Bangalore: The notion that the public-private partnership (PPP) model is the salvation for Bangalore’s infrastructure deficit has been sharply questioned by the report of the Joint Legislature Committee on Bengaluru International Airport (BIA).
The report, tabled in the Legislative Assembly on Monday, reveals that the Karnataka Government spent a significant proportion of the project cost for the construction of the BIA without incurring any returns for a project that was promoted by three private companies — Siemens, Larsen and Toubro and Unique (Flughafen Zurich AG) Zurich Airport.
What the report establishes is that although the Government held only a 13 per cent share in the company, it spent substantial amounts, which, rightfully, should have been counted as equity in the project. If this had been done, the Government would have been entitled to its share of profits.
In effect, after having invested Rs. 50 crore as its share of share capital, the Government spent at least Rs. 600 crore more.
India’s top business organisation is warning that a bill on land purchasing due to be introduced in parliament this week would hinder industrial development by making it more difficult for private companies to buy sites for big factories.Nice. But as expected, the business world doesn't like it one bit. Too bad.
Under the proposed bill, state power to acquire land for infrastructure or defence would be enhanced and protections would be put in place to ensure fairer compensation for farmers whose land was taken.
The state, however, would no longer take the lead in buying land for factories, office parks, residential areas or economic zones. Instead, that would be left to private groups, with the condition that once the buyer was able to secure at least 70 per cent of the required land, the state could step in to compel those holding out to sell.
Through the second half of October and for most of November this year, Rajasthan was engulfed in an unusual form of protest, spearheaded in the main by gram panchayat officials. Joined in some places by elected MLAs and MPs, and backed covertly by a section of District Collectors, the panchayat staff held meetings, sat in dharna, issued threats, and when these did not suffice, blocked highways, to get a single point across. They would not tolerate civil society participation in social audit of works done under the National Rural Employment Guarantee Scheme (NREGS).
The protestors filed cases in two courts and obtained stay orders against the inclusion of non-governmental organisations (NGOs) and social activists in future social audit exercises. It would have been easy enough for the Ashok Gehlot Government to convince the courts that civil society participation brought credibility to the audit exercise. Not only did the government not do that, it went a step further and called off the audits it had announced for one panchayat each in 32 of the State’s 33 districts.
It is claimed that foreign companies are reluctant to invest in India as they do not want to run the risk of having to compensate without a cap for a nuclear accident on account of imposition of absolute liability. It is understood that the government to appease the foreign investors proposes to introduce a Civil Nuclear Liability Bill whereby inter alia the compensation payable in case of a nuclear accident is capped at $450 million.
In effect, this means that in case the actual damage and the cost of remedying environmental degradation exceeds the proposed ridiculously low cap of $450 million or any other sum, the government would have to bear the remaining burden. This would be directly contrary to the Supreme Court’s ruling that it is not the role of the government to meet the costs involved. The effect of a cap in reality would be to shift the financial burden of the consequences of the accident to the taxpayer. According to the Polluter Pays Principle that has been embedded in our jurisprudence, the liability and responsibility for compensating the victims of accident and remedying the environmental damage caused is that of the offending industry alone. No part of the liability can be limited nor passed on to the government.
There can be two views about the advantages or disadvantages of foreign investment in India in the nuclear energy sector. But there can be only one view: health well-being and protection of our people are paramount and must override dollar considerations. Foreign multinationals are not solicitors of the fundamental rights of our people. The Bhopal Gas case is a burning reminder.
Rock bottom rates and tariff wars among mobile operators might soon be a thing of the past with sector regulator Trai deciding to intervene in the market and end years of forbearance. Operators would then have to present a business case each time they come out with a tariff package. Only once the regulator is convinced the new tariffs are profitable would they be approved.
With the Indian telecom market's growing maturity, Trai had moved to a orbearance regime in 2004, wherein operators did not require prior approval for tariff packages, but were left to market forces. Operators simply had to file their tariffs with the regulator within a week of implementing them.
