Power Politics: Process of Power Sector Reform in India

Author(s): Navroz K. Dubash and Sudhir Chella Rajan

Source: Economic and Political Weekly, Vol. 36, No. 35 (Sep. 1-7, 2001), pp. 3367-3387+3389-
3390
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I Special articles

Power Politics
Process of Power Sector Reform in India
Power sector policy in India appears to have locked itself into adverse arrangements at least
twice in the recent period. The first was when agricultural consumption was de-metered and
extensive subsidies were offered; the second when Independent Power Producer contracts with
major fiscal implications were signed by the State Electricity Boards. A third set of
circumstances, with the potential for equally powerful forms of institutional lock-in, appears to
be in the making with the reproduction of the Orissa model on the national scale.
This paper provides an analysis of the social and political context in which power
sector reforms have taken place in India. While a state-led power sector has been
responsible for substantial failures, is the design of the reformed sector tell aimed at
balancing efficiency andprofit-making on the one hand and the public interest on the
other? The discussion of the forces and actors that have shaped- the reform processes is
intended to contribute to an understanding of how the public interest can best be served in the
ongoing effort to reshape the power sector.

NAVROZ K DUBASH, SUDIIIR CHELLA RAJAN

power sector in India is responsible for state control to independent, para-statal

Introduction
T he electric power sector in India is
in a state of upheaval. Over the
decade of the 1990s, the long-held
belief in public ownership and operation
of this critical sector has been eroded. In
its place has emerged a growing vision of
the sector organised around participation
by the private sector, competition and in-
dependent regulation. The significance of
these changes for economic, distributive
and political outcomes is potentially
profound. Since independence, the sector
has been operated as an instrument of
public policy. Critics of this approachhave
argued that public ownership has led to
inefficiencies and scope for undue politi-
cal influence. The alternative proposed,
and in the process of implementation in
India,envisions a privatisedand liberalised
electricity sector which will be run like a
business, with attention to its profitability.
This paperis motivated by a concern that
in the new electricity world, the dictates
of economic efficiency and profitability
will leave little space for articulation of
and promotion of the public interest in the
electricity sector. While a state-led electric
substantial failures, is the design of the
reformed sector well aimed at balancing
efficiency and profit-making on the one
hand, and the public interest on the other?
In this paper, we provide an analysis of
the social and political context in which
power sector reforms have taken place in
India. We focus on the characterandeffects
of those reforms, and the roles and re-
sponses of different players. In particular,
we are interested in promotion of a 'public
benefits' agenda as part of reform. In-
cluded in our definition of public benefits
are expanding access to electricity ser-
vices, particularly to rural areas, attention
to the price of electricity for economically
disadvantaged populations, and the envi-
ronmental profile associated with provi-
sion of electricity services. We also place
emphasis on the governance processes
necessary to achieve these objectives. In
brief, we are interested in the forces and
actorsthatshapedreformprocesses, in order
to contribute to a discussion on how the
public interestcan best be served in ongoing
efforts to re-shape the power sector.
Reforms in the power sector are part and
parcel of growing interest in privatisation,
and a shift in governance patterns from
regulationin Indiathroughthe 1990s. Many
of these changes were also evident in major
sectors such as finance and banking, in-
surance, and telecommunications where
state ownership was, until recently, widely
justified on grounds of 'naturalmonopoly'
and 'public service'. Supporters of this
form of restructuring maintain that it is
essential to respond to serious fiscal and
credibility crises. Public divestment, even
in service-oriented sectors, is necessary
because government can no longer afford
to support loss-making enterprises. Also,
the conflicting roles of government as
owner, provider and rule-maker in these
enterprises have led to corruption and poor
performance, deepening the suspicion that
more government cannot be part of the
solution. Thus, it is argued, a competitive
private sector would relieve the govern-
ment of its losses and. allow it to divert its
resources towards its p rimarydevelopment
and governance functions (such as health
care,educationandsound monetarypolicy).
Similarly, independent, transparentgover-
nance would reduce the scope for corrup-
tion while regulating private monopolies
or partial monopolies.'l in opposition to
this view is an argument ,ssociated with

Economic and Political Weekly September 1, 2001 3367

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All use subject to JSTOR Terms and Conditions
 Figure: Schematic of the Indian Power Sector Pre-1991.
Ministry of Power, Government of India (power
policy)
Central Electricity Authority
(Technical Analysis and Approval
of Projects)
Public Sector Corporations:
National Thermal Power
Corporation,
National Hydro Power
Corporation, Power Grid
Corporation, Power Finance I >
Corporation
Rural Electrification
Corporation
(loans, power contracts)
Single Arrow (->) refers to chain of command and double arrow (=>) refers to flow of information, finance
or electricity.
a burgeoning popular reaction against
globalisation, which states that these
changes are driven by vested interests to
allow powerful multinationalcorporations
to buy off the state's resources at bargain
prices, and thatthey would ultimately pave
the way for them to gain control over
public programmesand policies. From this
perspective, the fiscal and governance
crises in many public enterprises are over-
rated and, where not, may be addressed
through internal reform that has not been
seriously considered.2
In between these positions, of course,
are less sanguine as well as less cynical
views on reforms. In this paper we steer
clear of debating the merits of such nar-
ratives, focusing instead on how the actual
course of events is shaped by the relative
influence of different players and the
effectiveness with which their interests are
representedin policy-making. As we show
in this paper, outcomes are shaped not
only by interest groups, but by institu-
tional and technological path dependen-
cies, political opportunism, socio-eco-
nomic structures and unforeseen contin-
gencies. All of the:e play vital roles in
defining the politics, and determining the
outcomes, of reform processes.
We shall present an historical account
of what we identify as four majormoments
in the reform process, examine their most
likely antecedents, and follow the trajec-
tories of identifiable interests connected
with the associated events. Through this
approach, we hope to draw a rough map
3368
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Planning
Commission
(planning)
State State
*
Electricity Ministry of
Boards Power
of the power sector reforms in India to
examine the opportunities for protecting
public benefits that have either been put
to use or ignored. The paper is organised
chronologically to highlight four overlap-
ping but distinct periods of power sector
policy: pre-1991, the 1991 Independent
Power Producer (IPP) policy and its after-
math, the World Bank-led restructuring
policy thatbegan to be implementedaround
1993 in Orissa, and finally, the period
shortly after 1998, when the restructuring
model was scaled up through national
legislation and state-level reforms.
A note on methods. The narrative is
based on numerous official documents,
newspaper andjournal articles, and several
interviews thatwere conductedwith present
and former bureaucrats, donors, consult-
ants, activists, scholars and journalists
associated with power sector reform.These
interviews were conducted on a 'not for
attribution' basis to encourage candour,
and therefore individual comments are not
attributed by name. The result is neces-
sarily interpretive, and in providing our
interpretation, we have been careful to
triangulateandcross-check views thatWere
shared with us. The goal of this paper is
by no means to provide an evaluation of
the outcomes of reforms in the sector thus
far, and indeed, this method does not lend
itself to such a policy exercise. Instead, we
hope to shed light on the circumstances,
actors and forces that guided reforms in
particular directions, and by so doing,
provide a basis for understanding how
Economic and Political Weekly
All use subject to JSTOR Terms and Conditions
future reforms can best serve the public
interest.
II
Background: StateRun
Sector
Electricity Pre-1991
Institutionsand Organisations
When India gained independence from
British colonial rule in 1947, private com-
panies or local authorities supplied more
than four-fifths of the total generation
capacity in the country, which amounted
to slightly less than 1400 MW [World
Bank 1993c]. The Electricity Supply Act
of 1948 subsequently brought into state
purview all new power generation, trans-
mission and distribution facilities, thereby
limiting some of the provisions of the 1910
Electricity Act, which had primarily set up
licensing rules for generation for private
as well as public operators.
As a result of the 1948 Act, nearly every
state and territory organised its own ver-
tically integrated entity or state electricity
board (SEB). Most SEBs were financially
structured entirely through state govern-
ment loans and operated as extensions to
the states' energy ministries, 'indebted in
perpetuity' to the government, as one
former planning bureaucrat described
them.3 By 1991, SEBs controlled over 70
per cent of power generation and virtually
all distribution. They controlled most of
the transmission lines within states, and a
national transmission grid company was
developed to share power among regions.
There were also a small number of private
companies thatcontinued to provideelectri-
city services to some cities, including
Calcutta and Bombay, but which largely
purchased power directly from SEBs.
Under the Indian Constitution, electri-
city is considered a concurrent subject,
meaning thatboth state andcentral govern-
ments have jurisdiction over the sector.
Administratively,therefore,centralgovern-
ment -organisations and the states have
traditionally regulated different aspects of
planning, sectoral policy, financing and
operations through a fairly non-conten-
tious division of labour (see the Figure for
a schematic). Thus, for instance, the 1948
Act demarcates tariff authorityto the SEBs
except when centralgeneratorssupply elec-
tricity to one or more states, in which case
the central government prescribes a tariff
based on a negotiated power purchase
agreement with the SEBs. The legislation
expected the SEBs to function commer-
September 1, 2001
cially and achieve a minimum 3 per cent
return on capital.
In several importantways, the pre-1991
institutional arrangements were remark-
ably effective in accelerating the develop-
ment of electricity services in India. Be-
tween 1948 and 1991, they were respon-
sible for increasing generation capacity by
over 50 times, at a breakneck speed of 9.2
per cent per year, which was at least twice
India's admittedly sluggish economic
growth rate during that period (except for
the 1980s, when economic growth rate
was about 5.5 per cent per year). Much of
the economic expansion was in capital-
intensive sectors like infrastructure and
manufacturing as well as in agriculture,
and much of this growth could be attrib-
uted directly to the availability of electric-
ity. By 1991, official reports could also
make the surprising claim that the electri-
fication rate was 80 per cent, and that in
some states like Karnatakaand Punjab, it
was 100 per cent. This often meant, how-
ever, that the grid had reached most ham-
lets, but not that every household in them
was electrified; in fact, official figures
showed that even in states claiming 100
per cent electrification, fewer than one in
two rural households received electricity
from the grid.4
Politics of Agriculture Subsidies
Two parallel developments starting in
the 1960s and 1970s, one broadly driven
by technology and the other by politics,
can help explain the emergence of crisis-
like conditions in this seemingly robust
situation. By the late 1960s, India had
entered a period now referred to as the
Green Revolution, which involved the
widespread use of high-yielding crop
varieties, with significant increases in
inputs of water and fertiliser in fields that
had hitherto been almost solely dependent
on rainfall. In states like Tamil Nadu and
Punjab, this meant that 2-3 crops per year
could be harvested, significantly raising
farm productivity and profits. Much of the
early irrigation projects were large, pub-
licly funded ones involving surface water
resources, but especially in the 1980s,
groundwaterpumping on individual farms
using electrical or diesel pump-sets be-
came increasingly popular. Irrigation of
both forms was widely credited with sig-
nificant increases in food production in the
country.
