The Telegraph
Since 1st March, 1999
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- Privatization is not a magic wand that will by itself resolve complex ills

Many discussions resulting in a few proposals for private investment in electricity, toll roads, coal, water supply and sewage took place in the Nineties. This has now reduced, but the need has not because the private sector is expected to bring superior efficiency and there is need for fresh investment funds. World Bank data shows that the maximum cancellations of private projects in developing countries have been in these areas (excluding rail and coal). Government dominance in them resulted from scarcity of resources, lack of a thriving private sector and the superior ability of governments to raise large resources.

Many believe that opening infrastructure to the private sector will hurt the poor and “sell the family silver”. In the past some interested parties were bogus, without expertise or even the finances and some used underhand means to influence decisions in their favour. Private investors would, it was feared, exploit consumers, raise tariffs, serve only prosperous customers, create private monopolies and prevent competition. These fears have diluted enthusiasm for private investment in infrastructure.

Private investors also see many risks. They might not get paid adequately or at all. Public opinion distrusts private investment in infrastructure. Governments and political parties are not vocally supportive. Private investment requires an enabling environment and long-term commitment. Governments must be willing to take unpopular actions like forcing higher tariffs, stopping services to those who do not pay their bills, prosecuting thieves, and so on.

Electricity is a right that many expect to be cheap and easily available. Government ownership has led to over-staffing, gross inefficiencies, tolerance of theft and collusion in theft, poor commercial and accounting practices, poor investment in maintenance and modernization, and rising deficits. Distribution and supply are the worst. Governments so far have been unwilling and unable to take prior actions to clean the system.

The present private distribution licensees have performed better than state electricity boards, but need to improve. Of the six licensees, Calcutta Electric Supply Corporation had 23.4 per cent transmission and distribution loss in 2000-01. Three others had high losses. The trend has been upwards despite their serving easier-to-serve urban areas and many bulk consumers. Manpower performance and cost showed wide variation, from an average cost per man month of Rs 10, 200 in Noida to Rs 5,700 in Surat. Employee cost per unit sold varies from Rs 0.11 for Tata, a predominantly generating company, to Rs 0.05 for Noida and Rs 0.21 for CESC.

Capital investment (Rs per unit sold) by CESC is Rs 2.78, the highest among distribution licensees and higher than the combined investments for Mumbai’s utilities. Yet power quality is worse in Calcutta than in Mumbai. Distribution costs also vary and are particularly high in Calcutta and Mumbai. The regulator also has been tardy (as in Mumbai) in his readiness to hear tariff revision applications. Neither the operations of the present private distribution licensees nor the regulatory arrangements are a model.

Of the first distribution privatization to two companies in Orissa, only Bombay Suburban Electric Supply Ltd remains. AES has opted out. The Orissa privatization was based on poor information. BSES and AES entered despite this. Orissa is backward and poverty-stricken, with relatively inefficient governments, tariff uncertainty, high levels of losses, high collection risks, lack of paying capacity of many consumers, problems of inherited staff, difficulties of imposing own management and bringing in own employees (as happened to AES who did so and found themselves unable to manage the enterprise).

After Orissa private investors are reluctant to take over hitherto state-run distribution unless they get safeguards against risks and adequate returns. They demanded a transition plan before privatization in Delhi and Karnataka. The main elements of such a transition plan are: multi-year tariffs and automatic pass-through of power purchase costs, to enable licensees plan efficiency improvements and investments; licensees committing to a binding multi-year programme to achieve the standard costs and efficiency parameters; and committed and funded subsidies during the transition period to bridge the gap between targets and actual, any cash deficit financed by the government, a tariff plan from the regulator, an efficiency improvement plan from the existing distribution company, a subsidy commitment from government and a binding agreement among between all the parties.

The Enron-Dabhol project had extremely high and apparently heavily padded capital costs. There were also suspicions about back-handers paid, inability of consumers to pay resultant tariffs and high levels of public distrust. Enron has been thoroughly discredited. Demand growth has been much slower than forecasted for the project. The resumption of the project with the same foreign parties as before is very unlikely.

In the Coimbatore bypass and bridge project, the role of the government in a public-private partnership was unreliable. An additional bridge to make the old two-lane into four-lane and a 27.77 kilometre bypass were to be built on a “build-operate-transfer” basis. The cost was to be recovered through tolls on both the bypass and the bridge. The contractors were allowed to charge tolls for 20 years on the bridge and for 30 on the bypass. While traffic risk was with the contractors, the risk due to non-payment of tolls was with the government. Multiple users (state and private buses, taxis, trucks) did not want to pay for each trip and others did not want to pay when there had been no toll on the old bridge. Police support to collect tolls was ineffective. After four years, the contractors had lost Rs 126 million. The usage of the bridge is heavy and has been a great convenience to users. Only one bidder, lack of preparation of public opinion to pay tolls, weak government commitment were some reasons for the unhappiness of all parties.

Pune had high levels of unaccounted water, intermittent supply, low pressure, limited sewage treatment, rising river pollution and need to extend services to include an additional 0.8 million inhabitants. A water-supply and sanitation project with private investment was to remedy deficiencies and meet future demand. Financing was to be from internal and external sources with Pune Municipal Corporation guaranteeing one-third of the cost from public funds and two-thirds to come from private funds to be arranged by the contractor. PMC would create a special fund from octroi collections. Substantial tariff increases were proposed. The project was cancelled because of loss of political support despite being consistent with state policy on public-private partnerships for infrastructure development, close consultations at all government levels, and broad cross-party support.

On the other hand, the Tirupur Water Supply Project has reached financial closure, with first phase completion in 2005. It was initiated by local industry. Tirupur is the largest knit- wear exporter from India. Insufficient water for domestic use and for the industry, pollution and attendant problems, focussed the project on plugging the 25 per cent leakage of water. There was local equity participation. It has received wide funding support and is expected to make good progress.

Viability of private investments in water supply and sewage depend greatly on plugging leakages of water and collections. Many times this is not enough and tariffs also have to rise. Capital investments required must be carefully evaluated for their impact on tariffs and the prospect of their being accepted by users. Public and political opinion must be mobilized in advance behind the project.

Private entry is not a magic wand that will by itself resolve complex ills especially in electricity, public transport and water and sanitation. It can work if there is far-sighted and effective governance, willingness to improve the sector in advance, substantial initial preparation and transparent selection procedures of the private parties. Governments will have to take earlier actions to clean up the infrastructure enterprise and build public opinion for private entry and more rational user charges.

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