Prabhu’s Power-Sector Reforms Public Investment For Private Appropriation

Suresh Prabhu in a recent interview (Business Line: January 22, 2002) spelt out his views on power sector reforms. He has admitted that the policies of the past ten years have failed to address the basic problems of the power sector and the only way forward lies in improving health of the State Electricity Boards (SEBs) along with public investments in the power sector. While all this may sound positive, there are other positions that he has espoused – here and elsewhere — that contradicts much of what he says. The most important issue in this is his Electricity Bill 2001, which is now before the parliament. The objective of the Bill is quite simply to continue with the reforms of the past 10 years: private investments, privatisation of the SEBs, introducing competition in generation and trading in electricity. In other words, precisely the kind of policies that caused the California debacle in the summer of 2000.


De-regulation, all the buzz then, has now been exposed as nothing but an attempt to promote trading in electricity in order to favour energy companies such as Enron. Loretta Lynch, the chief California regulator has asked where in the world has de-regulation succeeded, a question to which no answer has yet been given. The second of Prabhu’s errors is to talk of the need for another 50,000 MW in the next five years and additional 100,000 MW for the next decade. This perspective of huge impending shortages is what paved the way for Enron to enter Maharashtra, for which we are still paying a very heavy price. Both these issues need to be juxtaposed in the context of Prabhu’s view of future power reforms.

Before we turn to Prabhu’s “new discoveries” about current power sector reforms, let us look at how they were being pushed in the country. The reforms have, as their driving force, the World Bank, International Monetary Fund and the governments of the US and other developed countries. They have been preaching the gospel of the market to the third world while effectively insulating their domestic power sector from such reforms except for extreme examples such as California. The modus operandi is that the World Bank (and also other funding agencies such as ADB, OCEF, etc.) offers loans for consultants to study restructuring of the SEBs. These consultants are a part of the crony culture of the World Bank and consist of leading international financial and management companies that will also “help” in subsequent privatisation of the SEBs. These companies stand to make huge amounts from privatisation that follows such re-structuring exercise. They make money from giving advice and even more when the clients follow that advice. It is this kind of conflict of interest and crony capitalism that the Enron case is now bringing to light. The consultant’s advice is pre-ordained. If you stand to make a pile from a particular decision that the client will take and you are in charge of giving them the advice, it does not take much imagination to figure the advice you are likely to give. Not surprisingly, all the international consultants employed by the SEBs have tendered only one advice: privatise the Boards and allow “competition” in generation. It did not matter whether the Board was surplus or deficit, whether it had low installed capacity or a large one and what its financial state was. The reports all had the same text, and only the figures changed depending on the Board. In the age of Word processing and electronic copying, this was a good way to make a living, particularly if you were cosy with the World Bank and other funding agencies.

The other driver of these so-called reforms was the intervention of various governments. The US case is now very well documented as Dabhol is getting a lot more attention post the Enron collapse. It is now clear that the agencies of the US government, both under Clinton and later under Bush, were deeply involved in the Dabhol case and in pushing Indian power sector reforms in a particular direction. Enron connections such as Frank Wisner, the former Ambassador who joined Enron subsequently, Zoellick, the former Enron employee who is the current US Trade Representative and visited India to discuss the Enron case, the open pressure that Ambassador Blackwill exerted, Dick Cheney’s raising the Dabhol issue last year in his meeting with Sonia Gandhi, are only the tip of the iceberg. It is now surfacing that even the National Security Council of the US was deeply involved in the Dabhol case. Washington Post has quoted Susan Schwab, a Commerce Department official from the first Bush administration and now dean of the University of Maryland’s School of Public Affairs, said she was surprised that the commercial advocacy has become “one where it’s not the State Department or Commerce Department but the NSC leading the working group.”

It is now known that Bush administration had discussed the Enron case with the Indian government and had used its good offices to set up meetings between Brijesh Mishra and Kenneth Lay. The Indian government had put pressure on NTPC and the Indian financial institutions to bail out Enron, which was to be the centrepiece of Vajpayee’s US visit. Only the Enron collapse and Enron turning “radioactive”, made the Bush administration back off with White House emails saying that Bush should now stay out of Enron in discussions with Vajpayee.

