"Unbundling of SEBs is the key..." - Views on News from Equitymaster

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"Unbundling of SEBs is the key..."

Jun 6, 2000

S K Podder was a member of the Indian Audit & Accounts Service. After having served in various capacities up to Accountant General under Comptroller & Auditor General of India (C&AG India), he was deputed to Maharashtra State Electricity Board as Member, Accounts. Currently he is a consultant to the Dabhol Power Company.

In an interview with equitymaster.com Mr Podder talked at length about the ills plaguing the Indian Power sector and what can be done to resolve them.

EQM: What are the major hindrances for power sector reforms? How can they be resolved?

Mr. Podder: You know the power sector was organised as a separate electricity board in mid 1950's, after the 1948 Supply Act was passed. In order to ensure that it does not fall into long term decision making process as in a government department, so a separate arm was created as a semi-independent authority. This has served its purpose in the initial period when infrastructure sector was not attracting a lot of private capital because of its long gestation periods. Profits were the key drivers for private investments in those days.

As a result, government stepped in to set up electricity boards, where decision making will be quicker. Over the past 4 decades, these electricity boards have no doubt served their purpose, but after having developed a tolerable level of infrastructure in the shape of electricity generation and T&D (transmission and distribution) capacities, it is now being realised that the present set up of SEB's are not enough to keep pace with the present day requirements.

The ideal investment proportion in generation and T&D should be 1:1. Although investments in generation has kept pace, but T&D investments have lagged behind. This has resulted in the present day anomaly in distribution of electricity. As you will notice, some states are power surplus, while other face shortages. In short, carrying capacity of electricity has not kept pace with generation for an equitable distribution of power across the country.

In order to solve this anomaly huge capital investment was called for. On the one hand investments in generation had to continue, on the other there was an urgent need to step up investments in T&D infrastructure. T&D must get more attention, more funds than generation.

In order to meet the situation, the government initiated the power sector reforms in the early 90's to attract foreign capital for investment in power generation. At that time it did not make the necessary legislation to attract private investments in T&D segment. This was realised only in the last three-four years. The relevant change in legislation to attract investments in transmission and distribution was made only in 1997-98. As a result, major investments in T&D are yet to take place. That is one major hindrance in the power sector reforms.

Secondly, although a lot of foreign investors have evinced interest in power generation, the policy makers could not, within a short span of time, develop a firm policy that was acceptable to both the SEBs and the private investors. As a result, even today the policy itself is in a development stage. Recent changes in the government have also contributed to this delay.

Initially, 7 fast track projects were given counter guarantees. All of them, for various reasons could not come on line. In the mean time, the government changed its policy by attaching more conditions for giving counter guarantees. This was applicable to even those first round, fast track projects that were still in the middle of tying up their funding. At the moment, therefore there is confusion prevailing at the policymakers' level, at the implementers' level and in the market. The market is not very sure what way they should go. Their main problem is to mitigate risk. The extent of mitigation is the main point, which will ensure whether a particular project is going to get 65-70% of the investment as loan capital. The shifting stand regarding the security package offered by the government of India in its policy has led to uncertainty in the minds of the institutions (foreign as well as domestic). Conflicting demands are also coming from these institutions, as they keep on adjusting their demands depending on the nature of the project, the state in which it is being set up and the changing stance of the government.

These according to me are the main problems, which have afflicted the industry in the 90's and are now being carried forward into the new century.

Apart from these, the other problems, which have developed in the last five decades, are because the uneducated or semi-educated people's representatives, who have actually considered the organisation of the state electricity board as their fiefdom. They have utilised these boards to serve their purpose, rather than that of the society. This problem has also been aggravated sometimes, by the collusion between employees, consumers and the people's representatives.

There has to be a change in approach. A certain mass of consumers feels that it is the government's job to supply electricity. It is their right to consume without paying for it. Unless this attitude changes, merely divesting the government's stake in huge quantities will not achieve the desired results.

On the brighter side, state after state is coming out with SEB reorganisation plans. If the reorganisation is well meaning, we can expect the power sector to be cleaned of its ills in ten to fifteen years time frame.

EQM: How can the SEBs be reformed?

Mr. Podder: Unbundling of SEBs is the key. Unbundling can be done in two ways. One is industry function wise unbundling, wherein electricity generation, transmission and distribution functions are separated. The second is vertical or geographical unbundling where all three functions in respect of a geographical area would be under one entity.

We should go for the industry or functional unbundling. Generation can be in the hands of one or more players. Transmission is a natural monopoly; it has to be with a single operator. Distribution can be in multiple hands to induce competition. This should be the ideal reorganisation scenario in the future.

