distribution capacity in the state. Now the state-owned Orissa Hydro Power Corporation (OHPC) owns the hydro plants and thermal generation is owned by the Orissa Power Generation Corporation (OPGC), in which AES Corp. of the USA has a 49 per cent stake. Apart from this generating capacity (which adds up to 2297 MW), Orissa has a share of 1,158 MW capacity of the central sector generating stations in the Eastern Region. Table 2 - Power Infrastructure Summary (2001) 4 Total Installed Capacity 3456 (MW) Energy handled (MU) Consumers (million) 1.7 Agricultural Consumers Villages Electrified 35,232 (76%) Per capita consumption 313 (kwh, 1999) Employees (approximately) 35,000 2 For more detail, see: India Power Sector Reforms Update, Issue I (October 2001), Issue II (January 2002), Issue III (May 2002), Issue IV (August 2002), Prayas, Pune. (Available at and ) 3 Section 2.9, Ref. 7 4 Installed capacity and Energy include imported power also. Employees are spread over GRIDCO (5,000), Distribution Companies (24,000), OHPC (6,000) and OPGC (700). It is reported that the number of employees reduced to 26,000 after the reform. Numbers are approximate. Source: Reference [1,5,17] 5

7 Subsequent to the opening up of power generation to private participation by the central government in October 1991, many Independent Power Producer (IPP) projects were planned in Orissa as well. Norms were relaxed: this included permitting 100 per cent foreign ownership, long-term power purchase agreements, assured profits, government guarantees on payments etc. The government of Orissa (GoO) and OSEB agreed on a power sector reform plan in Nov GoO set up a group to work out the details of the reform programme. Grid Corporation of Orissa Ltd (GRIDCO) and Orissa Hydro Power Company Ltd (OHPC) were incorporated in March After the Reform Act was made effective in April 1996, GRIDCO, OHPC and OPGC took over the functions of OSEB. 2.2 Reform Highlights In April 1995, GoO released a policy statement on power reforms 5. Reform was planned in three phases: Phase-1: ( ) a) Setting up reform implementation organisation b) Unbundling of OSEB (separate generation, transmission and distribution companies) c) Finalising the reform programme d) New generation through competitive bidding Phase 2: ( ) a) Corporatisation of generation and transmission companies b) First steps towards privatisation of distribution c) Reform Act, setting up Regulatory Commission d) Tariff reform Phase 3: ( ) a) Privatisation of distribution b) Steps towards privatisation of transmission c) Commercial operation of the power sector. The reform programme was reviewed in January-March 1994 and endorsed by World Bank consultants after some modifications. In 1995, the tariff revenue was sufficient to cover the cost of OSEB's operations. It can be said that one of the major reasons for reforms or for the failure of reforms - i.e., unsustainable low tariffs - was not applicable to Orissa. A GoO subsidy was required mainly to cover uncollected receivables and write-offs. The cross-subsidy burden was also not very high, since the agricultural consumption was only about 6 per cent. An analyst commented: 5 Power Sector Development Policy Statement, Government of Orissa, Bhubaneswar, April

8 "It was perhaps the small size of the power sector, small agricultural consumption, low level of political mobilisation, minor national profile of Orissa and the Chief Minister's perception of the impending financial bankruptcy of OSEB that made Orissa the choice for the World Bank model of power reforms in India" 6 ( See Table 1 in Annex 1 for the timetable of reform). 2.3 Policy Statement The policy statement outlines the framework for reform as the solution to the problems of the state power sector. "The Government's ultimate objective is to provide an appropriate policy environment for growth of the power sector and withdraw from it as an operator of facilities, having instead privately-managed utilities operating where feasible in a competitive environment under an appropriately regulated power market. Power sector industry and market structures being established under the reform programme have been defined so as to facilitate the realisation of this ultimate objective. Significant private sector participation is to be achieved during the implementation of the proposed Bank loan which we are seeking to support our power sector reform programme" 7. The document goes on to outline the actions already taken by the GoO for reform and gives commitments on the key performance indicators of reform. The key principles of the reform programme are identified under five sections: a) Restructuring of OSEB by corporatisation and commercialisation b) Privatisation - hydro & thermal generation, distribution and grid operation c) Competition for new generation capacity additions d) Regulation separate from the government e) Tariff reform at bulk, transmission and retail levels All these are in line with the model of reforms proposed by the World Bank. The policy document assures the employees that personnel policies and 'transition plan' (including reduction of staff through attrition, voluntary retirement scheme, transfers to other government bodies) will be discussed with staff and implemented with 'legal and social responsibility to the rights and dignity of the affected staff'. It also goes on to pacify the employees: "We also reiterate that the power sector in Orissa is poised for rapid expansion. Therefore the seemingly redundant staff may get adequate scope for being absorbed" World Bank Loan 9 In 1995, the World Bank agreed to a GoO request to convert and earlier loan to power sector assistance. Of the total US$997 million loan, the World Bank's contribution is US$350 million 6 Navroz K Dubash, Sudhir Chella Rajan: Power Politics: Process of Power Sector Reform in India, Economic and Political Weekly, September 1, Orissa Electricity Reform Act Power Sector Development Policy Statement, Government of Orissa, Bhubaneswar, April Orissa Power Sector Restructuring Project - Staff Appraisal Report, World Bank, April

