Darkness Visible

INDIA is hurtling into the worst power crisis it has ever faced, perhaps worse thananything the world has ever known. And it may already be too late. Too late to savemillions of Indians from being condemned to days and nights without electricity, thousandsof hospitals from carrying out operations by candlelight, factories and farms across theland from crippling spells of un productivity. Too late to save the economy from agrinding slowdown, the nation from a pathetic downturn in its quality of life. Fivedecades of muddled policy, self-serving politics and weak management have combined with ahalf-baked privatisation programme gone hopelessly awry. If this sounds like cheapscaremongering, take a look at the facts.

How bad is it, really? The Union power ministry ’s own estimates peg peak demandpower short-fall at a dangerous 20-21 per cent, expected to climb to 30 per cent in’97. This fiscal year (’96-97), the peak demand shortfall is expected to be thehighest in the North (38.5 per cent), followed by the South (25.3), the East (24.7), theWest (23) and the North -east (20.8). Bihar is the worst-hit with an average demandshortage of 38 per cent, followed by Arunachal Pradesh with 31 per cent. Karnataka’sdeficit is 25.9 per cent, Jammu and Kashmir’s 24.5 per cent and Andhra Pradesh’s20.2 per cent. Maharashtra, the most industrialised state with the best record of power,has announced load shedding of 500 MW d a i l y. In Gujarat, second on theindustrialisation scale, industries are reeling under a 25 per cent power cut. Rajasthan,with a peak demand shortfall of 46 per cent, is forced to impose a four-hour cut onindustrial consumers. 

In Karnataka, there is an incredible 70 per cent power cut for high-tension industry.Almost all industrial machinery is designed for a 50 hertz frequency, but today in westernIndia frequency drops to 48 hertz every evening. A shortage of one hertz means a deficitof 500 MW, which adds up to a hidden 1,000 MW short fall daily in the West alone. AdmittedUnion Power Secretary P. Abraham, when Outlook spoke to him in April: "Shortages arelikely to be more pronounced in the coming years. Privatisation got bogged down in delaysby clearing agencies." Says Dr Rajendra K. Pachauri, director, Tata Energy ResearchInstitute (T E R I): "There ’s nothing on hand to suggest a best case scenario.In the next few years, things will get progressively worse."

The present installed capacity in India is 83,000 MW, but our average Plant Load Factor(P L F) , or capacity utilisation, is a low 63 per cent. We lose 22 per cent of thisgenerated power in the transmission and distribution (T&D) stages (10 per cent isconsidered acceptable the world over). So only 49 per cent of the power India has thepotential to generate reaches the consumer, legally (much of the T&D losses are due topilferage). And, says S.S. Dua, dire c t o r (technical), Bombay Suburban Electric Supply(BSES): "Twenty-two per cent of thermal stations ( thermal stations account for 74per cent of total) are running at a very low 40-50 per cent PLF. "

There's a thumb rule: for every 1 per cent rise in Gross Domestic Product (GDP), power generation capacity has to be hiked by 1.6 per cent. India's GDP grows by 5.5 per cent, and power generation capacity should have to keep growing at about 9 per cent annually—about 7,500 MW—to support GDP growth. But 1985-90, the Seventh Plan period, saw an average annual addition of a mere 3,850 MW. The Eighth Plan's original target was an optimistic 48,000 MW. This was later slashed to a more achievable 30,538 MW, but this goal too is about to be missed by a mile. The Eighth Plan period will end in 1997 with capacity addition of only 19,000 MW, 37.8 per cent below the revised target. The Government had hoped, after declaring privatisation in 1991, that new entrants would set up capacities worth 10,000 MW by 1997; it now seems highly unlikely that they will manage a single watt by then.

And remember: even if we manage to keep adding 7,500 MW of new capacity annually through some act of God, it will only maintain the current demand-supply gap, not bridge it. Not only are we woefully short of catching up with demand, we are rapidly falling even where keeping the shortfall at its current level is concerned.

To bridge the gap, says Abraham, India needs to generate an extra 1,18,000 MW during 1997-2007: split into 57,000 MW during the Ninth Plan period (1997-2002) and 61,000 MW during the Tenth. This means an investment of Rs 10 lakh crore (that's 1 followed by 13 zeros), equal to the country's current GDP! The common economic programme drafted by the United Front earmarks 6 per cent of the GDP every year for infrastructure. That is, using simplis tic arithmetic, 60 per cent of current GDP over 10 years, and infra structure includes roads, telecom, ports etc., apart from power.

According to a FICCI paper, the public sector may generate only about 40,000 MW during '97-2007. That's a gap of 37,000 MW during '97-2002 and 41,000 MW in 2002-2007. Unless the private sector moves in fast and in a big way, we're talking 50-60 per cent peak demand shortage—roughly, eight to 10 hours of power cut every day, at least in summer. And despite all the hype, the private sector is far from helping light up our homes. Perhaps, too far.

