Tripping up

It is easy, but still correct, to come to the conclusion that the sharp increase in power shortages over the years is due to the lack of investment in this critical sector. While power generation rose by 8.4 per cent per annum in the 1980s, it fell to 6.7 per cent in the first decade of reforms and has further declined to a mere 4.7 per cent in the first five years of the current decade. Indeed, just 56 per cent of the 10th five-year Plan's additional target capacity is expected to be achieved when the final numbers are totted up. Not surprisingly then, the peaking power shortage of around 14 per cent between April 2006 and January 2007 is worse than it was in 1997-98. It is also easy to conclude, as was done in the fast-track power project days of the 1990s, that there is no power as expensive as not having power. After all, the average power shortage of around 70 billion units translates into a production loss of around $100 billion (or nearly one-eighth of GDP), assuming that each unit of power costs around Rs 3 and that the energy-intensity of GDP is around 5 per cent. But this logic breaks down when one considers the asymmetry of those who get the benefits and those who bear the costs. Various industrial/service units gain from the production that is possible through regular supplies of power, but it is the electricity boards (or their private sector successors in a few places) who lose from each unit of power that they supply, as the average price they receive per unit of power sold is way below the average cost of generating/buying each unit of power. So, unless the gainers share this with the losers, the system is not going to work.

Another point easy to make, under the circumstances, is that private sector power is not the answer the country is looking for. Despite Manmohan Singh's assumptions in the 1990s, the argument goes, the private sector did not step in to fill the vacuum created by the public sector in terms of power investment; so there is no reason why anyone should expect better results now. That is, the only way the country is going to get fresh power investment is if the government itself steps up such investment. But this argument ignores the main reason why private investment never took off in the 1990s, and will not take off even now, which is poor policy. Private sector firms planning to invest in the power sector will do so only when there is security of payment, and that is not going to be possible as long as the state electricity boards are the main buyers and are bankrupt. The solution, found in the Electricity Act, was to allow "open access", so that electricity producers could supply directly to select buyers who are credit-worthy. That way, if a firm finds it loses a lot of money through power outages, it is willing to enter into a long-term contract with a supplier for fixed supplies of electricity""the supplier, in turn, is willing to invest in putting up a new plant because he knows he will get his money from such solvent units, as compared to getting it from insolvent state electricity boards. Sadly, however, despite the law being in place, no regulator has allowed "open access" so far, for one reason or the other. Till this fundamental reform takes place, even the public sector will find it difficult to bankroll more than a handful of power projects.