9 (35 per cent). GoO, Indian financial institutions and GRIDCO are to raise US$292 million in Rupees, which works out to be 29 per cent of the loan. The remaining 36 per cent is to be raised by ADB and ODA (now DFID). Some part of the funding is grants (the DFID portion) and rest is loan. It can be seen that the average annual restructuring fund is nearly 60 per cent of the annual revenue of the utility! Table 2 in Annex 1 gives the financing plan. 2.5 Reform Act & Regulatory Commission The Orissa Electricity Reform Act 1995 formalises the institutional structure of the sector after reforms. The Act is "to provide for the restructuring of the electricity industry for the rationalisation of the generation, transmission, distribution and supply of electricity; for avenues for participation of private sector entrepreneurs in the electricity industry; and generally for taking measures conducive to the development and management of the electricity industry in the state in an efficient, economic and competitive manner including the constitution of an electricity regulatory commission for the state and for matters connected therewith or incidental thereto" 10. The Orissa Electricity Regulatory Commission (OERC) became operational under the Act in August It is a 3-member body selected by a committee constituted by the state government and consisting of a) the Chairman of State Public Service Commission as the Chairman, b) the Secretary in charge of Department of Energy, GoO as convenor, and c) the Chairman of the Central Electricity Authority (CEA) or any Member of CEA. A selection committee suggests two names for each post and the state government appoints one of them as the member. One of the three members shall be designated as chairperson by the state government. One member is expected to be an electrical engineer with industry experience, at least one to have qualifications and experience in economics, commerce, accountancy, law or administration or management. OERC has the powers of a civil court. The removal of a member of the Regulatory Commission (RC) requires a long and complex procedure. Thus, the RC is a government-appointed body, but has the potential of acting independently of the government. OERC has issued six tariff orders so far. Tariff orders give details of the bulk supply and retail tariff. They also give the revenue and expense plans of the utilities for the year and typically contain many directives to the utilities (related to performance, targets etc). The process leading to tariff orders involves submission of proposals by the utilities, making these available to public who submit objections and holding public hearings. All these typically attract a lot of attention. OERC has performed the difficult task of pioneering the regulatory process in India. There has been appreciation for laying down a framework and facilitating some amount of transparency and participation. There is criticism by some policy watchers that OERC gives too much emphasis to the tariff process and limits itself to regulation, thus considering the development of the power sector beyond its responsibility. There is also a concern that in the absence of effective civil society participation, the RC with enormous power and little public accountability may sabotage the reform objective of making the sector consumer-friendly and efficient. Civil Society 10 Orissa Electricity Reform Act

