New Delhii Power PDF

Kennedy School of Government HKS103
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Case Program CR15-08-1891.0
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New Delhi Water and Power
The monsoon season was over and a soft breeze wafted through Sheila Dikshit’s New
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Delhi office. She had been chief minister of India’s capital territory for almost six years and felt she
understood what her voters wanted. But now the whole fiasco around the reform of the Delhi
Water Board had shattered her self-confidence. She reviewed the reasons she decided to push for
reform: water services were poorly managed, the supply was inadequate, losses were high, and
bills were not collected. Rumors of corruption in the system were rampant, and many poor
neighborhoods were not served at all.
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The chief minister walked over to her desk and picked up the 2005 evaluation of the
electricity reforms. They had been one of her administration’s most significant achievements and
had been far more radical than the baby steps she was suggesting for the water sector. Why had
one been a political success, instrumental in her reelection, while the other had galvanized a
groundswell of popular opposition? Didn’t the people want better water services? In the case of
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power, the government had sold its majority ownership of the electric distributions companies,
while in the case of water, the government was only proposing to hire private managers for two of
the city’s 21 zones. The public’s reaction seemed irrational.
The chief minister knew that she would have to make a decision on whether or not to walk
away from the water reforms that she firmly believed would enhance the lives of millions.
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Background
Sheila Dikshit was sworn in as chief minister for the Government of the National Capital
Territory of Delhi for her second consecutive term in December 2003. In her reelection campaign,
This case was written by Henry Lee, Lecturer in Public Policy Harvard Kennedy School, Harvard University, and
Avjeet Singh, Research Associate, Harvard Kennedy School, Harvard University, with extensive input by Rajat
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Misra, Vice President of SBI Capital Markets. It is intended for class discussion only and not as a source of primary
data or as an example of appropriate or inappropriate policy. (0108)
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New Delhi Water and Power _________________________________________________ CR15-08-1891.0
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she promised to continue her efforts to improve the quality of government services. “We will make
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Delhi a capital city that people will be proud to live in. Our aim will be to improve the quality of
life and offer a better Delhi to future generations.” She spoke about her successes promoting e-
governance, the CNG bus fleet, the initiation of the Metro rail line, and especially the privatization
of the electricity distribution companies.
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While electricity service was perceived to have improved, the provision of water services
continued to decline. The 2001 census recorded a population of 13.85 million; an increase of 46
percent in ten years. Providing municipal services to a rapidly growing population was a daunting
challenge and demanded a high level of innovation and leadership. Further, as the nation’s capital,
anything that happened in Delhi was a national story, which was not the case in other Indian
states.
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The Power Sector: The Problem
The electricity supply in India was in private hands under British rule. After independence
in 1947, most of the private companies were nationalized and placed under the control of vertically
integrated electricity boards in each state. In the case of New Delhi, the government monopoly
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provider was the Delhi Vidyut Board (DVB), which in 1997 had replaced the Delhi Electricity
Supply Undertaking, a wing of the Delhi Municipal Cooperation, part of the Home Ministry, a
federal agency.
Delhi has a high per capita power consumption marked by sharp diurnal and seasonal
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variations, resulting in large differences between peak and off-peak consumption. In the seven year
period between 1995 and 2001, the demand for power at peak times increased 50 percent to 2,670
megawatts. During the intolerably hot days of the summer, the system was often unable to meet
demand and blackouts became a normal occurrence.
While new peak generating capacity was needed, the bigger problem was that certain
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portions of the DVB were losing more than 53 percent of its power through theft, uncollected
revenue and technical loses. (See Exhibit 2.) The latter was estimated at 8.6 percent while the two
former categories accounted for approximately 45.3 percent of the power generated. This meant
that DVB had to buy 150 megawatts in order to obtain revenue from its customers for 69
megawatts. In other words, to get 10 rupees from electricity sales, DVB had to spend more than 20
rupees. This condition was exacerbated by retail tariffs for the residential sectors that were
significantly below costs. Industrial rates were above costs, but theft by this sector was unusually
high. Instead of being outraged, some elected officials condoned electricity thefts and prevented
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enforcement action.
Not surprisingly, this plunged DVB into dire financial conditions. The government
provided loans and annual subsidies to allow the company to continue to function, but the Board
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simply did not pay for much of the power that it bought from the generators or transmission
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providers. By 2001, DVB’s total liabilities were close to $5 billion; more than six times its asset base.
The management of the company was in very poor shape. The DVB employed 22,450
workers and gave rise to a culture where all jobs were safeguarded, removing most incentives to
perform. As one consultant remarked, “DVB staff had a mindset focused on government, not the
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customer, with almost no attention to efficiency improvements.” In 2002, the Annual Account of
the Board was six years in arrears and data on revenue and consumption pattens was in disarray.
1
The government of New Delhi was spending Rs 1,500 crore annually to subsidize the DVB.
The company’s public image was in disrepair. Many customers purchased expensive
backup equipment to protect against frequent power interruptions. Poor neighborhoods were
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ignored and complaints about poor service skyrocketed.
When she ran for the office of chief minister in 1998, Dikshit was convinced that without
reform, the DVB would remain a political and financial liability. It was true that Delhi was a fiscal
surplus state and could afford to keep subsidizing the DVB. However the perception within the
Dikshit administration, the media, and the business community was that the failure to make the
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needed reforms would result in serious political consequences. The voters demanded action.
The Reform Package
Once in office, Dikshit moved swiftly. Involving the World Bank or other external parties
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would have drawn out the process. Instead she formed an ad-hoc committee to recommend a
strategy on how to proceed. Based on the recommendations from the committee, in February 1999,
Dikshit proposed unbundling DVB, separating generation and transmission from distribution.
Separate companies would be formed to take over each of these functions. The three distribution
companies would be privatized as joint ventures with the government owning 49 percent of the
shares. The hope was that private involvement would improve the management and would gain
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access to capital markets foreclosed to a government-owned company. A new regulatory