EQM: The Maharashtra State government has recently announced its plans to reorganise its electricity board. Any comments on that?

Mr. Podder: It is a positive step. Though one has to see to what extent its 120,000 employees are carried along with the idea. Maharashtra is the most industrialised state and disturbance in power supply even for one full day, will be crippling. It is of utmost importance that the employees are taken into confidence at every stage. This might involve initially, some sort of assurance being given to them. One must take into account that 120,000 employees translate into 120,000 families, which is a large vote bank. So any meaningful reform will not be possible without their cooperation.

EQM: Going forward what in your view will be the structure of the power industry?

Mr. Podder: Ultimately, power has the characteristic of water. If it gets a connected line, it flows. Surplus power can flow in any direction where there is a line available. This being so, it is possible to ultimately make one grid in the whole of India, which will reduce the present inconsistency in the matter of distribution and that is most essential.

The fourth draft of the Electricity Bill 2000 is a step in that direction. Initially, there will be regional grids and ultimately there will be a national grid. As a result surplus electricity in one region will not go waste.

But the bigger issue is rooting out corruption, which has become synonymous with electricity business under government hold at the moment. Big contracts, medium contracts, small contracts none is free from corruption. The bigger the contract, the bigger the level of people involved. Indians should not waste their national assets. At the moment we are doing so.

One point of controversy is regarding supply of electricity to rural and agricultural sector. Cross subsidy involved in the process is being widely discussed at all levels. I am of the opinion that while bringing in restructuring, the need for separate corporations (within or outside government fold) should be considered.

EQM: Internationally power companies are using their existing infrastructure like electricity lines to enter/offer other services such as Internet connectivity, transmission of data etc. Do you foresee this happening in India?

Mr. Podder: In India this process has already started. BSES, MSEB are some examples. Use of available transmission lines, fibre optic lines will definitely contribute to the need for additional income in the capital intensive electricity industry. This additional utilisation also lends financial viability to huge investments in the power projects.

The main reason for the Reliance bid for BSES is perhaps this.

EQM: The government is contemplating trading in electricity. What's your view on this?

Mr. Podder: Objective wise it is most welcome as ultimately the consumer is the gainer, because of the advantages of competition. What is needed at the moment is an ideal legal structure. You must allow people a certain level playing field. This issue has been addressed in the proposed electricity bill 2000. From the power trading angle, there is a realisation at least at the official level that changes in the Electricity Act 1910 and Electricity Supply Act 1948 are required, to keep pace with the changed situation in demand and supply of electricity.

So it is good step. But ultimately, everything depends on whether you are able to transfer surplus electricity from one state to another at a reasonable cost and that there is a buyer for this surplus electricity at the other end.

Another scenario, which one might witness, is that with the development of the market, some states may opt to outsource their power requirements totally from power surplus states simply because it is cheaper to do so.

If the concept does take shape there will be no monopoly supplier and the consumer will gain.

EQM: Is the IPPs frequent demand for counter-guarantees, escrows justified?

Mr. Podder: As I have said earlier, the main hindrance for investments in the power sector is the level of risk mitigation. International investors when they send out money from their country to another country, they do not know the level of risk involved.

We have before us the example of Mexico, where a large number of US banks had invested money. The money went down the drain. Ultimately the US government was forced to bail out the Mexican government. If it had not done so a large number of US commercial banks would also have failed. That Mexican experience has made the international community a little more cautious about risk mitigation.

The institution, which is taking a debt exposure to invest in the project, sinking especially large chunks of it on land and other fixed assets in some other country, needs some cushion to save these investments. They can't take away the land or the machinery already installed or the plant if something goes awry. So they must get adequate comfort about the safety of their principal and return on their investments. The rate of return they expect will be based on the quantum of risk involved.

This risk is assessed on their behalf by rating agencies like Standard & Poor, Moody's, Crisil, Icra etc. They assign each country a risk return rating. So if a foreign investor, based on the rating agencies assessment of a country, expects a higher security, I don't think, we as a country can blame them. We have to keep in mind that initially, we invited these foreign investors to invest in this country. In the early 90's India did not have an investment grade in the eyes of the international rating agencies. It got investment grade only around October 1995, by which time the first track projects in the electricity sector had already committed their intentions. So if they expected higher comfort from the Government of India and the state governments' in the shape of counter guarantee and escrow accounts, we cannot fault them.

EQM: Please tell us about the personalities that have influenced you the most.

Mr. Podder: My parents.

EQM: Can you tell us about any favourite books that have been a part of you?

Mr. Podder: I am currently reading 'Bharater Sadhak' (The Sages of India), in my mother tongue Bengali. It covers all the sages across the length and breath of India, which is covered in 16 volumes. At present it is available only in Bengali.

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