Electricity distribution remains to be the weakest link in the power supply chain hence, the only viable option to improve the utilities’ operational efficiency is through privatisation
Rapid economic growth has increased the burden on India’s infrastructure. An infrastructure deficit is widely considered to be one of the factors that could adversely hold back the country’s growth story. In the past few decades, the government has made concentrated efforts to accelerate infrastructure development. Much progress has been evident in sectors such as telecom, infrastructure, airports, etc. But, the power sector continues to struggle for sustenance despite many progressive measures and schemes like Saubhagya for household electrification and UDAY for financial relief.
Power is one of the most critical components of infrastructure crucial for economic growth and a utility of convenience to society at large. India added new generation capacity rapidly in past 10 years, which has led to power deficits declining from 12.2 per cent of peak demand and 10.1 per cent energy supply in financial year 2009-10 (FY10) to 0.8 per cent and 0.6 per cent, respectively, in FY19. However, the medium-term forecasts suggest that the trend may soon reverse as demand starts to overtake supply, resulting in further straining the financial health of discoms.
While all three segments of the power sector – generation, transmission and distribution are important, distribution needs to be established as the strongest link in the value chain. Persistent operational and financial shortcomings in distribution have repeatedly led to Central bailouts for the whole sector, even though power is a ‘concurrent’ subject under the Indian Constitution and distribution is almost entirely under state control.
Why should the government be in the distribution business?
In order to build a stronger economy projecting India as a developed nation in the future, we need to build a reliable and sustainable power distribution and production system. The government plays an important role in creating policies, reforms and other strategies that would push the discom sectors to flourish and function according to the demands. It is only with government participation, the state distribution sector and the private players can grow together creating a profitable business model. Globally, private participation has long been considered an effective way of resolving efficiency issues in distribution. In India, the “legacy” of private distribution utilities in Kolkata, Mumbai, Surat, and Ahmedabad with their impressive efficiency and customer service are obvious examples of the potential gains from private participation.
The government’s approach for the business model would always be citizen-centric rather than customer-centric, which would enable inclusive growth. The objective of state discoms is primarily guided by government policies, and even after the formation of state regulatory commissions, state discoms are still influenced by the state government. But, the downside of the same is that, since the promoter of all discoms is state governments, there is no element of competition among them in terms of improving customer services, quality of power and cost of supply, etc. This ultimately results in a lack of robust and efficient process and consequent losses or low profit. In order to break through this issue, it is important to involve private players in order to create an environment of healthy competitiveness. And it is the amalgamation of the two that would finally ensure that affordable and accessible energy is provided to all.
There are innumerable examples around the world that privatisation of such businesses has shown a sustainable and significant turnaround. The reason is that the private sector’s approach is always consumer-centric and with competition around, the focus of the management is always on improving efficiency of processes, reducing the cost, improving the quality, concentrating on employee’s engagement and competence and working on regular feedback from voice of customers. In the early 1980s, Britain under Margret Thatcher’s regime started the rise of state-owned privatisation. Similarly, other advanced countries, for example, the USA, Canada, Australia, Western Europe, and developing Asian and sub-Saharan nations started adopting the privatisation approach for some of their public service delivery.
The need to adopt privatisation varied among the countries. For some it was due to budget deficits leading to poor investment in infrastructure and inability of the government to manage the state owned enterprises, for others it was based on need to expand and extend quality services to their growing populace through divestiture, public-private partnership (PPP), outsourcing, and granting of franchise to the private investors.
Latin America, which resembles the Indian sub-continent to a large extent, introduced privatisation of electricity utilities in the 1990s. By 2003, 60 per cent of the consumers were serviced by private electricity distribution companies. According to various reports, the subject change in ownership enabled significant improvements in labour productivity, efficiency, and product/service quality. Similarly, the Malaysian model of privatisation of the power sector has been able to secure adequate supply of reasonable quality, ensure affordable and stable electricity prices, provide confidence to the investors, meet the funding challenges, promote competition, and improve efficiency and productivity.
In India, the Delhi government had privatised the distribution of electricity in 2002 under the PPP model. The experiment model turned out to be a grand success for all stakeholders. Consumers are having uninterrupted supply, new connections within few days, accurate billing, upgraded network and above all, AT&C losses have reached about 9 per cent from more than 50 per cent in 2002. Delhi has made a saving of Rs 30,000 crore since then, due to the efficiency in power distribution, rather than making an annual loss of Rs 1,200 crore in 2001. It has been a win-win situation for all.
Considering that the electricity distribution remains to be the weakest link in the power supply chain and based on global experiences, the only viable option to improve the utilities’ operational efficiency and to obtain full-cost recovery is through privatisation. Delhi’s experience with privatisation, clearly highlights that not only the customer is getting benefited by getting 24X7 reliable, quality power supply and enhanced customer services, state government has also been able to provide and support financial benefit to the customer by way of subsidy. Further, the performance of privately-owned utility can always be ensured through strong incentives and governance systems, duly supported by the government. Good governance and transparency shall be the key to strengthening confidence and private investment in the energy liberalisation effort.
– Sanjay Banga, CEO, Tata Power-DDL
(originally published in ET Energyworld)