DVB Privatisation: No Lessons Learnt from Orissa

The privatisation of Delhi Vidyut Board (DVB) has now gone from a public tender to one of private negotiations with private parties. After initially rejecting the bids of the only two bidders left in the fray BSES and Tata Power and claims of collusion, the Delhi Government is now busy offering even more concessions to these private parties. The unfortunate part is that the Delhi Government is now offering Rs.3,500 crore in “accommodation” from the transmission company, which will be owned by the Delhi Government. The actual valuation of the distribution companies are very low as the companies have been valued not on the basis of their assets but on the basis of their “profits”.

BSES and Tata Power have quoted prices that are half the reserve price. They have also asked for a 16% rate of return for the next 30 years as against the 5 years promised in the original tender. The private companies have also refused to reduce the distribution losses by 20% but only by about 12% over the next five years. And even the Chief Minister, Sheila Dikhshit found the figures quoted by the two bidders remarkably similar raising suspicions of collusion.

The argument for privatising DVB is the high losses of DVB, which are primarily due to high T&D losses. Of course such arguments do not address the sharp rise in cost of power being bought by DVB due to Government’s attempt to induct private Independent Power Producers (IPP) in the country. While the private power that came in was insignificant (except Enron), it led NTPC and other central generators to raise their price steeply, charging the SEBs IPP rates. The result has been the rapid worsening of the financial status of the SEBs, forcing them to raise their tariffs to very high levels. Once the price of power went up to figures that were very high, the industry, the mainstay of the power sector, started to move away from the grid. The net result is that in spite of such tariff hikes, the gap between revenue realised and the cost of power has increased.

The key problems in DVB are the high Transmission and Distribution (T&D) losses and that DVB buys its power: its own generation is only a small part of the total requirement of Delhi. The T&D losses in Delhi should be one of the lowest in the country as Delhi is one compact area and has less than 3% agricultural load. Till 92-93, its T&D losses were comparable to any other SEB in the country. The post reform period saw a sharp rise in such losses and they are now estimated by DERC, Delhi electricity regulator at 51% today. The question that arises is that if losses took about 5 years to increase by 30% — from 22% to 51% — why should the private companies take five years to bring down the losses to not even half this amount?

Before we analyse the current DVB privatisation scheme, we need to understand why the T&D losses in DVB have risen so fast in the last 8 years. The phenomenon of T&D losses rising rapidly has been there all over the country, even though DVB’s case is perhaps the worst. The major reason is that the period of reforms have seen a deliberate attempt to run down the SEBs in the country. One of the reasons is of course to justify the privatisation policy. The various measures required to control or bring down losses ere not only not taken, the Government and the management of the SEBs went to town saying that the SEB losses could not be brought down unless they were privatised. They also pronounced all the employees and engineers were thieves or incompetent, completely demoralising the employees. The corruption in DVB – purchase of faulty or sub-standard equipment, allowing rampant theft – all of it increased in this “reform” period.  The entire exercise was to demoralise the honest and efficient employees within the SEBs while extending political patronage to the corrupt. The earlier BJP Government presided over the rapid decline of DVB, with Madan Lal Khurana and the subsequent two chief ministers: Sahib Sing Verma and Sushma Swaraj presiding over this decline.

Once DVB was made sick, its losses increased from Rs.250 crore in 92-93 to Rs.1250 crore by the year 2000, the game plan was to how to sell of its assets at throw away prices. The entire argument of the Government – both the Congress Government in Delhi and the BJP led Central Government – that as the government is incapable of running the electricity sector, it should be given to the private sector. To facilitate privatisation, the Delhi Government decided to take over the entire past losses of DVB so that its balance sheet could be made clean. It also decided to split the distribution in three zones, central-East, South-West and North. Generating stations were also separated as also the transmission company. As a first step, it was decided to privatise the three distribution companies.

The valuation of the huge DVB’s assets was done in a way that they were grossly undervalued. Thus, the entire generating assets of DVB including RajGhat, Indraprastha and the newly built Pragati, totalling about 1000 MW and the transmission system was valued at only Rs.800 crore as against a realistic valuation of at least Rs.3,000 crore. The distribution assets of the three companies were also undervalued and have been considered worth only about Rs.2300 crore. The privatisation bids were supposed to quote above a reserve price fixed on the evaluation of the net worth of these zonal assets. The private companies were also supposed to reduce T&D losses by 20% in the next five years. In return, these companies were guaranteed rate of return of 16% on their capital investments (the price they have quoted), loan on account of electricity worth Rs.2,600 crore. DERC also agreed, on the plea of the Delhi Government to fix the bulk tariff of power of Rs.1.48 per unit to be supplied by the Government owned generating and transmission company. This is against the cost per unit of supply today being in the range of Rs.2.80. If we take the distribution losses out of this, the average cost of generation today is not less than Rs.2.00, the Government is going to supply power at a loss of at least Re0.60 paise per unit.

Four companies were initially in the fray for the three distribution companies, namely reliance, BSES, Tata Power and Kolkata’s Cescon. Final bids showed that only BSES and Tata Power were left in the fray as the other two backed out. They both quoted very similar figures, raising suspicions of collusion. BSES and Tata Power quoted less than half the reserve price, agreed to reduce T&D losses only at the nominal rate of 2%-2.5% in the next five years, and asked that the 16% rate of return should hold good not for five years but for the next thirty years. The Government is now in negotiations with these parties of offering further concessions – offering instead of Rs.2600 crore another Rs.900 crore and various other relaxations from the tender terms and conditions.

We will not discuss here the patent illegality of such post tender negotiations. If any of the terms are to be relaxed, they should be done through a re-tender. Post tender negotiations are no different than the case-by-case privatisation made famous by Sukh Ram, which finally saw the discovery of suitcases full of money under his bed. We are more concerned with the supposed basis of privatisation: the reduction of T&D losses and financial losses of DVB that was put forward as a justification for the privatisation of DVB. It is now clear that even after gross under-valuation of the assets, the private companies want more money to “buy” the distribution assets of DVB. If we cut the verbiage that surrounds DVB privatisation, the Government is paying the private companies about Rs.3,500 crore over the next five years to take over DVB. Further, it will also pay a guaranteed rate of return of 16% for whatever price that the private companies are offering for these DVB distribution companies. It should be now clear that the Government is guaranteeing profits to private companies and losses for itself by such measures. Instead of DVB’s losses, which can be reduced if there is political will, the Government is now going in for a scheme of guaranteed losses for the next thirty years.

Perhaps the consumers may think that all this is one side. They might perhaps get better service with privatisation. The Orissa case is particularly relevant here. We reproduce below some of the conclusions of the Kanungo Committee set up by the Orissa Government on the Orissa power reforms:

 The private DISTCO neither brought in superior management skills nor working capital.

The privatised DISTCO’s 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 DISTCO’s actually worsened; from billing and collection efficiency of 84%, it went down to 77%. 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% (pre-restructuring period loss figure).

The problem with either the BJP led Central Government or the Congress Delhi Government is that they are today working on the ideological premise of private sector being better than the Public sector. Even if all the evidence is to the contrary, their trajectory shows no change. In Delhi’s case, it is worse as BSES, one of the companies indicted by the Kanungo committee, is one of the bidders. If the DVB privatisation goes through, the tariffs will rise for the consumer, the Delhi Government’s losses will also increase, while the majority of the consumers will see deterioration of their electricity supply.