The Hindu Business Line : Power bargaining on energy trading

The opening up of the energy services industry in India should be done with caution. As this exercise has started only recently, there is enough room for negotiations at the WTO on the manner and form in which the trade should take place.

India would stand to gain by joining the global market for energy services.

WITH increasing globalisation of business transactions, the competitiveness of Indian industry would hinge on an efficient energy services sector that, among other things, channels scarce commercial energy resources for productive use. Also, the sector has assumed significance because of the overarching need to protect the environment, by promoting energy management and sustainable resource use. In this context, it has become imperative for India to draw up a mandate for negotiations on liberalisation of energy services at the WTO.

Energy services, in general, include exploration, development, extraction, production, marketing, consumption and management of energy products and fuels. Transport, transmission and distribution of energy are considered core energy services; the others include consulting in energy efficiency, conservation and renewable sources of energy. Also, construction, maintenance of networks and services related to distribution, such as metering and billing, fall in the realm of energy services.

Despite the identified economic advantages, energy services were not treated as a distinct category in the Uruguay Round. The reason, perhaps, being the sector at that time was the preserve of state-owned enterprises, functioning based on the regulatory environment in the country concerned. Hence, WTO members made very few commitments that can be clearly defined as falling under energy service, and much of the industry is yet to be covered under the specific commitments of GATS.

Recently, however, a number of countries, both developing and developed, seem to have recognised the importance of reliable, efficient and reasonably-priced energy for ensuring economic and social development. As a result, many are coming forward to submit proposals on energy services for discussion during negotiations on trade in services under GATS.

India would stand to gain by joining the global market for energy services; the benefits would, in fact, far outweigh the costs. This is because liberalisation of energy services would increase the predictability of policies in the sector and, hence, attract more foreign investments into the country.

Foreign participation in energy services, especially in transmission and distribution, would enhance competition and, thereby, increase the domestic energy sector's efficiency, reduce costs and contribute to the nation's ability to compete in the global marketplace. Besides, the likely benefit of joining a binding multilateral regime would be to loosen the energy sector from the grip of powerful interest groups and further reduce the need for other measures (subsidies, for instance) to promote investment and growth.

It is common knowledge that the domestic energy sector is characterised by erratic supplies and inefficient operations. This has resulted in product prices of both the manufacturing and primary sectors rising and power/fuel prices continuing to be high. For instance, in 2002-03, while fuel prices rose 5.6 per cent, the general price index and manufactured product prices went up by 3.4 per cent and 2.7 per cent respectively.

This implies that input prices are rising more sharply than those of final products. This dampens the competitive advantage of industry, by squeezing profit margins. Also, investments would be hit, especially in units that just about manage to cover their costs. The high cost of energy services is the single most important factor limiting the competitiveness of Indian industry. Hence, to be globally competitive it is essential to raise energy efficiency to international standards. And this would be achieved, inter alia, by opening up the sector to domestic and foreign competition.

Most of the developed countries participating in the negotiating process look for market access and export gains for their industry. This suits the interests of developing countries such as India, which do not have the technology edge in energy services. Hence, the opening up of the sector in identified areas may lead to significant gains. In such a scenario, the real issue before India would be obtaining the best possible deal at the negotiating table. Market access should be given only to the extent the foreign country has a well-established comparative advantage. And there should be an element of reciprocity during negotiations at the WTO.

As regards energy services export, there are a number of areas in which India enjoys a competitive edge. For example, the country is strong in technical, economic and managerial consultancy in energy. Besides, it has expertise in business services and civil engineering — these also form part of energy services.

But there continues to be a variety of restrictions on the physical movement of natural persons to developed countries under GATS (mode 4). These barriers relate primarily to grant of visas and work permits, and problems with recognition of qualifications and work experience.

India should seek better market access for its semi-skilled, skilled and knowledge workers. Besides, there is need for establishing multilateral

norms to reduce the scope for discriminatory practices, particularly with regard to social security contributions and ensuring transparent administration of the visa regime.

The opening up of the energy services industry should, however, be done with caution. This is because, though regulation in the industry has been changing, the basic need for government intervention to address problems of market failures has not disappeared altogether. There is no gainsaying the need for regulatory policy to reduce systemic risks while enhancing competition. Hence, undue haste in transiting to a competitive environment should be avoided.

Besides, as the country started opening up of the energy segment only recently, there is enough room for negotiations in the manner and form in which the trade should take place. Also, a longer transition period for opening up of the sector further must be bargained for.

A major difficulty during negotiations could be about the definition of energy services. This is because the industry itself has traditionally not drawn a distinction between energy goods and service activities. The energy sector is dominated by state-owned, vertically integrated utilities in production, distribution and related activities. At the same time, the segment is subject to restrictive and discriminatory regulatory systems which pose a serious barrier to market entry. Besides, the sectoral classification list of GATS does not include energy services as a comprehensive category.

India would do well to recognise the complex and highly regulatory nature of this sector and structure its arguments at the WTO in such a way that the scope of negotiations is limited to energy services and not extended to ownership or operation of energy systems, as this would have implications on energy security. Care should be taken to protect national interests in the areas of energy security, supply reliability, environmental preservation and public safety.

Gains from opening up would accrue only with the strengthening of the domestic sector through reforms. In this context, though, post-liberalisation, private sector participation has been extended from generation to transmission and distribution, much more attention should go to improving the efficiency of the distribution system. At the same time, competitive conditions should be created to attract more foreign funds, particularly in long-term equity. This deserves special consideration at the policy and implementation levels.

The sector will have to gear itself for the post-WTO situation, which would be characterised by increased competition from the global players. In the near-term, industrial economies will have the competitive edge and, hence, are likely to remain the major suppliers of energy services globally. Reforms in the energy sector have to be carried out with the objective of facilitating the emergence of major domestic players.

To reap the benefits of globalisation, the country should enter into strategic alliances with select global players and, based on our comparative advantage, increase exports of identified energy services to select developing markets.

(The author is an economist with PHD Chamber of Commerce, New Delhi.)