Bharti Airtel (BHARTIARTL.BO: 319.850) CEO Manoj Kohli had recently urged Trai to look into predatory pricing, where operators offer tariffs at below cost.
Well, well, well. Who'd have thought that the market couldn't work it all out? The predator would be bankrupted over time leaving the strongest competitor in the field. Right? Apparently not. Markets work in mysterious ways. Link
Physical Demands of the System: Is Electricity Different?
Proponents of electricity markets point to gains from restructuring in the airline industry, trucking, telecommunications and natural gas to support their cause [Malloy 2005], but electricity has several characteristics that make it stand out. Since electricity cannot be stored, demand must match production at any given moment in a manner that keeps voltage and frequency stable across the whole network [Joskow 2003a; Sioshansi and Hamlin 2004]. Sprawling transmission networks help achieve this task by providing scale over which to smooth supply and demand; network congestion reduces the efficiency of the network at performing this role. Moreover, the AC transmission network is like a gigantic commons, in which bilateral contracts between two parties can introduce externalities through loop flow effects [Joskow 2003a; Van Doren and Taylor 2004]. The balancing task is further complicated by slow supply responsiveness because generation capacity has a long lag time, and low system elasticity of demand because consumers tend not to be price responsive. Congestion in transmission networks can shrink the geographic scope for competition, exacerbating the problem of matching demand to supply. For several of these reasons, system reliability requires provision of "ancillary services" and complementary, and complex, markets for these services [Joskow 2003a; Lave, Apt, and Blumsack 2004].
On the generation end, the capacity mix matters to how electricity markets work. For example, in hydropower based systems, reservoir discharge along a river has to be coordinated to maximize production, which may result in dispatch quite inconsistent from the demands of market competition.
In brief, electricity systems are machine like in their nature. Under vertical integration, coordination is achieved through direct control, while electricity markets have to indirectly ensure technical coordination through economic relationships. Commenting on this challenge, U.S. deregulation guru Alfred Kahn, has observed "I am worried about the uniqueness of the electricity markets. I've always been uncertain about eliminating vertical integration. It may be one industry in which it works well" [quoted in Kahn 2001].
Of Rocks and Hard Places: A Critical Overview pf Recent Global Experience with Electricity Restructuring:Navroz K. Dubash and Daljit Singh: December-2005)
Competition, albeit poorly understood and poorly defined, is well on its way to becoming the contemporary magic formula to a healthy power sector. The tone is set by the Electricity Act, 2003, the preamble of which states that "promoting competition" is an end in itself, or at least as a taken-for-granted means to a better electricity sector. The Act is written to enable, if not mandate, competition in electricity although it does also encompass several other types of reform measures in its ambit.
Editorials in the business newspapers are unanimous in urging adoption of competition; a recent sample from the Business Standard declares "… critical if India is to remain competitive … is that competition be introduced in the [electricity] sector" [Business Standard 2005]. Commenting tariff hikes and their subsequent roll-back in Delhi during the summer of 2005, one of only two states to have privatized distribution, news commentators confidently assert "…competition is the only alternative" [Karnik 2005] and "competition … must be allowed in residential areas" [Times of India 2005].
empirical evidence suggests that "aggressive but plausible" estimates of price savings from wholesale electricity competition are 10%, translating to retail price savings of about 5% [Wolak 2004]. By contrast, subsidy reform, loss reduction, and a host of other more prosaic improvements are likely to result in savings many times greater, with far fewer downside risks. From this perspective the preoccupation with electricity competition in India is somewhat perplexing.
