Power distribution in India needs sweeping reforms if it is to bring back the country to a high growth trajectory and meet its goal of expanding access to electricity for all by 2019, says a recently released World Bank report.

India’s annual per capita power sector consumption at around 800 kWh is among the lowest levels in the world.

Titled ‘More Power to India: The Challenge of Distribution’, the World Bank report is a review of the Indian power sector across key areas of access, utility performance and financial sustainability. The study was conducted at the request of the Government of India.

The report identifies electricity distribution to the end consumer as the weak link in the sector and recommends freeing utilities and regulators from external interference, increasing accountability and enhancing competition in the sector in order to move it to a higher level of service delivery.

While making an urgent call for reform, the study recognizes the many impressive strides that the sector has made over the years.

Generation capacity in India 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 the potential gains from private participation. Grid-connected renewable capacity rose from 18 MW in 1990 to 25,856 MW in March 2013. More than 28 million Indians annually gained access to electricity between 2000 and 2010.

However, the report points out that 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 1.14 trillion ($ 25 billion) in 2011. These losses were overwhelmingly concentrated among distribution companies and bundled utilities – State Electricity Boards and the State Power Departments, says the report.

Sector losses have led to heavy borrowing – power sector debt reached Rs 3.5 trillion ($ 77 billion) in 2011, as much as 5 percent of India’s GDP. The report says that the problem is concentrated in a handful of states and by tackling the losses through a focused approach, it should be possible to notice a marked difference in sector performance.

Over the last two decades, the power sector needed periodic rescues from the central government – a bailout of Rs. 350 billion in 2001 and a ‘restructuring package’ of Rs 1.9 trillion ($ 19 billion), announced in 2012.

“Two decades after the initiation of reforms, an inefficient, loss-making distribution segment and inadequate and unreliable power supply are major constraints to India’s aspirations for growth,” said Onno Ruhl, World Bank Country Director in India.

“Revitalizing the power sector, by improving the performance of distribution utilities, and ensuring that players in the sector are subjected to financial discipline is the need of the hour,” he added.

Poor Performance of Distribution Sector

A number of factors contributed to the losses in the distribution sector, says the report.

The cost to discoms of purchasing power rose faster than revenues, primarily due to fuel shortages and the need for expensive fuel imports by generators as well as generation inefficiencies. Rising interest expenses contributed to rising costs and tariffs did not kept pace with costs over the years. Finally, there were factors well within the control of utilities such as under-collection of bills and delayed collection of payments, along with the fact that more than one-fifth of electricity purchased was collectively ‘lost’ by the utilities and therefore failed to generate revenues for them.

Projections show that even if tariffs rise 6 percent per year to keep up with the cost of supply, annual losses in 2017 will likely amount to Rs. 1,253 billion ($ 27 billion).

“The crux of the matter is that distribution utilities are not run on commercial lines. Despite corporatization, their boards remain state-dominated and are rarely evaluated on performance. Regulators have not pushed them sufficiently to improve performance, in part because of limited regulatory accountability and also the difficulty of regulating a state-owned entity. And a history of state rescues has meant that lenders do not pressure distributors to improve their operational and financial performance, expecting to be paid back by the state,” said Sheoli Pargal, Economic Advisor, World Bank and author of the report.

The other facets of sector performance highlighted in the report bring out some very interesting facts. Over 60 percent of the sector’s accumulated losses in 2011 came from the states of Uttar Pradesh, Madhya Pradesh, Tamil Nadu and Jharkhand. Uttar Pradesh alone accounted for 40 percent of the sector’s accumulated losses. Also, even though grid connectivity has increased, over 200 million people without power live in “electrified” villages. The report reveals that it takes seven procedures and 67 days to get a power connection for a commercial establishment in India. In comparison, the same takes 28 days in China, 35 days in Thailand and 36 days in Singapore.

Mounting Subsidies: High Opportunity Cost, Weak Targeting

Utilities face pressure to provide below-cost power to agricultural and rural residential consumers for which they are reimbursed through subsidy payments by state governments. However, currently, 37 percent of the subsidies booked by state utilities are not paid to them, says the report. Since 2003, subsidies booked grew by 12 percent per year and subsidies received by 7 percent per year. The cumulative gap between the two, amounting to Rs. 466 billion ($10 billion) for the period 2003 –11, had a crippling effect on the already struggling financials of the utilities.

“State financial support, which has become essential to keep many utilities afloat, has a high opportunity cost. Our study estimates that 15,000 hospitals and 123,000 schools could have been developed in 2011 if the power sector had not pre-empted these funds. Our recommendation is that states should compensate their utilities if they are required to provide free or below cost power to specific consumer categories,” said Sudeshna Ghosh Banerjee, Senior Economist, World Bank, and co-author of the report.

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

Key recommendations

The report suggests various measures aimed at moving towards efficient and effective service delivery to improve sector performance. The measures include aligning stakeholder incentives, strengthening regulatory governance and processes, implementing key regulatory mandates, improving corporate governance of state utilities, promoting responsible lending to the sector, ensuring availability of high quality and updated data, reinvigorating planning and coordination mechanisms, exploring different models to improve distribution and promoting electrification in a financially responsible manner through different delivery models.

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