Privatization Of The Indian Power Sector Economics Essay Free Essay Example

The power sector in India has witnessed enormous betterments the last 4-5 old ages, the way forward nevertheless is n’t smooth. There are many challenges to get the better of chiefly due to the execution jobs faced in our state and the spread that exists between what is really planned what is implemented. This term paper highlights some of these spreads and efforts to analyse the job. We analyze the hazards prevalent in the industry, and the stairss required to get the better of these.

The authorities part and control over this sector has been huge and needs to be studied in great item. We have so taken the instance of the Orissa State Electricity Board and pull decisions on how it was implemented and besides place the cardinal lessons that would profit in the future executions of a power sector denationalization.

CURRENT SCENARIO IN INDIA

The power sector on the whole can be divided into three parts Generation, Transmission and Distribution.

India has the fifth largest coevals capacity in the universe with an installed capacity of 152 GW as on 30 September 2009, which is less than 5 % of the planetary power coevals. The installed capacity of India as of July 2008 was 167278.36 MW. The power coevals in India is fundamentally fuel based of which thermic power coevals dominates. The graph below shows the assorted agencies used to bring forth power and besides that thermic power for which coal is a premier input.

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Though the accent has ever been at that place on the power sector through authorities disbursement and the five twelvemonth programs, the execution of power undertakings have ever been a concern.

The planned marks have barely been achieved. The Indian authorities has allocated immense budgets and set ambitious ends to accomplish in the 11th program, which if successful could take to a immense enlargement in the power coevals. However, over the old ages we have ever seen a mismatch between the planned marks and the accomplishments. This tendency can be observed from the graph below –

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Already the marks for the first few old ages of the 11th five twelvemonth programs have non been achieved. Some of the grounds can besides be attributed to the deficit of fuel for coevals of power. Even in the transmittal and distribution sector there has been investings planned to manage the extra capacity.

Laterality OF STATE AND CENTRAL UTILITIES

There was a general belief that the power sector had to be vertically integrated with the coevals, transmittal and distribution being controlled by a monopoly participant. Since, power was critical for the economic growing, it had to be in the custodies of the authorities. So in India besides, the full power sector was controlled by the authorities through the State Electricity Boards and Central Agencies. The power sector had a really low portion of private participants runing. The graph below shows the distribution of the installed capacities –

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In the coevals infinite, out of the overall capacity of 152 GW, the portion of cardinal and province public-service corporations stands at 49.8 GW and 76.6 GW, severally ; and that of private sector stands at 25.8 GW. Even, of the 78.7 GW planned capacity add-ons during the 11th five-year-plan, cardinal and province public-service corporations together are estimated to add about 63.7 GW. Similarly, transmittal and distribution is besides dominated by Power Grid Corporation and State Electricity Boards.

The conditions prevalent earlier and presence of high ordinances, this sector was non favourable for the private participants to come in into this sector. There were entry barriers, extended licensing regulations set up by the authorities which prevented private participants in take parting in the industry. Besides, the cost of puting up a coevals works or a distribution web was rather high.

Besides, due to the critical nature of power, Government had to traverse subsidise the power between different consumer categories. This made the market inefficient and hence, a hindrance to the private participants. However, during the recent times, there has been a tendency reversal and the private participants have made an entry into this sector. We have seen immense corporate houses like the ADAG Group, Birla Group plundering into this industry in India. We have besides seen a few success narratives with the private participants in this apparatus. One such instance will be discussed subsequently in the paper.

KEY CHALLENGES AND DRIVERS FOR SUCCESS

The industry as a whole faces some challenges which need to be addressed before we see great betterments in this sector. The below tabular array summarizes the challenges faced and some of the steps that could be adopted to get the better of the challenges.

The issues that could crawl up are given in the ensuing issues column along with the key drivers for success.

How denationalization would work out the job of increasing coevals capacity would be discussed in the following twosome of subdivisions. Fuel handiness is a sedate concern with the industry dependant on gas and coal. Some of the participants already have bought coal mines outside India, but the demand-supply spread still exists. There have been some jobs in this respects every bit good. The chief international market for coal supply to India – Dutch east indies might alter its ordinances towards foreign states. The planned marks from confined coal mines in India have besides non been achieved. The merely other option in this respect is to look at other signifiers of energy such as the atomic energy. This nevertheless, has a long manner to travel before it becomes the chief provider of power in India. The works equipment deficit besides exists as the authorities undertakings are normally with the already burdened public sector units like BHEL which is fighting to complete undertakings on clip. This has impacted in the capacity edifice programs of Government another ground why the authorities should travel towards denationalization. Puting up big coevals, distribution units require land which is hard to get due to bureaucratism and other authorities ordinances.