An alternative approach for India
The Indian electricity sector is between a rock and a hard place. The recent past of state- led dysfunction offers few reasons for hope, and the future, at least in the form of the international model of restructuring and competition, promises more confusion and only uncertain success. Electricity market optimists declare the problems with the model can be fixed. Pessimists suggest that once all the fixes are in place, the costs may well outweigh the benefits, and price signals will have been considerably muddied. Both agree that electricity markets have been far more challenging to implement than anyone had earlier thought. In this context, organizing the sector around improved regulation becomes a viable alternative option. In reality the long-term choice for India is not the easy one between a discredited state-led past and a shining market future, but the far more difficult one between flawed regulation and imperfect competition.
For countries like India, there is a strong case for stepping back to look at specific national priorities, rather than examining every option only through the lens of a market- based structure, which in the case of India is anyway a distant and uncertain dream.
First, it would be wise to adopt a "no-regrets" strategy on reforms that goes beyond the wish list approach of the National Electricity Policy to more concrete and time bound steps. Debate over competition should not be a delaying tactic or hindrance toward progress on more prosaic and necessary reforms. Leading the list of "no-regrets" measures is certainly management improvements in the distribution sector, whether under public or private ownership. Closely related is the need to strengthen the ability of regulatory institutions, which have already improved transparency in the sector and are undoubtedly critical to ensuring distribution improvements. Again, even if competition is introduced in the future, investment in strong regulatory institutions will certainly not have been wasted. Similarly, investment in transmission upgrades will be beneficial irrespective of industry structure.
Second, the sector is currently trapped between the ephemeral promise of the invisible coordinating hand of the market, and the reality of weakened and uncertain planning institutions. In the short to medium term, more deliberate planning is inevitable, particularly for generation capacity. Indeed, one of the weaknesses of fully restructured markets has been inadequate incentives for generation. Open access for a small proportion of demand in India is unlikely, by itself, to result in the desired investment. Instead, there is a strong case for use of Integrated Resource Planning (IRP) techniques to ensure that low cost generation (or demand side) options are fully explored. Additionally, there is no reason why IRP cannot be mated to competitive bidding mechanisms to enhance efficiency. However, planning needs to go beyond the short term needs of the sector, to develop and embrace a cohesive long-term vision.
Third, a preoccupation with organized electricity markets and in particular the full standard model obscures a more productive discussion to be had on emergent new directions in electricity reform that stress hybrid approaches. For example, experience in major developing countries such as South Africa, China, and Brazil suggest that both the state and the private sector will continue to play a major role in electricity through mixed or hybrid structures.
...India would be better served by focusing on fundamental, if unexciting and challenging, basic management reforms in the sector, particularly at the distribution end. Under the right conditions, competition can be a tool to an end. It is unlikely to be a shortcut.
Apparently, Brookings Institution & UTI Bank did a study in July 2007, mainly concentrating on the distribution aspect (The Power Sector in India: An Inquiry into the Efficacy of the Reform Process). Here are two interesting observations from that study:
Following a series of policy interventions instituted after a default crisis in the power sector around 2000-01, the rot in the power sector has been stemmed. The financial situation of the sector has eased, and together with the improved fiscal position of states, the strain on the states' fiscal deficits has lessened. Deficits as a share of GDP have declined [note : the policy interventions were not necessarily moves towards privatization. They were steps like unbundling, revenue orientation, management changes etc].
While the data in the paper shows evidence of only a weak relationship between ownership and profitability, it is important to bear in mind that the more successful subset amongst the discoms which have been privatised (i.e., Delhi) is a relatively nascent experiment, which has still managed to outperform many of its more mature peer utilities, while having started from a more disadvantaged initial condition.
Their finding on privatization/profitability is interesting, even though they apparently were not able to resist giving a thumbs up to private players. I mean, the private discoms in Delhi got a clean balance sheet, loads of loans/subsidies [note: there is very little data on how much of the loans have been repayed etc], extremely low target loss %, a guaranteed return on equity of 16% - that is a disadvantaged position?!
