Over 20 per cent of all small scale units have shut down due to soaring power tariffs
Jadhav and Bhasin are among 2.5 lakh small and medium-sized industrial unit owners in Maharashtra who are discovering the difficulty of doing business in the country's most industrialised state. With the latest price hike, Maharashtra has the dubious distinction of having the highest power rates in the country and among the highest in the world. And for a large number of engineering units, mini steel plants and smelting units in Mahara-shtra, electricity accounts for up to 40 per cent of manufacturing costs.
The results are shocking. A fifth of all small-scale units in the state—accounting for as much as Rs 600 crore worth of business—have closed down, according to an estimate by the Chamber of Small Scale Industries Association (CSSIA). That's three lakh families that have lost their source of income. And, warns Madhusudan Khambete, president, CSSIA: "Another 20 per cent of units in industrial zones like Thane are on the verge of closure."
While the MSEB claims a hike of 17 per cent in the tariff, consumers—industrial, commercial and domestic—are actually paying 20 to 45 per cent more (see table). For instance, the increase in tariff rate from Rs 3.62 to Rs 5.24 per unit for domestic users works out to an increase of almost 45 per cent; that of commercial units is up 36 per cent; while demand charges for low tension users have risen 40 per cent. And things promise to get only worse when the Enron plant goes onstr-eam in a year's time. In the World Bank's opinion, 'substantial adjustments' would be required to accommodate the high cost of power which will be supplied by Enron. The bank estimates a doubling of tariff initially, followed by a 15 to 20 per cent increase every year.
For the first time, in a state where the attitude has been keep-going-come-what-may, the consumers of Maharashtra have raised a belligerent voice. Thirteen associations of small scale units in the state have together moved court against the MSEB. The associations want to know why the brunt of the rise should be borne by regular bill-paying consumers and not by defaulters. And they are questioning the hike on several grounds revealed in the findings of the Rajadhyaksha Committee that was set up by the Government of Maharashtra to review the financial performance of the MSEB.
The root of the problem, according to the report, lies in simple economics being distorted by political compulsions—a fallout of the subsidy raj. The MSEB's deficit in March 1996 stood at a staggering Rs 2,187 crore. Of this, more than a quarter is due from agricultural consumers, who pay 24.42 paise per unit of electricity (less than 5 per cent of the Rs 5.24 paid by urban domestic consumers). The other categories accounting for large overdues include public water works and street lights, sick industrial units, and co-operative units.
IDEALLY, says the committee, the tariff should cover the elements of fixed cost and variable cost for supplying power. The fixed costs can be recovered through demand charge, and variable costs could be decided on actuals. "This very rational principle has been given a go-by, and a large number of consumers in certain categories such as agricultural and domestic users, poultry farms, cold storages and pre-cooling plants of grape cultivators and their cooperative societies, low-tension industries, some hospitals, rural and public water supply schemes and street lighting are provided electricity at varying concessional rates, casting unbearable burden on other categories. Such an approach is neither scientific, rational nor equitable," states the report. To compensate, the government has forced the MSEB to load a major portion of the increase in tariffs primarily on high-tension industry, commercial users, bulk supplies, inter-state sales and railway traction supply.
"Maharashtra state," says the report, "has issued directives to the MSEB to delay collection of arrears from certain categories of consumers and instructed it not to disconnect their electricity supply, despite protracted default." Such favours are not uncommon. The government, for instance, has asked for concessions for grape growers, powerlooms and for Navaratri and Ganesh festivals.
The MSEB has been writing off overdues with a never-before alacrity. From Rs 2.77 crore between 1981-82 and 1992-93, it wrote off Rs 200.24 crore in 1994-95—a 70-fold increase! According to the report, the provisional write-off for 1995-96 is Rs 165 crore: agriculture Rs 81 crore; high-tension industry Rs 40 crore; public water works Rs 31 crore; residential Rs 13 crore. Financial pressure is being added by the World Bank. In order to use the loan it was granted in 1996 for the Chan-drapur thermal power project, the MSEB has to guarantee a minimum of 4.5 per cent on the average net value of the fixed assets in operation. But over the last four years, the MSEB's returns have fallen drastically, from a profitable 5.23 per cent in 1992-93 to a 4.3 per cent loss in 1995-96.
