Subsidising Tatas and Ambanis: The Crux of Power Sector Reforms

The bankruptcy of the privatisation policy of the power distribution is now clear from what is happening in Delhi. Even after another 9% rate hike this year following the earlier steep rise of 16% about 20 months back, the Delhi Government will shell out Rs. 2,600 crore to the private distribution companies run by Tata and Ambani. This is a 250% increase in subsidy from the highest subsidy ever given to the erstwhile Delhi Vidyut Board in any year of its operations.

The crux of power privatisation is essentially one of subsidising private capital – subsidising Tatas (Tata Power) and Ambanis (BSES and now Reliance Power) – instead of the earlier policy of subsidising the less well-off consumers. And as private capital has deep pockets, the subsidy to them has to be of a much higher order of magnitude. It is clear that the policymakers have learnt nothing from the earlier debacle where BSES had been castigated by the Kanungo Committee in Orissa for essentially siphoning out money and bringing neither capital nor expertise in its operations. The Delhi case only proves the point further.

The promise of privatisation of distribution is that the private companies would reduce losses and improve revenue collection, thus lowering the outflow from the government exchequer. The private companies had committed to reduction of losses of the order of 2.5% per year, even lower than what DVB had achieved in the last year of its operation before privatisation. The private distribution companies have failed to achieve even these very modest targets and have instead demanded a rate increase to cover what they claim is a “huge revenue deficit”. Meanwhile, they have inflated their expenditure, siphoned off the money under various pretexts, cut down projected maintenance and other investments that DVB was putting in place for monitoring theft. As the Delhi government had agreed to underwrite the losses of the private companies for the initial five years, the consumers now have pay large increase in their bills with Delhi Government giving an even larger dole to the Tatas and Ambanis using tax payers’ money. At the same time private capital was guaranteed a 16% rate of return on equity. Profits for the private sector is guaranteed while the government takes over the losses, the classic model of privatising profits and nationalising losses is what is being done in the power sector reforms.

The Delhi Government had transferred the assets of the distribution part of DVB at half the reserve price of these assets, agreed to take over all the previous losses of DVB, agreed that the private companies would reduce losses by only 12 % over the next five years. Even after this, the Delhi Government had agreed to provide power below cost from the state owned Transmission Company and subsidise the private companies over the next five years to the tune of Rs.3,500 crore. The private distribution companies have failed to meet their very modest targets for loss reduction or any of the performance criteria set for them. The subsidy in the first year alone is a whopping Rs.2,600 crore. In this context we would like to reproduce what we had stated at the time of privatisation of DVB “If we now total all the commitments that the Delhi Government has made to these private companies, it is not less than Rs.8,000 crore over the next 3 to 5 years and much higher than the projected losses of DVB.” As we can see, our projection on this count was much closer to reality than what was claimed by Delhi Government at the time of privatisation. Obviously, the Delhi Government deliberately under played the real figures to cover the huge transfer of money it was committing itself to as a part of this privatisation exercise.

The argument for privatising DVB was the high losses of DVB, which are primarily due to high T&D losses consisting of technical losses and what is called euphemistically commercial losses but is in reality theft. Undoubtedly, T&D losses was one major reason for crisis in DVB. The financial crisis of DVB was also due to sharp rise in price of purchased power. The sharp rise in cost of power being bought by DVB was 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 state 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 was that in spite of such tariff hikes, the gap between revenue realised and the cost of power has only increased. DVB was no exception, its state being worse than other SEBs as it generates relatively a small portion of it total power requirement.

The T&D losses in Delhi should be one of the lowest in the country as Delhi is a 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 and was of the order of 22-23%. 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 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 were 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 them. 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 Governments presided over the rapid decline of DVB, with Madan Lal Khurana and the subsequent two chief ministers: Sahib Sing Verma and Sushma Swaraj continuing in 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. It is interesting that in all the models of privatisation, the transmission company is always state owned so that the government can buy power expensively and supply it cheap to the private distribution companies. This then remains as a conduit to subsidise private capital at taxpayers’ expense, precisely the method being followed in Delhi.

We also find the role of DERC in this exercise unfortunate. Before passing the tariff order, it should have opened it to public consultations. Instead, it has held private consultations with the distribution companies and the Delhi Government and issued the Tariff Order. This is a complete violation of all regulatory principles.
The governments of states such as Punjab, Andhra, Madhya Pradesh, etc, who are contemplating privatisation of distribution should learn from the results of Orissa and Delhi. It should be clear that such privatisation would only increase the outflow from the government and the costs to consumer. There is no escape but to reform the SEBs to strengthen their integrated operations and reduce losses. This is the path that the power policies should follow instead of the disastrous policies of inviting in Enrons and subsidising Tatas and Ambanis.