commission was to be formed to regulate the companies. To oversee the reform process, Dikshit
appointed Jagdish Sagar as the chairman of the DVB.
Within two months the Delhi Electricity Regulatory Commission (DERC) was established.
Sagar persuaded the employee unions to sign an agreement that guaranteed job security for all
current employees, required the government to assume all existing pension liabilities, and paid
employees a bonus if and when the reorganization reforms went through. While India had a
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history of strong labor opposition to privatization, the electrical workers union realized that any
1
One rupee equals 2.4 US cents ($0.024). Crore is a unit in the Indian numbering system. Rs 4.17 crore is equal to
$1 million US dollars.
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agitation to save DVB was unlikely to garner popular support. Further, the government organized
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seminars to explain possible reform packages, and union leaders were sent to look at how similar
reforms adopted in Mumbai were working.
The government hired SBI Capital Markets, a subsidiary to the State Bank of India, to help
develop the structure of the reformed entities and design the bidding process to award the
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majority shares in the new firm. In April of 2000, SBI submitted their recommendations to the
government. In November, after debate and discussion, the Dikshit administration promulgated a
comprehensive proposal to restructure the DVB.
The plan called for the creation of six companies: a holding company, a generating
company, a transmission company, and three distribution companies. All the liabilities of the six
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proposed companies would be held by the holding company, which in turn was 100 percent
owned by the government. These liabilities included loans and interests accrued prior to 1997 (Rs
12,953 crore) when the Delhi Municipal Corporation managed the utility and liabilities incurred by
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the DVB since 1997 (Rs 10,184 crore). Thus, initially, the other five companies were starting fresh
with no historical liabilities.
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A request for proposals (RFP) was issued to sell 51 percent of the stock in the three
distribution companies. While six companies were pre-qualified, only two, Reliance and Tata,
actually submitted bids. These were the two largest private providers of power in India and both
were almost entirely domestically owned.
The government established fixed values for the three companies: $14.61 per attached
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customer for DISCO 1 (renamed BSES-Yamuna Power Ltd or BYPL), serving the central and
eastern area of the city; $58.79 per attached customer for DISCO 2 (renamed BSES Ragdhani Power
Ltd or BRPL), serving the south and western sectors; and $53.74 per attached customer for DISCO 3
(renamed North Delhi Power Ltd or NDPL), serving north and northwest sectors. The prices for
BRPL and NDPL were five times the price received for the distribution system in Orissa state, but
the total amount received by the government was only $102.4 million, which at least one NGO
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claimed was 20 percent of the real value of DVB’s asset base. This assertion was later proved false,
but the perception of “undervaluation” stuck, gaining favor with opponents.
The bidding parameter was reductions in Aggregate Technical and Commercial line losses
(AT&C). To insure that the bidders would make significant investments, the government set
minimum bids equal to more than half the line losses. These targets differed from one company to
the next, but the goal was to reduce the losses by approximately 50 percent within five years.
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However none of the bids met the targets. Both Reliance and Tata stated that the best they could do
was meet targets that were 10-15 percent less than those set by the government. After several weeks
2
Jagdish Sagar, “Why and When do State Governments Reform: The Case Experiments in Electricity in Delhi,”
India Infrastructure Report, 2004, ch 7, table 7.3.
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of negotiations, the government accepted a new schedule of reductions that was very close to what
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the companies had proposed. Each of the distribution companies was granted a predetermined
return on equity, after accounting for allowable expenses to be determined by the regulator. These
returns were conditioned on their success in meeting the AT&C loss reduction criteria.
Reliance assumed 51 percent ownership of BYPL and BRPL, and Tata was awarded 51
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percent of NDPL. While the government retained most of the historical liability, some debt was
reallocated to each of the companies based on their projected revenue flows and efficiency
improvements.
In addition, the government, through the holding company, provided loans totaling Rs
1,416 crore to the three companies to help cover their costs. Principal and interest payments could
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not begin until June 30, 2006.
To meet the companies revenue needs SBI Caps projected tariff increases of 10 percent, 10
percent, 10 percent, 5 percent and 3 percent for each of the financial needs from 2002-03 to 2006-
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07. The actual tariff increases were lower.
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Even with the projected tariff increases, the government was expected to provide Rs 3,450
crore in subsidies to the companies, which was lower than the Rs 7,000 crore that it might
otherwise have had to provide.
Basically, the government subsidized the price of purchased power. The size of the subsidy
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was calculated through a three step process. First the DERC, the regulatory agency, estimated the
amount of revenue each distribution company was likely to collect from its customers given the
projected tariff. Second, it then determined the DISCOs allowed costs, excluding power purchases,
but including capital. It subtracted the latter from the former. The result was the amount of money
that remained to pay the Transco for power purchases. It divided this amount by the total number
of kWhs projected to be purchased. The result was the price the distribution companies pay for
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power purchases. In other words, the price for power was based on the distribution’s companies’
ability to pay, not the cost that the Transco paid for that power. The government, in turn, provided