10 Institutions (CSIs) have been able to make some impact on the sector using the OERC. This has been mainly in the area of transparency by making information available to the public. 2.6 Distribution Reform The distribution system of OSEB was geographically divided into 10 distribution circles. As a part of reform, they were grouped into four zones - Central, North Eastern, Southern and Western. These zones were subsequently converted to Distribution Companies (DISTCOMs). The assets, liabilities, proceedings and personnel of GRIDCO were transferred to these respective companies in November Distribution Operation Agreement with Bombay Suburban Electricity Supply Company (BSES) Since the regulatory mechanism was not well established and there was very little experience of privatisation, a short-term distribution operations agreement (DOA, also called Management Contract) path was taken up initially. In October 1996, Bombay Suburban Electricity Supply Company (BSES) was awarded the 3-year DOA for the Central Zone. BSES was responsible for distribution, maintenance and collection of dues. It was expected that this short-term agreement would develop into a long-term arrangement. Performance was to be reviewed every 6 months. BSES was not able to improve performance due to a variety of reasons - its inability to manage the employees (who remained GRIDCO employees); government interference; limited management effort from the BSES side etc. The DOA was terminated on 30 April Privatisation of Distribution After the DOA failed, GoO decided to privatise the four distribution zones. It can be said that Orissa was able to beat the deadline (December 2000) set by the reform project for privatising distribution. However, one company (BSES) ended up controlling three distribution companies, when there was an understanding that one organisation would not be allowed to control more than two distribution companies. Moreover, AES, which already had a 49 per cent stake in OPGC, controlled the fourth distribution company. These remained as aberrations to the paradigm of competition. BSES with three companies ran a loss of about Rs. 2,000 million at the end of its first year of operation. The reasons were many: tariffs were fixed by OERC based on 35 per cent T&D losses whereas the actual losses (as claimed by BSES) were per cent; targets of billings prepared by GRIDCO were too optimistic; it was not easy to change the operational culture etc. However, BSES is reported to be planning micro-privatisation with the involvement of village communities to improve distribution management. BSES was working to turn around the situation and Mr RV Shahi (then Chairman, BSES) was quite optimistic: " We found that out of a million consumers, almost 70% did not have energy meters or had defective meters. We launched a massive meter installation programme... By next year, hopefully, 100% metering will be in place.. The distribution loss has reduced from around 50% to around 44% in and 9

11 to around 42% in I had felt that gestation period (for turnaround) would be about two to three years. But now I think a slightly longer gestation period, may be four to five years" 11. BSES now plans to take corrective steps like improvement in billing, giving extensive training to field staff (at Mumbai and at international distribution companies), conducting consumer awareness programmes, forming village committees and implementing WB supported projects speedily 12. BSES has asked for support from OERC, GoO, WB, and DFID to tide over the crisis. In September 2002, Reliance Industries, one of the biggest industrial houses in India, has become the single largest shareholder in BSES with a 40 per cent holding. With the backing of Reliance, BSES (renamed as Reliance Energy in early 2003) has become a major player in the Indian power sector. There has been criticism of AES taking over a distribution company when it already had a 49 per cent stake in the Generation Company, OPGC. CESCO, the AES-owned distribution company, covers eight coastal districts with a majority of domestic consumers. The T&D loss in CESCO is the highest. Power supply to nearly 19,000 villages was affected in the super cyclone of October AES had committed to restore supply by 31 March OERC issued a show cause notice to CESCO on 01 May 2000 since it failed to meet the commitment. In its order dated 18 Jul 2001, OERC imposed a fine of Rs. 0.1 million on CESCO for failure to comply with the tariff order of 19 Jan The Managing Director of CESCO (an AES representative) resigned in July 2001 saying that "it is impossible to do distribution business here" and that he is "frustrated with the current regulatory and contractual structure of the distribution system in Orissa" 13. Following a petition by GRIDCO, OERC had to take a radical step and it appointed a CEO and administrator (as per the reform act) at CESCO. This was the first instance of the use of such strong regulatory powers in India. AES has said that there is too much interference by government and wished to walk out of CESCO by end 2001, but GoO maintains that the contractual agreement requires AES to stay till AES is attempting to sell its share in CESCO, but there has been no success so far. The reform review committee (set up by the state government in May 2001) has severely criticised AES for its mismanagement of CESCO (see section 3.1). All the distribution companies feel that OERC is conservative with tariff hikes. For example, in , CESCO asked for an 18.8 per cent hike and was granted 9.6 per cent. GRIDCO had asked for a 13 per cent hike, but was granted only 9 per cent. It is said that OERC used unrealistic T&D loss and collection efficiency figures to calculate the tariff. DISTCOMs were to start making profits from But the aggregate losses by the four DISTCOMs have been mounting. In July 2002, the performance of the DISTCOMs was reviewed by the OERC. The review showed that the losses have been increasing, bill collection 11 Interview with Mr RV Shahi, Powerline, May Field studies would be needed to understand the impact of these efforts. 13 India Power Sector Reforms Update, Issue I (October 2001), Issue II (January 2002), Issue III (May 2002), Issue IV (August 2002), Prayas, Pune. (Available at and ) 10