With respects to manpower deficit, there is a general impression that talent deficit in the power and substructure sector is a long term job and is likely to go on to force up undertaking costs and hazards. The flow of has been bit by bit cut downing up as campaigners have sought an option and more moneymaking calling options. The Government, which sponsors a bulk of the capital undertakings has non done plenty to turn to this issue. Training the alumnuss is the most feasible option even though this could force up the undertaking costs to a certain extent.

DRIVE TOWARDS PRIVATIZATION

From the above treatment, we can clearly detect the demand to seek out something different to profit the power sector and the option available in the sight is denationalization. Some of the apparent advantages of denationalization are –

Implementation issues of power undertakings could be solved

Technological promotion through increased R & A ; D spend to derive competitory advantage

Increased investing – Foreign investings

Improves gross realisation doing the service more efficient

More participants to cover up for the shortage

It is normally assumed that private participants would put to death the undertakings with greater efficiency and hence, the execution issues could be resolved. There would be greater investings in this sector to deduce the best and derive a competitory border while doing the concern feasible. Hence, the engineering used presently could undergo a revamp and do great promotion through greater spend in research and development. The foreign participant who are presently keen on investing in India ‘s growing narrative could convey in better engineering, investing and the expertness to transport out big power undertakings. This would besides convey in greater efficiency and as a consequence of denationalization we could see greater figure of participant viing. The power shortage presently faced by the state could be addressed due to the being of big figure of participants and besides there could be a addition for the consumers through monetary value wars and being of a competitory market.

Paving THE WAY FOR PRIVATIZATION

The authorities has besides realized that there is a range for improvisation and sees the advantages of denationalization. Since, this is a to a great extent regulated sector Government ordinances play a immense function in driving the denationalization. It has now undertaken some actions that could pave the manner in front for the denationalization of the sector and promote greater investings from the private sector. Some others like the Land Acquisition Bill are yet to be passed but presently confronting some political opposition. The reforms taken by the authorities are –

Electricity Act, 2003 is an historic statute law, which non merely integrates the old three Acts, but goes beyond in seeking to make a competitory environment.

Consumer is the cardinal point of this statute law and the chief characteristics are:

Promoting competition for benefit of the consumers.

Effective mechanism for redressal of consumers ‘ grudges

Regulatory inadvertence for transparence

Measures to command larceny of power

Particular steps for power in rural countries

Facilitates Investment by making competitory Environment

Entry Barriers removed/reduced

Generation de-licensed

Freedom to captive coevals including group prisoner.

Acknowledging trading as an independent activity.

Open entree in transmittal already in topographic point.

Open entree to consumers above 1 MW within five old ages get downing from 27th January, 2004 ( day of the month of enforcement of amendment of Electricity Act ) .

Multiple licences in distribution.

Regulatory Commissions – to develop market ; repair duty

The key reforms that were a turning point towards denationalization were

Removed the demand for licence

Competition through international competitory command

Unbundling – Transmission viewed as a separate activity

The other policies and cardinal reforms undertaken were

Unbundling of SEBs

Tax Benefits

National Tariff Policy of 2006

Allotment of confined coal blocks to private companies

Accelerated Power Development and Reform Program ( APDRP ) for distribution, permission for trading of power, etc.

The Ministry of Power had signed an MOU with the International Energy Agency in April, 1998 for cooperation in the power sector. With some of these stairss undertaken, the authorities has paved manner for denationalization and the power sector is set to turn at a rapid gait. We have seen success in the instance of Orissa State Electricity to an extent every bit good as the Delhi Distribution Privatization.

ORISSA STATE ELECTRICITY BOARD PRIVATIZATION

Introduction

Orissa is the 9th largest province in India, and is the 11th largest by population. The seashore line and the natural reources of Orissa organize its greatest strengths. At the same clip, Orissa ‘s part to the GDP of India has been less than 2 per centum. Infact, the rate of development in Orissa has been really less with GDP growing touching a upper limit of 7 % ( YoY ) in the early 1990s.