the Transco with a loan equal to the projected amount of the subsidy, which the Transco could
collect by increasing its tariffs, starting July, 2006 when the repayment of the loan would begin.
3
In their rate filings for 2006, the companies informed the government that they would need greater returns in order
to begin repaying those loans. The government countered by suggesting that they refinance these loans with
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commercial banks. Commercial debt would increase their overall operating costs by up to 3 percent.
4
Prayas Energy Group, A Critical Review of the Performance of Delhi’s Privatized Distribution Companies and the
Regulatory Process, May 2006, p. 34.
5
The description of the three steps was taken from Manish Agarwal, et al, “The Delhi Electricity Privatizations:
Some Observations and Recommendations for Future Privatizations in India,” the World Bank, October 2003, pp.
30-33.
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Without this subsidy, it was doubtful that any private company would have bid for the
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distribution companies, unless the government was willing to raise retail tariffs substantially
beyond the level considered to be politically feasible. The plan was that the need for the subsidy
would be reduced each year and would be eliminated in year six.
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Assessing the Reforms
In July 2002, Reliance and Tata took over 51 percent of the respective distribution
companies. The three companies missed their loss reductions target by a very small margin in the
first two years, but exceeded the targets in the next two. NDPL run by Tata reduced its losses from
53 percent in 2002 to 28 percent in 2005-06. Theft in the NDPL system went from 35 percent to 13
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percent during this period. The two Reliance companies did not reduce theft as dramatically, but
still reduced losses by a significant percent by drastically cutting collection losses.
As theft was reduced and more bills collected, the distribution companies turned their
financial situation around. All of them showed a profit in 2006-07. In fact NDPL paid a dividend in
2006. Moreover, with the DISCOs now accountable to the regulator, a performance-oriented
culture has emerged in each of the companies. Consumer satisfaction with the service improved. In
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fact in the past five years, tariffs increased three times, totaling a 23 percent increase (less than that
projected by SBI Capital in its original plan).
On the other hand, the public-private partnerships [PPPs] introduced high expectations,
some of them less realistic than others. An objective assessment of the performance of the three
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distribution companies was difficult because the financial data for the period prior to 2002 was six
years out of date and the accounting definitions were continually changing. The financial
conditions of the three companies improved, (especially that of the NDPL, run by Tata) and thus
the burden on the city government was reduced. (See Exhibit 3.) Capital expenditures by the three
companies were much lower than either SBI Cap or the companies themselves projected in the first
two years, but picked up dramatically in the last three. (See Exhibit 4.) Costs per kWh were
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reduced, but only marginally. (See Exhibit 5.)
A goal of the reforms was to reduce the number of power outages. To measure the level of
improvement, the regulator must differentiate outages due to generation and transmission
problems from outages due to distribution problems, such as transformer problems or other parts
of the distribution system. Unfortunately the public usually did not make this distinction, as was
evidenced in the summer of 2005, when the lack of generating capacity caused multiple blackouts.
Shortages in April 2005 were as high as 30 percent of demand, not just in New Delhi, but
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throughout Northern India.
As of 2006, the DERC did not request formal filings from the companies on power outages,
thus the evidence was anecdotal. BRPL and BYPL stated that transformer failures decreased from
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132 in July 2002 to “almost zero” in 2005. “No Power Supply” complaints to the NDPL, which were
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3 percent in 2000, were 0.50 percent in 2005-06.
The most controversial aspect of the reforms pursued by the companies was the
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installation of electronic meters. In the past, the old and poorly functioning meters
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underestimated the actual amount of power being used. When the more accurate bills showed
greater power use, consumers protested, claiming that the new meters were “too fast” and were
inflating their power usage. Responding to these complaints the DERC initiated a formal
investigation and urged the DISCOs to work diligently to remedy all metering and billing
problems, which were perceived to be more acute in the BYPL and BRPL districts. The companies
agreed to do so. However, the dissatisfaction did not dissipate. In fact it increased, spurred by the
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tariff hikes proposed in 2005. Responding to these complaints, the DERC initiated an on-site
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inspection of over 536 meters and found only four to be faulty.
Finally in October 2005, the DERC released draft rules on performance standards to be
followed by the distribution companies. These covered issues such as connections, metering and
billing complaints, theft, and unauthorized use of energy. Even though these standards were
required under the law, the DERC took almost three years to develop them and did not include
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any penalties for non-compliance.
Public discontent seemed to be a function of tariff levels and power outages. By 2005 it was
substantial, prompting the government to back away from the 2005 tariff increase. Instead, it
agreed to provide the utilities with 50 percent of the proposed 10 percent increase through a direct
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subsidy and asked then to forego the other 5 percent. The shift in public opinion from 2003, when
Minister Dikshit earned reelection based in part on the success of her electricity privatization and
2005, when the public outrage over power shortages, high bills, and the proposed water reforms
was striking.
Clearly, public infrastructure companies in India operated in a very difficult political