12 reducing, and billing efficiency dropping. This has in turn caused problems to GRIDCO, which has not been paid by the DISTCOMs. 2.7 Transmission Sector - GRIDCO The government-owned GRIDCO manages the transmission system. It is the single buyer of power from all generating stations and is the sole supplier to the DISTCOMs. GRIDCO has been one of the main victims of the reform process. GRIDCO's finances have taken a nosedive after unbundling and the privatisation of distribution. Some major reasons are: a) The liabilities of distribution companies were transferred to GRIDCO - Rs. 16,000 million to GRIDCO and Rs. 6,000 million for all four DISTCOMs b) The assets of GRIDCO were 'up-valued' (a book adjustment suggested by reform consultants) to match liabilities during unbundling. This has increased depreciation and all other factors that depend on the 'bloated' capital base 14. c) OHPC aligned tariffs to the new asset base and a 16 per cent rate of return. Tariffs to GRIDCO went up from Rs.0.1/kWh to Rs.0.49/kWh in April d) OERC asked GRIDCO to meet a T&D loss target of 35 per cent when it was claimed to be around 50 per cent. Tariffs were calculated based on these targets. Neither GRIDCO nor the DISTCOMs were able to meet these targets. e) OERC did not grant tariff hikes of per cent as planned in the SAR. Instead the tariff increases were 11, 9.3 and 4.5 per cent respectively, in the first three years. f) Budgetary support from GoO by means of subsidy was cut off right from the first year. g) Central sector power was costly and GRIDCO had to purchase it to meet the requirement. h) The privately owned distribution companies persistently defaulted payments to GRIDCO. By September 2001 they owed GRIDCO a sum of Rs. 10,800 million. Thus GRIDCO had two problems: first, generating stations with high rates, and second, DISTCOMs which could not streamline operations fast enough, and therefore would not pay their dues. The reviewers of the reform project (including the World Bank) have pointed out this crisis and GoO has been asked to take corrective steps. The government of India has prepared a bail-out package for GRIDCO, which includes securitisation of dues to central generating stations, reduction of staff by 10 per cent etc. 14 The transmission and distribution assets were transferred to GRIDCO at a value of Rs.19,580 Million when their historical cost was Rs. 8,380 Million. This meant a revaluation of assets by 11,200 Million. 11

13 2.8 Structural Changes The following table sums up the changes in Orissa s electricity sector: Table 3 Structural Changes in the Industry in Orissa Function Before Reforms After Reforms Generation State-owned utilities: OSEB, NTPC, NHPC, Few Private Captive power plants State-owned corporation and Private owned. Selling power to GRIDCO Transmission State-owned: OSEB State-owned corporation: GRIDCO Distribution State-owned: OSEB 4 private companies Policy State Government State Government, Funding agencies, Consultants and OERC 3. GOALS AND ACHIEVEMENTS: A REPORT CARD OF REFORMS 3.1 Stated Goals Power sector reform in Orissa was lauded as an essential step to make the sector economically viable with private participation. "The new utilities will improve the efficiency of power supply in Orissa and close the chronic power demand/supply gap to the benefit of all electricity consumers. Visible progress in system improvement with Bank support under the new loan will strengthen the credibility and help gain public acceptance and support for the reform programme. The programme will promote fiscal adjustment as it enables the Government to cut its power subsidies and reduce public spending in the power sector. Finally, we are proud to state, the programme is already providing a model for state power sector reform in India" 15. In broad terms, it was expected that after investing US$ 1,000 million, in 5 years time the Orissa power sector would become a healthy profit-making enterprise. It would start contributing to the state economy and thus help the government perform better in other social sectors. Several quantitative indicators are given in the Staff Appraisal report of the Bank and include expected values (for the period ) for annual demand growth, T&D loss reduction targets, profit targets, average tariff etc. We see in Section 4 that the majority of these projections on performance have not been met. It is a matter of irony that the only parameter that has met the reform script is the tariff increase! 15 From the policy statement of the state government (1995) 12

