HOT TOPICS
SPOTLIGHT AGENCIES
Learnings from Delhi's power supply privatisation
Written By murali772 - 23 July, 2009
Privatization Media Reports efficiency India utilities Others Everything else
DELHI has never been inviting in May and June. This summer, the capital saw its worst power crisis, and frayed tempers pushed Sheila Dikshit’s government on the back foot. Power cuts lasting 12 to 15 hours a day became routine, especially in the worst 20 days of June when the temperature shot beyond 44{+0} Celsius. Since then, every aspect of power generation and distribution has been under the scanner as the government found it hard to explain a crisis of such magnitude after the much-publicised privatisation of power distribution in 2002.
When power reforms began in 2002, the Delhi Vidyut Board (DVB) was unbundled into three privately owned distribution companies – a power transmission company, a power generation company and a holding company that held most of the DVB’s pre-privatisation liabilities. Following the unbundling of the DVB in July 2002, the business of power distribution was transferred to North Delhi Power Limited (NDPL), owned by the Tata group; BSES Yamuna Power Limited (BYPL); and BSES Rajdhani Power Limited (BRPL), owned by the Anil Dhirubhai Ambani group. All this was part of the Delhi government’s effort to increase the efficiency of power distribution. These entities function as joint ventures with the Delhi government, but they hold 51 per cent of the shares.
For the full report that appeared in the Frontline, click here
The imperatives of privatisation of distribution of power, particularly in urban areas, has already been discussed threadbare here. Now, if the processes taken up are not going on too smoothly, let's examine the why of it all, based on the above report.
Points of note from the report:
1) Private discoms have proved more efficient than the DVB is the reduction of power losses and thefts. The losses, which were at 52.3 per cent in 2002-03, are now down to less than 20 per cent.
This means the freeing of a capacity of close to 1200 MW, which otherwise would have required an additional investment of Rs 6,000 cr.
2) More and more people now question the very basis of the privatisation decision, which has so far only meant power cuts and rising tariffs for the people and higher subsidies for the government.
At a gathering of Socialists, convened essentially for privatisation bashing, that I attended a few years back, a lady went on to blame TATA’s and Reliance for the faulty meterings in New Delhi, after they took over the distribution, and went to lament that A/C, which she termed as a necessity in the Delhi summer, has now become unaffordable for even the middle classes. The fact of the matter, however, is that the consumers in Delhi had so far been ‘managing’ the government-owned DESU very well, and, with the private sector players taking over, the consumers are now having to pay the actual costs.
There was another gentleman who went on to state that ‘electricity’ is now a necessity, and therefore, should be treated as a ‘fundamental right’. The question that arises simultaneously is whether A/C in Delhi should likewise be treated as a fundamental right, even as the poor in the villages are roasting in the summer heat because of the incompetencies of the government service providers. For more on that, click here
3) NDPL, however, seemed to perform better, mainly because of its strong human resources and the infrastructural upgradation it undertook over the past few years.
Perhaps, brings out the difference between TATA's and Ambani's.
4) The Reliance-backed BSES has been operating for seven years, but its chairman, Lalit Jalan, admitted that the old distribution network had not been replaced. “Around 50 per cent of the network is old and needs replacement. Old transformers are prone to breakdown,” he said. Upgrading the whole system would have made power supply “unviable for consumers in the long run”, he added.
However, replacing the transformers was part of the mandate for the private discoms when they took over from the DVB. Instead of spending money from their own pockets, the utilities are now demanding investment from the Centre. On their behalf, the Delhi government has also sought funds from the Union Ministry’s Rs.50,000-crore national scheme for power infrastructure development.
The Accelerated Power Development and Reforms Programme (APDRP) would give Delhi around Rs.300-400 crore as part of the funding, according to a newspaper report. “The money will only be used for better services. Why should Delhi consumers not benefit from Central funds just because their power distribution is privatised?” asked Arun Kanchan of BSES. The three discoms, however, are rich with a surplus of Rs.938 crore, and BSES claims to have spent Rs.3,500 crore on infrastructure upgradation.
The Delhi government still stands by its claim that decentralisation makes the power sector more efficient. However, the Public Accounts Committee (PAC) of the Delhi Legislative Assembly during the previous Sheila Dikshit government criticised the whole process of privatisation in its report in 2006. The committee, headed by a Congress member, S.C. Vats, accused the core committee of the State government of bending all “rules and colluding” with the business houses to “accrue monetary benefits” to the latter.