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climate. S.L Rao, former chair of the Central Electricity Regulatory Commission, stated “The Delhi
citizen is spoiled, subsidized, well-connected, has access to the media and hates to pay for
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something that he has got free all these years.” These words would resonate more loudly as the
government tackled the problem of water and sanitation.
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6
Electronic meters allowed remote control meter reading, the potential to introduce time-of use rates or monitor
peak and non-peak use.
7
Prayas, ob cit, p.58.
8
Latha Jishnu and Vishaka Zadoo, Cold Comforts, Business World, May 28, 2007.
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Delhi Water
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Even though New Delhi had access to more than an adequate amount of water reserves—
at least by Indian standards—the actual service was intermittent and inequitable. This was
exacerbated by a high level of technical and commercial losses. Recent estimates put the amount of
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water that disappeared between the source and the point of consumption at 42 percent. (See
Exhibits 6a and 6b.) Water was only available a few hours per day.
The Delhi Water Board (DWB), the agency responsible for providing water to the city, had
made substantial investments to increase supply and quality, including the construction of a new
treatment plant, additional wells, and recycling of wastewater as well as measures to harvest
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rainwater. However as Delhi’s population skyrocketed, these efforts had little success in bridging
the gap between supply and demand.
DWB was far from an autonomous agency. Its ties to the government were very close. The
chief executive officer was a member of the Indian Administrative Service, the elite wing of the
Indian bureaucracy. It was self regulating and set its own tariffs (with the approval of the
government) and service standards. Its relationship with its consumers was strained at best, and its
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ratio of workers to customers was several times that of international standards.
Corruption was rooted in many parts of the Indian economy. State officials were often
reluctant to give up the patronage and rents acquired in the present system. In fact, it was
estimated that water and sanitation utilities in South Asia spent 20-35 percent more on construction
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contracts than the value of the service rendered.
Despite the fact that the DWB Act mandated full cost recovery, the tariffs set by the agency
had never approached this goal. Even though Delhi had the highest per capita income, it had the
lowest water tariffs among all the metropolitan areas in India. DWB recovered Rs 4.63 per kilolitre
of water sold as compared to an average total cost of Rs 13.18 per kilolitre. Capital costs and a
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portion of the operating costs were funded by loans from the government that were not paid back.
For example, in 2004, the government lent Rs 7,000 million to the DWB for capital expenses and Rs
3,000 million for operations.
Tariffs had been kept low on the pretext that water must be affordable to the poor, but the
poor rarely received municipal water. Instead they had to buy it from private entrepreneurs at
rates five to seven times higher. There were almost no incentives to increase municipal coverage
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The Delhi Water Board is referred to in India as the Delhi “Jal” Board. Jal is the Hindi word for water.
10
Jennifer Davis, “Corruption in Public Service Delivery: Experiences for South East Asia’s Water and Sanitation
Sector,” July, 2003.
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into the slum neighborhoods. As a result, DWB’s record in providing service to the poor had been
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inconsistent, at best.
In summary, the Delhi Water Board had been among the worst run water utilities in India.
Its investment in new infrastructure had not kept pace with the population, its ability to keep its
costs down had been non-existent, and it had not been able to improve the quality of its services
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and meet consumer expectations.
The government had been aware of this problem for some time and began to address it
prior to the electricity sector reforms. In 1998, before chief minister Dikshit’s election, the DWB
approached the World Bank for a loan to assess their problems and suggest alternative measures to
improve their service. The Bank suggested that they hire a consultant and agreed to cover the
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consultant’s costs by offering a loan of $2.5 million.
Procuring a consultant took almost three years and the tenders were bid twice before Price
Waterhouse Coopers (PwC)’s India office was selected in 2001. PwC was previously involved in
World Bank initiatives in India including the proposed privatization of Andhra Pradesh’s
electricity sector (never implemented). The consultant reviewed the existing situation and
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submitted its “vision” for reforming the water sector to chief minister Dikshit in 2003. It included a
new policy and management framework, as well as a proposal for physical improvements and
capacity building.
To insure that all the key stakeholders were consulted, the chief minister ordered the DWB
to embark on a program of external and internal consultation with stakeholders, using the PwC
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recommendations as the foundation for a reform program. Two workshops were held in March
and May 2004 and over 100 participants attended, including staff and management from the DWB,
state and central government, resident welfare associations, multilateral development agencies,
non-government organizations (NGOs), leading academics, and officials from other Indian water
utilities.
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At the end of the process, DWB held a third workshop to brief members of the legislative
assembly, Parliament, and the Municipal Council on the proposed reform package. chief minister
Dikshit herself presided over the meeting.
Simultaneous with convening the workshops, a survey was conducted to determine the
willingness of Delhi consumers to pay more for improved water services. A strong majority said
that they would be willing to accept higher prices. Influenced by this result, the DWB increased
water tariffs in December 2004 for the first time in six years. It announced that future tariff
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increases would be phased in and would be linked to improved services.
Armed with the feedback from the workshop and surveys, the Delhi Water Board decided
to embark on a reform program that included rehabilitation of water and sewerage systems, the
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installation of bulk metering, audit programs to identify illegal connections, and measures to
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improve the internal management of the Board. It also agreed to develop pilot projects to mobilize
low income communities to improve water services.
The reform package was to be funded by loans or grants from the government since the
DWB did not have the financial capacity to meet its capital needs. The hope was that reducing
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water loses and increasing revenue would allow the DWB to cover 100 percent of its operating
costs, excluding interest and depreciation.
PwC had proposed various options to include the private sector, but the government
understood that the historical absence of such involvement created uncertainty as to how full
privatization would be accepted by DWB employees and other key stakeholders. Therefore, a
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decision was made to undertake a pilot project in two of New Delhi’s 21 water zones, covering 12
percent of the city’s water connections. Specifically, DWB management proposed to outsource the
management and operations for these two zones for a five year period. The management firms
selected would be paid a fixed fee plus bonuses (or assessed penalties) if it met certain
performance indicators, such as reducing water losses and energy consumption, increasing the
number of connections, or improving the quality of the water and collection efficiency.
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The assets, staff, revenues, and tariff regulation would remain with the DWB. The
proposed management contract would balance the need to induce private companies to apply,
while insuring that citizen interests, especially those of the poor were protected. No present DWB
employee would be laid off or would lose their pension.
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The purpose of the pilot would be:
1. To harness the technical and managerial talents of the private sector to