As a consequence, the province ‘s overall growing was crippled and being majorly an agricultural economic system, it faced a major challenge in footings of development. The province remained poorness stricken and the authorities was looking at chances through which development could be achieved, to raise the province from its present jobs.

New ECONOMIC REFORMS

In the twelvemonth 1992, the authorities of India, opened up its markets for international trade and investing. State authoritiess and authorities owned endeavors were encouraged to seek the support in footings of fundss and engineering to better the ill province of their endeavors.

It was around this phase that several sectors saw a bustle of investings in assorted sectors. Governments became more unfastened to the thought of sharing their monopoly, particularly in sectors which their expertness was limited.

The authorities of Orissa during that period considered power reforms as one of the primary agencies of acquiring out of this trap. By ask foring expertness into their power sector, they looked to this chance as a agency of supplying quality service and at the same clip encourage development.

THE POWER SECTOR IN ORISSA

The power sector in Orissa was managed wholly authorities at all three phases, viz. production, distribution and the transmittal. The Orissa State Electricity Board managed the entireness of the above operations. An absence of cost plus duty led to low gross and higher loan capital. OSEB ‘s duty degree was low and industrial sector ‘s portion in entire ingestion declined from 69 % in 1960/61 to 31 % in 1996/97. There was high T & A ; D loss in the signifier of proficient and commercial losingss ( unauthorized connexion, faulty metres and misclassification of consumers ) .

The power sector in Orissa suffered from

high transmittal and distribution losingss,

unequal answerability for assorted sections ( coevals, transmittal, and distribution ) ,

hapless fiscal public presentation, hapless quality of service and work force related issues

There was a pressing demand to work out the fiscal jobs of Orissa State Electricity Board ( OSEB ) every bit good. There was besides a pressing demand to run into the jutting demand of financess for investing in coevals, transmittal and distribution system. The National Economic Policy announced in 1991 envisaged liberalization and private engagement in substructure development, and this looked like the life line for the authorities itself.

Get downing of Power Reforms in Orissa

The first comprehensive restructuring and reform exercising was carried out by Orissa State Electricity Board ( OSEB ) in India and was the innovator in South East for the same. Several taking direction advisers and many-sided bureaus like World Bank, Department of International Development ( DFID ) – Government of UK, Asian Development Bank. The experience of Orissa would in future prove to be utile for the preparation of reforms in other provinces draw a bead oning to make the same.

Restructuring the Power Sector

The World Bank understanding for Power Sector restructuring in Orissa consisted of

aˆ? Unbundling and corporatization of OSEB

aˆ? Privatization of coevals, Grid Corporation, and distribution

aˆ? Creating Competition for new coevals capacity

aˆ? Establishing a Separate regulative organic structure

aˆ? Duty Reform

At the nucleus of the reform procedure was to imagine more liberty for the host public-service corporation and engagement of the private sector in power sector development. The function of the authorities would thereby be more inactive and there was a demand for the Orissa authorities to switch from its earlier active function.

Reform Procedure

The reform procedure that was started in Orissa was carried out in a phased mode. The initial phase was puting up of the ordinance committee viz. the Orissa Electricity Regulatory Commission. It was decided that the puting up of this board would be of extreme importance and therefore the functions were defined.

The function of OERC was to:

Take steps to guarantee that an efficient electricity industry is set up in the State

Issue licences for transmittal and distribution and put duty

Safeguard the involvements of consumers

Ensure that monopolisation was removed from the system

Reforming of electricity duty at the majority power, transmittal, and retail degrees

Reform Phase I

The first stage of the reforms was to be started with the unbundling and corporatization procedure of the assorted sections in the former OSEB.