Irrigation had broad appeal because it
seemed to be accomplishing two impor-
Economicand PoliticalWeekly September1, 2001
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tant political goals: achieving food secu-
rity while increasing the profits of farmers
who could thereby be organised into large
vote blocs. Politics was indeed quite cru-
cial in determining events related to the
power sector in this period, and subse-
quently led to a type of institutional lock-
in with profound impacts on the sector.5
In 1967, the Congress Party split and for
the first time the model of a dominant party
in the Indian political scene, both at the
centre and in the states, was seriously
challenged. Regional parties in the south
quickly came to power on populist plat-
forms and, for the next several years,
recovery of those constituencies became
a major preoccupation for the ruling fac-
tion of the Congress Party under Indira
Gandhi. The mid-1970s were another
tumultuous time in Indian politics, be-
cause the country was in the midst of high
inflation in the wake of the international
oil crisis and IndiraGandhi, to avoid facing
a corruption trial, imposed a national
Emergency in which political foes were
imprisoned,constitutionalrightsabrogated,
and the press placed under strict censor-
ship. In 1977, confident of being able to
consolidate political support, the govern-
ment ended the Emergency and announced
national elections, which the Congress
Party lost badly, having to relinquish its
power in Delhi for the first time in three
decades.
According to one long-time observer of
the power sector and senior bureaucrat,the
first use 9f electricity subsidy as a political
tool may have occurred during the 1977
elections, when the Congress-led southern
state of Andhra Pradesh offered flat-rate
tariffs (tariffs based on capacity of the
pump rather than on measured consump-
tion) to farmers as an election promise to
help Congress get re-elected.6 This may
have had a demonstration effect for the
neighbouring state of Tamil Nadu, where
a new non-Congress Party (the ADMK)
that had just come into power in a fragile
four-way election, decided to offer free
electricity to some groups of farmers. But
here, as one scholar explained, "the proxi-
mate cause of the lowering of electricity
tariffs was a large and violent agitation by
the Tamil Nadu AgriculturistsAssociation
(led mostly by large farmers who wanted
better 'terms of trade') in the late 1970s,
to which [the chief minister] responded
first by ordering police firing and then
offering a progressive tariff structure
providing free electricity only to small
farmers".7Subsequently, political leaders
All use subject to JSTOR Terms and Conditions
in Maharashtra,Kamataka and elsewhere
began to view the entitlement per se as a
remarkably effective political device, in
partbecause of the growing political power
of backward rural communities and the
rise of a middle-class farmers' movement.
In many states, a flat-rate tariff, ratherthan
free electricity, was offered, but in either
case, existing meters were no longer
monitored or were simply removed and
returned to the SEBs. This was driven in
some measure by outright opposition to
metering but also by the high transactional
costs of such non-remunerative monitor-
ing and meter installations for new con-
nections.8
Power subsidies have since become
routine political instruments especially in
agricultural states, and were adopted as
late as 1996 in Punjab, in spite of the
tremendous negative implications at the
time for attractingmultilateraldonor funds
to the state. While the political claims for
many agricultural power subsidies are
typically made on behalf of poor farmers,
several studies confirm that the constitu-
encies at stake are so-called 'kulak' or
landed classes, to whom the bulk of the
subsidies are directed, and who are most
likely to invest in irrigation and use the
surplus water either to grow high value
crops or sell to other farmers [Sant and
Dixit 1996]. In fact, it has even been re-
ported that there is considerable popular
opposition among the ruralpoor to provide
free electricity to farmers, which is seen
as a way of furtherempowering the rich.9
Also, since the quality of power actually
delivered to farmers has for long been
extremely poor, it is widely accepted that
most farmers are "likely to prefer metered
and priced reliable electricity to un-
metered free (or low-tariff) unreliableelec-
tricity" [Reddy 2000]. Yet, given the frag-
ile electoral position of political parties in
most states since the mid-1980s, few have
the ability to take risks that could concede
space to the opposition. That is to say, even
though the constituents who stand most to
gain from the supply of free electricity may
be in the minority, they haveappeared thus
far to be those who maintain just enough
swing power to capture the attention of
most political parties.
With the growth of agriculturalconnec-
tions in states where subsidies were being
offered, the reliability of consumption
estimates also became increasinglysuspect.
For instance, in Karnataka by the early
1990s, it was estimated that less than half
the electricityproducedwas being metered,
3369
the rest being attributedto agriculture and meet their statutory requirement of 3 per become a model of modern operational
transmissionanddistribution(T&D) losses cent annual return on capital was through practices that the SEBs could emulate",
[Reddy and Sumithra 1997]. Indeed, this discretionary state government support. the central government established the Na-
situation generated a perverse benefit to Since SEBs were already faced with se- tional ThermalPower Corporation(NTPC)
SEBs, because they could hide their losses rious cash flow problems, and because and the National Hydroelectric Power
underthe category of agriculture.10 In any many state governments failed to compen- Corporation(NHPC) [WorldBank 1999b].
case, this situation quickly became a race sate them for the subsidies to agriculture, The Bank was very supportive of this move
towardsunsustainabilitybecause therewere they often had no other option than to and directed the bulk of its sector lending
virtuallyno incentives or regulatorychecks introduce cross-subsidies from industry. over the next several years almost exclu-
to save either energy or groundwater re- This meant that industrialtariffs were kept sively towards NTPC projects.
sources.11 By the mid-1990s, electricity high relative to the average or even mar- Close to half of the more than 7 billion
subsidies to agriculture were estimated to ginal cost of supply to compensate for dollars approved by the World Bank for
be in excess of Rs 100 billion, but not- near-zero revenues from a growing agri- power sector projects in India between
withstanding gross transfers from state cultural sector.12 1970 and 1991 were for large thermal
governments to SEBs. that exceeded this Cross-subsidy undoubtedly caused dis- power plants built by NTPC [World Bank
amount, a number of SEBs continued to affection among industrialconsumers, who 1999b:27-30], In the view of one senior
report losses [World Bank 1999b]. finally found it expedient to set up their bureaucrat,hadequal emphasis been placed
From a broad historical perspective, the own captive generation plants to supple- at an early stage on network planning and
indiscriminate extension of subsidies in ment, if not replace, grid supply. Thus, transmission and distribution infrastruc-
many sectors o(fthe economy, but foremost while industrial consumption constituted ture, many of the power quality problems
in agriculture in the 1970s and 1980s, nearly two-thirds of total SEB sales in of subsequent years might have been
became the. major cause of fiscal crisis in 1960, by 1991, its share dwindled to about ameliorated. 14 Nonetheless, there is wide
the 1990s. In 1989, subsidies were almost 40 per cent, in part because o the rapid agreement that NTPC itself, which is now
a quarter c!f all government expenditures growth in agriculture (whose share mean- the world's sixth largest thermal power
[Chibber '1995], yet the expansion of gov- while jumped from about 10 to 25 per generating company, has turned out to be
ernment, spending had almost become cent), but also because many industrial a model public sector corporation, and a
essential in order to maintain fragile po- consumers had cut back on their consump- benchmarkfor the power sector, with some
litica'! majorities. But by 1991, even these tion from the grid [TERI 1993]. The net of the most efficient coal power plants in
maniorities \cere no longer viable and the result was that the additional revenues the country. NTPC was overtly rebuffed
er'a of coalition governments became from industry were no longer able to during the post-1991 period of private
entrenched in Indian politics. effectively counter the losses from agri- power development, however, when vari-
culture.13 With most SEBs having nega- ous project sites earmarkedfor its projects
Power Sector Players and tive cash flows, staff development has also were 'handed over' to independent power
Interests: Dissension and been an issue: real wages through 1991 in producers (IPPs). A former NTPC man-
Differences most SEBs were stagnant or negative and ager and at least one senior bureaucrat
sales per employee were registeredas being concurred ratherbitterly that a level play-
Throughout the 1970s and 1980s, for among the lowest in the world [Guti6rrez ing field, with NTPC being offered the
different though overlapping reasons, 1993]. Otheroperationalproblems showed same incentives (for instance, high rates
power industrybureaucratsand staff, plan- up as high technical and 'commercial' of return, see the next section for a dis-
ners, and some classes of consumers losses (a euphemism for theft), and be- cussion) as the IPPs, would have avoided
became increasingly frustrated with the cause many connections that were subsi- the 'wasted decade' of the 1990s.15
functioning of the sector. The main com- dised were also left un-metered, there was Yet, the strategy of infecting SEBs with
plaint of SEB managers was that, as a growing gray area of the sector that was good institutional practices from the out-
government appointed officials, their using power but not paying for it. In due side failed. In the Bank's own analysis, one
elected superiors were providing them course, the inefficienciesin the sectorbegan reason was that its demand for a two-part
directives thatrinterferedwith day-to-day to manifest themselves as poor power tariff structure for purchases from NTPC
operations. They were also frequently quality in the form of frequency fluctua- that would "send proper signals to the
transferredout of the sector based on the tions, brownouts, and blackouts, which SEBs on merit-order dispatch" was not
whims of their superiors or the vagaries not only rankled but also caused inesti- followed by the SEBs [World Bank
of elections. Such interference frequently mable financial losses to all users. 1999b:12]. The two-part tariff structure
included demands for ad hoc extensions At various points in the 1970s and early was meant to include a fixed part (to cover
to the grid to address the needs of particu- 1980s, planners in the central government, fixed costs, including a reasonable return
lar constituencies, which worsened the donor institutions and individual scholars on capital) and a variable part (mainly to
performance of the distribution network engaged their energies to address the crisis cover fuel costs related to actual genera-
and increased the potential for theft. that appeared to be unfolding itself with tion). The idea was to train SEBs to dis-
The combination of structuralinefficien- a relentless logic of its own. In 1975, patch their own baseload and peakload
cies introduced through political interfer- apparentlyin an attemptto build a coherent power from sources with low and high
ence and forced subsidies without govern- power development framework by con- variable costs, respectively. By the 1980s,
mentcompensation led to a situation where trolling sizeable generation capacity and, the Bank decided that more substantial
most SEBs were often in serious financial in the words of a recent World Bank SEB reforms were "essential for the long-
trouble.The only way many of them could evaluation of its power sector policies, "to term viability of India's energy develop-

3370 Economic and Political Weekly September 1, 2001

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All use subject to JSTOR Terms and Conditions
ment programme," and directed modest that the requirements of electricity and be at the forefront of the new liberalising
loans to SEBs for financial restructuring, installed capacity would only be about 40 India.