improve water services and reduce costs.
2. Use the pilots as “showcases,” demonstrating that it was possible to provide

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water 24 hours per day.
3. Provide an “on the job training ground” in best industry practices for the DWB
staff, so that these practices might be introduced in the 19 other zones.
4. PwC calculated that the economic and social net present value of these reforms
would be over Rs 12 billion.
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The response from international water service companies was positive. Four companies
expressed an interest in managing the two zones: Infilco’s Degremont Technologies, Bechtel, Saur,
and Veolia. The first two companies were US-based and the latter two were French.
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The DWB’s consultative meetings were still ongoing when Parivartan, a local citizen’s
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group, began to raise questions about the private management contracts. Parivartan means
“change” in Hindi. The NGO described its mission as fighting corruption and ensuring just,
transparent, and accountable governance.
Parivartan opposed the reforms on two grounds: the merits of the project and the World
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Bank’s involvement. It alleged that the project would lead to higher tariffs and accused the
government of ignoring the needs of the poor neighborhoods. It further asserted that private
management contracts were an abrogation of government’s responsibility.
This project is a financial bonanza for the multinational water companies,

which will be paid by the consumers in the form of higher tariffs... New
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Delhi will be moving from a policy of providing safe drinking water to all
to selling water on commercial lines as a commodity. It is being proposed
to shift the responsibility of providing water from the Government to
business entities. Our governments must remember that water is a critical
issue, where multinational companies have no stake except their own
commercial self-interests.
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Secondly, Parivartan insinuated that the reforms were the product not of an open process,
but rather a blatant attempt by the World Bank to impose its vision and solutions onto New Delhi.
It accused the Bank of subverting the competitive process to select a lead consultant and that PwC’s
selection was dictated by the Bank. (See Exhibits 7 and 8.) Parivartan’s spokesperson argued that
“India exports managerial expertise to the rest of the world, it does not need hand-holding by the
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World Bank.”
The Bank did not deny that it had intervened in the process, but claimed that its
involvement was solely to insure that the process was transparent, fairly implemented, and
provided an opportunity for Indian firms to compete. But its defense did not carry the same weight
in the Indian press as the accusations. In August 2005, when World Bank President Paul
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Wolfowitz visited India, he was confronted with vociferous protests against “the Bank’s policies of
water privatization through the backdoor.” Dr. Vandana Shiva an official with the Indian Research
Foundation for Science, Technology and Ecology told the press,
The World Bank is forcing governments and public utilities to increase

water tariffs and to commodify [sic] water, undermining people’s
fundamental right to water as part to the right to life.
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Parivartan used the media to publicize its arguments. It developed excellent ties with
leading newspapers and magazines and held multiple press briefings. It also aggressively reached
out to policy makers, academics, and other NGO/activist organizations.
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As their arguments gained currency, Parivartan began to link its concern over the private
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water management proposals to what it argued was the deteriorating conditions in the electricity
sector. It asserted that the power shortages, the “installation of fast meters” and the proposed
increase in electricity tariffs were part of the misguided efforts by the chief minister to privatize
public infrastructure services. When the city government decided to withdraw the proposed
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electricity tariff increase, Parivartan felt vindicated.
The DWB found itself constantly on the defensive. The controversy over World Bank