The PAC reportedly recommended an inquiry by the Central Bureau of Investigation (CBI) to ascertain the circumstances that led the members of the committee to go against the interest of the public exchequer by favouring the conditional bidders. The BJP, citing a CAG report, alleged that there was a Rs.12,000-crore scam in the power sector, and this became a campaign issue in the last Assembly election.
BSES has also been notorious for quoting an exaggerated Aggregate Revenue Requirement (ARR) to be approved by the Delhi Electricity Regulatory Commission (DERC). For instance, in 2004-05, BRPL claimed Rs.800 crore as capital investments. Of this, the DERC cleared only Rs.525 crore. For the same year, BYPL claimed Rs.700 crore, but the DERC cleared only Rs.416 crore.
The Tata-owned NDPL, in contrast, claimed Rs.328 crore – all of which was cleared. The DERC also complained, in the same year, that both BRPL and BYPL had spent just 40 per cent of the capital expenditure approved by it towards improving the power distribution network in the capital. The scorecard of NDPL is better: it spent almost 75 per cent of the capex approved by the DERC. Earlier this year, the DERC also sent notice to the discoms to replace faulty meters following numerous complaints of abnormally inflated electricity bills.
Reliance got into this business by acquiring BSES in Mumbai, which already was a fairly efficiently run set up, in the private sector. As compared to that, taking over from where the 'government boards/ undertakings' were earlier operating, is a far trickier job. So much so, even after seven years, Reliance and TATA's are still trying to chart their way through the minefield that had been laid out by the erstwhile DESU, in Delhi. In Orissa, in fact, a foreign player gave up and ran away after handing it over to RPG of Kolkata, for some salvage value. Based on the learnings, perhaps it can happen faster now. But, the greater the delay, the more difficult it's going to be.
It can perhaps be said in defence of Reliance that they may be tending to compare their financial performance in Mumbai with that of Delhi, and finding it comparatively unremunerative, are playing around to get the state to invest more (rather than pumping in their own money), using the various enabling clauses they would have managed to introduce into the contract in fine print. These pitfalls are inevitable when you allow the government agency to be run to ground, and then out of desperation look for a competent player to take over. This once again brings out the urgency for the government to divest itself from these functions early.
As for TATA's, this being their first full-fldged foray into distribution, they are not carrying any baggages, and are perhaps able to approach it totally objectively, and from a long-term point of view. This of course is apart from the intrinsic differences between TATA's and Ambani's.
5) However, according to a Power Ministry report, all the three discoms have, in fact, sold 5.4 million units of energy through power exchange for Rs.5.35 crore between June 21 and June 29, the worst phase of the power crisis in Delhi. Power Ministry officials, who did not want to be quoted, said that despite the shortage of power in the capital, the three discoms had a history of selling power for profit and being stingy when it came to purchasing power for the city. In the monthly report of the Central Electricity Regulatory Commission’s (CERC) short-term transactions of electricity, compiled by the Market Monitoring Cell, Delhi ranked among the top five power sellers of the country both in the open market and through bilateral agreements for the first three months of 2009. But it ranked among the bottom five in purchasing power.
“The DVB, under the Delhi government, functioned with the sole purpose of providing service, but the private discoms are here for profit. If a company makes profits, it is also expected to upgrade its service and infrastructure, but BSES has not spent much on its units and it does not have adequate human resource to address people’s grievances. Since the power sector is one that directly affects people, accruing profits should be secondary. This situation is only one of the negative outcomes of the privatisation of such an important sector,” one official said. A.K. Sah, former Chairman of the NTPC has a similar view: “The discoms are being very commercial by not buying expensive power when consumers are suffering.”
I wonder what the regulator is doing. Clearly calls for strengthening the regulatory mechanism
6) Delhi Transco Limited, under the Delhi government, is responsible for wheeling power to the discoms and is known for having the lowest transmission loss in India. The discoms, therefore, seem to be the only entities responsible for the situation.
If they are known for keeping the losses at the lowest level compared to any other transmission company in the country, that is indeed commendable. However, transmission is a fairly simple function, requiring very little man-power, and consequently the efficiency can be quite high. Even our own KPTCL does a fairly good job of it.
Conclusion: Well, like I have stated before, it's nobody's case that privatisation is the panacea for all the ills. There will continue to be problems. But, like the late Sri C Subramaniam had once stated, atleast these will be new problems, and not the same old ones for which we have no solutions for over half a century.
Further, apart from Delhi and Mumbai, the cities/ areas that 'enjoy' power supply from private companies are Ahmedabad, Surat, Kolkata, Greater Noida, and in all these places, the customer satisfaction and profitability levels are far higher than elsewhere where the supplies are with government companies/ agencies, all being subject to uniform regulation by the respective SERC's. So, there must be enough merit to it. And, perhaps learning from the experiences in Delhi, the switch-over in other cities can happen more smoothly.