Unbundling and Corporatization

Three Government-owned corporate public-service corporations were formed with understanding guaranting full liberty with consequence from 1st April 1996. Their functions and duties were good defines with their independent boards. These were:

Orissa Hydro Power Corporation ( OHPC ) – responsible for hydro power coevals

Grid Corporation of Orissa ( GRIDCO ) – responsible for transmittal and distribution maps

Orissa Power Generation Company ( OPGC ) – Responsible for thermic power coevals

OPGC Divestment

In the twelvemonth 1998, 49 % of the portions of OPGC were divested by the Orissa Government in favor of a mechanism to include international spouses through strategic command. The AES command, at Rs 6.03 billion ( $ 144.5 million ) , was the highest among commands from houses including the UK ‘s PowerGen Plc, local house BSES, and Tata, Reliance and Hindalco group companies.

By a elaborate stockholders understanding, 41 % of the portion were transferred by the Government of Orissa to the AES corporation and another 8 % were allotted to them in the name of their subordinate in Mauritius.

Reform Phase II

In the 2nd stage of the reform procedure, it was decided that the denationalization of the distribution activiites would be carried out by the company

Denationalization of Distribution Expenses

The procedures were carried out in the undermentioned stairss by the authorities of Orissa

Govt. of Orissa transferred the distribution assets and belongingss along with forces of GRIDCO to four distribution companies CESCO, NESCO, WESCO and SOUTHCO

Through a procedure of international competitory command, GRIDCO disinvested 51 % portion to Private Sector Investors maintaining a portion keeping 39 % with it and 10 % portion for Employees Welfare Trust.

GRIDCO purchases power from independent coevals public-service corporations e.g. NTPC, OHPC, OPGC, IPPs, CPPs and provides it to four privatised distribution companies who in bend cater to the demand of clients.

The new shareholding form of the assorted parts of the new construction is detailed below.

S No

Entity

Government ( % )

Private ( % )

1

GRIDCO

100

0

2

WESCO

49

51 ( Bombay Suburban Electricity Supply Company

)

3

NESCO

49

51 ( BSES )

4

SOUTHCO

49

51 ( BSES )

5

CESCO

49

51 ( AES Transpower )

6

OPGC

51

49 ( AES Transpower )

Impact of Reforms

There have been positive and negative facets of the reforms that have taken topographic point in Orissa.

Following the power sector reform, the net hard currency flow for Government of Orissa has improved significantly

The entire electrified country in the province has increased by 13 % over the last decennary.

Orissa has been systematically registering a YoY addition in GDP of an norm of 12 % over the last 6 old ages

However at the same clip, there have been a few inquiries of the full divestment procedure that has been carried out by the province of Orissa. Few statistics show the existent and true province of personal businesss in Orissa.

The T & A ; D losingss that were assumed to be 39.5 % , were really greater than 50 % . OERC based their Duty Order sing 35 % T & A ; D losingss, taking to an extra T & A ; D loss of 15 % being absorbed by GRIDCO as losingss.

Private distribution companies are unable to pay GRIDCO and therefore have caused shadow on the overall reform exercising.

Non metered supply to most agribusiness consumers made it impossible to gauge the true extent of the T & A ; D losingss

Even though 100 % Collection Efficiency was assumed by FY98, the existent aggregation was 83 % in FY99

Political Context

However, despite all the grounds given by the authorities to travel for a divestment, there have been inquiries on the existent motivations of the same.

The restructuring activity carried out by Orissa authorities on the compulsive waies from the World Bank, which at that clip indicated that it would fund undertakings merely where restructuring was carried out as a requirement.

The so main curate of Orissa, Biju Patnaik clearly saw the at hand bankruptcy looming in the power sector. He found the World Banks ‘ proposals as the lone manner out.

Therefore we can see that political additions were besides on the top of the authoritiess at that clip and therefore there were several vested involvements every bit good.

Decision

The province of Orissa was the first to continue with a reform programme in response to the World Bank ‘s offer. While its estimated per centum of T & A ; D losingss was high and aggregation of measures was low, the province had the advantage of a comparatively little agricultural burden and hence it needed a lower agricultural subsidy.

To do distribution more attractive 75 % of the shared fiscal liabilities were transferred to the publically held transmittal sector. Generation was made more attractive by increasing the monetary value charged to GRIDCO, which nevertheless was non allowed to go through on the monetary value addition to the distribution companies. Therefore GRIDCO built up tremendous liabilities that undermined its long term viability.

Grosss from denationalization were non ploughed back into the sector but absorbed into the authorities budget for other intents.

Subsequently significant duty additions were imposed on the populace but with few betterments in service, taking to turning public discontent.