| Under a cloud
The World Bank and the International Monetary Fund seems to function under the rationale that public sector electricity generating and distribution companies are both inefficient and unviable. The only option is to invite the private sector to produce and distribute electricity. In fact, such is the World Bank’s faith in the latter that new loans for energy projects in developing countries are granted only if they are in the private sector. The IMF also puts pressure on borrowing countries to sell off public sector electricity companies to reduce budget deficits.
But does it work' The experiences of many countries show that privatization and deregulation of the power sector eventually costs the government more. Besides affecting the country’s technological capabilities. As private companies are linked to foreign multinationals, they downplay domestic technology and import technology indiscriminately. This can undermine a country’s ability to develop an independent and self-sufficient energy sector.
Take Brazil. As a result of the accords Fernando Henrique Cardoso signed with the Anglo-American establishment in 1999, foreign investment was to be maintained only if the state electricity, telecommunications and other companies were handed over to the private sector. The Brazilian energy grid was to be modified to allow a natural gas cartel of Enron and other energy multinationals to play a central role in supplying electricity to Brazil. The IMF tacitly prohibited the state electricity companies, which controlled generation and transmission of electricity, from making fresh investments because all such investments would be counted part of the public deficit.
Brazil had earlier been called as the “Saudi Arabia” of electricity, because of the mighty rivers nature had endowed the country with and which generated the cheapest energy in the world. From 1950-90, successive governments invested heavily in hydroelectric plants, which today produce 91 per cent of the electricity generated in the country. But privatization resulted in the dismemberment of the formerly inter-linked chain of optimal generation, transmission and distribution.
The next item demanded was higher rates, as the existing ones were considered very low by potential international investors. The distribution company, Light, would buy energy from the state generating company, Furnas, at $23 per megawatt-hour, and would sell it to consumers for $120, a more than fivefold increase in place of the usual 2.5-fold increase. From 1995 to 2001, electricity rates in Brazil have risen 108 per cent more than the average rate of inflation in that period. To entice foreign investors, the Brazilian energy grid was modified to make it virtually captive to imported natural gas.
Enron has imposed similar rules on the government of India. The Indian government was forced to import vast amounts of liquified natural gas and reduce the import duty on it from 105 per cent to 15 per cent, undermining the domestic coal industry.
The agreement between the Maharashtra state electricity board and Dhabol Power Corporation was made without competitive bidding. Between April 1999 and January 2000, the price of DPC power was already more than twice the average price paid to other suppliers. Currently MSEB is obliged to pay DPC about Rs 85.6 crore a month, even if it purchases no power. By 2003, MSEB would have been bound under the agreement — whose fate is in the balance after Enron registered for bankruptcy — to buy 87 per cent of DPC’s output, whether it needs it or not:
In its guarantee to Enron, the Maharashtra government had undertaken to “indemnify and keep indemnified the company against any loss sustained or incurred by the company by reason of the invalidity, illegality or unenforceability” of the deal. In a counter-guarantee, the Indian government had staked its assets as surety for the payments due to Enron.
While many hailed the project and its promised benefits, some economists doubted its feasibility and bridled at Enron’s highhanded behaviour. The guarantees were considered by lending institutions as additional state debt. A few months before the accounting scandal broke in the United States of America, the nearly 90 per cent complete project was put on hold amid new disagreements over the price of energy. With the fate of Enron hanging in balance, there is very little chance of recovering the nearly Rs 6,300 crore invested by the Industrial Development Bank of India.
The energy industry in US was once highly regulated. But the creation of a free market for electricity during the early Eighties brought in newer problems. As a result of the rise in energy costs, severe budget cuts were imposed by state governments in important sectors.
Documents released by the federal energy regulation commission revealed that Enron had deliberately created real and imaginary shortages during 2000-2001, to drive up prices and profit from the newly deregulated energy market.
Besides, Enron also indulged in “megawatt laundering”, that is it bought power in California, at lower capped prices, sold the power out of the state and then bought it back in order to resell it to California at a huge mark up. This enabled Enron to circumvent price restrictions inside California.
Not that Indian private sector electricity companies are not any paragons of virtue. CESC, for example, owes the West Bengal state electricity board several hundred crores for power purchased from the state utility. The amount of non-performing loans, loans taken by private companies who have not paid them back, in Indian public sector banks now total more than Rs 70,000 crore.
But why do the IMF and the World Bank continue to insist upon privatization despite overwhelming evidence of its negative effects' Especially in developing countries where money can bend every rule, every regulation. The IMF and the World Bank should attempt to look at all these questions before trying to assert their views.