What went wrong? Says a senior power official: "We really seemed to have planned for shortages." The most glaring instance is our state electricity boards (SEBs), which supply around 65 per cent of India's electricity needs, and whose annual losses now stand at Rs 7,000 crore. If the SEBs were private companies, the world would have long ago acknowledged that most of them should be closed down. Under Section 59 of the Electricity Supply Act, 1948, the SEBs are required to earn a minimum rate of return of 3 per cent on their net fixed assets in service. Current rate of return: minus 13 per cent.

Subsidies to farms and households now exceed Rs 13,000 crore per year—over 77 per cent goes to agriculture. With 80-100 per cent subsidies, agricultural consumption has shot up, from 10 per cent of the total in '70-71 to over 30 per cent now. The reasons: proliferation of electric pumpsets, higher usage, wastage and legal loopholes. In Tamil Nadu, Karnataka and Madhya Pradesh, power is free for pumpsets of up to 5 horsepower. So, huge farmhouses run as many as a dozen 5 HP pumpsets and receive no electricity bills. In some states, says Harry Dhaul, director-general, Independent Power Producers Association of India, as much as 70 per cent of power is subsidised.

 These politically important subsidies are the main reason for the state of the SEBs' balance sheets (see chart). Says Abraham: "Unless the SEBs are made viable, the power situation will never improve. The minimum rate should be a cost-plus tariff. Because SEBs are in the red, they can't give better supply to consumers, as there's no money to put up new capacity, or to build new T&D networks. Hence, both quantity and quality of electricity is suffering." Says Dhaul: "Investing in the state power sector is like pouring water into a bucket with many large holes."

 As a result, we are witnesses every year to a comical cycle. Since SEBS collect far less than they spend in reaching power to the consumer, they don't pay the National Thermal Power Corporation (NTPC) for the power they buy from it. NTPC then stops paying its fuel bills to Coal India, which doesn't pay the Railways for transporting the coal and the Railways stop paying the SEBs. After some brinkmanship, it's all sorted out at the ministerial level in Delhi, and life continues as usual. And the customer all suppliers squeeze the most is industry: it consumes about 40 per cent of India's power. As of February '95, the SEBs owed the central power corporations Rs 5,679 crore, with arrears to NTPC alone touching Rs 3,093 crore. "Can any private producer, Indian or foreign, bear such a heavy burden like NTPC does?" asks ASSOCHAM Secretary General V. Raghuraman.

Even the World Bank is washing its hands of the muddle. Between July '93 and June '95, it has not financed any power project in India. From May '85 to March '93, it lent the Indian power sector over $6 billion—over $2 billion went to SEBs. Says Javad K. Shirazi, director, resident staff in India, World Bank: "With returns of most SEBs being negative, there is little point in pouring in money." Asks another Bank official: "If SEBS don't sell at appropriate rates, how can they buy from private producers?"

AH, PRIVATE PRODUCERS! "What worries us most is no major private project has started since '91. And not much is expected during the Eighth Plan," says Abraham. Quite simply, the Indian private sector doesn't have the wherewithal to meet the gigantic shortfall. Says S.K.N. Nair, former member, Central Electricity Authority (CEA): "If India's large industrial houses plough back 10 per cent of their internal resources into the power sector, up to Rs 3,000 crore can be generated yearly. With that kind of equity, about Rs 7,000 crore can be obtained as loans every year." Thus, the Indian private sector can raise Rs 10,000 crore per year for the power sector—Rs 1,00,000 crore over a 10-year period. So who is going to cough up the remaining Rs 9,00,000 crore?

Then, is the white man with his Rolodex, spreadsheets and Texan accent the only answer? Says a foreign trade diplomat: "Those who look to foreign investors as a simple solution are dreaming." Agrees Raghuraman: "Power projects have long gestation periods with risks. Compounded by the present confused policy, it's clear that foreign investments can at best supplement national public and private efforts." Foreign diplomats say the private power sector, including foreign majors, are frustrated by false starts to privatisation and the unstable investment climate. Even if the states start power reforms in earnest, the private sector won't be in a position to play an important role till at least 2000. Simply, not enough investors, foreign or Indian, are keen on the Indian power sector. The Dabhol Power Project, in its first phase, envisages a 740-MW capacity. India needs 15 to 20 more Dabhols right now, and a similar number every year.

Trouble is, the private power policy announced in 1991—and celebrated by all as the panacea—is a muddle-headed rushjob. Says TERI's Pachauri: "Private power projects can't get off the ground by the mere announcement of a policy. The Centre should have first changed the decision-making structure, sensitised state governments to handling cases of private investment, both Indian and foreign, and sorted out pricing and contractual issues. Most important, unless we have an independent regulatory body, quick decisions can't be made and transparency suffers."

 A World Bank study agrees. "The (power ministry) notification (announcing the private power policy) itself has many shortcomings and ambiguities," it says. "Its implementation has been rendered difficult by uncertainties in the approval process and a general lack of coordination among the various central and state agencies involved." "Foreign investors are not keen on investing," says Dhaul, "because of all the confusion and lack of clarity in policy." 

For instance, power is a concurrent subject—it comes under both the Centre and the states. So who's really in charge, especially if, like with Dabhol, the state and the Centre have very different views? Then again, the Government announced single-window clearance for private power projects. To unsuspecting investors—and to any sane person—this means all approvals can be obtained from a single contact point in the Government. Imagine their surprise when the supposed single window quickly began revealing many windows inside it, and many more inside those windows.

