The reform of the electricity sector, especially the decision to unbundle and privatize, has in India been based on the premise that the state (government) does not have adequate financial resources, given its need to control the fiscal deficit. The assumption is that, to bridge the gap between investment requirements and available public resources, the active and largescale participation of the private sector is necessary. While this assumption is increasingly being questioned in official circles, the ‘reform’ thus far, engendered by this perspective, bears all its limitations. This chapter would contend that privatization has its own logic, in terms of overcoming the ‘principal-agency’ problem, and ushering in incentives for efficiency, especially allocative efficiency. The resources gap argument is not only misleading but is inconsistent, and takes privatization in the wrong direction. This premise is also entirely inadequate as a basis for a privatization programme, since it ignores the underlying reasons for the financial incapacity of the state in general and the electricity sector in particular. It takes as given the current inefficiencies and leakage of resources from the state electricity boards (SEBs), and does not factor in improvements that can contribute a great deal to the investable resources. Similarly, the hastily crafted Independent Power Project (IPP) programme has added considerable burden on the SEBs, especially the ‘well performing SEBs of Maharashtra, Gujarat, and Karnataka. IPP proposals have come down dramatically and many very close to financial closure have been dropped. This has happened because in a situation where basic reform was not pursued, private parties had successfully shifted nearly all risks on to the state sector. The contingent liabilities of state governments have as a result swelled. As state governments have woken up to this risk shifting, the basis for IPPs which did not exist, stands exposed. While it is privatization of a sort, it can hardly be sustained, and the vast potential benefits of a meaningful possible privatization would go unrealized. These and other problems had been anticipated when the first of the ‘reform’ initiatives were announced, but the government, especially the Ministry of Power (MoP), had chosen to ignore them. Only belatedly have some of the issues raised been recognized and corrected. Thus the early restriction that limited local financial institutions (FIs) participation in IPPs to 20 per cent or less of project cost and constrained IPP promoters into tied finance from equipment manufacturers abroad and hence to high cost projects, has given way.
Power Sector Reforms And Regulation: The Road Ahead
Author : Sebastian Morris