A reform fiasco in Orissa

Behind the power reforms in Orissa is a sordid tale of mismanagement and callousness of the private sector, which should rightly serve as a warning to other States on the path of reforms.

THE recent setback to the process of privatisation of the Delhi Vidyut Board, the national capital's beleaguered power utility (Frontline, April 26, 2002) hardly comes as a surprise to those who have been tracking the unedifying experience of the process of power reforms in Orissa, under way since 1996. The Orissa model of 'reforms', under the prescription, guidance and supervision of the World Bank, has since been adopted by virtually every reforming State in the country, with Madhya Pradesh, a recent entrant into the arena, being the only exception so far. Even though Delhi decided only recently to reform its utility, it does not seem to have heeded the signals from the Orissa experience, and substantially adopted the Orissa model, albeit with a few significant variations.

The dramatic exit of AES Corporation, the U.S.-based multinational power company, from the distribution business in Orissa was in the headlines last year, but few realised the extent to which 'reforms' had vitiated Orissa's power sector until the Kanungo Committee Report blew the whistle. The committee, set up in May last year by the government of Orissa to produce a scorecard of the State's six-year-old power reform process, was headed by Sovan Kanungo, a retired bureaucrat, and comprised five other members, all of them experts on the power sector. The committee's report, which came after intense scrutiny of relevant internal documents, meetings and feedback from over a hundred stakeholders across the spectrum, is a telling commentary on how a misconceived reform model can turn out to be a lot more damaging than no reform at all.

The origins of the Orissa power reforms can be traced to a World Bank-funded hydel project in the State which got stalled in the early 1990s owing to rehabilitation issues. The Bank therefore converted the loan into a reform-linked one and scripted, with the help of international consultants, a reform strategy which consisted of unbundling, corporatising and privatising the power utility in the State. It must be pointed out that the Orissa reforms failed not because the Bank's milestones were not adhered to, or because the State government reneged on its commitments to the Bank. The reforms failed in spite of the State achieving the prescribed targets on time, some even ahead of time. Successive governments in the State also have given full cooperation to the implementation of the reform model. The workers of the unbundled Orissa State Electricity Board (OSEB), who initially resisted the changes, accepted the reforms once their apprehensions about the terms of their employment with the successor entities were allayed. Tariff increases in the State have broadly conformed to the Bank's projections, and private ownership and management have replaced public control over the distribution companies.

Yet, six years after the reform process was launched, the Kanungo Committee found the Orissa power sector in a state much worse than it was under public management. AES, which has had wide experience in utility management, has actually walked out of CESCO, the central distribution company, abandoning its responsibility to supply power in its monopoly franchise area. BSES, the other private player, and which runs the three remaining distribution franchises, has also been facing problems, but is bravely plodding along. (Incidentally, former BSES chief executive officer R.V. Shahi recently took over as Union Power Secretary.) Average retail power tariffs in the State have increased by 267 per cent since 1991-92 (40 per cent since the reforms began). This percentage is much higher for domestic consumers because of tariff rationalisation. Peak shortages continue. Generation capacity stagnates at 2900 mW, and there appears to be a flight of industries from the State. Gridco, the State-owned transmission company which owed Rs.1,667 crores to the National Thermal Power Corporation (NTPC) as on April 1, 1996, for power purchased from the latter during its earlier avatar as OSEB, now has a staggering Rs.7,310 crores (inclusive of interest) as outstandings to the NTPC and the National Hydroelectric Power Corporation (NHPC), as on September 30, 2001. The interest liability alone was Rs.4,262 crores as on that date. But more important, the figure of transmission and distribution losses, officially reported to be 39.5 per cent of the power supplied at the beginning of the reform period, have since been revised upwards and were acknowledged to be around 44 per cent in 2001. Just 54 per cent of all power supplied is billed, and collection efficiency is 77 per cent of billing, both figures lower than what was obtaining in 1996. The four privatised distribution companies had notched up losses of Rs. 383.21 crores in 1999-2000 and Rs.324.65 crores in 2000-01. Gridco reported a cumulative loss of Rs.1,394 crores in the first four years of reform. These figures are bound to have worsened since then. In short, the World Bank-designed reform model has failed to deliver.

WORSE, the Kanungo Committee found that consultants who drew up this reform model received a whopping Rs.306.422 crores as consultancy fees. The pre-reform consultancy services offered by KPMG cost Rs.41 crores, the privatisation consultancy by Credit Suisse First Boston Rs.105.261 crores, the project management consultancy by Merz McLellan & Seaboard International Rs. 49.433 crores and other services offered by PriceWaterhouse Coopers cost around Rs.65 crores. While a part of the consultancy fee may have come from grants from Britain's Department for International Development (DFID), a substantial chunk is likely to find its way into tariffs charged to consumers.