14 3.2 Review of Reform A six-member committee headed by Mr. Sovan Kanungo was appointed by the state government on May 30, 2001 to review the reform programme. The Kanungo committee held extensive consultations with the state power utilities, OERC, the World Bank, DFID, consultants, employee associations, consumer organisations, industry forums and many concerned citizens. It submitted a 100-plus pages report in October This report highlights many shortcomings of the reform programme and points out that no benefits have resulted. a) No reduction in transmission and distribution losses: Even after five years of restructuring the T & D losses which were expected to reduce to 21 per cent are still at the prerestructuring level of 45 per cent. b) Collection efficiency deteriorated: During the five years of the restructuring process there has been a substantial decrease in the collection efficiency from 84 to 77 per cent. c) Quantum jump in debt burden: Due to large capital investments and revaluation of existing assets, GRIDCO's loan burden has increased four times. Obviously this burden will be transferred to consumers in the form of higher tariffs. d) Increase in the cost of generation due to asset revaluation: Due to the revaluation of the assets not only did GRIDCO's loan burden increase, but also the cost of generation increased extensively. For example, before restructuring, the cost of generation of hydroelectric power station was Rs.0.20/unit, which increased to Rs.0.50/unit after restructuring. e) Steep tariff increase but losses continue: In the past 9 years, electricity tariffs in Orissa have increased by a huge 15 per cent per year. Such a steep tariff increase implied that tariffs nearly quadrupled in the last decade. But in spite of such a tariff increase, the power sector continues making losses to the tune of Rs. 4,000 million every year. (Total annual revenue collection is only Rs.18,000 million). f) No capital investment: As per the findings of the Kanungo committee, the management of all four distribution companies has not improved. These companies have neither brought in additional capital nor made adequate provisions for working capital requirements as promised to the government. g) Incomplete projects: Rs. 41,250 million of capital works to streamline the transmission and distribution system was planned. Not even half of this has been committed, not a single work completed and no benefit realised. Annex 9 of the report, titled 'Exit of AES', unveils the callous attitude and at times illegal operations of AES corp. AES did not bring in working capital and failed to pay GRIDCO on time. This resulted in great financial stress for GRIDCO. Other aspects of the practices of AES are even more shocking. For example, the company did not implement the concessions given to various bigger consumers sanctioned by the regulatory commission. Months before they resigned in July 2001, many board members and senior officers of AES would stay in New Delhi and manage from there, without even visiting Orissa. Towards the end, the AES office in Orissa was locked and daily activities were made impossible. Following a petition from GRIDCO, OERC appointed an administrator in August 2001 to take over the operations of the company. 13

15 The Kanungo committee has noted that the restructuring process was carried out under the guidance of the World Bank, DFID and various international advisors. Expenses on account of foreign consultants have been to the tune of Rs.3,060 million. But all these have not been able to result in visible benefits for the consumer as yet. Problems like T & D losses, inefficiency in recovery of electricity bills and financial losses have become more serious. The committee has made various suggestions like filling up vacant posts in the regulatory commission, reviewing asset revaluation, eliminating the dependence on external advisors, appointing experts to high posts in the power companies and appointing professionals. In order to turnaround the sector, the committee states that the World Bank, the British government and the Indian government should provide a total amount of Rs.32,400 million to the Orissa power sector in the next five years. 3.3 Lessons: Some Good, Some Bad The regulatory process in the power sector has been set up in Orissa and many other states have benefited from this experience. Tariff filings, public petitions, public hearings, orders, formulation of performance guidelines etc were done for the first time in Orissa. There has been some increase in transparency and participation. There have been attempts to evolve some alternate governance models like micro-privatisation to manage distribution by some DISTCOMs. These could give some good lessons on improving the distribution system management. Participation of local expertise in the reform process has been very poor. International consultants dominated the scene. The only Indian consultant was the Xavier Institute of Management, which was paid a sum of Rs. 1.2 million! It is perhaps the dominance of international consultants who were anxious to promote the success of the reform model which resulted in over-projection of benefits, unrealistic time estimates for project completion and poor project implementation. The participation of Indian experts may have given more realistic projections. 14