Prayas has reports on their site, laying out the experience of various regions/countries in the area of power sector reforms (http://www.prayaspune.org/peg/energy_pbl.php?cat_id=1&sub_cat_id=10&#links). They provide conclusions for each region/country. They look not only at distribution but the entire electricity sector from generation onwards. In fact they give much priority to generation (makes sense since generation cost is 70% or so of total power cost). I've extracted summary/conclusion parts of the reports below form the individual reports with links to the full reports.
In the mid-to-late 1990s, several ASEAN countries initiated wide-ranging programs to reform their electricity industries. Such reform, argued its proponents, would improve the productivity of the electricity industries, and attract much needed private investment. A review of these reform experiences suggests that there is a significant disparity between the expected and actual outcomes of reform. Explanations for this disparity [tend] to be narrow, industry-centric, and ideological. This is unhelpful as it obscures the real challenges confronting the electricity industries and precludes consideration of meaningful policy prescriptions. There is a need to develop a broader perspective on electricity reform. This paper is an attempt in that direction.
[From the Epilogue]
.... much of the underlying arguments for reform in the region are untenable. 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. There does not appear to be any compelling logic behind these expectations. For example, how does one restructure the existing (below marginal cost) tariffs and achieve price reductions? There also appears to be a general lack of understanding about the differences between the means and ends of reform. The privatization of the industry and the introduction of full competition appear to have emerged as the ends in themselves rather than the means to achieve technical and economic efficiencies. Further, the technical characteristics (for example, capacity constraints, fragmented systems, technological backwardness) and, more importantly, the socio-political contexts (for example, rural settings, institutional weakness) in the region do not appear to be positively disposed to the creation and sustenance of fully competitive and privatized electricity markets. These reforms therefore are unlikely to yield desirable outcomes.
The remedy, this author argues, resides in acknowledging the importance of the regional socio-cultural context; discarding the existing puritanical approach to reform that sees the world in 'black' and 'white' only and does not recognize the 'grey' where the multitude of humanity lives and strives, on a day-to-day basis, to carve out a dignified existence; and developing institutions and policy prescriptions that accommodate the interest of the wider citizenry in a culturally sensitive, yet responsible, manner. (Italics mine)
Latin American Countries & the Carribbean
The main proposition of this paper is that power sector reform has made significant progress to overcome problems that plagued the pre-reform sector in LAC. But it still faces significant challenges, some of which arise because of the technological features of electricity markets, while others arise because many LAC countries lack the institutional development and the human resources implicit in the adopted models. Gains from the reform have varied. Success of the reform should be measured with a pragmatic yardstick, weighing the desirable against the feasible.
Although the starting points and objectives were different, reforms in LAC followed the pioneering OECD countries. The possibility that OECD experience was dependent on context seems to have been given scant attention. Reform appears to have been based on ideology, which assumed that the market could be trusted to solve the problem. While some basic elements are essential, a cautious approach might have been to say that no universal model exists, and that success of sector reform depends upon the institutional setting and the timing of reform. Unless those tacit elements, crucial to success in the original, are replicated or replaced with local versions, and unless reforms are coherent across the economy, transferring a model out of context is a gamble. While blueprints, best practices, international codes and standards and harmonization may prove useful for some narrow technical issues, large-scale institutional development requires a process to discover local needs and capabilities. (http://www.prayaspune.org/peg/publications/global_reform_latin_epw_066A06.pdf)
The Norwegian experience
[They talk very little about distribution in respect to the Norwegian experience. In any case, ownership was not changed in Norway. The State plays the dominant role].
South Africa - From State to Market & Back Again
The "standard" model of power sector reform of the past decade—vertical and horizontal unbundling, wholesale and retail competition and privatisation—has, in effect, been abandoned by South Africa, and increasingly by many other developing countries. This does not mean that governments will accept inefficient utilities. There is a still a commitment to ensure improved performance by state-owned enterprises through appropriate governance and regulation. Capital constrained countries will also open up space for private investments – mostly within the framework of a "hybrid market" where the state utility remains dominant. What remains to be seen is whether the investment mistakes of the past can be obviated and whether security of supply can be achieved at an acceptable price.(http://www.prayaspune.org/peg/publications/global_reform_sa_epw_066A08.pdf)
There was little apparent need for reform in 1987. Service was reliable, prices were in line with European countries, the industry was profitable and investment needs could be readily financed. However, there were three strong non-sector objectives that influenced the decision: generation of government revenues; widening of share ownership; and breaking trade union power.