Lest people believe that Enron was only a Republican problem, the Bush White House has dug into the Clinton record and shown that Clinton had also provided full support to Enron on Dabhol. White House press secretary Ari Fleischer said on January 18 in a Press Conference that three of President Clinton’s Commerce Secretaries — Ron Brown, Mickey Kantor and William Daley — also advocated for the Dabhol energy project that Enron, General Electric and Bechtel Corporation undertook in India. Among the documents that Bush officials retrieved was a January 5, 1995, letter that then Commerce Secretary Brown wrote to India’s minister of commerce before travelling to India. Brown asked his Indian counterpart to facilitate “financial closing” of the Dabhol power project “in time to be celebrated during my visit.”

The intention here is not to write again on Enron. Enron has only brought into the clear glare of daylight how the US government influenced the Indian power policies. And if Prabhu has discovered that earlier policies did not work, it is not unconnected to Enron’s being knocked out of the influence peddling game both in Washington and in India. With Enron’s influence waning, perhaps we might start looking at power policies not through the eyes of energy companies such as Enron, but from the country’s standpoint. In that case, we might start discussing what really ails the power sector.


One of the major planks of the “experts” and others pushing for private investments is the huge projected shortfall that CEA unfailingly provides. CEA, in all its Power Surveys, project huge increase in demand. By their calculation, from the mid 80s onwards, the surveys show the need for adding 100,000 MW for the next decade. The assumptions are that demand for power is autonomous and depends neither on its cost or economic growth. It is supposed to grow at an 8 per cent rate of growth and the starting figure is itself higher than actual demand. The actual increase in demand has been always half of the projected figures. In the days of Planning Commission actually making plans, this was necessary as the Planning Commission always scaled down such ambitious targets to some reasonable level. Now this bureaucratic game of claiming large demands for its inevitable pruning is being used to create panic and justify policies such as inviting foreign and Indian private capital on disastrous terms. Unfortunately, while Prabhu is willing to accept that past policies failed, he is not willing to examine why they were introduced in the first place. If he still wants to have an increase of installed base in the next five years by 50,000 MW, he is courting a disaster.

What the power minister to tell the Indian people is why, when we have about 105,000 MW already installed in the country, can we not meet a demand of less than 75,000 MW at the bus bar? The peak met to the installed capacity is far higher in Bangladesh, Pakistan and Malaysia. We cannot even claim that this is an Asian or a South Asian phenomenon. Our peak to installed capacity actually met is less than 70 per cent, an abysmal figure by international standards.


The other issue that Prabhu ignores is the price of power. The 90s – reform decade – saw the highest rise in power costs that we have seen in the country. It was not only far steeper than anything we have seen in the past; it also outstripped the rate of inflation. One of the major reasons for this was the IPP policy lead NTPC and other public sector units to use the IPP standards and jack up their rates to the SEBs. The SEBs thus came under a double bind – not only did they sign up for ruinous IPPs, they were also paying much larger amounts to NTPC and other public generating companies. A quick calculation shows that NTPC has overcharged the SEBs by more than 25,000 crore in the last ten years using IPP norms. The net result is that SEBs are now broke while NTPC can show large profits, at least on its books.

As the SEBs were going bankrupt, there was a barrage criticism regarding the employees, their corruption and inefficiency. There was a deliberate attempt to sabotage the SEBs and undermine the morale of their staff so that their assets could be handed over cheaply to private parties. It is not therefore surprising that the reform decade shows the highest rise in “distribution losses” including theft, as also in financial losses.

The Orissa “restructuring” has also collapsed with AES now having bailed out completely from its distribution circle. The three BSES distribution companies are fairly close to their death. Instead of a Brave New World of competition and an efficient electricity sector, the Orissa reforms have produced only high costs for the consumers.


The trek back to the SEBs and public investments is welcome, even if it is driven by the collapse of the existing power policies. However, the task of formulating a new policy cannot be done if the power ministry decides to be coy about the reasons why the existing policies failed. Prabhu cannot uphold the beauty of private sector, competition and trade in principle and argue for public investments. Prabhu says in his interview “Structural changes will bring the sector to a level or platform from where private investment can be launched.” He also talks about privatisation as one of “lofty ideals”. In other words we need to make the SEBs efficient with public money so that we can privatise them later. He has to remember that privatisation was offered as a cure for the inefficiency of the sector.

Now to argue that we will have to make the sector healthy in order to bring in private capital defeats the professed argument for private capital. It then stands out for what it is: an ideological argument, pure and simple. Prabhu likes private capital and is willing to put in public money, as without this public money, the sector cannot be turned around. I have no quarrel to Prabhu admitting his love for private capital; it is dressing it up as anything other than ideology that is the problem. Prabhu’s new policy in essence aims at promotion of private capital at the cost of the country and its people and not efficiency and lower costs.