tariff adjustments, improved metering and per cent of those in a conventional pro-
collection, in short, to improve distribu- jection commissioned for the state, with Ill
tion efficiency [World Bank 1999:12]. Be- comparable reductions in investments in PowerSurgethatNeverWas:
tween 1989 and 1994, through the Bank's new capacity and emissions. But, admin- IPPDebacle
International Finance Corporation (IFC), istratorsonly seemed to have perfunctory,
it also experimentedwith supportfor private academic interest in IRP, which was never
OpeningDoorto PrivateSector
power generation and system expansion seriously examined despite several appeals
through loans and equity investments in to develop long-term power policy for the The year 1991 has become a watershed
four integrated private power companies. country. in the history of India's macroeconomic
While the Bank's focus was on improving By the beginning of the 1990s there was reforms. In thatyear, broadpolicy changes
the performanceof SEBs, it also continued broad consensus that the power sector took place to reduce government control
to focus on the need for new generation was in dire straits, and that major reform over diverse sectors in the economy. The
capacity, even though its own analyses had was needed to change its functioning. immediate impetus for these shifts was a
indicated that peak shortages did not re- There were peaking shortages in many serious crisis in balanceof payments,whose
flect a deficit in capacity but poor system parts of the country, severe financial implications turned out to be far-reaching
load management and regional dispari- burdens imposed on state governments because it reducedthe country's bond rating
ties.16 But by 1993, the Bank had decided because revenues did not match costs, and in international credit markets and there-
that institutional reform of the SEBs poor quality of supply. While donors, fore severely restricted the government's
without changes in ownership was a lost planners, academics and activists had ability to use short-term external borrow-
cause. It shifted its focus to a new reform proposed competing analyses of the situ- ings to address the problem. Coming as
strategy, in conformance with a broader ation and options, none were seriously it did, at the end of an extended period of
Bank-wide energy policy to.promote pri- explored, mainly because the sector was moderate recession, the crisis precipitated
vate participation in the power sector and already entangled in too many knots. remarkable external and internal pressure
particularly in distribution. Political considerations did not allow to deregulate, if not privatise, major seg-
The planning bureaucracy in India, any significant withdrawal of subsidies, ments of a vast economy that had been
meanwhile, had also embarked on its own for which political control over SEBs tightly controlled for nearly a half century
analyses of the power sector, and proposed was essential. This led to cross subsidies, of independent democratic governance
using different models for long-term de- system inefficiencies, losses and theft, and following colonial rule. Policies introduced
mand and resource assessments for the poor morale ariong employees, which during this period include measures to
country as' a whole to help streamline caused revenues to drop, in turn exacer- free currency and capital markets, reduce
generation needs. A series of reports on bating many of the above impacts. All the government controls on banks and other
tariff reform appeared, many of which while, unbridledagriculturalconsumption, financial institutions, drastically cut back
urged the reintroduction of agricultural increased use of captive power plants at on licensing requirements for industry,
tariffs and metering, but these were ig- low capacity utilisation and unplanned and, most important for this paper, allow
nored by state governments [see, for in- system expansion led to worsening the entry of private players in electricity
stance, Government of India 1980; Plan- emissions, increased resource use, and generation.
ning Commission 1994]. For example, in energy loss. There were circumstances within the
1991, a committee of six chief ministers The situation urgently called for change administration, as well as ideologies be-
and the finance and power ministers rec- in the sector. Given the broad agreement yond it, that helped to steer the minority
ommended thatall stategovernments adopt on the diagnosis of the problems in the Congress-ledgovernmentunderNarasimha
a minimum agricultural tariff [Govern- sector, this would have been an opportune Rao towards liberalisation of the economy.
ment of India 1999]. In 1996, at a confer- moment to step back and chart a new Echeverri-Gent(2000), for instance,argues
ence of chief ministers, a minimum tariff course. In particular,if there was a moment that politicians found reform attractive in
of Rs 0.50 perkilowatt-hour($0.015/kWh), to seriously consider re-regulation of the a globalising world because it seemed to
to be brought within three years to 50 per sector to re-assert the independence of offer them special opportunitiesto increase
cent of the average cost of supply, was SEBs from their political masters, devise the resources under their control.18 Al
proposed,butno stateactuallyimplemented mechanisms of accountability to match the the same time, reform proponents incited
this norm [Government of India 1999]. conferral of independence, and to make a little or no opposition among political
Other studies of the sector called for serious attempt to cut through the Gordian parties, who at that time were also anxious
fundamental changes in the operation of knot of politically influential consumers to keep a fragile coalition together. The
the sector. In 1991, an independent team pampered by subsidies, this was it. This media tends to credit Harvard-educated
of scholars published the DEFENDUS however, proved not to be the moment for bureaucratsand an enlightened minister in
(DEvelopment-Focused, END-Use ori- considered reflection on policy. India was the finance ministry for playing the
ented, Service directed) model, an inte- set to press the accelerator, and motor into- catalysing role in building momentum for
grated resource planning (IRP) approach the next century. This was a moment to the reforms. In addition, the unraveling of
with supply and demand-side options develop and demonstrate nimbleness, to the Soviet Union punctuated a worldwide
weighted by life cycle costs and environ- show the world, but particularly foreign shift away from ideas of social democratic
mental impact.17 Analysis for Karnataka capital, that India was a good place to do governance towards those of market
using DEFENDUS showed, for instance, business. The power sector was chosen to liberalism, which infected even socialist

Economic and Political Weekly September 1, 2001 3371

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All use subject to JSTOR Terms and Conditions
politicians with a strong dose of realism
(e g, Jyoti Basu of the Communist Party
of India-Marxistin West Bengal). Finally,
the international donor community was
sending explicit warnings that countries
should not rely exclusively on multilateral
finance for their development needs, but
would have to increasingly turn to private
capital.19 Thus, once the country found
itself paintedinto a macroeconomic corner
by mid-1991, various internal and external
factors combined to point to liberalisation
as the only way out.
Reforms in the power sector began in
October 1991, when the power ministry
of the governmentof Indiabegan to publish
a series of notifications seeking to encour-
age the entry of privately owned generat-
ing companies into the electricity sector.
These government orders, some of which
were laterenacted in parliamentto become
the Electricity Laws (Amendment) Act of
1991, radically revised prevailing legisla-
tion by permitting private entities to es-
tablish, operate and maintain generating
power plants of virtually any size and to
enterinto long-termpower purchaseagree-
ments with SEBs. The initial government
notification also provided generous incen-
tives to these independent power produc-
ers (IPPs), the most noteworthy of which
was a guaranteed minimum 16 per cent
(repatriable) return on equity for plants
that operated at their rated capacity for at
least 6,000 hours in a year, with additional
bonuses for improved capacity utilisation.
Other attractions for potential investors
included a five-year tax holiday, a two-part
tariff (the first part covering fixed costs
including the assured return, the second
covering variable costs), equity require-
ments that were as low as 20 per cent of
project costs, and selective counter-guar-
anteesfromthe centralgovernmentto cover
payment default by SEBs. The rules were
clearly intended to attract foreign private
capital into the sector, because they al-
lowed 100 per cent foreign equity but
insisted that Indian financial institutions
not provide more than 60 per cent of the
total debt component of any given project.
As a defining moment in the history of
electricity in India, the 1991 policy imme-
diately spawned a broad spectrum of re-
actions. From both domestic and inter-
national investors the response to the in-
centives offered was overwhelming. By
mid-1995, there were about 189 offers to
increase capacity by over 75GW, involv-
ing a total investment of over UU $ 100
billion. Of these, 95 projects for a total
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installed capacity of 48,137 MW had change and organised numerous confer-
reached the stage of Memorandaof Under- ences and workshops in several cities
standing (MoUs) or Lettersof Intent(LoIs) around the country on a large number of
with state governments. But meanwhile, topics, ranging from financing, fuel allo-
since none of the projects had yet reached cation and regulation to environmental and
financial closure, the central government consumer concerns. But outside of the op-
introduced another set of carrots, granting ed columns of the financial newspapers,
'fast-track' status to eight of the most IPPAI's meetings did indeed provide an
promising projects and agreeing to offer important space for the articulation of
them counter-guarantees. concerns about the reform process among
For all the excitement with which it was IPP promoters, investors and lenders,
launched, the reform programme signi- bureaucrats, academics, NGOs and the
ficantly under-performed.Against a target media, albeit within the restricted format
of over 40,000 MW in the period 1992-97, that its members' principal agenda would
less than 17,000 MW were added. How- permit. In some quarters of government,
ever, that was hardlyits most controversial though, there was apparently a 'negative
aspect. As we shall see below, like the opinion towards IPPAI',24whose growing
institutional impacts of lowered agricul- influencein being ableto win special favours
ture tariffs and de-metering in the 1970s to IPPs was becoming unmistakable.
and 1980s, the IPP policy of 1991 created Even the original IPP policy had its
new forms of lock-in with serious impli- detractors within the central government,
cations for all subsequent reform efforts. notwithstanding the clout of its boosters
among politicians of virtually every shade.
IPPPolicy InPractice:From While it had clearly been approved at the
Euphoriato Disillusionment 'highest levels', it appears that there were
some senior bureaucrats at the finance
The initial mood with respect to the ministry who were strongly opposed to the
reforms in various quartersof government extravagant concessions offered to IPPs
and business throughout the early 1990s and contended that they would in fact
was reportedly 'euphoric'.20 In 1992, a generate net outflows in foreign exchange.
delegation led by the power minister made In particular,some of the individual power
a special trip abroad to apprise potential purchase agreements were considered to
investors of the vast investment opportu- be outrageously lopsided, with unjustifi-
nities that were now available in India. able risks having to be borne by the SEBs
Elected officials in different states from and, eventually for projects with counter-
across the political spectrum went to guarantees, by the central government (see
extraordinarylength to woo IPPs, in some box on Enron). Yet, there is no evidence
cases signing MOUs with their represen- of any serious resistance from these quar-
tatives within hours of their arrival in the ters ever having manifested itself, other
country.21 than the occasional withdrawal (or per-
Yet, there were several signs of discon- hapsforced transfer?)from the power sector
tent right from the start, amounting to a by a handful of senior officials who felt
serious 'lack of trust' on both sides [Pillai uncomfortable with implementing the
and Krishnamurthy 1997:71]. IPPs, con- policy.25 In contrast, by the late 1990s, a
sulting organisations and related support- substantial shift in attitude on IPP policy
ing companies, while remaining the most had occurred, with a broadening consen-
vocal supportersof the policy, were indig- sus among both former and functioning
nant about delays in obtaining clearances bureaucrats that the IPP policy was very
and hurdles to securing adequate fuel 'flawed', although it had been the 'most
supply, and were generally apprehensive promising option at that time'.26 The gen-
about recovery of dues from SEBs and the eral opinion, in any case, would be that
country's overall political stability.22 In the IPP policy was forced through by the
1995, partly to fill an apparentcommuni- power ministry against the betterjudgment
cation gap between industry and govern- of both financial and energy experts.27 In
ment, the Independent Power Producers the course of trying to implement the IPP
Association of India (IPPAI) was started policy, however, the lack of consultation
as a 'neutral proactive forum'.23 IPPAI with other agencies within government
increasingly took on a self-consciously served as an obstacle. It frequently con-
strategicrole to lobby governmenton behalf fronted obstacles to rapid implementation,
of privatesector participationto help shape obstacles that investors viewed as recal-
the direction and pace of institutional citrance, but which were defended by
Economic and Political Weekly September 1, 2001
All use subject to JSTOR Terms and Conditions
officials from otherministriesas legitimate
rulesrelatingto fuel security,importpolicy,
environmental protection and the like.