16 Rural electrification has suffered in the process. All private DISTCOMs have neglected this sector, which is not financially attractive. The number of villages electrified has remained constant for the past few years and so has the number of pump sets energised. The Kanungo committee has suggested setting up a Rural Electrification Planning Organisation to give focus and direction to rural electrification. RC has not been able to sense the crisis in time and take corrective actions. It is also regrettable that the civil society institutions could not gather enough strength to pressurise a comprehensive mid-term review a few years earlier. Also, the way DISTCOMs handled the massive cyclone disaster needs further study. The very high fees given to external consultants, the capital-intensive projects (from which many private companies have benefited), the Indian government's blind pursuit of the reform agenda and World Bank pressure contributed to the model s collapse. Even the review commissioned by the Bank in 2000 failed to provide any danger signals. The few sane voices raising caution and criticism were ignored 16. There is criticism that the privatisation of distribution was hurried. None of the transmission and distribution projects were completed on time. Time overruns may make the costs go up. BSES was given three companies, and AES was requested to take over the fourth company, even as AES held a 49 per cent stake in the generation utility. AES arrogance has shown an ugly face of reform. As mentioned before, all four private companies have defaulted payments to GRIDCO, pushing it into a financial crisis. It is to be noted that many reasons for this crisis collapse can be traced back to the reform prescription of the World Bank. 4. SUMMARY OF LESSONS LEARNED The reform was not as effective as expected 17. Most of the key parameters did not improve (see graphs below). GRIDCO and DISTCOM profits did not grow as projected; and so the total economic benefits of reform were not realised. In fact, the Kanungo committee estimates that nearly the same amount of money and time has to be invested to restore the sector. The graphs below capture the variation of some important parameters during the reform period. It can be seen that the reform plan had forecast a very high percentage of load growth (7-16 per cent annual growth), whereas the load did not grow at that pace (Graph-1). Graph-2 captures the behaviour of T&D losses. The World Bank had projected a T&D loss reduction from 39.5 to 21.7 per cent from 1997 to It has now emerged that losses in 1997 were much higher at an estimated 49.5 per cent and the estimated loss figure in 2002 is 46 per cent. Graph-3 shows the revenue collection efficiency data. It was expected that from 1997 onwards, 100 per cent collection would be possible. But even in 2001, the figure remains at 77 per cent. Graph-4 shows 16 These included the analysis by Prayas (1998), articles by Sudha Mahalingam (1999 onwards), RP Mahapatra etc [9,13,15] 17 Table 3 in Annex 1 gives the plan for performance indicators over the course of reform along with some actual data, to highlight the variation between plans and actual achievements. 15

17 the average tariff variation. This is one area where the plans and the actual values are close. It was planned to increase the tariff from 207 paise/kwh (1997) to 266 paise/kwh (2001). It has actually gone up from 201 paise/kwh to 281 paise/kwh. Against a planned percentage increase of 29 per cent from , reforms have resulted an increase of 40 per cent! Energy Input Plan Actual 2. T&D Loss Plan Actual MU % % Revenue Collection Plan Actual Paise/kWh Average Tariff Plan Actual Graph 5 shows the category-wise increase of tariff for a few selected consumer categories (see also Table 4, Annex 1). Tariff values are normalised using 1997 values to prepare the graph. Between 1997 and 2001 the irrigation tariff has gone up by 85 per cent, domestic by 60 per cent and small industry by 110 per cent. The large industry tariff has gone up only by 9 per cent. Thus tariff revisions have benefited the big consumers at the cost of the small. Normalised % Tariff 250% 200% 150% 100% 50% 0% Year Domestic Irrigation Commercial Small Indy Large Indy Graph 5: Category-wise Tariff The official Kanungo review committee ends the report on a sober note: 16