involvement triggered delays in releasing information requested by Parivartan and other NGOs.
These delays gave credence to the image that there was a secret back room deal between the
Dikshit administration and the World Bank. Little information on the reform proposals was placed
in the public domain. What did exist focused not on the details of the private management
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contracts, but instead on how the reforms would increase access to water, improve efficiency and
reduce New Delhi’s fiscal deficit. DWB argued that the cost of continuing with the existing
situation would be higher than the cost of reforms.
By the end of the summer, the central government informed chief minister Dikshit that it
was concerned about her water proposals as well as the unraveling power situation.
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In September 2005, chief minister Dikshit sent her reform proposals to the Planning
Commission for the Federal Government of India. She received no response, which was an
ominous sign. To implement the reforms, she had requested a $140 million loan from the World
Bank. Should she throw in the towel and withdraw her request and put the two pilot management
contracts on hold?
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No
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Exhibit 1:
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Power Sector Reforms: Chronology of Events 11
March 1999 The Delhi Electricity Regulatory Commission (DERC) was set up under the Electricity
Regulatory Commission’s Act, 1998. At this stage the power of tariff fixation, norm setting
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etc. was conferred on the Commission but not licensing power.
November 1999 Consultants engaged (SBI Capital Markets, a subsidiary of the State Bank of India).
December 1999 Chairman and single-member of DERC appointed.
April 2000 The Consultants submitted an initial “Inception Report.” (This continued to be processed
in the Delhi Government Secretariat until January, 2001).
June 2000 GNCTD constituted a Coordination Committee to monitor the progress of the reforms,
including representatives of the Ministry of Power, Power Finance Commission and the
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Consultants. The Committee expedited secretariat processing.
October 2000 The Delhi Electricity Reforms Ordinance, 2000 was promulgated and on the same day a
Tripartite Agreement was signed between GNCTD, DVB and employees’ representatives.
The Ordinance vested full licensing and regulatory powers in DERC. It provided for
restructuring of the power industry in Delhi; but (unlike other State Reform Acts in India,
did not mandate any particular industry structure).
November 2000 The Delhi Assembly passed the Ordinance as the Delhi Electricity Reform Bill which was
12
then sent for Presidential assent.
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January 2001 Government accepted the “Inception Report” and took certain related decisions (discussed
below). An Investors’ Conference was organized jointly with the Power Finance
Corporation.
January 30, 2001 DVB submitted proposals for five-year tariff setting principles to DERC, intended to
facilitate the Reform process along with its ARRs 2001-02.
February 15, 2001 A Request for Qualifications (RFQ) document was issued.
tC
March 2001 The Delhi Electricity Reforms Act (DERA) came into force after receiving Presidential
assent.
May 15 2001 Seven prospective bidders submitted Statement of Qualifications; six were pre-qualified.
May 2001 DERC rejected the proposal for five-year tariff setting principles.
July 2001 Six shell companies were registered to become successor entities of DVB. Meanwhile, the
Consultants submitted their final report, (which GNCTD approved in October, 2001).
November 2001 The Delhi Electricity (Transfer Scheme) Rules and the Policy. Directions were issued.
No
February 2002 DERC fixed opening loss levels and initial bulk supply tariff.
April 2002 Bids were received from the bidders.
May 31 2002 The Cabinet met and approved the negotiated outcome followed by execution of a Share
Acquisition Agreement, the same day.
July 1 2002 The Transfer Scheme was operationalized and unbundling plus privatization of
distribution became effective.
Do
11
Source: Sagar, Jagdish: Power Sector Reforms in Delhi: The Experience So Far.
12
In India, cases where both the State and Central legislature enjoy power to legislate on any issue, any State
legislation that is intended to supercede existing Central legislation requires prior Presidential assent.
13
t
Exhibit 2
os
Commercial Performance of Delhi Vidyut Board (1993-2002) 13
1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02

