Orissa Restructuring and Privatisation: A Failed Paradigm

 sickle_s.gif (30476 bytes) People’s Democracy

(Weekly Organ of the Communist Party of
India (Marxist)


No. 17

May 05,2002

Restructuring and Privatisation: A Failed Paradigm

Prabir Purkayastha

THE failure of
the Orissa power reforms – separation of generation, transmission and distribution
first and then their privatisation – has received little attention considering that
similar reforms are now the lynchpin of current government policies. Most states are
following the Orissa route, and this is also clearly Suresh Prabhu’s favourite.
Incentives are now being offered in distribution that are similar to the concessions
offered while inducting private IPP projects. The central and the state governments are
both earmarking a considerable amount of money for “encouraging” private
companies to take over the SEB’s assets. In other words, the state and central
government will not only hand over their assets to private companies but will also add
“cash incentives”. The Delhi Vidyut Board (DVB) privatisation is one such case
where a provision of Rs 2,400 crore is being kept by the state government to
“fund” the privatisation of DVB. Meanwhile, the central government is trying
hard to force the SEBs in paying the central PSUs, failing which their power supplies
would be suspended. The net result is severe power shortages in states such as UP, in
spite of adequate installed capacity.


The Aide Memoire
that the Orissa government signed in 1994 with the World Bank was that the electric supply
industry will be completely restructured in Orissa. The World Bank agreed to give a loan
of 450 million dollars for this restructuring. Out of this, 300 million dollars loan was
for Upper Indravati, originally frozen by the World Bank, but renewed as a part of the
Aide Memoire.

The Aide Memoire
with Orissa government contained a time bound schedule within which the Orissa State
Electricity Board would be completely privatised. As per this agreement, the Board’s
activities were split in three and “unbundled” — distribution, transmission and
generation were made into independent activities. An “independent” State
Regulatory Authority was formed that was responsible for tariffs, access rights and terms
of power exchange between the generation, transmission and distribution sides. The
distribution side was hiked off to form four Regional Distribution Companies (DISTCOs),
while the transmission side was constituted as a State Power Grid Corporation (Gridco).
The generation side was formed into independent generating companies — Orissa Hydel and
OPGC — while the Talcher plant was sold to NTPC. All these companies — apart from Gridco
and the Orissa Hydel Corporation –were privatised and the State Electricity Board (SEB)
wound up.


The four
distribution companies were privatised in 1999 by transferring 51 per cent of the share of
these companies to private companies. Three of them were taken over by BSES, while the
fourth (CESCO) was transferred to AES Corporation of US who were also the 49 per cent
owners of OPGC generating plant. The record of the four privatised companies make dismal
recording. A high level committee was set up after the collapse of CESCO and the
withdrawal of AES by the government of Orissa headed by Sovan Kunango, IAS (Retd). The
Kunango Committee Report, submitted in October 2001, is a damming indictment of both the
privatisation process and the private companies. Some of the major conclusions of Kunango
Committee are given below.


  • The privatisation process should
    have been a sequential one by which errors in privatisation of one DISTCO could have led
    to avoidance of such errors in other zones
  • The private DISTCO neither
    brought in superior management skills nor working capital.
  • The privatised DISTCOs working
    capital consisted of defaulting on payments to the state, owned Gridco. Gridco’s
    “generosity” allowed them to pile up huge arrears (estimated at Rs 1,000 crore);
    AES arrears alone amounted to Rs 403 crore.
  • The quality of management skills
    and personnel brought is by the private companies was poor.
  • Billing and collection efficiency
    under the privatised DISTCOs actually worsened; from billing and collection efficiency of
    84 per cent, it went down to 77 per cent. Rampant theft continued unabated.
  • Sharp increase in tariff without
    reduction of techno-commercial losses or improvements in consumer service.
  • There was complete neglect of
    maintenance as shown by much lower expenditure under this head compared to all other heads
    where expenditure grew by leaps and bounds.
  • Huge amounts were taken out of
    these companies as consultancy fees.
  • T&D losses did not show any
    improvement and remained at 45 per cent (pre-restructuring period loss figure).


