The great Indian power balancing trick10 February 1998
Peter O’Neill analyzes the state of privatization in the Indian power sector, focussing on the Orissa and Haryana projects.
THE licence-raj, left behind by the British at Indian Independence in 1947, has slowly been unravelling since liberalisation started in 1991. That was the year when India’s then Finance Minister and academic, Manmohan Singh, pulled the country’s accounts back from the edge of international bankruptcy by opening up the economy.
Power production and a bigger role for private investment in power station joint ventures were at the front of change. India’s state governments also started to claw back power which the British, the Nehru dynasty, and particularly Indhira Gandhi, had taken from the Indian regions into the centre. Under the Nehrus, hydro started as the majority base of indigenous power generation. This became a minority as the thermal coal lobby grew stronger. Now individual Indian states want and have growing power to do their own deals. The balance of the power pendulum has swung towards stronger state Chief Ministers - who, after all, deal with larger populations than most European countries.
In the power sector, there are three dominant scenarios. The first are projects (mainly thermal, coal, gas and naphtha) with financing put together by foreign companies as joint ventures with the state government. These are overseen and possibly counter-guaranteed by the central government. The second, of growing interest to the less well-off states, is mini to small hydro (up to 200MW); they are easier to fund, and avoid the centre altogether as Delhi no longer insists on clearance at this level. These are of great interest to smaller Indian financing institutions, power construction companies and state electricity boards. They are fast to implement and have none of the problems of fuel supply - whether domestic coal, oil or gas or foreign provision - or waste that have dogged all the large thermal projects. Fly ash problems, for example, have meant the Cogentrix 1000MW Mangalore project has dragged on through the courts for more than three years because of environmental public interest litigation.
Meanwhile, Indian and Italian engineers have been merrily tunnelling their way through the Himalayas on the Nathpa Jhakri Himachal Pradesh (state) hydro scheme, which will feed Haryana and earn good money for poor Himachal, home of the Viceroy’s summer government in Simla.
The third and controversial scenario is the privatization of the power system via the State Electricity Boards (SEBs).
There are political forces in national and state parliaments who believe a low-cost economy like India’s, with 300 million officially below the poverty line, cannot be charged the high-cost economy (read international) electricity prices which privatization may bring. Power is still seen as a vital element in food security and Indian industrial competitiveness abroad. That means low prices for millions - farmers, for example. It also means that cheap hydro or coal, produced by miners paid one fiftieth of UK or US miners’ wages, should not become a ‘cash cow’ to make profits from high prices.
This private versus public debate (as opposed to mixed liberalization) will be tested during the spring elections forced by the Congress Party withdrawing support for the United Front (UF) Coalition government. A number of parties in the UF coalition have fought the government’s moves to put through a Common Energy Programme which changes the Electricity Acts so that central government is no longer obliged to try to provide universal electricity provision, but can devolve this on to individual states.
The World Bank carrot The World Bank says that ‘Not surprisingly, states that have the weakest SEBs are the most willing to consider the radical reform of their power sectors.’ This must be the case, especially when a loan is being offered. The Bank denies it has a political agenda. It does say its privatization route is supported by its own commercial wing, the International Finance Corporation which has privatization clearly stamped on its loan strategy because it deals with the private sector.
In India, the poor northeast state of Orissa heads the privatization stakes, followed by Haryana, a grain bowl state. Across the state border with New Delhi, the desert state of Rajasthan, most famous for India’s first nuclear test at Pokharan in 1974, is in advanced talks with the World Bank, and others are in the queue.
It should be noted that Haryana Chief Minister Bansi Lal’s privatization programme has been fought, both from within his state and nationally. His newly-appointed energy minister resigned in protest in spring 1996 when he found out about what he called ‘secret’ negotiations with the Bank. Not long afterwards, a committee of power experts (including former chairmen of the Central Electricity Authority) attacked the whole basis of foreign borrowing to build up the country’s power system, saying it was flawed and would be very expensive in the long term. Their message was that hydro had become neglected and was still far cheaper than thermal. They said the key to India’s problems was not privatization or foreign control but better management of the grid to cut losses plus building new transmission. They believed there were enough domestic funds to finance better managed, not privatized, generation and transmission.
It is interesting to note that Japan agrees. The Japanese Overseas Economic Co-operation Fund (OECF) has been giving hundreds of millions of low-cost loans for Indian network transmission systems through its loans and grants to India. Its officials say transmission infrastructure is the key to economic growth - and Japan has proved that at home. It is the key to exploiting India’s own still massive hydro potential as well as exchanges with even bigger untapped potential in Nepal.
There is no doubt that the massive funds which the World Bank can make available directly to Indian state governments, rather than their battling with the central treasury, will ensure there will be takers for the privatization route. But there is another group which may not like privatization of this kind. The World Bank itself says the progress of the government’s National Thermal Power Corporation has been ‘remarkable’, and it now accounts for 30 per cent of Indian power. Powergrid (set up in 1993) has also been very successfully pulling in bad debts from SEBs by simply threatening to turn off the power. The National Hydroelectric Power Corporation is also flexing its muscles and above all tapping domestic finance. None of these bodies will want to lose their newly found power to either foreign power-producing partners or autonomous, privatized state bodies, while they try to ensure a fair share of electricity for all at a reasonable price when they need it.