Notes the World Bank study: "Apart from collecting clearances from various state departments and the CEA, a project generally needs clearances from the ministries of power, finance, environment and forests, petroleum and natural gas, and possibly railways, shipping and transport. Other relevant entities include the Central Water Commission, the Directorate General of Civil Aviation and the RBI." Raghuraman reckons that 67 to 92 clearances are needed to set up a power project. Quipped a US executive cynically: "You guys in India are better than Bill Gates at making windows." 

As a result, though 243 private power projects have been proposed, few have progressed beyond the signing of memoranda of understanding (MoU). Even fewer are being promoted by world leaders in this sector. It may surprise the layman, but Enron is not considered a serious player in the global power business. It is a gas company which has entered power. As its core business is to supply gas to power projects, it decided—rightly—that profits would rise if it got into the generation business. Seen this way, Enron's interest in Dabhol is predicated on the fact that the fuel would come from Enron's Qatar gasfields. This is the key issue in the project, and most analysts have missed this altogether.

Nair feels the Centre adopted a very simplistic approach: "The assumption was that large scale investments would come just by throwing open the sector to private players. Moreover, the proposed cost of generation by private projects is higher than the public sector's. Negotiations with foreign majors haven't been strong enough." There were political ends to be met too. For instance, Orissa decided it would be very nice if it was the first state to have a private project. The result: the Ib Valley project was given on the most favourable terms, to the foreign investor, of course, says Nair.

He says the problems have stemmed from the Centre trying to work out easy solutions by giving guaranteed returns without going into linkages of investment with T&D needs. Regulatory and infrastructure problems like coal and transport remain. Besides, the private power policy is obsessed with only the supply side, generating more capacity, without matching changes in other areas.

Sadly, it appears the Rao government knew all this. It saw the huge power crisis looming and realised that sorting out the demand side was too complex and politically unpalatable. So it decided that if India could get huge new capacities through foreign investors, the resultant chaos when the time came to pay the electricity bills would be so enormous that somehow, if all our fingers are crossed hard enough, it would solve the problem. This naive faith ignored one  critical element: where will the money for setting up all these projects come from? The Rao government overlooked the unique nature of the power  project financing business. For, the bottomline is that besides the eight "fast track" projects, very few of the 243 proposed private projects will ever be set up. And as of now, no one can do anything about it.

NO PRIVATE POWER? It's an open secret in the power business that no one in his right mind is going to lend money to set up projects in India. The very high levels of investment required means the promoter brings in only a fraction of that as equity. He usually relies on international consortia of lenders. But, power financing is "non-recourse financing"—every project is a separate company, and if the company goes bust, the lenders can't "take recourse" to the promoter to pay up. If the Dabhol Power Company folds up, the lender can't ask the promoters—Enron, GE and Bechtel—to pay up.

On this idiosyncrasy hangs the story of the disaster looming over India's private power programme. The tale is simple, and it's recounted in the graphic at the bottom of this page. So if the Government can't guarantee repayments, and the insurance company won't insure, and the SEBS can't pay, and the lenders can't get their money back, then where on earth is all this money going to come from? No one has an answer.

IS THIS THE END OF THE ROAD? Outlook spoke to Planning Commission member G.V. Ramakrishna in March. There are limits to cross-subsidisation from industrial users, he said. Any investor who supplies 30 per cent of power for agricultural users, where tariffs are less than the cost of generation, will lose money. SEBs should be given autonomy. An independent Tariff Regulatory Board should take care of both producers and consumers, without political interference, that key unattainable! SEBs have no freedom because of excessive control, says Pachauri. The state governments are to blame—they regard SEBs as a convenient vehicle for political patronage. Says he: "Illegal connections and power thefts are connived at in the establishment. Someone or other in power is supporting the guilty...their connections even extend to the state's minister."

Fortunately, the Planning Commission and the Power Ministry concur on the way to redeem SEBs. Says Abraham: "The only answer is to reform and restructure them, with full autonomy. There should be an independent regulatory body to fix viable tariffs. Subsidies should be wiped out immediately." All agree that private participation is essential. But for best results, the entire policy framework may need to be re-examined to start the whole process anew. In this best case scenario, says Pachauri, if new projects commence, India will start getting additional capacity from the private sector by '99-2000.And consumers are probably willing to pay double the current rates if they are assured of uninterrupted supply. Says Abraham: "The outdated Indian Electricity Act, 1910, and the Electricity Supply Act, 1948, have to be amended or new legislation brought in."

But all this has to be done very quickly, maybe in the next six months, otherwise the harm won't be undone. Serious foreign investors are already losing interest. Says a foreign diplomat: "There is now a tremendous amount of suspicion on the merits of privatisation of India's power sector." Dua of BSES observes that though the Government has offered attractive incentives, worldwide players are still not enthused.

In the meantime, the clock goes on ticking. In two-three years, each metro can expect at least eight to 10 hours of power cuts per day. The rural areas will be worse off. And India will be one big burning inferno.