There were also instances where the
legacy of older institutions hindered IPP
development. For instance, the IPPs found
it complicatedto secure contractsfor Indian
coal because the vertically integratedSEBs
had traditionallydefaulted-onpayments to
public companies managing coal and rail-
ways. Neither the coal ministry nor the
railways ministry were willing to change
their otherwise bureaucraticprocedures to
accommodate IPPs, because they contin-
ued to perceive payment risks. But many
IPPs preferred to seek imported fuel for
their projects, in spite of import tariffs,
because fuel costs were typically passed
through to SEBs purchasing power from
them. Still, even these options were some-
times limited by fuel import restrictions
(particularly for petroleum products) set
by the commerce ministry. For example,
the petroleum ministry allowed naphthato
be used as an interim fuel for gas-based
projects and so-called short-gestation
projects, a policy that was itself subject to
criticism from many quarters because of
the choice of fuel and the complicated
allocationrequirementsrelatingto imported
and domestically produced naphtha.28
For those elected officials in state and
central governments who were anxious to
retain the interest of foreign investors in
a political and institutional setting that was
startingto appearincreasinglyburdensome,
their own environmental departments and
the Central Electricity Authority (CEA)
often seemed to present the most annoying
hurdles. As per existing legislation, the
major forms of authorisation needed for
the power projects included a techno-
economic review and approval from the
CEA and environmental clearances from
the central ministry of environment and
forests (MoEF) and the state environment
departments.In 1996, undera newly elected
government,the power ministryannounced
thatCEA and central environmental clear-
ances would no longer be required for
projects with an investment of under Rs 10
billion (about USD 300 million), which
gave enormous relief especially to a large
number of IPPs who intended to set up
liquid-fuel projects.29 The ministry began
announcinga series of other moves to acce-
lerate the enhancement of new capacity.
Lenders, meanwhile, who had been
cautious aboutthe 'bankability' of projects
but were generally satisfied as long as
counter-guaranteeswere offered, began to
Economic and Political Weekly September 1, 2001
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seek new ways to finance IPP ventures
when the central government announced
that these would be limited to the fast track
projects. It was clear to lenders that the
long-term viability of the new arrange-
ments would depend On stable revenue
streams from distribution, and they began
to seek mechanisms like escrow accounts
for prime distribution areas, limited debt
guarantees from multilateral donors,30
using the Power Grid Corporation as the
prime purchaser and, ultimately, restruc-
turing of SEBs. Escrow was seen as the
most attractiveof these options, andagainst
the objections of several planners and
bureaucratswho were concerned about the
further burden on SEB creditworthiness
this would involve, several state govern-
ments began to set up escrow accounts for
IPPs. But that too reached its limit very
quickly, when it was realised that most
SEB revenue streams were too thin to
supportescrow requirementsof all the IPP
projects that were seeking to come on line.
As the CEA slowly found itself getting
shuntedout of electricity policy altogether,
with fewer allies than ever in government,
many former bureaucrats from the orga-
nisation and elsewhere who had been
connected with power planning began
to express alarm about the implications of
the new power policy. These erstwhile
officials, togetherwith a few energy experts
in academia and NGOs and a handful of
informed journalists, were among the few
early critics of the 1991 reforms within
civil society. Theirjudgmentwas harshand
was based on several points of contention.
First, they gave loud voice to the private
admission of many senior government
officials who felt that the extra entice-
ments offered to IPPs were extravagant.
In fact, they were unnecessary even to
attractforeign power generators,who were
already looking to invest in Asia since
power markets elsewhere were in decline.
Second, they argued that the possibility of
giving SEBs true financial and adminis-
trative independence from state govern-
ments with phased solutions to the agri-
cultural subsidy problem was never really
explored; these might have strengthened
existing institutions and generated in-
ternal resources for capacity addition.
Instead, in the name of reform, many
successful institutions and organisations
in the sector were being dismantled and
replaced with untried and formidably
expensive alternatives.
Third, existing public sector generating
companies like NTPC were not being
All use subject to JSTOR Terms and Conditions
offered a level playing field with the IPPs
even though their performance and capa-
bilities had been well-established. Fourth,
least-cost planning, considering all pos-
sible options, including energy efficiency
improvements for production and end-use,
ought to have been conducted to estimate
actual capacity needs at the regional level,
instead of the now reckless attempt to
expand capacity at any cost. In the process,
the country was getting locked into long-
term power purchase obligations which
committed the electric sector into adopting
certain technologies (like combined-cycle
gas) for long periods, without first explor-
ing available options for more sustainable
energy paths, including demand manage-
ment. Finally, the policies generated new
opportunities for rent-seeking and corrup-
tion and flagrantviolation of environmental
norms. The projects typically did not go
through competitive bids, power purchase
agreements.(PPAs) were kept secret, and
the public often had no clear knowledge
of its futureobligations, which were sealed
fOrdecades through'take-or-pay'contracts.
Environmentalists and social activists
were also alarmed about the evident haste
and secrecy with which numerous project
MoUs were signed, and the enormous
pressure that promoters and politicians
seemed to have placed on government
agencies to clear them quickly. In several
instances, they felt that environmental
norms were not being applied properly.31
Agency staff were quite unprepared to
cope with the complex and interrelated
environmental issues relating to resource
use, pollution and ecology that they were
being asked to evaluate within a very short
period of time. The project promoters, on
the other hand, were using an army of
experienced consultants to prepareprofes-
sional environmental impact assessments
that required skilled interpretation. Most
significantly, the evaluation process al-
lowed virtually no public inputs even from
project-affected people. While most of the
environmental opposition to IPP projects
was organised at the community level, a
few nationalcampaignswerealsoconducted,
one famously resulting in a Supreme Court
verdict directing a national environmental
research agency to review the environ-
mental clearance.32
The environmentalist campaign against
individual IPP projects often dovetailed
with the broader criticisms of IPP policy
by other activist organisations and the
intellectualanalysesprovidedby journal-
ists and the former bureaucratsalready
3373
mentioned. Their views were mostly ar-
ticulated in numerous NGO-organised
workshops and seminars, newspaper com-
mentaries and occasional television
programmes. While not always speaking
with a single voice, these groups frequently
called on state and central governments to
review the policy as a whole.
Public opinion remained..quite divided
on the new power policy. A standardopin-
ion expressed in the media was that old-
style bureaucraticdelays had hamperedthe
progress of the reforms and that valuable
opportunitiesfor enhancing power supply
were being squandered by incompetent
andpossibly corruptgovernments. Several
urban middle-class consumer groups en-
teredthe political fray angry about the lack
of progress on privatisation and believing
strongly that the public sector was inca-
pableof improvingelectricity supply. These
groups helped bolster the lobbying efforts
of industryassociations, who were among
the early advocates of privatising the entire
sector, including distribution, arguing also
that some segments of industry ought to
be allowed to take care of its own power
needs, through captive or 'merchant'
plants.38 But even when these themes
appeared to become dominant in the
mainstreamdiscourse, corruptionscandals
andjudicial findings in favour of environ-
mental groups seemed to present a dark
side of the IPP policy, at least as evidenced
in the shifting tides of newspaper edito-
rials and other opinion makers.39
One of the more intriguing aspects of
this period of relative disquiet in the elec-
tricity supply industry is the position
adoptedby multilateraldonors, whose prior
dominance as patrons of the Indian power
sector was, by all accounts, expected to be
displaced by private investors once the
floodgates of competition were opened.
To what extent donors indirectly sanc-
tioned or were at all involved in helping
encourage the initial 1991 policy remains
unclear, but they welcomed the 'private
power initiative' that the policy seemed to
represent[World Bank 1991] .40 But what
they witnessed from the sidelines, as it
were, was the dismal failure of investments
in new capacity to be anywhere near the
expansion that took place in previous
decades. IPP projects did not rely on
multilateral funding and therefore donors
were not obligated to comment on the
policy. Yet, while being coy about making
any direct analysis of IPP policy, they
continued to express concerns about the
broader elements of the sector relating to
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its financial and technicalperformance,and Despite this strong, if confidential state-
provided comment on particularprojects. ment on the Enron project, the donors'
For example, a confidential memo from relatively mutedpublic stance on IPPpolicy
the World Bank to the government of India during this period is problematic. They
on the Enron project strongly criticised the tended to fall back on the view that as
basis on which the project was chosen. The lenders, they were in no position (unless
memo states that the project as then for- explicitly called to do so) to intervene in
mulated was "not economically viable, the government's policy agenda and had
and thus could not be financed by the no role to play even as advisors of the
Bank" [Vergin 1993]. The memo never- broader policy framework. This line of
theless urged the government to 'explore argument is somewhat tenuous, however,
possible ways to sustain the interest' of the because the Bank began direct lending to
project sponsors and went on to state that some SEBs to improve their operational
the Bank 'strongly' supported the practices and financial viability prior to
'government' s privatepower initiative and and through the period that they were
[was] keen to consider other private power signing binding, long-term contracts of a
project proposals, including a reshaped serious nature with IPPs. These contracts
Dabhol project,...for Bank financing" surely had negative implications for the
[Vergin 1993]. long run success of the Bank's attempts
The EnronAffair
Itis impossibleto capturethe intrigue,counter-plotsand ultimatetragedyof the Enron
affairin the space of a few paragraphs,but no study of India'spower sector reforms
would be complete withoutat least a briefaccount of what took place.33
InOctober1992, the Congress-led governmentof Maharashtraannounced to the world
thatithad signed an MOUwiththe Indiansubsidiaryof EnronCorporation,DabholPower
Company(DPC),foran LNGplantof about2,000 to 2,400 MWcapacityand to purchase
electricityfor 20 years. The site chosen was one that had been earmarkedfor NTPCto
set up a coal power plant.The MOUwas completed withalacrityand secrecy, despite
the considerablesize and financialobligationsof the project,amountingto expenditure
of roughly$ 1.3 billionper year.
Despite strong reservationsexpressed by the CEA,some state and centralgovernment
bureaucrats,and the WorldBank (whose countrydirectorstated the Bank's opinionin
a confidentialmemo to the state government34),the projectwas cleared and a PPAwas
signed for a first phase of the project. Just as lending arrangements were being
concluded, the new BJP-ShivSena government,whose election platformin 1995 had
stressed nationalself-reliance (but was not anti-reformor anti-privatisation,as such),
cancelled the contractand proposed to invitecompetitivebids. This single act brought
internationalattention to the project, although the response was primarilynegative
towards the Indianpolity,with solicitous concerns expressed about the India'sreform
programme.35By this time, Indianenergy analysts and journalistshad begun to explore
the implicationsof the projectand hadfoundindicationsof astonishingcomplicityamong
officialsto bend laws to accommodate Enron'sdemands and obtain clearances.36
Withintwo months of the projectbeing cancelled, followingthe recommendationsof a
government-appointedrenegotiationcommittee, a new PPA was signed, this time for
two planned phases, and with virtuallyno other changes. All clearances, including
counter-guarantees,were subsequentlyawarded.A publicinterestlawsuitwas filed by
AbhayMehta(a privatecitizen)andthe CentreforIndianTradeUnionschallengingthe final
clearances that were given to the projectand alleging fraud.Whileoutcome of the suit
Tsstill pending, the firstphase of the projecthas been commissioned for 690 MW.