The conclusion
of the report was that the power utilities would not break even in Orissa even if the
retail tariff goes up from its current figure of Rs 2.81 per unit to Rs 4.32 per unit. It
may be noted that the tariff for the year 1993-94 was Re 0.95 and now stands at Rs 1.57 in
spite of Orissa having a considerable amount of cheap hydro-power and low agricultural

The condition of
the three BSES DISTCOs is not much better than the AES mismanaged CESCO. IFC, the World
Bank’s financial arm for the private sector, as well as other lenders, have turned
down proposals from the BSES DISTCOs as they find these projects not viable.


The revaluation
of assets prior to restructuring led to two consequences. The Gridco’s loan burden
increased from Rs 820 crore to Rs 3,300 crore, an increase, which will ultimately be paid
by the consumer in the form of higher tariffs. The other is the increase in the cost of
hydel power from Re 0.20 to Re 0.50, again an increase that has been passed on to the
consumer in form of higher tariffs.

After five years
of restructuring, the Orissa government now estimates that another Rs 3,000 crore is
required to restore some semblance of health to the electricity sector in Orissa. The
annual losses to the state-owned Gridco are now higher than the earlier losses of the
Orissa SEB. If we take these losses and the costs of restructuring already incurred by the
Orissa government, we will see that this is much higher than the losses of OSEB earlier.
This shows that the drain on the State exchequer does not stop after privatisation. The
important issue here is that even after taking all the losses of OSEB on the state owned
Gridco’s books, making Gridco responsible for loss making rural electrification, and
with only nominal agricultural consumption of electricity (of the order of 5 per cent),
the privatisation experiment in Orissa has failed and failed miserably. Undoubtedly, the
protagonists of privatisation will find new excuses for this failure. The stark reality is
that if Orissa privatisation, deemed to be the most attractive case for privatisation in
view of its low agricultural consumption, did not succeed, other boards have even less of
a chance. The situation is no different for the Greater Noida distribution privatisation,
which now owes huge amounts to UPSEB, even though it receives electricity at Rs.1.42 from
UPSEB, estimated to be less than 50 per cent of the current cost of supply.


We are not
raising questions here regarding what happens to electrifying rural areas, which was the raison
for the formation of the SEBs or the impact of privatisation on low-end
consumers. There is little doubt that neither rural electrification nor providing power to
low-end consumers will be an objective of the private distribution companies. They have
already made clear that their business is to make profits for their shareholders and not
fulfil any social objective. Those arguing for reforms are committing a fraud on the
people by not clarifying that the government now does not consider that it has any social
obligations in the sector. The privatisation proposals and the electricity bill being
introduced is thus a complete re-orientation of the sector away from its earlier

After the
failure of the policies of inviting foreign capital on concessional terms, the power
ministry in conjunction with the World Bank and the finance ministry, is now pressing for
restructuring the Electricity Boards by breaking them up and selling them to the private
sector. The stated objective of this policy is that only competition can bring in improved
efficiencies and lower costs of power. Therefore, according to the government, once
generation, transmission and distribution are separated, the generators will compete
amongst themselves and bring down power costs. Further, the policy makers claim that the
privatisation of distribution will lead to reduction of losses including revenue leakage.
The Orissa restructuring now makes clear that none of these claims are tenable: all these
objectives have failed in Orissa.


If restructuring
does not yield the benefits claimed, why is the government pushing such policies? The real
aim of the policy is to promote private power further. As private capital is loath to
invest in new plants, they are being encouraged to invest in existing public assets built
with peoples’ money. In any case, one has to only look at the California disaster to
realise that under conditions of electricity shortage, competition does not work.
Shortages create profiteering and as long as there are shortages in the electricity
sector, this talk of competition has little meaning.

What the policy
makers are hiding from the people is that the current restructuring will push up the cost
of electricity even further. The issue that is of vital importance is the price at which
power is going to be delivered to the consumer. In India, this objective currently
finds little mention. Instead, the slogan advanced is ‘power at any cost is preferable to
no power’. It is this mindset that power has to be added whatever its cost that has
produced aberrations such as Enron and choosing the expensive hydrocarbon route. Even
worse, only lip service is paid to rural electrification of providing electricity to every
rural household.

Clearly, neither
private generation of the Enron variety nor privatisation following the Orissa model, can
succeed in the power sector. In the DVB privatisation tender, the private parties have
admitted that they will not be able to reduce losses and are asking for assured returns. The
privatisation of electricity is a failed paradigm and sooner the government admits it the
better it will be for the country.

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