Compare this with the Rs.630 crores that has been disbursed by the Bank in Orissa under its loan programme. It is not known whether the sum includes payments made to the consultants listed above. The Bank, which had originally stated that it would lend Rs.1,442 crores ($350 million), has since suspended further disbursements for want of satisfactory progress. Of the $650 million that is slated to come from a variety of other sources, not a cent seems to have materialised. Internal resource generation of the restructured entities has been negative - even the net worth of Gridco and the distribution companies stands eroded. The privatised distribution companies not only failed to invest their own funds in the system, but they refused to bring in any working capital. The distribution companies told the official committee that raising working capital was the joint responsibility of the two partners, although the shareholders' agreement between the private promoter and Gridco mandated that the former would arrange working capital.

IN the case of CESCO, the distribution company that was controlled by AES Corporation, Gridco was to provide the working capital up to an amount of Rs.174 crores (deferred payments for power purchase), beyond which it would be the responsibility of AES. However, the Kanungo Committee found that "AES never fulfilled their part of the obligation and were allowed to pile up unpaid power purchase bills amounting to Rs.403 crores by the time they walked away in August 2001." The committee chastised Gridco for inflicting pain on itself by continuing to supply power to CESCO despite non-payment of bills.

Even the meagre loan funds released during the last six years have not been properly utilised. The Kanungo Committee found that not a single project undertaken by Gridco and the distribution companies with the proceeds of loans has so far been completed. The committee remarked: "Not a single work has been completed and no benefit realised from the large investment made out of borrowed funds incurring heavy debt servicing liabilities." The committee pointed out that this was despite the fact that a full-fledged project management unit (PMU) was functioning all these years under the supervision of international consultants. The committee therefore recommended that no new projects should be taken up. Projects already taken up with borrowed funds should first be completed, it said.

The Accelerated Pow-er Development Prog-ramme (APDP) of the Government of India has made huge outlays to improve system efficiency in various States, but with its poor track record of bank loan utilisation, Orissa may not be able to avail itself of this source of funds, a quarter of which is in the form of grants.

The Orissa experience has also exploded the myth of superiority of private sector managerial skills. AES walked out without depositing the provident fund and pension contributions of its employees, a statutory obligation. Yet the company had claimed excessive expenses on travel, communications and so on. In its tariff proposals it had claimed expenses of Rs.1.12 crores towards telephone and communication charges, Rs.11.2 crores towards consultancy and legal fees, Rs.7.24 crores towards travelling and conveyance, and Rs.2.41 crores towards watch & ward and miscellaneous expenditures - in just two years, 1999 to 2001. It had stopped paying salaries to its employees around July last year and then had to be allowed to dip into the escrow to pay salaries. On July 25, 2001, AES wrote to Gridco seeking permission to sell its stake in CESCO, contrary to the shareholders' agreement, which stipulated a lock-in period of five years until March 31, 2004. According to CESCO's own admission, it had piled up provisional liabilities of Rs.656 crores by September 2001.

There was a series of changes in the top management of CESCO; the Kanungo Committee Report commented: "Even before formally resigning, the outgoing MD and other nominee Directors of AES had been staying in Delhi... In-house billing (and hence collection) in several divisions came to a standstill since the computers were kept in the corporate office which was under their lock and key." In September 2001, AES even brought in a candidate to be the new managing director whose appointment had to be approved at the annual general meeting as the person was underage. The mismanagement of CESCO by its private managers eventually forced the Orissa Electricity Regulatory Commission (OERC) to intervene. On August 24, 2001, OERC issued an order vesting the management of the company in the hands of a State government nominee even as AES went about lobbying to be allowed to sell its stake and exit.

The scathing indictment of reforms, coming as it does from an official inquiry committee which had access to all the relevant information and documents, has evoked only silence from the World Bank, its acolytes and other reform enthusiasts. The only excuse that is being offered is that the government had abruptly withdrawn subsidy payments and had not ploughed back the proceeds from the sale of the distribution companies. But this complaint conveniently ignores the fact that the Bank had not envisaged payment of subsidy to the utilities.

As for the sale proceeds, the accumulated losses of Gridco and the distribution companies far exceed the amount that could have been ploughed back into the utilities. There is no evidence of the fate of the reforms having forced a rethink and introspection on the model adopted, except that it has been ensured that state subsidy for other States pursuing reforms would continue. If the reforms in Andhra Pradesh and elsewhere have not unravelled yet, it is mainly because the State government, despite the strain on their coffers, continues to cough up hefty subsidies to the utilities.

Even the Delhi model has a built-in clause for a government subsidy of Rs.2,600 crores to be disbursed by the State government over the next five years. While the architects of reform will have us believe that this is a loan to the distribution companies, it can be deemed to be so only when it is actually repaid - a prospect that seems rather remote, going by the track record of other States on the path of reform.

Thus, reforms, originally premised on the argument of 'resource-constraint' and 'additionality of funds' have now come full circle. We are now told that if reforms are to succeed, State governments should continue to dole out subsidies; that neither private ownership/management nor tariff increases/rationalisation is sufficient to restore the viability of electrical utilities.