Muralidhar Rao
COMMENTS
some interesting mail exchanges
murali772 - 16 November, 2009 - 10:52
VB mailed the this link to an article titled 'Smog smothers scams in Delhi' in 'The Pioneer', on the ill effects of Delhi power distribution privatisation, a select group, adding besides his comment "maybe the next gravy train is : WATER in Delhi DJB? Why shd they leave that behind? Despite the PWC, DJB, WB scam of 2005"
I responded with
Interestingly, the report is silent on the performance of the other licensee - TATA's. Is it because it is good? Reliance has never covered itself in glory anywhere. Whatever, it wouldn't be wrong to rate their performance in Mumbai as good.
For all the criticism in the report, Madame Sheila Dixit appears set to break Jyoti Basu's record for getting re-elected. And, the Delhi electorate are known to be more discerning in their choices.
For a more balanced assessment of the Delhi power supply privatisation, I would recommend a reading of the report by organisations like PRAYAS of Pune, based on some of which I have attempted a summing up here(above). However, those who choose to subscribe to the views in "Pioneer", may also want to subscribe to this too.
VB came back with
Did the DERC order not affect the TATA's and if so will they / have they raised tarriffs
Am not sure if the Prayas report was relased prior to the order and since a 30 % proposed annual hike is unprecedented any where in the country and also since such an order has come after privatisation it raises issues of prifits, trading & both resource and tariff equity and power for whom!
Can a post-privatisation order such as this be cjhallenged on the above grounds. the annual reports of the companies in the years following the order will reveal the real impact
Elections are fought on many grounds and difereing issues. The comparison could be to SMKrishna and chandrababu naidu then CM's of Karnataka and AP who in their reforms zeal for serving investment destinations and urban areas lost elections, There were famrers agitations and now both states have govts who came to power on free power to farmers planks
As much as Shelia dixit brought in DVB privatisation she also got a major BRT corridor in and CNG buses as well as stopped the privatisation of DJB due to widespread public pressure and the scam
DKP came in with
Couldn't find the Prayas report. Found this TOI article though: 'Privatisation no solution to power problems: Prayas'
The Frontline report referred to in the Praja post is pretty downbeat on privatization. It concludes that there was only one improvement - power losses & theft were brought down from (unreliable/ inflated) 53% or so to 20% or so. BESCOM has the corresponding figure at 9.5%.
I responded with
The Frontline report is what I have tried to analyse here (above). And, quite like PRAYAS, what I have stated (in the concluding para) is appended below:
"It's nobody's case that privatisation is the panacea for all the ills. There will continue to be problems. But, like the late Sri C Subramaniam had once stated, atleast these will be new problems, and not the same old ones for which we have no solutions for over half a century.
Further, apart from Delhi and Mumbai, the cities/ areas that 'enjoy' power supply from private companies are Ahmedabad, Surat, Kolkata, Greater Noida, and in all these places, the customer satisfaction and profitability levels are far higher than elsewhere where the supplies are with government companies/ agencies, all being subject to uniform regulation by the respective SERC's. So, there must be enough merit to it. And, perhaps learning from the experiences in Delhi, the switch-over in other cities can happen more smoothly."
Delhi apparently is now paying a high price for having delayed the reforms process. Bangalore will perhaps have to pay an even higher price. Actually, it's already doing so, if one takes into account the enormous cost of stand-by (in many cases - mainstay) power that the entire city (as well as the state) population is dependent on - check this
In the Hindu report (to which a link was provided) the line "Power theft was being accounted for as T&D losses, the Minister said" is significant. In power sector parlance, T&D losses have from long been known as "theft & dacoity losses", and the incapacity of the government to curb it is the root cause of all the problems. In fact, when Delhi power supply was under DESU, a state cabinet minister was operating a high-consuming battery charging unit from an unlicensed connection, right in the heart of Delhi.
The following excerpts from the KERC site, in this connection, are significant:
a) BESCOM distribution losses (FY09) for cities is 8.73%; for rural areas - 26.22%; Aggregate - 16.81% - shows they have not been too successful in curbing the theft in the rural areas
b) Realisation of dues from KPTCL/ESCOMs: The Company has taken up with the GoK to ensure 100% current monthly billing payment together with definite time frame for liquidation of old dues and allocation of outstanding dues of KPTCL amongst ESCOMs - the dues are huge, impacting further investments in upgradation and modernisation adversely.
c) Subsidy between 2000-01 to 04-05: (Rs cr) 709, 1779, 1796, 1538, 928 resply; Total 6750 - the figures for the remaining years have not been provided. But, knowing the government's mismnanagement of finances over these years, the position can't be much better. This is what results out of the existing symbiotic relationships between service providers and the government.
