A useful first step in power reforms

Context:  Recently, The Ministry of Power had released a Standard Bidding Document (SBD) for the privatization of Distribution Companies (DISCOMS) that will help in reforming their structure, operations and finances.

Key features of the draft SBD:

• Minimizing government role:  By seeking 100 % and 74 % equity participation by the private sector for urban and urban-rural options, respectively.

•  Maintains the existing set of DISCOMS: It bypasses the issues of selective investments, where rural areas are avoided due to less profitability.

• Only good entities shall be privatized: The entity to be handed over would have a clean balance sheet, free of accumulated losses and unserviceable liabilities.

• Not Binding: SBD will not be binding on the states.

Challenges to the draft SBD:

• Limited investor interest:  Maintaining the existing set of DISCOMS may limit investors interest since there could be vast areas (typically rural) which are less attractive. 

• Huge subsidies by the states: linked to the losses of DISCOMS renders the privatization of good entities by SBD ineffective.

• Little flexibility to procure cheap power: Since the SBD provides for Power Purchase Agreements (PPAs) to be transferred to the newly privatized entity, it may lead to 

• An increase in consumer tariffs.

• A ‘Moral hazard’, in the form of reneging of PPA’s, which the few states have done recently.
• Uncertainty in government support: related to issues like transition support, staff union resistance handling, law and order matters emanating from billing, collections and disconnections.

Way Forward:

• Adopt a Franchise model: In areas where an outright sale may not be the desirable option, as it is much simpler and cost-effective.

• ‘Transition Support’ by the government: To ensure there is no consumer backlash with sudden spikes in tariffs and also sustains investors’ confidence.

• Allow for more creative consortia formation: would serve to enlarge the pool of potential bidders 

• Regulating the freedom for DISCOMS to pick PPAs: In this context, two points become important – 

• Ensuring the reduction in PPA’s to be passed on to consumers.
• Devising a mechanism to handle the stranded capacity for PPA’s that are moved out of the new entity.

Conclusion: DISCOMS privatization requires cooperation and communication between consumers, feisty power sector unions, vested interests, investors and governments at all levels.