More or less as analysts had predicted, the project has started to generate severe
financialproblemsfor Maharashtra.The SEB, which had been profitablein 1998-99,
plungedintolosses exceeding $ 300 million(excludingsubsidies received fromthe state
government)in 1999, when the average productioncost of electricityin the state was
about halfof that providedby the Dabholplant,butwas forced to back down purchases
fromthe formerin orderto honorits take-or-paycontract.37Startingin December 1999,
the SEB defaultedin its payments to the DPC, and in April2000, the the Maharashtra
ElectricityRegulatoryCommission (MERC)ordered the SEB to purchase power on a
meritorder dispatch basis - that is, pick up the largest quantityfrom the lowest cost
producer.
In Janurary2001, the SEB defaulted on billfor November 2000 and DPC invokedthe
state guarantee.Whenthe Maharashtragovernmentexpressed its unwillingnessto pay
the state's creditratingwas downgradedto 'speculative'.DPCsubsequentlyinvokedthe
sovereign counter-guarantee,by whichtime the SEB and the state governmentcleared
theirdues. Arbitration proceedings in Londor have since been initiatedby the DPC, but
the SEB has counteredthat the properforumfor settling all disputes and the company
is the MERC,a dispute that has since moved to the Supreme Court.
Economic and Political Weekly September 1, 2001
All use subject to JSTOR Terms and Conditions
at SEB reform. SEB reform could not be
successful without bringing some type of
financial closure to the so-called 'IPP
hangover', namely, the enormous finan-
cial obligations thatstate governments had
encountered as a. result of their romance
with IPPs.41 Perhaps the best explanation
of the Bank's relative tight-lippedness in
public about the IPP policy is that Bank
staff sought to walk a fine line between
criticising both the unfavourableterms and
the actual policy of seeking IPPs, even
while signalling their support for govern-
ment of India's attempts at liberalisation.
Eventually, national support for the IPP
policy, even among the elite who had been
promised more and better power faster,
was eroded by the mounting evidence of
its incoherence. Over the period of nearly
a decade, very few projects were finalised,
and even fewer were actually commis-
sioned.42But moresignificantly,the energy
costs from these projects, even in the
original agreements, frequently turned out
to be between one-and-a-half to twice that
of comparable NTPC and SEB projects
[Reddy and d'Sa 1995]. Moreover, few of
them were designed to meet peak demand
even though that was the most pressing
need of the hour. PPA obligations and a
falling rupee have hiked these costs even
further and, moreover, many plants were
being run to fulfil base loads, backing
down cheaper options. In Maharashtra,the
Enron-Dabhol project today constitutes
surplus capacity in the state, and the di-
lemma for the SEB is now to try and sell
the excess power it is obliged to buy at
high rates to neighbouring states in order
to recover losses.
The higher costs have translated into
deepening fiscal woes for SEBs, andhigher
tariffs in some states. The environmental
consequences of the IPP projects are no
worse than those of conventional projects,
but adherence to the policy has meant that
efforts to introduceDSM or IRP have been
set back. Also, technology choice became
an arbitrarydecision left to the whims of
thenegotiationsbetween stategovernments
and IPPs, which effectively locked in large
fossil-fuel based technologies in many
instances,althougha few renewables-based
IPPs also entered the scene, as a conse-
quence of parallel developments initiated
by the availability of GEF funding and
MNES programmes.Overall,the IPPpolicy
did indeed produce a 'wasted decade' for
power policy, whose legacy continued to
confound laterdevelopments in the reform
process.
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IV Argentina hadrecently undergone changes
Privatisation
By Example: similar to UK, with the main impetus for
The'OrissaModel' the change there having been to improve
efficiencies and reduce average costs. 43
Reforming SEBs to improve operational And, in Argentina at least, the results were
efficiency and revenue collection had long starting to look promising in the 2-3 years
been a core concern among power sector since the restructuring had begun.
planners, donors and academics involved In early 1993, the Bank reviewed its
with the sector. Many of the early proposals historical role in financing the power sector
in the 1980s had called for tariff rationali- and recounted the dismal tale of poor
sation as the underpinning of any reform. technical and operational performance,
Yet, implementing it had seemed like an mounting losses and bad governance
impossible bootstrappingexercise because that the Indian power sector exemplified
of the strong political underpinningsof the all too well [World Bank 1993b]. Such
prevailing tariff regime. The IPP policy, problems, it suggested, were the logical
as we saw, only exacerbated the situation outcome of a conflict of interest "between
by introducing a new type of drain on the government's role as owner and its role
SEBs' finances and, worse, by locking as operatorof utilities". The consequences
them into expensive and long-term con- were the "opaque command and control
tractsto buy power thatwas, in some cases, management, ... poorly defined objectives,
redundantto serve the needs of their users. government interference in daily affairs,
Only in the mid-1990s was the first and a lack of financial autonomy"[World
serious effort at reforming an SEB under- Bank 1993b:12].
taken, in Orissa. This 'Orissa model' as The document went on to lay out a
it is often referred to in India, involves strategic guide for ongoing World Bank
'unbundling' the generation, transmission engagement in the sector. According to the
and distributioncomponents of the sector, strategy,the underlyinginstitutionalframe-
and selectively privatising these com- work needed was transparentand indepen-
ponents. This approach went consider- dent regulation to remove the conflict of
ably beyond the earlier proposals for interestthatgovernments found themselves
tariff reform and management changes in in, which would then allow efficiency
SEBs, and heralded a dramatic break with improvements to be implemented and also
hitherto unchallenged assumptions about addressenvironmentalproblems.Commer-
the organisationof the sector. Inthis section, cialisation and corporatisation would be
we discuss the genesis of the Orissa model, the "necessary first steps in the process of
its implementation and effects, and its restructuringand attracting private sector
subsequent adoption in other states. participation" [World Bank 1993b:13].
This could only be sustained throughcom-
World Bank Leads the Way petition in power supply (and increasing
reliance on the capital market for funds),
During the 1980s and early 1990s, the and could include "the participation of
lending of the World Bank was increas- private generating companies, the pri-
ingly influenced by what came to be known vate contracting of construction, main-
as the 'Washington Consensus'. In this tenance, and various other services, or
view, development processes were hin- restructuring and complete privatisation"
dered less by capital shortage, and more [World Bank 1993b: 17]. The Bank would
by economic policies that hindered market try to use its lending leverage to push for
forces [Standing2000]. Throughthe 1980s, these reforms, and governments needed to
the power sector, which conventional "realisethatthe time of 'business-as-usual'
wisdom held was a naturalmonopoly, was [was] over and that they [would] not be
relatively insulated from this trend.All this able to roll forward financial and perfor-
changed with the adoption of competitive mance covenants to successive Bank lend-
institutionalstructuresfor the power sector ing operations" [World Bank 1993b: 17].
in a few countries. Influenced by the Finally, referring explicitly to IPP con-
privatisationof the power sector in the UK, cerns about payment and fuel supply risks,
and the separation of the utility into sepa- it offered to "use some of its financial
rate and business units for generation, resources to support programmes that
transmission and distribution to facilitate [would] facilitate the involvement of
regulated competition, the Bank began to private investors" [WorldBank 1993b: 18].
approachprivatisationas a seriouspolicy While based on the experience of the
optionforthe sectoras a whole.Chileand UK, andto some extentChileandArgentina,
3375
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this approachwas relatively new. In parti-
cular, the approach was untried in the
context of inefficient power sectors, lim-
ited institutionalcapacity, and low propor-
tions of access to the grid faced by many
of the Bank's borrowers. In a roundtable
convened to discuss this new policy, various
critics, but notably the French utility
Electricity de France (EdF), had raised
several concerns about the efficacy of
privatisation and competition for power
sector reforms [World Bank 1993a:16].
First, while electricity reform was urgent
in the developing countries and govern-
ments ought to redefine their roles in the
sector, private ownership needed regula-
tory mechanisms that would be "more
complex and more cumbersome than in an
integrated monopoly" [World Bank
1993a:16]. Second, whether developing
countries possessed the 'institutional
maturityand balance of power' to sustain
independent regulation was uncertain.
Third, privatisation and competition may
not, in fact, attract long-term investors in
developing countrieshaving few resources.
Fourth, unbundling, it was feared, would
distort the advantages of economies of
scale andscope needed to expand the sector.
Finally, and perhaps most significant,
privatisation would introduce "contradic-
tions of interests between the shareholders
and the essential public goals," [World
Bank 1993a:27]. Under these circum-
stances,weak orcorruptgovernmentsmight
collude with private interests, leading not
only to the loss of any advantage associ-
ated with privatisation, but also to harmful
effects on social welfare.44
The Bank's contention seemed to be that
its framework was flexible enough to
address these and similar concerns about
the ill-effects of privatising the sector. For
instance, it proposed that for countries
whose institutional characteristics were
weak to begin with, there would be no need
to unbundle the electricity sector or have
an independent regulatory authority; the
main reformobjectives would be to restore
reliable electricity services and reduce
costs. The full range of options, right up
to full or predominant private ownership
would only be suitable for those countries
with a "well developed power sector, active
privatesector, nascent capital market[and]
significant institutional capability"
[World Bank 1993a:773.
In 1993, in an early attempt to draw
attention to its new policy position, the
World Bank sponsored a conference in
Jaipur for Indian policy-makers In addi-
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tion to reviewing the prevailing dismal had no new power sector loans for ap-
conditions of the Indian power sector, the proval between 1993 and 1996, it used
conference also highlighted the experi- existing project credit and mobilised re-
ences of ongoing experiments to reform sources from bilateral donors (primarily,
the power sector in Argentina, China, UK the UK and Japan) who were also support-
and the US. Several constraints to imple- ive of the Bank's plan,-to promote legis-
menting full-fledged restructuring along lative change. Although Haryana was
these lines were also discussed in the initially considered the prototype, and
conference. At the conclusion of the consultants first went there to investigate
meeting, the Bank announcedthat it would the application of the reform model, the
finance or guarantee power projects to focus shifted to Orissa because of a per-
begin structural adjustment lending to ceived recalcitrance on the part of the
"support the boldest,...most deserving Haryana government to comply with spe-
state-level power sector reforms"provided cific reform measures.46 Orissa thus be-
they engaged in commercialisation, tariff came an unlikely pioneering state, the first
reform, regulatoryreform and reduction in state in India to launch an overhaul of its
distributionlosses [WorldBank 1993c].45 power sector.
It also presented an ultimatum: it would
no longer finance or guaranteepower sector Makings of Orissa Model
projects in states thatwere not undertaking
restructuring efforts [World Bank The power sector in Orissa was undoubt-
1999b:19]. By restructuring the World edly in a shambles, by some measures
Bank meant: unbundling and corporati- more so than in other states. Generating
sation of generation, transmission and plants were being inefficiently run at 36
distribution;establishment of a regulatory per cent (1993-94), transmission and dis-
authority with responsibility for tariff tribution losses were estimated at 43 per
reform;privatisationof distributionactivi- cent, the proportion of bills collected was
ties; and privatesector participationin new a miserable 17 per cent, and the ratio of
generation facilities. In short, this was the customers to staff was an astonishingly
formuladeveloped in its 1993 sector policy low 29 (1993-94), the lowest in the country
and strategy paper. [Rajan 2000:660].