In 2003/04, the 'honeymoon' period for the privatised British electricity industry came to an end and the price reductions from 1987 onwards were almost wiped out in only a year. The good results up to 2002 were based on three factors:
• A significant improvement in the performance of the British nuclear power plants; and
• A transfer of resources from tax-payers to electricity consumers.
The criterion on which the reforms must be judged is whether efficient markets have been created. On this criterion, they have failed. The wholesale market is not competitive. Confidential contracts and self-dealing within integrated generator/retailers dominate wholesale purchases leaving the spot market with no liquidity
and unreliable prices. The failure to develop a competitive wholesale market places the onus on the retail consumers to force competition on the industry. Large consumers can do this and have done well from liberalisation. But, these gains have come at the expense of small consumers and, unless government strengthens regulation at the expense of markets, this exploitation will get worse. The industry is dangerously close to an oligopoly with a veneer of competition and there will be an increasing need for consumers to pay for the replacement of written off pre-privatisation assets at full price.
United States of America
In the 1970s, the U.S. electric utility industry was faced with rising costs and sluggish demand. Efforts at lowering costs and revitalizing the industry through competition have largely been disappointing. Consumers have not seen prices fall, except where regulators have intervened. The merchant [generating] sector has suffered a financial crisis, hurting competition in both wholesale and retail markets. Advocates for deregulation assert that minor changes to market rules and regulations will yield the benefits promised. We argue that things are not so simple. Successful deregulation requires markets to be competitive and complete, neither of which is true in the U.S. Creating competitive markets is not impossible, but doing so imposes costs on the system which may outweigh the benefits of deregulation.
Policymakers in countries (particularly developing countries) considering a competitive electricity-market model should take a hard look at the challenges faced by the United States, and think carefully about the underlying goals of electric sector reform. In particular, will competition serve as an aid or impediment to achieving the stated goals? What costs would be involved in the transition to a competitive market structure? (http://www.prayaspune.org/peg/publications/global_reform_usa_epw_066A05.pdf)
India related lessons in the next two mails.
You mention that you want to omit Delhi's experience and only consider North Mumbai's experience when discussing Karnataka ESCOMs' privatization, on the grounds of comparing oranges to oranges and not oranges to apples. I'm sorry but that is just cherry picking the evidence to prove a point. I'm saying consider all the cases. The only conclusion then becomes that privatization/reforms is not a silver bullet and that everything depends on the context. The World Bank report I mentioned in an earlier mail (in the context of Rajasthan) says that, Prayas clearly says that, and a Brookings Institute study I'll quote in later mails says that. And the Delhi discoms were given sweet deals - they should be doing better. The govt stake is not a hindrance at all.
You say BEST is running losses & Reliance Infra is running profits. Compare the figures for 2007-08 in these two links: http://www.bestundertaking.com/finance0506.pdf and http://www.rel.co.in/Rel/newsmedia/RInfra_APR_FY_09.jsp . You'll find that the gap for BEST for that year is Rs 221 crores (lower than earlier year). Gap for Reliance Infra is Rs 550 crores. (note: Reliance consumer base is larger than BEST's). Where are the profit numbers? In fact, the last study I mention above finds no relation between ownership and profitability, very reluctantly I might add (link & excerpt in later mails).
Regulators are supposed to be independent. They could lean towards public discoms, but equally they can be won over by the private discoms.
