N K Singh Committee’s Report on the Power Sector: World Bank-IMF Wine In BJP Bottle

ONE of the many problems with the current NDA government is its insistence that India must shine at all costs, even if it means sweeping under the carpet all evidence of failure. The power sector policies that the BJP-led NDA government is following is a classic case in question. Not only have the privatisation mantra failed in Orissa, the Kanungo Committee has openly admitted that private players neither improved performance nor brought capital or expertise into the running of the distribution companies. Unbundling has failed in California with now the experts also admitting the difficulty of separating generation, transmission and distribution. Yet, the latest report – the N K Sing Committee’s Report of the Task Force on Power Sector Investments and Reforms – is a dreary rehash of the same failed mantra of providing additional incentives to private players and arguing how automatically it will help to improve performance of the sector. It is evident that the ideology of privatisation is so deep seated in the BJP-led NDA government that any contrary evidence cannot even be mentioned in a report on the sector.

PROMOTING A RENTIER ECONOMY

The sector’s policies are already dominated by the need of attracting private capital into power generation sector: manufacturing of equipment for the sector is now actively discouraged. The duties have been lowered to the extent that it is now cheaper to buy equipment abroad then buy from here; there is now negative protection for the power sector equipment manufacturers. The N K Singh Committee’s Report goes one step further and suggests that we should give similar duty structure to imported coal and naphtha, the fuels for the power sector. Instead of focussing on how to make the sector efficient and viable, the focus is on more concessions to investors in generation. Apart from lowering duties on equipment and fuels, there is a series of recommendations by which not only can the private owners not pay taxes on income or dividend, they can offset losses from other areas using their investments here. If this were not enough, N K Singh’s Committee further recommends measures for banking and financial institutions that endangers their safety and violates the recommendations of the committees set up to oversee the banking sector. Clearly, N K Singh Committee’s recommendations are one more step in promoting a rentier economy as distinct from a productive manufacturing one.

The earlier holistic view of the power sector where the power policies were a part of a larger energy and industrial policy is now given up with the vision that if the government takes care of the private investor, the market will take care of the rest! No wonder the last decade has seen the cost of electricity almost tripling: from Rs 1.09 in 90-91 to Rs 3.04 for 2000-01. Even the small amount of private power injected into the system has led to a major escalation in price as central generators such as NTPC have snapped up the incentives created for private capital. The net result has been the deepening of the crisis of the SEBs, who despite improving their plant performance – the PLF of the SEBs is far higher today than a decade earlier – their financial viability has eroded even further.

ALL ROUND FAILURE

What are the key features of the N K Singh Committee’s Report? While the task force was set up for only finding the right climate for promoting investments, it seems to have taken on itself of generating a comprehensive set of recommendations for the reform of the sector. While the idea that any recommendations of an investment climate necessarily needs to look at the sector as a whole is not wrong, the problem arises when there is no attempt to look critically at the last 10 years of reforms either in India or elsewhere. The common problem with the private sector entry worldwide is that it has resulted in the cost of electricity rising well beyond what the people can pay. It has led to large-scale resistance in various countries. Secondly, fragmenting the sector – unbundling of generation, transmission and distribution – and creating a market for power has not helped the small consumer. The markets have tended to become dysfunctional with power speculators cornering the market and holding the consumers to ransom. Even the World Bank has started to discuss the problems with private capital in the power sector and conceded there may be some benefits to public ownership here. Specifically, the results of reforms of privatisation of infrastructure have shown that none of the benefits that they were supposed to bring have materialised; the critics have been proved right. In country after country private power has spelled anarchy and prohibitive costs. The failure of companies such as Enron who were such a powerful force in the restructuring of the sector, has also led to slowing down of these reforms. Competition and power markets are continuing in the advanced countries, but it is taking place at the margins. The overwhelming bulk of power there is still produced and distributed by vertically integrated monopolies. It is in the developing countries that the mantra of the market is being trotted out as an universal goal. This brings to mind what one of the leading power engineers told a visiting team of foreign ‘experts’, “Can you please tell us why we should do what you are saying and not what you are doing?”