T&D Losses (%age) 41.96 45.27 48.48 48.41 48.61 48.21 47.52 45.64 47.45
rP
Collection Efficiency (%) 92.42 89.45 87.44 88.1 88.27 88.28 90.81 91 90.61
Revenue Realised (Rs million) 13227.8 15550.9 17119.5 19701.9 26991.4 30319.9 32667.5 35543.2 40047.3
Net Commercial Loss (Rs million) 2454.6 3265.5 5007.6 7097.4 5363.1 8334.7 8339.3 11044.1 11960.4
Operating Deficit (Rs million) 1141.4 1729.5 3543.5 4918.1 2819.8 5022.3 2927.2 4626.3 2480.4
Exhibit 3
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Discoms Consolidated Revenue Gap and Tariff Increase Trends 14
(All amount in Rs million)
2002-03 2003-04 2004-05

Revenue Gap at existing tariffs 11850 17350 18620
op
Tariff Increase 0 5.02% 9.80%
Revenue from tariff increase 0 1030 3790
Government Support 13640 12600 6900
DVB arrears collected (80%) - 2100 1030
Regulatory Assets - 0 6970
tC
Total Increase in revenue 13640 15730 18690
Notes: The revenue costs, and revenue gap shown here are those estimated by DERC at the start of the respective year.
The actual values for these variables, known only at the end of the year were naturally somewhat different.
No
Do
13
Source: DVB’ Annual Accounts audited up to 1990-91 in Sagar, Jagdish: Power Sector Reforms in Delhi: The
Experience So Far.
14 Source: Data from respective tariff orders (in ‘A critical review of the Performance of Delhi’s Privatized
Distribution Companies and the Regulatory Process’: Prayas Report, 1/2006).
14
t
Exhibit 4
os
BYPL Capital Expenditures—Proposed, Approved and SBI Caps Estimates 15
1800
rP
1600 Amt requested in
prev yr petition
1400
Included in prev yr
1200 petition
1000 Cap Inv claimed in
800 Petition
yo
600 Actual Cap Inv
400
Cap Inv per SBI Caps
200 Projections
0
02-03 03-04 04-05 05-06
op
tC
No
Do
15
Source: A Critical Review of the Performance of Delhi’s Privatized Distribution Companies and the Regulatory
Process, Prayas Occasional Report 1—1/2006, Prayas (Energy Group), Pune, May 2006.
15
t
Exhibit 5
os
Total Costs Per Realized kWh for Delhi 16
rP
5
Rs./ realised kWh
3
2
yo
1
0
02-03 03-04 04-05
Power Purchase and Transco Costs Discom Costs

op
tC
No
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16
Source: Source: A Critical Review of the Performance of Delhi’s Privatized Distribution Companies and the
Regulatory Process, Prayas Occasional Report 1—1/2006, Prayas (Energy Group), Pune, May 2006.
16
t
Exhibit 6a
os
Delhi Water Sector: Fact Sheet
Delhi - Fact sheet

Population (million) 14
rP
Number of connections (Lakhs) 14.5
Supply hours (avg.) 4
Non-revenue water (est) 40-50%
Cost to water utility Rs 6.97/kl
Cost to customer Rs 0.53/kl
yo
Annual Revenue expenditure (Rs) 6000 million
Annual Revenue Income (Rs) 2500 million
Rupees per U.S. dollar 44.68
Deficit till date (Rs) 50,000 million
Exhibit 6b
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Non Revenue Water: Breakdown by definition of International Water Association
17
Billed Metered Consumption (including

Billed Authorised 13% Revenue Water
water exported in bulk)
Authorised Consumption 50%
tC
Consumption Billed Unmetered Consumption 37%