Orissa Orissa is poor and mainly rural. It wants to be the future gate for Indian trade with the Bay of Bengal countries and the Far East, although analysts urge caution about government aspirations. It has major mineral resources and Pechiney of France helped build one of the biggest and most ‘power needy’ aluminium plants in the world there. It now has a US$350M World Bank loan for the Orissa Power Sector Restructuring Project.
This will split the State Electricity Board into separate generation, transmission, and distribution companies; and transfer its distribution system to private distribution companies by 2000.
The Bank estimates India’s power shortages are ten per cent of total electrical energy and 20 per cent of peak capacity requirements. The Bank says commercial losses of SEBS and State Generating Companies, which together generate almost 70 per cent of India’s electricity supply and provide most of the distribution to consumers, are rising, reaching an equivalent of about US$2.2bn in fiscal 1996. Anti-privatization politicians would point out that cheap power to farmers is part of vital food security to India. The US$2.2bn losses are equivalent to US$2.2 per head of the total population. The figure is also a tiny fraction of money spent by OECD countries on supporting their farming sectors through various subsidies.
The Bank’s privatization theory, along with the state governments, is that it will gradually ‘eliminate the burden the power sector has placed on state government resources and thereby release government funds for other priority sectors’. It sees these states as a test bed. ‘Only time will tell whether or not Orissa’s efforts will be replicated in other states and lead to a nationwide power sector reform momentum.’ On 1 April 1996, the Orissa Electricity Reform Act established a commission to regulate the Orissa power sector and assure the reform process. By 2000 the Grid Corporation of Orissa (Gridco) and the Orissa Hydro Power Corporation (OHPC) became the successor companies of the Orissa State Electricity Board. The process will use higher prices, metering and better collection to promote electricity conservation. Thermal stations will be rehabilitated and transmission and distribution rehabilitation and demand-side management measures are intended to reduce system losses and emissions. Better supply to industry is also hoped to attract more industrial investment. The total cost of financing is US$997.2M.
Haryana The Haryana privatization scheme has the same aims and a structure similar to that of Orissa. The main difference is that the loan will be spread over ten years and Haryana is a rich agricultural state. It benefits from low prices from India’s earliest post-independence, major hydro production schemes in neighbouring mountain states. It will get US$600M (US$60M from the Bank in the first two years).
Official figures for the Haryana State Electricity Board (HSEB) are as follows: an installed capacity of 2380MW, consisting of HSEB’s own power stations (863MW), joint- sector projects (899MW), and shares in central utilities’ power stations (618MW). The system serves about three million consumers. In the financial year 1996, the total energy available was 12 738GWh, of which 8745GWh was sold to ultimate consumers. Agriculture is the main consuming sector (45 per cent), followed by industry (23 per cent) and domestic (19 per cent). In the financial year 1996, peak demand was about 2840MW and in 1997 power shortages exceeded 25 per cent.
HSEB’s thermal plants are in poor physical condition with a low average plant load factor (PLF) of about 45 per cent, compounded by low quality coal and irregular supply (because Coal India does not get paid regularly) The Bank says system losses are recorded at 32 per cent but are more likely to be of the order of 40 per cent.
Priority supply is to farmers - who are also the main political ‘votebank’ of the state - particularly in the two peak crop seasons. Significantly, price increases have been made to non-agricultural users in recent years to increase revenue - 14 per cent in November 1990, ten per cent in June 1992, 15 per cent in December 1993, 20 per cent in December 1994, and latest, by about 21 per cent in July 1996. Collection is about 90 per cent.
The Bank is using a new financial instrument ‘Adaptable Program Loans’ to control progress - the stick as well as the carrot can be brought into play. The First Haryana Power Sector Restructuring Project will target ‘very critical bottlenecks in transmission and sub-transmission systems’. The Bank is also insisting that its project get as much publicity as possible by insisting that there is an improvement of ‘quality of supply in carefully selected areas to ensure maximum visibility and to demonstrate the positive impact of the process initiated by Haryana’.
There will be high voltage transmission works (220kV) to transport power from the Nathpa Jhakri and National Thermal Power Corporation Faridabad power stations to Haryana’s grid system. High voltage transmission works (132 or 66kV) will connect up to ten small power stations of 25MW each to the grid system. A decentralized, computerized billing system for consumer revenue accounting and a computerized complaint system, with radio communication facilities so that complaints may be dealt with more efficiently, will also be set up. Foreign companies will be able to bid for these some time this year.
The Bank is hedging its bets about whether Indian power privatization will succeed. It has admitted it is taking this route because loans in earlier years for power reform produced new plants, but not better financial returns from the consumer. The Bank has been criticized internally and externally for not ensuring proper management or expecting state governments (in a number of countries including neighbouring Nepal) to put into place Bank management systems which would have ensured a better result. Arun III in Nepal was criticized on this basis.