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The mess in the power sector needs to be addressed

Utility losses are a major component of governments’ fiscal deficits

  • Published 17.09.19, 1:55 AM
  • Updated 17.09.19, 1:55 AM
  • 4 mins read
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As state electricity boards’ losses mounted, they invested less and less in generation, and state governments, which felt forced to meet their voters’ needs, imported power. Shutterstock

The story is well known, of Benjamin Franklin flying a kite into clouds on a rainy night in 1752 and luckily escaping electrocution when electricity from lightning travelled down the wet string to his wrist. Godalming, the beautiful little town near London, was the first place to get electric lights, powered by a water wheel on River Wey, in 1881. As technology of power generation, transmission, transformation and distribution advanced, electricity spread to neighbourhoods, then towns and, finally, to regions and countries. But it was all thermal electricity, except for a small proportion of hydroelectricity where water flows permitted.

Concern about the global warming effect of carbon dioxide emerged in science in the 1960s; it spread to the wider world in the 1970s. The oil crisis following the sudden quadrupling of oil prices by Arabs in 1968 created interest in renewables at about the same time. By the 1980s, conviction about global warming had strengthened enough for renewables to become of serious interest.

Half a century has passed since then; how far has the world moved? Johannes Urpelainen and Joonseok Yang recently published a study of 142 countries. They distinguished between textbook reforms and hybrid reforms. Textbook reforms are those advised by the World Bank — principally, privatization of the electric power industry, creation of wholesale markets, and retail competition which would let consumers choose between suppliers. Hybrid reforms fall short of this package: unbundling of generation, transmission and distribution, creation of a power regulatory authority, corporatization of State-owned power producers, and creation of a legal framework for entry of private producers. Virtually all of Europe and North America have carried out all the textbook reforms. Latin American and Asian countries have done one or two of them. The rest of the developing world is in a hybrid state. The difference is connected with bundling: virtually all the countries that have done textbook reforms have unbundled their power industry, whereas hybrid reformers have not. Textbook reforms are characteristic of rich democracies with effective governments; hybrid reforms of poor, poorly-governed countries. The picture is confirmed by the World Bank. Over 60 per cent of developing countries have set up a regulator, allowed some private entry, and done some divestiture. Less than 20 per cent have done horizontal unbundling, allowed competition, introduced a single buyer model, or allowed the private sector in transmission.

The World Bank then set a more modest target: forget about privatization and competition, how did electric utilities in developing countries perform on cost recovery and operational efficiency? It found that of the 17 cases, full economic costs were covered only in two — Ukraine and Colombia. The worst were Andhra Pradesh and Rajasthan, where even half the costs were not recovered. Odisha was not too bad; it covered over 89 per cent of the costs. The recovery level had nothing to do with costs: Egypt, which produced power at 6 cents a kilowatt-hour, recovered about a half, whilst the Philippines, whose costs were three times as high, nearly recovered full costs.

Failure to collect money is only one cause of under-recovery; the other is excessive transmission and distribution losses (which are often because power is stolen). Utilities in Odisha lost over 20 per cent of their revenue; those in Andhra Pradesh and Rajasthan, surprisingly, lost less than 5 per cent.

Few utilities are compensated for losses by state subsidies; most just accumulate losses and fail to pay debts. Their losses are in effect passed on to their suppliers. No one would want to lend to the bankrupt utilities, so where they can raise loans, they pay extremely high interest rates. But many governments give cheap or interest-free loans to their own utilities. Utilities that recover a higher proportion of costs do not necessarily invest more of their revenue; conversely, more profitable utilities do not necessarily attract more funds. Investment in most countries is controlled or influenced by governments, which invest irrespective of profit prospects. Utility losses are a major component of governments’ fiscal deficits; they see the subsidies as help to the poor. They seldom meet the entire losses out of subsidies; losses accumulate even after receipt of subsidy.

An earlier World Bank study by Mani Khurana and Sudeshna Ghosh Banerjee adds some valuable details to the above picture. They found that most of the utilities’ losses in the first decade of this millennium were in distribution; some were in transmission, and virtually none in generation. In other words, the losses were because state governments and utilities did not collect the full cost from consumers. Subsidies covered less than a third of the losses; the rest just accumulated as bad debts, to government banks amongst others. Uttar Pradesh and Madhya Pradesh were the worst culprits amongst the states. The best performers were Goa, Kerala, Gujarat, West Bengal and Andhra Pradesh.

Some of the bad debts were owed to Power Finance Corporation, Infrastructure Development Finance Company, and Rural Electrification Corporation. But more than half of the debts were to banks. Non-payment for electricity was a major component of banks’ non-performing assets.

As state electricity boards’ losses mounted, they invested less and less in generation, and state governments, which felt forced to meet their voters’ needs, imported power. Hence there was positive correlation between state electricity boards’ losses and purchases. But here too, some governments and state electricity boards were more ‘efficient’ in buying electricity: they looked around for cheaper power, and minimized transmission costs. The most efficient ones were Tamil Nadu, Andhra Pradesh and Maharashtra; the worst were Assam, Uttarakhand and Himachal Pradesh.

Khurana and Banerjee constructed an efficiency index for five years, from 2006 to 2010. The states that figured most frequently amongst efficient ones were Gujarat, West Bengal and Delhi; the most frequently inefficient ones were Bihar, Madhya Pradesh and Uttarakhand. Was there any evidence that the less efficient ones learnt from more efficient ones? None was reported. A surprising conclusion was that the most efficient states were also ones that raised prices as costs rose: technological and economic efficiency were correlated.

What struck me was that Urpelainen and Yang as well as Khurana and Banerjee were commissioned by the World Bank. They were given the same question to answer: how to improve power systems? One pair answered it in the world context, the other in the Indian context. The answers they came up with could not be more different. Are the two geographical entities so different? Did the World Bank seek different answers? Or did each pair ignore the context outside its study area?

The mess in power is important, and we should be looking for answers wherever they may be hidden. I think we in India need to look at the world. Not just in the context of power, but in every context. The World Bank could help us do so. Why does it not? Because it looks for answers that Indians in government would find acceptable. The parochialism is ours; it limits our horizons, and makes us miss solutions. There was a time when the prime minister wanted the world to come and Make in India. He has waited enough; it has largely ignored his invitation. Maybe it is time for us to go and look around the world.

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