"Managing transition vital"

TERI is a premier research organization focusing on energy and environmental issues. In a freewheeling interview with Nitin Chittal of FE-Thinktank, TERI director, Dr R K Pachauri spoke extensively on the ongoing reforms process in the power sector. What are your views on the restructuring of the Orissa SEB? The exercise was well executed. Of course, in retrospect one reviews the entire exercise and dwells on what things could have been done differently. I feel the Orissa experience could have been compressed into a shorter time period. Perhaps, it could have been done at a lower cost. Of course, we didn't bear the cost as most of it came by way of development assistance. I think we could have utilized the local consultants to a much greater degree. The whole project was largely in the hands of international consultants who, as you know, are terribly expensive and not always fully attuned to the environment here. Having said this, by and large the process has been executed fairly well. It is too early to predict the results. The initial signs are quite encouraging. There are other states too which are following the pattern. However, states like Haryana have kind of rolled back their reforms programme, which I think is very unfortunate. But I hope after the elections the government that comes to power has the will and the foresight to restart the reforms process again. This assumes importance for if the reforms process spreads across the country, then I think the entire reforms process could have a cascading effect and steamroll the resistance witnessed in the past. On the emerging industry structure There are two sets of reforms that are taking place in the power sector. One is external to the electric utility - relationship with the government, the ability to spell out tariffs that have the sanction of some authority which ensures fairness to the consumers as well as to the producers. The internal reforms is within the utility itself. The kind of reorganizations and restructuring that has to take place. What has now been established and I think is accepted is the unbundling of these SEBs into three separate entities, one dealing with generation, other with transmission and the third with distribution. I think this is the pattern which the other states have been following and will follow. This is only the first step towards moving into private sector investments in this industry and to my mind this is the only way to go. This, for two reasons: firstly, the government just doesn't have enough resources to invest in the power sector. So those days of large scale government investments into the power sector are over. Secondly, the only way you can ensure efficiency of operations and minimization or elimination of thefts is to involve the private sector. It is precisely for these two objectives that I think it is important for us to set ourselves on the road that leads towards privatization. This unbundling and creation of the three separate entities is the vital first steps towards privatization. Are states willing to restructure their tariffs, especially when the agricultural tariffs will have to be raised? The states have very little choice when they have independent regulatory bodies. When the external environment will be such that the prices will not be set by the government and the interface between the government and the SEB is different from what it is today, these prices will be set by an independent regulator. When that starts happening, certainly then the finances of the SEBs will improve substantially. But that by itself will not be sufficient, if you continue to have the level of thefts and leakages that your collections continue to be in arrears and so on. Hence, efficiency has to improve. To some extent that will happen once there is an independent regulator and he starts questioning things and disallows rate increases unless a certain level of efficiency is attained. But clearly this much is not sufficient. One has to move towards greater accountability. What are the lessons we should learn from the Orissa experience? A lesson learnt is that setting up a regulatory body is not enough. It has to be ensured that this body is fully empowered and has a requisite level of knowledge and expertise to manage the challenges of independent regulation. Secondly, it should be ensured that the valuation of assets is done in a transparent manner and leaves no doubts in minds as to whether the dice is loaded in favour of A or B. Finally, while moving towards privatization it has to ensure that there exists a competitive process through which the private sector entities bid and it has to be managed well too. Not only is the management of the transition important, quality of the management of the transition is equally important. It is not a question of taking a step, but taking it in a manner where the transition is done professionally. This is where we can learn from the Orissa experience. How does India's restructuring exercise compare with other countries? Structures in any dynamic society keeps evolving and what we have is an Orissa model from which we can at least know about the likely pitfalls and the strength areas. Therefore, one can start off with the Orissa model. It's not necessary that every state replicates the Orissa model. There could variations. However, the basic structure I think should be related to the Orissa model. Then, over a period of time it could evolve. One doesn't have to be fixed in on one model. Basically, it is the kind of structure that has evolved around the world. What is happening in the UK and US is that there is competition in the distribution area. Now this can only happen if there are choices in terms of the number of generators and transmitters of electricity. Only then could one opt for state A or state B citing that power in that particular state is cheaper and don't wish to remain hooked to buying power from NTPC. This is just an example. Certainly, at the distribution end it is very important to bring in the private sector. That is how choices will generate and some degree of competition will come into the industry. On whether the power privatization exercise embarked on the best way to go about it Each of these have their own merits. But one thing can be said with a certain amount of confidence, that starting at the generation end was not the best way to handle reforms in the sector. Because if you want to involve the private sector in generation unless there is an assurance of returns, who will risk his money? Further, assurance of returns is not possible for various reasons. Firstly, tariffs are totally irrational, secondly the realization of dues are totally inadequate and, thirdly the overall health of the SEBs is poor on account of overstaffing, inefficiencies, bad maintenance. Hence, anyone investing in power equipment assuming that he can sell the power to SEBs and also get paid for it, is obviously taking on a huge risk. In retrospect then, this was not really the best way to go about it and we should have first set up independent regulatory bodies so that at the tariffs' end one starts getting some interventions. One should have also gone in for privatization of distribution at least in areas where the problems could have been managed for instance in Delhi. I see no reason why we shouldn't privatize distribution in Delhi. It's a city state, its easily manageable, the density of load is lucrative business, and around 20 private sector operators would be willing to come to Delhi if provided with a level playing field. So, I think this is where we went wrong. The reason for going astray is that people don't do their homework properly. On the time factor for real interest getting evinced in the power generation sector If one is determined, major reforms could be ushered in the next two-three years. The moment people realize that India is serious about its reforms process, there will be a resurgence of interest, people will be willing to invest and one must remember that these negotiations and the process of finalizing contracts itself takes a year and a half. So you can actually telescope this process. While you are implementing reforms, initiating talks with the interested private sector parties could also proceed side by side.