58% Unbilled Unbilled Metered Consumption 0%
System Input Volume
Authorised
Unbilled Unmetered Consumption 8%
Consumption
Apparent Losses Unauthorised Consumption 2%

2% Non-Revenue
Metering Inaccuracies 0%
Water (NRW)
No
Water Losses Leakage on Transmission Mains 16% 50%

42% Leakage and Overflows at Utility’s
0%
Real Losses Storage Tanks
40% Leakage on Distribution Mains and
Service Connections up to Point of 24%
Customer Metering
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17 Source: Delhi Water Supply and Sewerage Project—Project Preparation, Final Report, July 2005.
17
t
Exhibit 7
os
rP
yo
op
tC
No
Do
18
t
os
rP
yo
op
tC
No
Do
19
t
Exhibit 8
os
rP
yo
op
tC
No
Do
20
t
Exhibit 9
os
Water Sector Reforms: Chronology of Events
Time Event
July-August1998 World Bank mission team visits Delhi Water Board (DWB).
September 1998 World Bank suggests appointing consultants to undertake reform study. World Bank
rP
approves financing consultants and other preparatory activities under Project Preparation
Facility amounting to US$2.5 million loan.
January-February 1999 DWB invites Expressions of Interest; 35 firms apply. DWB shortlists six firms from
developed countries. PricewaterhouseCoopers (PwC) ranked 10th and not in the shortlist.
March 1999 World Bank asks a firm from developing country to be included. PwC, which was
highest, ranked among the firms from the developing countries moves from 10th to 6th
position.
yo
May 1999 Detailed bids invited from the six shortlisted firms.
August 25, 1999 Detailed bids received from the six shortlisted firms.
October 1999 DWB evaluates technical proposals and shortlists two companies Tahal Consulting
Engineers of Israel and Deloitte Touche Tomatsu of US. DWB sends evaluation report to
World Bank.
December 1999 World Bank raises question on sub-criteria used to evaluate the proposals on the ground
that these did not adequately reflect the requirements of the terms of reference.
May 2000 DWB revises the sub-criteria. DWB and the World Bank decide to reject all original bids
op
and invite fresh proposals from the same six firms.
October 2000 Fresh bids received from five out of six firms.
November-February 2001 DWB evaluates revised technical proposals and only one firm (Montgomery Watson of
UK) scores among the qualifying threshold laid out in the bid documents. DWB sends
evaluation report to World Bank. World Bank asks one particular evaluator’s (out of five
evaluators) score be removed from the evaluation as they were dramatically different
tC
from the others. Three firms including PwC and the original qualifier passed.
March 2001 Financial bids opened and PwC wins on the basis of the combined technical and financial
score.
November 2001 World Bank and PwC sign US$1.6 million contract.
January 2003 PwC submits Draft Report. Study details out the proposed reform options. Study also
reveals positive willingness to pay based on survey.
March 12-13, 2004 DWB holds workshop with internal and external stakeholders for enhanced public debate
and to develop a Vision and reform milestones.
No
May 21-22 2004 DWB holds workshop to develop the ‘Reform Implementation Strategy’. Target date set
for mid 2005 for private management contracts in two out of twenty-one zones.
December 1 2004 Delhi government increases water tariffs after six years.
December 3 2004 DWB hold workshop to brief members of Legislative Assembly, Parliament on need for
reforms and proposed measures.
February-March 2005 DWB invites bids for pre-qualification of firms. DWB shortlists four firms viz. Degremont,
SAUR, Bechtel and Veolia. Target date shifts to end year.
July 2005 Parivartan, a citizen’s forum questions private management contracts on basis of
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documents obtained under Right to Information Act.

September 2005 Delhi government sends PwC study to Planning Commission, Government of India for
consideration
21

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Kennedy School of Government HKS103

The Reform Package

access to capital markets foreclosed to a government-owned company. A new regulatory

reduced, but only marginally. (See Exhibit 5.)

throughout Northern India.

Clearly, public infrastructure companies in India operated in a very difficult political

increases would be phased in and would be linked to improved services.

The purpose of the pilot would be:

1. To harness the technical and managerial talents of the private sector to

2. Use the pilots as “showcases,” demonstrating that it was possible to provide

water 24 hours per day.

This project is a financial bonanza for the multinational water companies,

The World Bank is forcing governments and public utilities to increase

1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02

2002-03 2003-04 2004-05

Total Increase in revenue 13640 15730 18690

Power Purchase and Transco Costs Discom Costs

Delhi - Fact sheet

Billed Metered Consumption (including

Consumption Billed Unmetered Consumption 37%

Apparent Losses Unauthorised Consumption 2%

Water Losses Leakage on Transmission Mains 16% 50%

documents obtained under Right to Information Act.

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