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SEBs' unviability -- Privatisation, the remedy

J. Nanda Gopal

THE OBJECTIVE behind the enactment of the Electricity (Supply) Act, 1948, to facilitate the coordinated development of electricity on a regional basis and transgressing geographical boundaries by investing significant powers in State Electricity Boards (SEBs), has not been translated into reality.

In the economic sense, the SEBs have ceased to be effective as they are run more as an extended arm of the State than as commercial enterprises. They do not have financial or managerial autonomy and lack initiative and enterprise.

The billing and collection parameters adopted by the SEBs have led to disastrous consequences, making them cash-starved. The outdated delivery system needs the infusion of new technology and work practices.

The SEBs' financial position is so abysmal that it has been contributing significantly to the fiscal deficit, posing a serious threat to economy. The tariff systems have worsened the situation and the absence of a cost-recovery approach in the distributi on segment is threatening the power sector's survival.

The distribution network is heavily tilted in favour of low voltages, which account for most of the technical losses and supply of poor quality power to consumers. Transmission has long been a neglected area and has seen few investments. Against the pres cribed ratio of 2:1:1 for investment in generation, transmission and distribution (T&D), investment in T&D has fallen far short.

In this context, the privatisation of distribution holds the key to power sector reforms. The issue today is how soon this will occur. In a report on the Indian power sector, the World Bank stated: ``Without a change in ownership of distribution and the introduction of independent regulation, the necessary improvement in corporate culture and introduction of commercial behaviour, proper incentives and accountability will not transpire.

What is sought from the privatisation are operational improvements through the introduction of up-to-date technology and practice, financial and economic benefits (including the reduction of government funding for the sector), and an environment for mana gement and employees that will require change in management and work practices''.

While SEBs cannot make new investments for system expansion and modernisation for want of financial muscle, private developers are content with payment security and cash flow guarantees.

For a project to be bankable from the perspective of equity and debt-providers, a well-defined security mechanism, a reasonable rate of return for investors and a clearly defined allocation of risks through well-structured project documentation and contr acts should be ensured.

Hitherto, the entire privatisation process has been limited to increasing the installed generation capacity with private investments. Investments in the main T&D network, the augmentation of the sub-transmission and distribution networks and concepts suc h as transparency and market restructuring are as important as increasing the installed generation capacity.

The underlying objective of privatisation makes it necessary that management, administrative and operation control is vested with the private promoter, who will be responsible for new investments and financing decisions. This is essential to improve the supply conditions and services to consumers.

The Coelho Committee made useful suggestions on possible arrangements for privatisation, subject to environmental constraints. They include joint ventures, contracting of services, distribution cooperatives, distribution by municipal undertakings/local b odies and outright sale.

While the few options of privatisation, such as management contracts, long-term leasing and franchisee arrangements, can be explored, they are not effective enough to make the private developer accountable for improving the system and investment decision s.

To control T&D losses, it is necessary to focus on technical measures and the autonomous functioning of the management to prevent malpractices in electricity supply. In this context, licensing a new enterprise to supply power appears feasible. Thus, the fact that the financial principles and the duties and obligations of a licensee are defined in existing legislation, would be an advantage. This would mean that the operations and profitability would be compliant with the Electricity (Supply) Act, 1948, that is, the profit earned by the company would be guided by the reasonable return on capital base.

The successful private developer would have to enter the system through competitive bidding, else the process would lack public acceptability or legitimacy. The institutional capability would also be tested to facilitate a well-documented process, develo ping market strategy to generate investor interest and implement a transparent selection procedure based on a time-bound programme.

To avoid a protracted transition period which could result in high transaction costs, clear policy guidelines for the privatisation process are important to sustain investor interest.

Financial restructuring, that is redefining the balance-sheet, rescheduling liabilities, including debt servicing obligations, identifying the contingent liabilities and assigning the economic value of assets, inventories and receivables vis-a-vis bad debts -- would be a key task.

The privatisation of distribution would not succeed unless industry restructuring is taken up simultaneously. In a larger context, the privatisation of distribution would be guided by the pace of reforms in taxation, bankruptcy and contract enforceabilit y.

Reforms in the labour market are equally important, as without a flexible policy, there cannot be a viable approach to the transfer, redeployment and rehabilitation of staff in takeovers by private developers.