A Carrot For Privatising India's SEBs

IMF's 2006 country report on India brings some interesting macro economic statistics to the fore. I will draw upon these numbers in this post and the next few.

This one is relates to the electric power infrastructure of the country and its effect on the manufacturing industry.

Apparantly, electricity prices in India are amongst the highest in the world. This is hurting our export competitiveness against other countries. The cost of electricity in China is half that of India.

Well, prices apart, we know that electricity is just not available for industrial use in many areas. The demand/supply gap is enormous.

Moreover, the power distribution is not reliable. The IMF report estimates that electricity outages cost Indian firms 8 percent of annual sales.

We all know the reasons –
- rampant electricity theft,
- free electricity to agriculture in many states,
- grossly inept state electricity boards (SEBs) and their bankrupt books,
- monopoly of SEBs in electricity distribution, and
- high taxes on power generation fuel.

The blame lies squarely on the SEBs. We must break up these clumsy behemoths, privatise electricity distribution and set up an independent body as a regulator. The expectation that private operators will run the distribution networks more efficiently is based on the premise that they will try to maximise profit.

Privatisation of Delhi Vidyut Board (DVB) is a case in point. Though still grappling with the legacy of mismanaged finances and infrastructure, the private operators have considerably reduced leakage losses of DVB, which stood at over 50% before privatization [India Infrastructure Report 2004, 3i Network]. BSES Bombay has a leakage loss of 11%. Private players are also expected to maintain their equipment better, so there'll be less power failures. An independent regulator a la TRAI will make sure that these players keep a decent service level.

Benefits? Besides peace of mind to millions, that is.

I. Let's say the statistic of 8% sales loss has been arrived for only the manufacturing sector. Manufacturing accounts for roughly 25% of India’s GDP. If we can reduce outages by half, it translates to a GDP growth bonus of 1% (Assuming a linear relationship between outages and losses). That’s 7 billion dollars. 33,000 Crore rupees.

Revenue increase for the Government: minimum 10% of 33,000 = Rs.3,300 Cr - Enough to fund reasonable electricity subsidies for rural areas.

II. Reduced leakage means lower electricity costs for consumers. Translates to higher productivity for the industry, meaning export competitiveness, more cash, more investments, more jobs and again more revenue for the Government.

III. A boost to private electricity producers, whose business models have so far remained highly risky due to shaky finances of the SEBs. There is a huge demand/supply gap in electricity, which private producers will fulfill. Yet more manufacturing output, and more enterprises coming up all over the country.

IV. Free up enterprise capital used for captive power generation. Captive power generation of say 50MW is much less efficient than 1000MW power plants. Again major increases in productivity and the virtuous circle that follows.

V. Government cuts its losses in funding the losses of SEBs. I gather from miscellaneous newspaper articles on the subject that DVB's losses, running over Rs.1000 crore mounted huge fiscal burdens on the Government.