It is heartening that one person, Mr Jairaj, made such a difference. If one person can do so much then the quest should be to retain such people and empower them. It would surprise me that he would advocate privatization when he has seen the improvements that are possible within the current setup. Indeed, he does not mention private distribution in this July 2009 interaction with Bangalore Chamber of Industry and Commerce: http://www.bcic.org.in/files/Interactive_Session_with_Mr_Jairaj.pdf.
I wouldn't mind putting it on Praja, in addition to HU. These mails have grown so huge that I'm not sure they would make sense there.
Dear Mr Dinesh Kumar
My compliments to you on an excellent and fairly well researched analysis of the overall power scenario in the country, even if not quite complete. Like I had some time back suggested to HU to nominate Rohan D'Souza to be on the board of the LDA, I would now like to request HU to nominate you to the KERC advisory panel. I believe there's a vacancy there, and if HU members are agreed, I can, in fact, take the initiative in getting other civil society organisations in Bangalore to also pitch in. This is particularly significant in view of the impending privatisation of the Karnataka ESCOMS.
Very clearly, there's hardly any defence of the way the Delhi power distribution privatisation has been taken through. But, that doesn't mean that the idea of privatisation itself is bad. In fact, if I recall correctly, it was Mr Gajendra Haldea himself who was the prime mover of the idea, when he was in the government. And, the PRAYAS report, I had read some 5 years back, had many recommendations for the way Delhi should go, based on the learnings from the mistakes committed in Orissa. Apparently, neither PRAYAS nor Mr Haldea were consulted, but instead TATA Consultancy was engaged, even while one of its sister companies was very much in the picture as one of the major contenders for the job - crony capitalism in full play. The problem lies largely there. And, subsequently, in the powerful players getting a very pliable 'regulatory commission' put in place, quite as much as in California.
49% equity ownership is more than good enough to ensure a say in the goings on, and if the Delhi government has not used its position to prevent the misdeeds cited, it certainly is guilty. I wonder why the civil society, and the opposition parties have not made enough of a noise. Whether with a government service provider or a with a private one, if the people (civil society) are not vigilant, between the mafia's and the lobbies, they will indulge in their loot.
My stance on privatisation comes largely from this clear example - comparison of oranges against oranges, and not against apples, viz Bangalore power distribution vs North Mumbai power distribution. Bangalore has always been with the government servise provider - BESCOM, successor to the earlier KSEB. Mumbai North has from long been with BSES, which was taken over by Reliance, some ten years back. Resulting from it all, Bangalore today is a Rs 1500/- cr market for gensets, inverters, converters, batteries, emergency lamps, candles, etc, whereas these products hardly have a presence in the Mumbai market. There lies the difference. Whereas Mumbai enjoys quality power, we are suffering the incapacities of the government-owned BESCOM.
Admittedly, even South Mumbai is in a similar happy state as North Mumbai, even with the supply there being in the hands of the city-owned BEST. But, BEST is losing money heavily, whereas Reliance is making fair profits, the playing field being uniformly level for both the players, ensured by the MERC. Given the scenario, the Mumbai city administration is now under pressure to hand-over the distribution to another private player.
Another major factor is that the government has an important role to play as the regulator, besides that of the facilitator. If it's to play the role of a player in addition, it can never be effective or impartial in its more important roles.
Yes, BESCOM is doing better now, compared to a few years back. But, I would attribute this largely to one person - Mr K Jairaj, the current Principal Sec, Power, whose stature ensures that even the neta's generally listen to him. But, it's the same Mr Jairaj who is piloting the privatisation efforts in the state in full appreciation of the fact that that's the only sustainable way to ensuring efficiency. And, PRAYAS is very much on the advisory panel in Karnataka. All we need to do is to ensure that they are not side-lined at the last minute, and some interested party brought in.
And, lastly, for now, why don't you want to put these on PRAJA? Please understand that I am not the voice of PRAJA. There are more people who question my views there than here, and in a more studied way like you do. Besides, by putting it on PRAJA, there's perhaps a better chance of your views reaching the likes of Mr Jairaj himself - just my view; I may be wrong.