Power: Incentivising commercial performance

Despite significant increase in private investment in the power sector in Maharashtra over the past two decades, electricity distribution to the end consumer continues to be the weakest link in the value chain, says a World Bank report.

While overall bank lending to the power sector stood at Rs.4,883 billion in FY14, higher than overall bank credit to other infrastructure, lenders to the sector have chosen to lend even in the face of continued inefficiencies in the distribution segment.

‘More Power to India: The Challenge of Distribution,’ presented in Mumbai recently, is a review of the Indian power sector across key areas of access, utility performance, and financial sustainability. The study, conducted at the request of the Government of India, recommends freeing state utilities and regulators from political interference, increasing accountability, and enhancing competition in the sector in order to move it to a higher level of service delivery. It calls for a transition from administratively run to commercially run utilities.

The power sector in Maharashtra has done relatively well when compared to other states. In 2013, the peak deficit stood at 8 per cent and the energy deficit at 2 per cent while elsewhere (e.g. in some southern states) the peak deficit was as high as 10 per cent. The average per capita annual electricity consumption in Maharashtra was 1,204 kWh in FY12 while the national average was only 971 kWh. The state has managed to plan its procurement well with only 5 per cent of power purchased through short-term sources as against a national average of 22 per cent. There have been timely and adequate tariff revisions; generation and transmission companies have been earning profits. However, there is scope for improvement electricity bill collection rate is low at 91 per cent and ATC losses were 22 per cent in 2013, in spite of the consumer mix being dominated by industries and commercial users, the study says.

Success story
In Maharashtra, private investment has made significant contributions to the power sector. In generation, the private sector accounts for around 50 per cent of the total installed capacity. There are eight transmission licensees and multiple distribution licensees.

Bhiwandi in Maharashtra, a textile hub of the country, is a success story of good management of power distribution. Bhiwandi was reeling under severe power shortage in 2006 with no investment in system upgradation, inadequate metering, low collection and high losses. However between 2006 and 2011, the distribution franchisee in Bhiwandi managed to reduce the gap between average tariff and revenue realisation and is expected to break even soon. Technical losses declined from 58 per cent to 18.50 per cent through network strengthening; 38,000 connections were regularised and 17,000 new connections provided; more than 80 per cent of old meters were replaced by electronic meters; two new customer service centres were opened; and a 24×7 call centre and mobile van were introduced for quick response to consumer complaints.

Maharashtra’s experience with private participation in the power sector highlights the potential for improving distribution by enhancing accountability, as seen in companies investing in system strengthening, tightening their commercial practices, increasing efficiency and improving the quality of service, said Sheoli Pargal, Economic Advisor, World Bank, and author of the report. At the same time, with the sector’s reliance on commercial borrowings, lenders are well placed to incentivise performance since there could be ripple effects of shortfalls on lenders and, potentially, on the health of the financial sector. A history of state rescues seems to indicate that lenders do not adequately pressure distributors to improve their operational and financial performance, expecting to be paid back by the state, she added.

Key deterrents
‘More Power to India’ also highlights some of the key deterrents holding back private entrants to the power sector. On the generation side, there are uncertainties related to domestic and imported coal; the poor financial health of the distribution companies; and difficulties with physical pooling of imported and domestic coal among others. On the distribution side, some of the key deterrents include a high cost of power relative to tariffs; a regulatory process that faces political pressures in discharging its responsibilities to the sector; a lag in implementation of open access; lack of clarity on models (licenses vs. franchises); no pressure to improve commercial orientation; poor governance; and utilities not being service oriented.

While making an urgent call for change, the study recognises the many impressive strides that the sector has made over the years. Generation capacity has tripled between 1991 and 2012, boosted by the substantial role played by the private sector. A state-of-the-art integrated transmission grid now serves the entire country. Private distribution utilities in Kolkata, Mumbai, Surat, and Ahmedabad, which have been owned and operated by the private sector since before Independence, point to potential gains from private participation. Grid-connected renewable capacity has risen from 18 MW in 1990 to 25,856 MW in March 2013. And more than 28 million Indians have annually gained access to electricity between 2000 and 2010.

However, according to the study, the financial health of the sector is fragile, limiting its ability to invest in delivering better services. Total accumulated losses in the sector stood at Rs.2.88 trillion or 3 per cent of GDP in 2013. Over the last two decades the sector has needed periodic rescues from the central government, a bailout of Rs.350 billion in 2001 and of Rs.1.9 trillion that was announced in 2012.

The study also highlights the need for better targeting of domestic subsidies. Lack of effective targeting of such subsidies has led to anomalies such as economically weaker sections of the population ending up paying more for consuming less power. In fact, in 2010 some 87 percent of the domestic electricity supplied India-wide was subsidised. Over half of subsidy payments (52 per cent) India-wide went to the richest 40 per cent of households in the country in 2010, the study adds.

Source: World Bank