KRC came in with
I am now convinced that there are no benefits of privatizing either public transport or electricity distribution.
Electricity distribution in a given area is necessarily a monopoly. A privatized electricity supply will therefore necessarily involve prices and quantity of electricity supplied fixed by the government so the efficiency advantages of privatizing can come from three quarters: a) buying the cheapest electricity in the market; b) transporting it in the cheapest way; and c) cutting on theft.
With the creation of the national grid, I am not sure there exists any concept of buying the cheapest power out there. In most cases, one just connects to the national grid, draws power from it and pays a sum determined by the government. Efficiency in transmission of electricity is dependent on the length of the electricity cables and the number of transformers in the middle, but one can safely assume that the government will anyway regulate this stuff. It is only in cutting down on theft that any significant efficiency saving can be made.
It seems to me perverse that the government would go through such an elaborate process of privatization simply to prevent poor people (unscrupulous, yes, but also mainly poor) from accessing electricity. The goal is not bad, there shouldn't be any free lunches, but the solution is so fraught with risks to public welfare that one has to question its wisdom. After all, if BESCOM cannot prevent poor unsophisticated people from stealing power from it, how good will the regulator be in preventing the private players in the market from ripping the consumers off?
So much so for privatizing electricity distribution.
I responded with
Electricity distribution is a natural monopoly situation. But, what you do in such situations is to divide the total area into two or three districts/ zones, and allocate it to different players, and the regulator periodically publishes comparisons of their performances based on given parameters. And, that's what Delhi has done. And, with the Reliance's performance showing to be poorer than that of TATAs, there's pressure on them to do better.
It's not just the price that determines the trade terms. As important are the payment terms. And, then there are other factors like the arrangement between Karnataka and Chattisgarh, where GoK-owned KPCL is going to be investing and setting up a generating station in Chattisgarh. The rates as such can vary considerably depending on the various factors coming into play.
The government cannot easily curb theft because it is largely its own people who are at it - furtherance of vote-bank politics. And, the biggest beneficiaries are people like the minister in the erstwhile Delhi cabinet who was running the battery charging unit, not the poor. Resulting out of it all, the quality deteriorates, and whereas the rich can then switch to genset, inverter, converter, etc, the poor are left at the mercy of the weather gods. Apart from this is the burgeoning subsidy bill, which ultimately gets passed on to the consumer.
On the other hand, when an Anil Ambani controlled Reliance sends its bills, even Dawood Ibrahim's henchman in Dharawi and Bal Thackeray in Matoshri, better up on time, failing which they will face disconnection as much as any ordinary human being. As a result of it all, not many people in Mumbai even know what a genset is.
With Socialism so steeped in the Indian psyche, I am now kind of convinced that change is too far to seek. And, being a businessman, basically, I see a great opportunity in getting into the rapidly growing two-wheeler, as well as genset, inverter, converter, battery businesses. I only hope the Socialists don't change their stance once I have got into them.
idontspam - 1 February, 2010 - 19:41
Imagine then the kind of capital required collectively by all the infrastructure sectors put together that you want the government to handle
The worst part of govt putting in all the money into is the deficit that the govt will likely run up. Already there is talk of relaxation in FRBM to allow state deficit to be hiked to 4% from the current 3.5%. Just last year this was raised from 3%.
On The GRAND DECEIT of Fiscal deficit
Public Agenda - 2 February, 2010 - 09:49
Just as an aside the DH today says the US budget has a fiscal deficit of US 1.54 TRILLION though %age was not mentioned
That is higher than the Indian GDP this year 2009-10. a SOVEREIGN nation like India if it is not beholden to IMF/ WB discredited economic model will not baul about the balooining deficit
what we need is more food production like the PM said yesterday
This is the only way we can be Food secure www.zeenews.com/news600618.html
and then maybe food inflation can be controlled
The reason that the highest urban and rural poverty in South India is in Karnataka ( economic census data 2005) is dues to the fcat that Karnataka in the SMK / WB regime granted the nation the Fiscal responsibility act
Now 22-28 states are also facing the same ..... not to mention the centre
Pl refer an article in EPW by the Fin Min of Kerala
Why Do the States Not Spend? (2nd December 2006) T M Thomas Isaac , R Ramakumar This paper investigates the unusual phenomenon of state governments currently maintaining large cash balances even as many important sectors call for substantial outlays. Is it a governance issue, as the union finance ministry makes it out to be, or is it something more fundamental affecting the fiscal powers of state governments? We argue that the constraint on expenditure is imposed by the Fiscal Responsibility and Budgetary Management Acts passed by the centre and most state governments; the cash surplus phenomenon is a perverse outcome of such legislation. This essay also investigates the price paid by Kerala, an outlier where receipts do not keep pace with expenditure growth, because of the mechanical constraints imposed by the fiscal responsibility legislation.
