Subir Roy: The politics of power sector reform

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Power sector reform in India remains among the most intractable. The initial error, setting right generation without tackling distribution, managed to put the cart before the horse and so came to nothing.

The number of independent power projects that eventually got off the ground was small. After sense dawned and the Electricity Act was passed last year, the groundwork for setting right distribution was done, more or less.

But loopholes that perpetuate monopolies remained. As a result, even till today distribution companies face no competition and actual improvements on the ground remains a mirage.

The World Bank has, over the entire reform period, actively engaged in determining what will and will not work in power sector reform without being able to derive much satisfaction from its efforts.

Its earlier espousal of unbundling state-owned power monopolies had little to show by way of results. It could not, say experts, so long as distribution companies were not disturbed from their monopolistic positions.

The latest developments in the power sector, despite the bank being actively engaged in it via the structural adjustment loans that it has and will continue to disburse to selected state governments, can only cause concern.

Karnataka and Andhra Pradesh were at one time at the forefront of state-level reforms and have been recipients of structural adjustment loans from the bank to set right their fiscal balance.

But over the last several months, under the compulsion of impending elections and their aftermath, both have announced concessions on the power dues of farmers, which have driven a card and horse through their respective power sector reforms.

Karnataka, before the elections, waived the power dues of its farmers till March this year. It paid a power subsidy of Rs 2,000 crore out of its budget in 2003-04 and its finance minister says the accumulated subsidy gap for the current year will rise to Rs 3,000 crore. The distribution companies seem to have bidden goodbye to improving their own efficiencies.

The rate of reduction in transmission and distribution losses has crawled to a near halt and the rate of recovery of farm dues has plummeted, courtesy the writeoffs. Yet the bank says the state does not give free power to its farmers and is ready to resume its adjustment lending.

The story in Andhra Pradesh is similar. After the present government there came to power on an election promise of free electricity, it reduced farmers' power rates from 20 paise per unit to zero.

As a result, the power subsidy, which amounted to Rs 1,300 crore last fiscal, will go up to Rs 1,800 crore in the current year. But the state government is confident it will receive the next tranche of the adjustment loan, which will become due early next year.

Both Karnataka and Andhra claim, and the bank buys the argument, that recent writeoffs are to give relief to farmers who suffered severely from successive years of drought.

Now that the rains are good, the recovery of power dues will resume. But they probably will not, at least not in a hurry. Karnataka has recently been forced to resort to power cuts in rural areas because the rise in the rural consumption of power, post-waiver, has become unmanageable.

Karnataka has at least budgeted for a reduction in power subsidy on the official expectation that the power companies will improve their working. Andhra, on the other hand, has hiked its budget estimates on account of power subsidy.

The World Bank has to remain in business, and, according to its recently revised country strategy, wishes to also engage those states that are the poorest and not at the forefront of reform.

It also sees itself as a storehouse of expertise, which it has offered to share with others to achieve the Millennium Development Goals and improve governance.

How does all this square up? It is not surprising that an intellectual churn is taking place within the bank and its experts are posing a question that is long overdue: Why is it that in poor countries with functioning democracies, governments and leaders who are unable to deliver a minimum level of services are not held accountable?

It is increasingly becoming clear within the bank that you cannot expect to design lending programmes that will work, unless you situate them in the political context in which they will have to survive. The latest World Development Report was the first bank document to formally address the P word.

Increasingly, an internal due diligence of programmes is ensuring that their authors are fed the required political analysis up front. There is now a much earlier recognition of the political context of a programme while formulating it.

This internal churn or new thinking is finding expression in emerging documents, and one that has been widely noticed internally is Can good economics ever be good politics? Case study of the power sector in India by Sumir Lal. It notes with satisfaction that the unsustainability of power subsidies and theft is unambiguously on the political agenda, even though this may appear to be empty rhetoric.

Also, there is a recognition of the need to make power subsidy transparent and improve the health and working of the power utilities. Simultaneously, there is a realisation among those who oppose reform that they cannot hold out much longer. And on paper, the Electricity Act, warts and all, represents progress.

On the other hand, there is a case for arguing that the reform agenda of "stealthy gradualism" has reached a point in the power sector where there is no more space for behind-the-scenes manoeuvre. Stark decisions have to be taken which will directly affect large blocs of powerful voters.

If not, the fiscal situation will become unsustainable and a critical infrastructure sector will get more and more sick. The study concludes that "a technocratic solution alone does not make a reform programme".

In order to build a coalition of support for the power reform programme, it should have "a nuanced understanding of the local political economy, a flexible and creative technical approach and an integrated underpinning of strategic, multidimensional communication."

sub@business-standard.com