18 "The state's power sector is now on the brink of a crisis. It is high time all the agencies, namely, the State government, the Central government, the World Bank and the DFID got together and took a holistic view on what can be done by each to rescue the reform. If electricity reform fails in Orissa, it would have its inevitable adverse impact on reform all over the country. What has taken place in the electricity industry of Orissa is only restructuring, privatisation and establishment of a Regulatory Commission. The real reform, which brings in its wake benefits to consumers, strength to industry and growth for the economy has yet to come" LESSONS AND ALTERNATIVES IN THE ALL-INDIA CONTEXT Many states have used the 'Orissa Model' for reforming their power sectors. The reform act and many procedures were almost copied. After it became clear that the 'Orissa Model' has limitations, there has been some caution in blindly following it. However, reforms are being pursued vigorously, with 19 of the 28 states having established Regulatory Commissions and the Electricity Act 2003 enacted in June It is therefore important to look closely at the Orissa reform process to understand the positives and negatives. This could give some idea of the possible alternatives when reforming the power sector, for which there is an urgent need. 5.1 Criticism of the Reform Process Non-Participatory and Hasty Process: The entire process of evolution and detailing of the model was completed in an extremely hasty manner. The process was conducted without any semblance of public debate or participation. Further, the model lacked the sound analytical basis that was necessary to address the techno-economic and institutional complexities of the sector. Projecting privatisation as the solution to distribution inefficiencies and pushing the privatisation process is a good case of this haste and lack of debate. As remarked by some, the reform model was not built through a consensus process; rather, consensus was sought over a prescribed reform model. Sabotage-Prone Regulatory System: The regulatory system in this model is expected to play a critical role in discouraging non-competitive behaviour by market players. However, because of many lacunae - mainly inadequate and discretionary provisions for transparency, accountability, and public participation - these regulatory structures were prone to sabotage and high-jacking by strong market players. A detailed study of the proceedings of the commission and study of orders would prevent this happening any further. Impact on Developmental Aspirations of the Disadvantaged: The vast majority of disadvantaged people in developing countries do not have access to electricity. The model treats electricity as a tradable commodity to be purchased, without subsidy, by those who can afford it. As a result, the model effectively puts severe constraints on the aspirations of disadvantaged areas that require electricity as a key input for their development but cannot afford to buy it at commercial prices. At a broad level, reports indicate that rural electrification efforts have slowed down. The impact of reforms on rural electrification and poor consumers needs to be assessed in field surveys. 18 Kanungo Committee Report, Government of Orissa, October

19 Impact on Democratic Rights of Disadvantaged: By conceptualising electricity as a private good that market players should and can supply, the model takes this core developmental sector out of the realms of public affairs and of 'politics'. The model divests the state - which is somewhat amenable to political pressures by disadvantaged sections - of its control over the sector. Further, it substitutes the state with independent regulatory mechanisms that are technocratic and legalistic. This further marginalises the disadvantaged sections as they lack the techno-economic and legal capabilities necessary to influence the working of these regulatory institutions. Effectively, the model constrains democratic rights of the disadvantaged to influence decisions in a sector that involves critical societal interests. 5.2 Limitations of the World Bank Model/ Privatisation as the Solution The state s withdrawal from the sector and privatisation are key components of the World Bank model. It has been demonstrated that mere changes in the ownership of utilities will not empower the public to effectively challenge the powerful members of the unholy alliances controlling the sector. In fact, there is a danger that, with the entry of powerful corporations, the new and equally (if not more) powerful and equally unholy alliances of corporations, politicians, and bureaucrats might take over control of the sector s governance. The situation after the entry of Enron and other IPPs has demonstrated that this apprehension is not ill-founded. Thus, the solution of privatisation does not effectively address the core malady haunting the sector, its governance crisis. In a way, even the protagonists of privatisation acknowledge this. They agree to the need for stringent and independent regulation to keep in check the non-competitive behaviour of private players, especially in view of the natural monopoly in the Indian power sector, which is likely to persist at least for some decades to come. In this model, the regulation is to be independent of the state (i.e. from political interference) and investor-friendly. This is because the main objective guiding the design of the regulatory system in this scheme is to protect private players and investors from state "interference". Such a system will not automatically serve the purpose of protecting consumers, and the disadvantaged sections of the population in particular. This is mainly because such a system does not pay the necessary attention to the special needs of these sections. Neither does it emphasise creating space for these sections in the regulatory process and building their capabilities to utilise this space. This effectively excludes them from participating. Thus the new regulatory system becomes an unrestricted domain for investors and private players. Further, as our earlier study of the World Bank s Orissa model demonstrates, the regulatory institutions in this model are severely prone to sabotage by powerful vested interests. In short, neither privatisation nor the accompanying independent regulation envisaged by the World Bank and its followers is geared to address and resolve the core malady plaguing the sector. 18