The Hindu Business Line : Short-circuited power reforms

There appears to be no solution in sight for the power crisis because of the lack of political will to pursue reforms on a war-footing. Continuing slippages could derail the rising economic growth rate. Consequently, most States have been resorting to load shedding, affecting industrial output and farm production. The decision to constitute a Standing Group of State Power Ministers can perhaps help tackle the crisis, says S. D. NAIK.

The growing power shortage is fast becoming the most formidable infrastructure constraint for maintaining the growth momentum and the competitive strength of the economy. Worse, no solution appears to be in sight to remedy the situation in the near future because of the lack of political will to pursue power sector reforms on a war-footing.

The escalating crisis prompted the Prime Minister, Dr Manmohan Singh, to call a conference of Chief Ministers for setting up a National Mission on Conservation of Energy. He rightly warned that continuing slippages could derail the rising economic growth rate. "Time is running out and unless we are able to arrest the growing shortages, the effect on our economy may be disastrous," he added.

MAJOR SLIPPAGES

Power generation targets remained unmet both in the Ninth and Tenth Plans with unacceptably large slippages. With hardly 50 per cent of the projected capacity addition actually materialising, the demand-supply gap has widened rather sharply over the last decade. While the capacity addition during the Ninth Plan was only 19,015 MW against the target of 40,245 MW, it was just about 21,000 MW during the Tenth Plan against the target of 41,000 MW. While the total installed capacity now is 129,000 MW, the actual demand for power is estimated at 200,000 MW. As of now, there is a 20-25 per cent power shortage in Maharashtra, 20 per cent in Uttar Pradesh, and 10-15 per cent in Gujarat, Madhya Pradesh and Delhi. Consequently, most States have been resorting to load shedding, both scheduled and otherwise, affecting industrial output and farm production.

Unfortunately, the Accelerated Power Development and Reform Programme (APDRP), launched in the Tenth Plan with the Centre providing Rs 40,000 crore in equal investment and incentives components, has failed to achieve its primary objective of reducing technical and commercial losses. The Aggregate Technical and Commercial losses (AT&C) continue to remain unacceptably high at over 35 per cent and they range from 18-62 per cent across States.

Most of these losses are actually on account of power theft and rampant corruption at various levels. Not surprisingly, the State electricity boards (SEBs) continue to suffer heavy losses and are not in a position to invest in new projects. In fact, the rate of return of SEBs deteriorated to minus 27.4 per cent in 2006-07 from minus 24.8 per cent the previous year.

The need for reforms

The root cause of the worsening power crisis is the failure of successive governments to pursue reforms. The repeated efforts to improve the finances of SEBs by reducing heavy cross-subsidies and curbing thefts have failed to bear fruit mainly because of the lack of political will and fiscal prudence. Even after more than a decade, power sector reforms continue to be short-circuited by political parties and vested interests. Political populism gets precedence over economic pragmatism.

The Electricity Act, 2003 and the securitisation of the over Rs 40,000-crore losses incurred by SEBs four year back had generated high hopes that the power sector would finally put up a better show with all-round improvement in performance. Unfortunately, these hopes have been belied and the accumulated losses of SEBs have once again surged significantly. While the Electricity Act, 2003 delicensed generation, issues relating to land acquisition, fuel, and so on, continue to remain major hurdles.

Reforms on the distribution side are in a shambles and about 75 per cent of the technical losses and almost all of the commercial losses occur at the distribution stage. This is largely because of the populist policies pursued by politicians in many States. The experiment of privatisation of distribution in Orissa some years back and, subsequently, in Delhi failed because of poor implementation and follow-up by the local governments.

A recent KPMG report expresses concern over the huge distribution losses in the power sector, aggregating to over $6 billion per annum arising out of power theft, pilferage besides non-collection of fees. The report highlights the need for phasing out subsidies and ushering in tariff and distribution reforms to bring efficiency to the power sector.

HIGH COST, POOR QUALITY

Apart from the growing power shortages, the power cost in India is relatively much higher than in many other countries mainly on account of the high Transmission and Distribution (T&D) losses and rampant pilferage. What is worse, it has seen a sharp increase this year because of growing shortages. With rising shortages, several State governments have been trying to purchase power from any source at any price. Consequently, the small and medium industries have been the worst hit and there is widespread sickness in this sector.

The power generated by captive units (of over 1 MW) is about 20,000 MW now. Naturally, this power is much costlier. Even so, industries prefer it for its assured supply and anyway it is better than no power. Currently, over 60 per cent of Indian firms own generators and the trend is gathering steam. This only reflects the worsening power scenario.

It is also a matter of concern that the quality of power supply in India is poor because of frequent load shedding, either announced or unannounced. According to estimates, Indian firms lose 9 per cent of output because of load shedding. In Malaysia and China, this figure is just two per cent. According to a 2004 World Bank study, Indian manufacturers face as many as 17 significant power outages each month compared with one in Malaysia and less than five in China.

POOR IMPLEMENTATION

While the capacity addition targets were ambitious, there have been huge slippages in successive Plans because of poor implementation. Now the Planning Commission's Working Group has set an even more ambitious target of adding 79,000 MW of capacity during the Eleventh Plan period. Of this, the Power Ministry is expected to add 40,000 MW, the States 28,000 MW and the private sector 11,000 MW.

If experience is any guide, it will not be possible to achieve this target, unless there is a dramatic change in the political and regulatory environment and a significant improvement in the standards of governance. Because of lack of co-ordination among different Ministries and between the Central and State governments, new projects get delayed indefinitely.

The Prime Minister's call at the Chief Ministers' Conference for a `crash programme' on raising the country's power generation capacity is in danger of going the way of many such calls in the past so long as there is no political consensus among the States on dramatically reducing the cross-subsidies. Without the co-operation of all the States on the reform agenda, no crash programme drawn up by the Centre can succeed.

In this context, the decision to constitute a Standing Group of State Power Ministers under the Union Power Minister is welcome. However, as the former Power Minister, Mr Suresh Prabhu, suggested, the Centre may have to play a leadership role to get the results as power is a Concurrent subject.