In contrast to the IPP policy, then, the But the main reasons that Orissa was the
new state level restructuringapproach to pioneer state were political. First, and
the power sector in India was not home perhaps most significant, was strong sup-
grown. In order to pursue this approach, port from chief minister Biju Patnaik for
the Bank needed political support among reforms. In other states, notably Haryana,
states. Starting in 1993, very soon after the politicians demonstrated little appetite for
Bank's policy was crafted, the Bank held a menu of short-termcosts associated with
meetings with government officials from reforms, including electricity price in-
different states to review the state of their creases and staff lay-offs, for the promise
power sector. Following this, five state of long-term benefits. Initially, the proxi-
governments "agreed to request Bank mate cause for the chief minister's atten-
funds for help needed to preparetheir own tion to reform was a World Bank hint that
restructuring programme" [World Bank funding for a hydroelectric project heavily
1999:19]. Evidently, the "review and favoured by him would be more readily
acceptance process [was] slow, with many forthcoming if the state undertook broad
hesitant steps and political setbacks," but reforms in the sector.47 However, this
Orissa and Haryana became the most should not be read as continued support
promising candidatesfor implementing the for reforms only under duress.48 Accord-
Bank's reformstrategy.Although the Bank ing to a senior former public official, the
PowerSector ReformInOrissa
(a) Unbundlingand structuralseparation of generation,transmissionand distribution;
(b) privatesector participationin generation and transmissionutilities;
(c) privatisationof generation and distribution;
(d) competitivebiddingfor new generation;
(e) establishmentof an autonomous regulatoryagency;
(f) reformof electricitytariffsat the bulkpower, transmissionand retaillevels.
Source. World Bank, April 19, 1996, Staff Appraisal Report: Orissa Power Sector
RestructuringOperation.
Economicand PoliticalWeekly September1, 2001
All use subject to JSTOR Terms and Conditions
chief minister clearly saw impending
bankruptcylooming, and quickly came to
see the Bank's proposals as the only way
out.49 Significantly, the succeeding chief
minister,J B Patnaik,maintainedthis strong
level of support. Second, Orissa had no
strongfarmlobby thatcould act as a political
brakeon reforms. Agricultural consumers
accounted for an insignificant 5.7 per cent
of total sales, as compared to around 40
per cent in many other states [Rajan
2000:666]. Finally, some have argued that
the World Bank chose a relatively poor
state, with a small power sector, low levels
of political mobilisation and a minor
national profile as an 'experimental rat'
that would fly below the national radar
screen.50 In'sifting through these reasons,
the chief minister's support appears to be
the single most crucial factor in thrusting
Orissa to the fore. However, while it may
not have been part of the design, a small
farming sector and low visibility and
national stakes cannot but have been
politically helpful as India steered toward
uncharted reforms in a critical sector.
Political support within the state not-
withstanding, the World Bank was the
driving force for reform and the most
consistent motivation for change.51 In-
deed, tariff increases priorto reforms were
undertaken at the behest of the Bank to
lay the ground for reforms.52 Within the
World Bank, officials candidly describe
their role as overcoming 'natural resis-
tance to change' within the state. Within
India, power sector reform consultants,
NGOs and government officials in a va-
riety of departments refer to reforms in
Orissa as the 'World Bank model'.53 Note
that these opinions were often not cast in
a negative light. Indeed, some appreciated
this proactive role of the World Bank in
building the momentum for change, and
suggested that change would not other-
wise have occurred. Some particularly
praised individual staff members for the
considerable time they spent in the state,
and their perceived commitment to the
reform process.54
The entire 'Orissa Power Sector Re-
structuringProject' was organised around
three parts, and was estimated to require
a total of US $ 997.2 million. Of this the
World Bank provided $ 350 million, and
the then Overseas Development Agency
of the UK provided $ 110 million. The
largest component accounting for about 8
per cent of the financing was directed to
supporting rehabilitation of transmission
and distribution. The second component
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was for demand side management (13 per rather than to evolve a model through a
cent). The third component paid for insti- consensus process."56 Our interviews
tutional development, training and techni- supportthis perception.The efforts to reach
cal assistance to support institutional out to broaderconstituencies were, by and
change in the sector, including the newly large, ex post attempts to explain forth-
formed regulatory Commission [World coming changes ratherthan seek input into
Bank 1996]. design of those changes. In the process of
The reformprocess was designed to bring NGO consultation designed to solicit in-
together government officials, power puts, there was a perception that the views
sector officials and donor agencies, and of those with local experience did not
to incorporate views of employees and count for much. For example, expressions
consumers. Specifically, reforms were de- of concern about impacts on the poor did
signed and implemented through a series not appear to result in any changes to the
of working committees at the state level, approach. Thus, the NGO consultation
and guided by a steering committee, which process was viewed as a 'way of reducing
reported to the Orissa secretary of power. tension'.57 The reform process appears
Consultants prepared the work submitted designed to usher throughreforms rapidly,
to these committees. As part of this pro- based on a political judgment that a long
cess, consultationswere carriedout through process would allow vested interests in the
a council that included the state govern- sector to politically mobilise and oppose
ment, the electricity board, and consumer reform. Indeed, both donor agency staff
groups [World Bank 1996]. Finally, public and some national officials suggest that if
officials organised meetings with power they had waited for resolution of priorities
sector employees to inform them on the and approaches in an open debate, reforms
process, and attempted to reach out to may never have proceeded in Orissa. The
consumers through newspapers and Orissa case thus raises a possible trade-off
television.55 between political expediency and demo-
Critics argued that the goal of this pro- cratic process, a possibility which we will
cess was to "achieve consensus on a model return to below.
Orissa ReformsChronology
* September 1993: the SEB hiked issued a steep tariffhike.
* November 1993: the chief minister formally communicated to the Bank the
government'swillingness to attempt to reformits power sector under the Bank's
guidelines. Soon after, the WorldBank allowed diversionof some finances froma
loan for the aforementionedhydroelectricprojectfor assistance on power sector
reform.
* 1993-95: With additional grant support from the UK's Overseas Development
Administration, andfinancingfromthe AsianDevelopmentBank,the state government
selected internationalconsultants to prepare backgroundstudies and develop a
reformagenda and legislation.A reformplan was completed in two phases through
1995, by which time three separate enterprises for handling transmission and
generationwere formallyincorporated.November1995: the governmentenacted the
Orissa ElectricityReformAct. The billprovidedfor the formationof an independent
regulatorycommissionand the divestmentof equityin generationand distributionto
the privatesector.
* April1996: SEB was formallysplit three-ways, into the Orissa Power Generation
Corporation(OPGC), Orissa Hydro Power Corporation(OHPC) and Grid Power
Corporation(GRIDCO).Allthree companies were initiallyin governmenthands, but
were earmarkedforpartialor completedivestment.GRIDCOsubsequentlyprepared
to privatiseits distributionbusiness by dividingthe state intofourzones and soliciting
bids.
* October1996: GRIDCOenters intoa managementcontractwithBombaySuburban
ElectricitySupply Company(BSES) to take over power distributionin one zone.
* April1997: Contractwith BSES was cancelled.
* August 1996: Orissa ElectricityRegulatoryCommission(OERC)was established in
1996 underthe provisionsof the 1995 ReformsAct,withthree members selected by
a government-appointedcommittee. OERC had a broad mandate to govern the
electricitysector in the state, to issue licences, regulate the purchase and use of
electricity,set tariffsand ensure qualityof service and maintainconsumer interest
and promotecompetition.
* November1998- early1999:The distributionrelatedassets and liabilitiesof GRIDCO
weretransferredtofourwhollyownedcompaniesof GRIDCO,whichweresubsequently
privatisedby sale of 51 per cent of the equityto privateinvestors,througha process
of internationalcompetitivebidding.
3377
All use subject to JSTOR Terms and Conditions
 Public officials and national consultants
(many of whom are former public offi-
cials) felt that the reforms were single-
mindedly focused on financial issues, and
on privatising the sector. International
donors,felt one, were obsessed with remov-
ing subsidies and increasing tariffs.58
Another characterisedthe donor stance as
'privatisation must be done; let's do it
somehow.'59 A representative of a donor
agency confirms this perspective when he
describes the Orissa reforms as 'basically
a bankruptcy workout.'60 International
consultants emphasise that they received
instructionsto promote rapidprivatisation,
and to 'create a process that was irrevers-
ible.'61 62 It is clear that donor agencies
saw financial issues at the heart of the
restructuring,and privatisation as the best
solution. However, donor agencies were
not alone in this view. Some senior na-
tional and state officials subscribe to the
same position without reservation. Others
agree, but reluctantly and only because
they feel that all other options have been
exhausted.63
The reforms in Orissa, and particularly
the passage of the Orissa Electricity Re-
form Act was a significant landmarkin that
it markeda departurefrom the framework
for the power sector enshrined in national
laws. It set the stage for a complete rethink-
ing of the instituitonal basis for the sector
in India. Not surprisingly, there was re-
portedly some consternation in New Delhi
when confronted with the act. Some within
the central government, notably the home
ministry, argued that the Orissa Act was
unconstitutional. There was also little
',lnport from the ministry of power, and
ouLi.lht hostility from the Central Electri-
city Authority, who presumably saw an
erosion in their responsibilities as a result
of the law. The law only cleared the central
government after active lobbying by the
Orissa chief minister.
