The power bailout package announced on Monday by the Union government is an important move to rescue the sector from imminent bankruptcy. But it is by no means a “reform” or even a solution to the power industry’s crisis. There can be no solution without bringing in good economics based on good politics – of which there is an acute scarcity.
In fact, the entire energy sector – ranging from oil to gas, coal and nuclear energy – is a minefield precisely because politicians have used it as a milch cow for bankrolling their re-election, not to speak of generating black wealth for themselves and their business cronies.
This is why even after the bailout, it is highly unlikely that the power sector will be rescued. Except for a brief while.
The main gainers will be Rajasthan (losses of Rs 39,710 crore), UP (losses of Rs 25,934 crore), Tamil Nadu (Rs 19,146 crore) and Punjab, says The Times of India. Politicians (past or present) in these states have successfully run their power companies into the ground. More than a bailout for the power companies, the package is a bailout for politicians. It is intended to protect them from the consequences of bad, or even malafide, power pricing decisions.
If there was no bailout, the power sectors in these states would come to a grinding halt – resulting in a huge popular backlash against politicians. The bailout will delay their day of reckoning.
Let’s see how the bailout is supposed to work in the first place. The plan is that state governments will take over 50 percent of the accumulated losses/debts of their power distribution companies (discoms, which currently owe over Rs 1,90,000 crore), guarantee repayment of the other half – which will be rescheduled by banks – and then agree to keep raising tariffs every year and trim transmission and distribution (T&D) losses.
Three things are obvious.
One, this is not quite a central bailout. The Union government is not writing a cheque for Rs 1,90,000 crore – it is merely providing transitional short-term financial accommodation to enable the states themselves to find the money for it.
Two, to get even this transitional finance, states will have to reduce the gap between average revenues and costs by 25 percent – which means raising tariffs steeply. In 2009-10, the gap was as wide as Rs 1.45 paise per unit. It could be more now. This means raising tariffs by nearly 40-50 paise per unit every year, assuming costs do not rise at all.
Three, the only money discoms will actually get is grants linked to reduction in transmission losses. Every 1 percent cut in transmission losses will fetch a grant of Rs 1,500 crore to all discoms put together from the centre. Individual states will obviously get much less.
If this is to work, it means reinventing Indian politics and political morality. As Utpal Bhaskar, writing in Mint, notes: “Apart from the obvious difficulties in its implementation, given the states’ inability to acquire the debt as this would breach their fiscal responsibility and budget management limits…the plan is based on the premise that the same set of stakeholders that have earlier landed the sector in this mess will behave in a rational way after signing agreements.”
Consider why power companies are in such a mess.
State politicians want to subsidise electricity for farmers – since this is where they get their votes – and segments of the urban middle class.
This leads to overpricing power for industrial use. But not all industrial consumers like paying the full price. So they steal the power to bring overall costs within reasonable range. This is why T&D losses tend to be high. It is not just lost in transit.
Power stealers usually share the savings with their political masters – who, in turn, protect them from scrutiny and harassment.
At the discom level, since the political pressure is not to collect dues from power stealers or from farmers and other subsidised consumers, there is thus no need for managerial competence. Just an ability to say yes to your political bosses is good enough. Incompetence and stealing are two reasons why northern and eastern India faced such a huge grid collapse last July.
So we have incompetent power companies, crooked politicians and huge constituencies that simply do not pay a reasonable price for power.