DANGEROUS RECOMMENDATIONS

However, the problems with the N K Singh Committee’s Report go far beyond its not examining the sector reforms critically and offering various tax breaks. The Committee has recommended virtually a break up of NTPC in smaller regional corporations, suggested unbundling of all SEBs, worked out a tariff policy to discourage what it calls cross-subsidies and also impinged on the powers of the regulatory commissions. We will take up these issues one by one.

The break up of NTPC should not be seen as a simple administrative measure of creating smaller corporations out of one large one. The key point here is that if NTPC is to be privatised, it needs to be broken up. The private players do not have the capital to buy up NTPC as a whole, so any move to privatise NTPC pre-supposes its break up. This is the end objective, otherwise the argument of why NTPC which is running well, generating profits and has put in about 10,000 MWs in the last 10 years when the private sector has only put in 4,500 MW including Enron should be broken up remains a mystery. The plea for this break up is that otherwise NTPC would acquire too high a market power! Considering that this sector is highly regulated and therefore monopoly pricing is not possible this is a bogus argument. And this from a government that has rendered MRTP completely toothless and failed to bring in anti-monopoly legislation.

The other major problem with the N K Singh Committee’s Report is under the guise of drafting a tariff policy, it has virtually drafted tariff orders and thereby entered the jurisdiction of the Central and State Regulatory Commissions. Under the Electricity Act, the government has to make the tariff policy. Presumably, a policy is to set in the broad directions of what has to be done and should leave out the exact working of this to the Regulatory Commissions. The N K Singh Committee does the reverse. The one area that the country requires a policy is how to treat different fuels in terms of tariffs and how to see that rural users get reasonable tariffs. Instead, the fuel policy is left to its current anarchy and the rural users are penalised due to what the Singh Committee terms as removal of cross-subsidies.

The issue of fuel prices has a major impact on the power sector. At present, Indian coal, with the prices set by the government, costs more than imported coal if we take the heating value of coal into account. Similarly, naphtha prices are set much lower (due to lower duties) than equivalent fuels such as diesel when both in heating value and in usage are similar. Gas prices are in an even bigger mess: the Administered Price Mechanism for gas makes gas available at half the price to some power generators and fertiliser plants while others have to pay twice the price. All this makes tariff fixing a major problem. The fiasco of promoting naphtha and LNG for power generation has become clear with the price of fuel for such power becoming two to three times that of domestic coal. The N K Singh Report has little to say on all this in terms of a policy except arguing in favour of reduction of duties for imported fuels. It has nothing to offer on working out a unified energy policy, which will help the power sector. And it is not that we did not have such an energy policy, it is that the market mantra has gutted this policy as it has a rational transport policy.

The so-called cross subsidy agricultural tariffs has been one of the biggest hoaxes in the power sector. It is now clear that not only is agricultural consumption inflated grossly, it also takes only off-peak power, which should not be priced at the same level as peak power. The addition to the installed capacity is largely to meet peaking requirement and this should attract higher tariffs than off-peak power. If agriculture does not draw off-peak power the units would have to be shut down every day, leading to large losses. Again, such a rational discussion is beyond a Committee, whose task apparently is to offer incentives and a stable high profit regime for investors.

One of the underlying assumptions of the N K Singh Report is that we need another 100,000 MWs to be added by 2012, perhaps to make India shine even better. This need for 100,000s MW has been a constant refrain for the last 15 years and is one of the causes for offering ruinous incentives to companies such as Enron. Unfortunately, the fixation of the government with this inflated demand prediction and using it to justify high cost power still continues. The first time of offering such incentives to private capital led to the tragedy of Enron; this time around it is going to be an even bigger tragedy. Obviously, the BJP, with its fascination for Enron kind of deals, has made up its mind to lead India down this ruinous path.

11th April 2004