The loss would have shown up much earlier, had it not been for proficient financial engineering by the government. In 1994, it converted Rs 1,478-crore loans into equity in order to avoid paying interest on the loan. Thus it had breached the 4.5 per cent rate of return (ROR). This window dressing helped the MSEB postpone its day of reckoning. Today, only a subsidy of Rs 632 crore from the government can help the Board achieve the required ROR. An exasperated World Bank suspended India's right to make withdrawals from Loan 3498-IN with effect from October 22, 1996. The Bank underlined that it had not found the Maharashtra government's representations convincing.
THE MSEB's most serious financial problems, according to the report, can be traced to its unviable tariff structure, based on decisions "handed down by the state government". Subsidies given to certain consumers amounted to Rs 3,650 crore in 1996-97 (see table below). For instance, the agriculture sector, which accounts for 13.1 billion units or 30 per cent of total consumption, accounts for a mere 3 per cent of total revenues, at a rate which is just 10 per cent of cost of supply. On the other hand, the high tension industry accounts for 31 per cent of total electricity consumption and contributed 52 per cent to revenues. In the last 20 years, the high-tension industrial tariff has gone from being the lowest (11 paise/unit) to the highest (363 paise/unit) among all categories of power users. Such skewed pricing is making industrial activity increasingly costly and internationally uncompetitive.
Clearly, cross-subsidisation has gone beyond all resonable levels. Moreover, a National Development Council study shows that 80 per cent of the farmers don't benefit from the agricultural subsidy. The main beneficiaries are 2 per cent of farmers who are members of large lift irrigation schemes. The self-contradictory subsidy structure provides for higher subsidies for farmers with larger capacity pumps rather than small needy farmers. Also, over 40 per cent of the tariff structure is unmetered. Which means that the consumption of categories of consumers like agriculture, powerlooms and public water works are mere estimates. Estimates which are open to challenge on the ground that they tend to inflate the figures of consumption—particularly of agricultural pumps—and thereby suppress the losses and thefts that occur in the transmission and distribution of power.
On the other hand, metered consumers have to pay variable costs like fuel adjustment charges. Fixed charges like sanctioned load are levied irrespective of how much power is consumed. Charges for the entire consumption are fixed at the highest applicable slab rate rather than giving the consumer the benefit of lower slab rates and a premium only on excess consumption. And when Dabhol begins producing power, contractually binding annual payments from the MSEB to Enron start at a minimum of Rs 5,200 crore according to the state government's own estimates. This amount is cost of electricity the Enron plant produces—not how much the MSEB uses. Even though the project will produce more electricity than what was used by all industry in Maharashtra in 1996-97, the MSEB will still have to cough up the money.
At the retail level, the MSEB's credibility is at an all-time low. Confusion and a feeling of being cheated is all-pervading. Complains Sandeep Parikh of Esjay Industries: "In the past eight years I have not been able to comprehend the formula on which the costs in the bill are calculated." Kham-bete refers to MSEB bills as "mysterious documents" where interest arrears are added on with no explanation provided, people pay meter charges even when the meters aren't working and monthly consumption is often arbitrarily decided.
While there are no easy answers to the quandary, the macro-repercussions could be terrifying. Says Khambete: "The cost of power in Maharashtra is already 260 per cent higher than the international average of 4 cents. Given the impending tariff hikes, the government can hardly expect us to be globally competitive." The committee endorses his view in stating that, given the tariff structure, Maharashtra is no longer the most attractive industrial and investment destination in the country.
The committee has presented several possible solutions. But revamping the tariff structure, freeing the MSEB from political whims and solving the Enron dilemma is a tall order. If things continue in this vein, says Khambete, the situation could resemble that of West Bengal in the '60s, when the state plunged into an almost irreversable process of deindustrialisation. Which would be a pity for India's most industrialised state.