The Fiscal fundamentalists want to control the defict Central at 3.8% when per ca expenditure for 700 mn public (for whom the constitutional rights and protection) virtually does not exist ? Maybe a quick return to fiscal norms in the FRBM is not so important after all
and I really hope the basis for the cancellation of any laon for Power privatisation will made public....
Power privatization - Start with distribution
Naveen - 2 February, 2010 - 12:03
It is clear that there is an enormous shortage of power - & demand will keep outstripping capacity for a very long time to come.
It is true that investments necessary for power generation are very high & roping in private sector funding has been on-going, though there have been many ups & downs (dabhol-enron, cogentrix, etc).
It is also clear that cheap power cannot be procured as & when necessary due to fluctuating demands & with it, prices. Even the largest of players, such as Reliance operate in a manner that suits them best which is to maximise their own profits, casting aside consumers' priorities. Tatas may have done well in Delhi or Mumbai, but this may be an exception, & not a general rule when private players are employed. In any case, they would still be dependent on power procurement from others at varying costs, & with it varying rates.
Tackling deficiencies in the distribution network is the first step as is reduction in T&D. For power privatization in Karnataka, would it not be best to start with only distribution & maintenance of the distribution network handed over initially to private parties ? If incentives were placed such that it would result in coverage as decided by the state, & rewards reduction in T&D losses, will this not improve the situation since about 15% more power would be made available, assuming T&D is reduced to below 5%, in say about 4-5 years, plus any capacity additions ?
As long as the supply side & coverage areas are controlled & left to be the state's responsibility, private parties will be in no position to cheat consumers or supply power to areas that suit their interests best. They will also be unable to resort to electricity price hikes - this would still rest with the state, for starters.
Once T&D losses have been minimized & distribution networks improved, further steps toward more privatization can be taken.
It would be foolish to open up the entire power sector for privatization at one go.
how do you expect governments to manage it all?
murali772 - 1 February, 2010 - 13:18
The last two (the last being mine) of a series of postings on the subject on the Hasiru Usiru Y-group:
RD:
The planners in the ASEAN expected to achieve a rather diverse and sweeping range of objectives from reform - attracting foreign investment, providing mass electrification, improving affordability, developing capital markets, and ensuring economic prosperity.
MR:
The per capita energy consumption of a country is generally considered a good indicator of its state of development, leaving aside for the moment arguments questioning this idea of development itself. For India, the figure stands currently @ 682 (in Kwhr per annum), while for Brazil it is @ 1422; UK @ 5218; USA @ 10,381.
Now, if India has to improve this by even a 100 units, it has to add generation capacity to the extent of 12,016 MW (assuming 95% efficiency & capacity utilisation), meaning an investment of Rs 54,072 cr at Rs 4.5 cr per MW (for thermal; for hydel and nuclear, it's much higher).
This is the kind of capital required by just one sector, for a marginal capacity addition, taking the macro view into consideration. Imagine then the kind of capital required collectively by all the infrastructure sectors put together that you want the government to handle - water supply, roads, sewage systems, drainage systems, bus services, AIR-INDIA, railways, sea-ports, air-ports, banking, insurance, hotels, etc, etc, and of course, defence.
Well, that was exactly what the Soviet Union was doing, and look where they have landed.
Even if you have a thousand Jairaj's in the government, it is unmanageable. And, it's perhaps in full appreciation of that that Mr K Jairaj is pursuing privatisation of power distribution. Being a bureaucrat, he cannot generally comment on policy issues. So, he has got the neta to do it - check this.
Admittedly, there are serious issues with the current regulatory mechanism. And, correcting that is where the future focus should be.
PRAJA.IN COMMENT GUIDELINES
Posting Guidelines apply for comments as well. No foul language, hate mongering or personal attacks. If criticizing third person or an authority, you must be fact based, as constructive as possible, and use gentle words. Avoid going off-topic no matter how nice your comment is. Moderators reserve the right to either edit or simply delete comments that don't meet these guidelines. If you are nice enough to realize you violated the guidelines, please save Moderators some time by editing and fixing yourself. Thanks!