Orissa Restructuring and Privatisation: A Failed Paradigm

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 demand.

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 d’etre 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 objectives.

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.