As the first home-grown experiment,
Orissa not only established a precedent for
states to deviate from the well-trodden
national path of public ownership in the
power sector. Indeed, in the World Bank's
view, Orissa "sets a model for state-level
regulatory reform tailored for Indian con-
ditions..." which "...may be eventually
adopted nationwide..." [World Bank
1996]. While the World Bank and the
British government provided the money,
and the World Bank and the government
of Orissa mobilised the political support,
the process of 'tailoring' reforms to
Indianconditionswas the provinceof the
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internationalconsultantshiredby the World Orissa into their patterns.'65 Another
Bank. central national actor in the reforms caus-
tically said that they were 'applying prin-
Role of International Consultants ciples of aviation to a jeep'.66 Specifi-
cally, nationalconsultantsandOrissapower
It is hard to overstate the role of inter- officials questioned the internationalcon-
national consultants in Orissa. In their sultants understandingof both the domes-
own words, they were the 'primary tic social and political constraints to re-
shapers' of the reformed power sector, form, and the social objectives of reform.
responsible for large design features, as An emphasis on the mechanical process
well as for many of the operationalfeatures and on financial issues, they felt, would
that determined how the system would fail to address social issues. Moreover,
function.64 For example, it fell to the con- expatriates alienatedpower professionals
sultants to decide how far down the track in the state by treating them as 'scoun-
to go toward a competitive marketsystem. drels', thereby losing the opportunity to
They opted for a single-buyer model based learn about local conditions.67 When local
on an assessment of the underlying tech- consultants were used, they were placed
nical, institutional and commercial base in in junior positions.68 International con-
the state, and its relative inability to sup- sultants, they concluded, lacked 'national
port wholesale or retail market forms. In feeling.'69
another example, they decided how to These comments should not be
structure the regulatory process, based on uncritically accepted entirely at face value.
a combination of the UK system of National consultants are competitors of
licensces, with features of the American internationalconsultants, and local power
system designed to encourage transpar- officials face redundancy as a direct result
ency. The various reform committees re- of recommendations by internationalcon-
viewed many of these decisions, but given sultants. Nonetheless, these sentiments by
the committee members' limited experi- national actors do indicate both a lack of
ence with private ownership and competi- domestic 'ownership' of the process, and
tive power markets, there appear to have a sense that more attention to the national
been few modifications to the consultants' context was required. Indeed, one inter-
proposals. national consultant volunteered that a
In making these decisions, consultants downside of using expatriates was that
had to draw not only on their technical 'subtleties ...got past us'.70
knowledge, but also had to make assess- The Orissa process, then, was designed
ments of the specific socio-political and to address the immediate financial crisis
institutional context in which reforms in the state's power sector. Reform con-
were being carried out. For example, in sultants were instructed to focus on these
unbundling the State Electricity Board, issues, and on privatisation as a way out
they were acutely aware of the need to of the problem. Solving the 'financial
minimise lay-offs to avoid opposition by problem was seen as synonymous with, or
unions. At the same time, they had to at least as the single most important step
balance this requirement against the need toward, enhancing provision of public
to develop new institutions with markedly benefits.71 Did this prove to be the case?
different institutional cultures and incen- Were there any explicit attempts at ad-
tive structures. dressing public benefits in the course of
Our focus on independent consultants the reform process? We turn to these
is not intended as a commentary on their questions next.
performance in the job - an important
topic but one beyond the scope of this Orissa Experiment:WhatRole
paper - but to highlight their role as a, for a Public Benefits Agenda?
if not the, node of decision-making in
the reform process. Several national An evaluation of Orissa has not, as yet,
actors questioned the appropriateness been undertaken, and indeed, several is-
and the ability of consultants to play this sues are still in play.72 Any comprehen-
central role. One set of comments focused sive analysis is confounded by the enor-
on the level of understanding of the mous devastation wrought by the 'super-
Indian context that expatriate consult- cyclone' which hit Orissa in October 1999,
ants could realistically develop in a short and which left the power infrastructurein
time period. The consultants, said one tatters. While this paper focuses on the
domestic public official, sought to 'fit process rather than the outcomes of re-
Economic and Political Weekly September 1, 2001
All use subject to JSTOR Terms and Conditions
form,in thissectionwe do brieflydiscuss
fourissuesaroundreformthateitherhave
been prominentin the debate,or that we
view as interestingoutcomes from the
reformprocess.However,this discussion
shouldnot be readas a completebalance
sheet on the Orissaexperim'ent.
Challengesof Privatisation
Privatisation in Orissahasnotprovedto
be a short-termpanacea;it is too early to
tell what the long-termbenefits will be.
Fromthe beginning,privatisationefforts
were confoundedby a chicken and egg
problem. Since the utility was in bad
financial,technicalandinstitutional shape,
therewouldbe few potentialbuyersunless
the situationwas improved.Yet, many
involved in the process felt that only
privatisationcould bring about positive
changes.73 How was this conundrum
resolved?Inlargepart,it was rtot.Instead,
some rapideffortswere madeto improve
publicutilityperformance, followingwhich
the utility was rapidlyprivatiseddespite
the lack of dramaticimprovementin per-
formance.The resultswere considerably
flawed.
The most problematicdimensions of
whatwerea verycomplexset of transac-
tions are quickly summarisedhere. The
processof utilityreformwasinitiatedunder
public ownershipby placing the utility
undera management contractwithBombay
SuburbanElectricitySupply (BSES), a
requirement of the WorldBankloan.This
proved to be a misguided move. BSES
was perhaps"unwillingto undertakethe
managementcontractwithout an assur-
anceaboutcontinuitybeyondthe contract
period,"and wanteda 'free hand' in the
deploymentof the employees, who were
officially still undergovernmentpayroll
andwhohadappealedto anadministrative
tribunalto retaintheir lien on the state
government [Mahalingam 1996]. In
addition,BSES was interestedin taking
over the distributionbusiness,and so had
little incentive to improve performance
andsubjectitself to a higherprice in the
future.
Next, in attemptsto place the finances
of generation anddistributionutilitiesbeing
preparedfor privatisationon a sound
footing, financial liabilities were effec-
tively transferredto the only segment
destined to remain in state hands, the
transmission company,GRIDCO.Specifi-
cally,generationcompanieswereallowed
to increasethepricechargedto GRIDCO,
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but the price GRIDCOchargedto distri-
butioncompanieswas underthe control
of independentregulators,and did not
increasecommensurately. Thus,GRIDCO
quickly racked up enormous liabilities.
Next, steps taken to provide GRIDCO
with a sufficientassetbaseandto resolve
past payments owed by the state to
GRIDCO left the utility with a cash
crunch.74Finally, in order to make the
distributioncompaniesattractiveto poten-
tial buyers, GRIDCOtook on the vast
majority,Rs 1,950croreof thesharedtrans-
mission and distributionliability, while
the four distributioncompaniestogether
shoulderedRs 650 crore.
After all these efforts to make invest-
ment attractive,privatisationof distribu-
tion resultedin far from a textbookout-
come. Inthecourseof distributionprivati-
sation, one company, BSES, obtained
control of three of the four distribution
zones, leading to an effective horizontal
reintegrationof distribution.Moreover,
AES Transpower,whichwas awardedthe
fourthdistributionzone, also owns sub-
stantialgenerationfacilities in Orissa.75
Thatparticularcorporationsholdmultiple
licenses threatensto underminethe com-
petition-inducingpurposeof unbundling
and restructuring efforts. Finally,reform
advocateshaveexpresseddisappointment
that in the (admittedlybrief) two years
since privatisation,the new ownershave
not broughteither funds or discernible
management skillstothenewlyestablished
companies.76
Thereis one hopefuloutcomefromthe
privatisation experiencein Orissa.Privati-
sation has allowed decentralisationof
responsibilitieswithanattendantimprove-
ment in performance.For example, the
Xavier Instituteof Managementin col-
laboration with BSES has established
villagecollectivesto manageandorganise
bill collectiontasks.Theinitialexperience
suggests that rural residents respond
very positively to control over electric-
ity managementat the village level. For
example, newly formedvillage oommit-
tees achieved a 100 per cent increasein
bill collectionsovera six monthperiod.77
Certainly,this approachneeds to be sub-
ject to greater scrutiny to ensure that
decentralisationdoes not transferpower
into the handsof local elites.Nonetheless,
this limitedexperiencedoes suggest that
aside from the debated benefits of
privatisation,therearepotentialcollateral
benefitsarisingfromthegreaterscope for
decentralised forms of organisation in
All use subject to JSTOR Terms and Conditions
the sector following a looseningof state
control.
Establishment
of a Regulatory
Commission
The establishmentof an independent
regulatorycommission(OERC)hasturned
out to be a highlysignificantandpositive
outcome.OERChad a broadmandateto
govern the electricitysector in the state,
to issuelicences,regulatethepurchaseand
use of electricity, set tariffs and ensure
quality of service, maintain consumer
interest,and promotecompetition.Since
past problems in the power sector are
directlyassociatedto theeffectivecapture
of power sector institutions by vested
interests,the regulatorycommissionis a
lynchpinin a new model aimed at inde-
pendentoperation.
TheOERChasset impressivestandards
for transparencyin India.So far, its per-
formancewith respectto access to infor-
mation,andconsultationhas been strong.
Notably,the OERChas set up a compre-
hensive web site to disseminateinforma-
tion, to complementinformationdissemi-
nationthroughmoreconventionalmeans.
Onseveralissues,theOERChasheldopen
hearings,at which a rangeof labourand
consumergroups have representedtheir
interests.78
The regulatorshave also demonstrated
a degreeof independencefrompressures
fortariffincreases.Forexample,theWorld
Bank's staff appraisalreportmakes as-
sumptionsabout increasesin GRIDCO's
tariffs,basedon which thefinancesof the
restructuring effortwereworkedout.While
OERC did issue annual tariff increases
since its inception, it also contested
GRIDCO's proposals by effectively
forcing it to reduce its expenditureon
powerpurchases,arguingthatthese were
high as a result of excessive T and D
losses.79 The OERCthuseffectivelypro-
tected consumersfrom part of the tariff
increases associated with system ineffi-
ciencies andtheft.Moreover,at one point
theWorldBankexplicitlyurgedtheOERC
to approve tariff increases to 'provide
comfort' to investorsjust before privati-
sation,a requestthatthey rejected.80The
difficulty,of course,is thatby establishing
the independentregulator,reformadvo-
cates in the Bank and the governmentof
Orissa lost controlover tariffsas an tool
in the reformtool-kit. The OERCcould
not be both regulators and reformers.
Curiously,theOERPC regulatorshavecome
3379
frombureaucracies withno greattradition
of independenceor public participation
andconsultation.Yet, by manyaccounts,
they have takenwith greatzeal to a role
of principledpublicoversightin whatone
observercalled, tongue firmly in cheek,
'the Seshan effect'.81
At the same time, critics have pointed
outthatthepromisingprovisionsrequiring
transparency andpublicconsultationthat
guideOERCfunctioningareby no means
sabotage-proof[Dixit and Sant 1998].
Principlesof good governancearediluted
by grantingtheCommissiondiscretionary
powers that allows them to circumvent
applicationof theseprinciplesin a variety
of ways, if they deem it necessary.82To
the creditof the OERC,they have made
mandatory publicproceduresfor approval
of PPAs in explicit acknowledgementof
this criticism.83 The broaderpoint here
is thattheeffectiveregulationof thepower
sectorcannotrely on a paternalistmodel
thatrelies on an unimpeachableand un-
accountablegovernmentbody to always
act in the peoples'interest.Indeed,it was
precisely such a model that led to the
presentcrisis in the sector.The pressures
for political accommodationremain as
strongas before, as both regulatorsand
government officialsunofficiallyacknowl-
edge. As one official put it, "Thereis not
only one god in the Indianpantheon.Any
regulatorwho does nottalkto thegovern-
ment is living in a fools paradise."84
Finally,theOERCappearsto be limiting
itself to a tariffsettingrole, to the exclu-
sion of the broaderlandscapeof power
sector developmentin the state [Sankar
andRamachandra 2000].Thislimitedscope
also rules out proactiveattentionto the
social or environmentaloutcomesof re-
form. Yet, at the moment,the state gov-
ernmentperceivesthe reformprocess as
anopportunity to riditselfentirelyof what
has become a burdensomesector.There
is, therefore,an absenceof responsibility
for longertermand broaderissues raised
by power sector development.
Partof the problemlies in the training
receivedby theOERCon regulatoryprac-
tice. Regulatoryeconomists who have
neitherexpertisenora mandateto explore
broaderissues of public benefits in the
sectorconductedthis training.Moreover,
since the past ills of the sectorwere per-
ceived as the resultof mixing social ac-
tivism with the business of providing
electricity,the message deliveredto the
regulatorwas "it is not the your role to
solve social problems".85 Yet, at the
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moment,thereis no otherbody in a po-
sition to do so. Moreover,it will be hard
to subsequentlygraft attentionto public
benefitsontothemandateandexpertiseof
the OERC.The initialtrainingperiodnot
onlydevelopsskills,butalsosetspriorities
andshapesinstitutionalcultures.The lack
of attentionto a long-termvision could
ultimatelylimit the full potentialof the
OERCas a progressiveforcein thesector.
A Half-Heated at
Attempt
DemandSideManagement
A thirdcomponentof the reformpack-
age wasaneffortto introducedemandside
management(DSM)in Orissa.The intent
wasto followuponearlierstudiesof DSM
potentialto developbankableprojectsthat
could then seek financing.This was an
initiativeled by the WorldBank. Other
reformerswereless thanenthused.Indeed,
one set of reformconsultantsrefusedto
have anythingto do with the project.86
The stateutilityagreedonly to passon the
funds and vet projects,but refusedto be
projectimplementers.87 Why,in the face
of this opposition,did the World Bank
pursuethe project?First,the potentialfor
DSM in the power sector in India was
demonstrablylarge,and the generalcase
for includingDSM in a reformpackage
was strong.Second,the WorldBankhad
come underfire from externalcriticsfor
pursuinglarge infrastructure projectsin
India, to the exclusion of efficiency en-
hancing and demand approaches.The
shadow of the NarmadaValley project
loomedparticularlylarge.In this context,
it was politicallyimportantfor the Bank
to includeDSM.International consultants,
otherdonor agencies, and state officials
cynicallydescribedDSM as a measureto
satisfy internalBank politics and proce-
dures- 'a box to be checked'.88
The results were not encouraging,in
large part because circumstancesin the
sectorwerenotpropitious.Therewas little
incentive for the utility to reduce con-
sumptionby industrialusers, who were
theirbestpayingcustomers.Therewas no
mechanismfor the utilityto recovercosts
incurredin runningprojects,and finding
a financial intermediaryprovedto be a
challengingtask.Otheropportunities were
forgonebecauseoperationalisation would
havebeencomplex.Forexample,themost
significantenergy savings potentialex-
isted in the domesticsector,whereexten-
sive use of electricalcookstovescontrib-
uted to high peak loads. But although
Economicand PoliticalWeekly September1, 2001
All use subject to JSTOR Terms and Conditions
switching to LPG would have been a
cheaperoptionfor consumersandhelped
reduce the demand,it was not adopted
becauseit wouldhavemeantcross-sectoral
transactionsthat the reformerswere un-
willingto focuson at thetime.Finally,the
best staff in the utility were deployedto
tasks deemedmorecentralto the reform
process,such as tariffsettingandregula-
tory reform, leaving the staff-intensive
processof DSM to the leastcompetent.89
There are two overarchingreasonsfor
this lack of success.First,while at an all-
Indialevel DSMmadeconsiderablesense,
at thatparticularmomentin time, Orissa
wasnotaparticularly goodcandidate.Most
important,Orissahas a small agricultural
sector. Since low-tariffelectricityprovi-
sion to agricultureis a loss-makingsector,
DSM is highly attractiveas a means of
cuttinglosses from agriculture.This in-
centivedidnotapplyinOrissa.Inaddition,
foravarietyof reasons,thestatehadsurplus
powerat the time of the reforms.Hence,
GRIDCOhadnoincentive toreducedemand.
Sincetheborrowerwasunconvinced, DSM
becamean extremelyhardsell.
Second, DSM received little political
supportfrom the World Bank, and this
view of DSM as 'an embellishment'per-
colatedthroughto GRIDCOofficials and
otherreformconsultants.As a result,even
thoughsubstantialfundswereallocatedto
DSM, it became clear that DSM only
occupied a "small chair in the comer",
ratherthana seat at the decision-making
table.90Thus,evenprojectsthatwereviable
in thelimitedcontextof Orissalanguished
for lack of attentionto specific hurdles,
suchas thelackof a financialintermediary
to carryforwardprojects.
TheWorldBankcertainlydeservescredit
for tryingto implementDSM. However,
in this case it was implementedin a state
whereits full potentialcould not be real-
ised, under institutionalconditionsthat
did not providethe rightincentives,and
with a lack of truecommitmentand po-
litical support.The silver lining to this
cloud is that DSM has remainedon the
agendafor otherstateswhereit is a more
timelyidea.Moreover,supportfortheidea
has deepenedand broadenedwithin the
WorldBankandwithinIndia.Implemented
correctly,DSM could amelioratesupply
shortfallsand build a political constitu-
encyforreforms(particularly inruralareas),
by bringingdemonstrable benefitsearlyin
thereformprocess.Howeverthelessonof
the Orissa experience is that for both
technicaland political benefitsto be re-
alisedrequiremorepoliticalsupport,and gained experience with foreign direct
an attentionto DSM as an integralpartof investment, a more sober view of private
reformefforts. sector participation emerged in business,
V same time, the opposition to reforms
ScalingUpthe Model
Thesecondphaseof privatisation, which
planned privatiseelectricitythroughthe
to
sale of assets and allowed independent
regulationwith virtuallyno role for the
state,was undoubtedlyfarmoreextensive
thanthe first, whichonly triedto include
contractingfor generationin otherwise
intactpublicsectorenterprises.By thelate
1990s, several other states had initiated
reformsalong the same lines as Orissa.
Fundamental reformof theSEBs(although
not necessarily through the route of
privatisation;re-regulationprovided an
untestedalternative)waslogicallypriorto
theintroduction of IPPs.Yet the sequence
was reversed.Whatwere the reasonsfor
this, and why did efforts at SEB reform
spreadin the late 1990s when they were
a non-starterin the early 1990s?
Intheearly1990s,a relativelyhighlevel
of collectivediffidencein governmentand
elsewherediscouragedany move to con-
templatepubliclya moreradicalform of
privatisation.This was, afterall, a period
when the country'sdiversepoliticalenti-
ties were barelygetting used to the idea
of liberalisation,after decades of state
control over numerous sectors of the
economy.While the IPP policy could be
crusadedas the introductionof competi-
tionthatwouldshakeupa sluggishpublic
sectorentity,thepoliticalandinstitutional
conditionsof that period could not yet
providejustificationfor the outrightsale
of publicsectorentities.Privatisation,in
the sense of removinggovernmentown-
ership and control, was only just being
contemplatedandeven then,notfor 'core
sectors'of theeconomylike electricity.91
Moreover,while privatization,at least in
theory,requiredthattheSEBsbe insulated
frompoliticalcontrol,and thattariffsbe
raised, IPPs requiredno such difficult
politicaldecisions.Indeed,the lureof the
IPPpolicywasthatit offereda wayaround
the difficultpolitics of the sector. Thus,
whenthe IPPpolicy appearedas early as
incentives
1991,providingunprecedented
to high profile foreign investors,it was
seen as the 'makeor break'powerpolicy
that would transformthe sector.
As the negative implications of the
IPP policy became increasingly appar-
ent, and other sectors in the economy
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cause even states with left governments
were competingwith othersto invitepri-
vateinvestors,to avoidlosingthestrategic
media and the power community. At the advantagespresentedby opportunitiesto
gain politicalpowerby accessinginterna-
through privatisationper se had weakened tionalcapitalflows [Echeverri-Gent2000].
considerably, in part because the labour By the late 1990s, the sector had thus
movement was fragmented, but also be- been primedfor reform,in partbecause
AndhraPradeshExperience
AndhraPradesh, a state with72 million,a sizeable agriculturalbase and strongpolitical
coalitions, providesa useful comparisonwith Orissa. The sequence of events relating
to restructuringin AndhraPradesh is as follows:In 1995, the HitenBhaya Committee,
composed of variouspowersector planningexperts, proposed reformsto unbundlethe
APSEB.InJuly1997, the state governmentannouncedplansto carryoutthe restructuring
and introducedthe reformsbillin the legislative assembly in April1998, which passed
although the entire opposition was suspended by the speaker for "blockingthe
proceedings of the House in protest of the bill"('AP Power Reforms Bill Passed',
Business Line, April29, 1998, p 2, col d). An ElectricityRegulatoryCommission
(APERC)was formedandAPSEBwas unbundledintotwo separate companies,namely,
AndhraPradesh PowerGenerationCorporation(APGENCO)forgenerationandAndhra
Pradesh Transmission Corporation(APTRANSCO)for transmission of power, with
plans to forma numberof distributioncompanies. In February1999, the WorldBank
approveda loanof $ 210 millionto supportthe firststage of the restructuringprogramme.
The decision to restructurethe APSEB was strongly criticised by scme, includinga
formermemberof the PlanningCommission[Ghosh1997], who arguedthatAPSEBhad
been an unusually well-performingutility,but for subsidies to the agriculturaland
domestic sectors and a huge interest burden, and that corporatisingAPSEB and
convertingits debt to the state governmentinto equity would have been sufficientto
address these concerns. But supporters of the reform, includingthe World Bank,
prevailed,takingthe positionthatalthough"operational efficiencyof [APSEB's]generation
plants compare[d]well withinternationalstandards, it suffer[ed]fromenergy shortfalls
of about 10 percent and peak demandshortfallsof about25 per cent. Due to subsidised
tariffs,lowinvestmentintransmissionanddistribution systems, inadequatemaintenance,
and high levels of technical and commercial losses, the state's comparativelywell-
performingutility" was thereforein "severefinancialdistress and [was] unableto provide
qualitysupply and efficientservice to its customers"[WorldBank 1999c].
By the late-1990s, the world'sbusiness communityhad already become enamoured
withthe chief ministerof AndhraPradesh, ChandrababuNaidu,for his laptop-wielding
diplomacy and apparent commitmentto making significant strides in infrastructure
development and poverty eradication. The APSEB restructuringexperiment was
therefore seen as a naturalextension of the state's other bo!d policies to improveits
social and economic condition;yet, it was clear to all that,far morethan Orissa, Andhra
Pradesh was the state that needed to prove the viabilityand strength of the reform
process.
Infact, the roadfrom1998 was even rockierthananticipated.WhenAPERCannounced
steep hikes in tariffsfor domestic and agriculturalsectors in mid-2000, massive state-
wide demonstrationswere organisedby the oppositionparties,in whichurbandomestic
consumers seemed to displaythe greatest ire. Partof the justificationfor the hike was
to cover transmissionand distributionlosses forAPTRANSCO,where earlierestimates
of around18 percent losses had been readjustedto around38 percent afterunbundling.
Eventually,the Naidu government promised additionalsubsidies to APTRANSCO,
which permittedthe commission to reduce the tariffincreases. Significantly,the 1998
legislationhad given the state governmentpreciselythis level of powerto "issue policy
directionson mattersconcerningelectricityin the state includingthe overall planning
and coordination[including]subsidies"('APPowerReformsBillPassed', BusinessLine,
April29, 1998, p 2, col d).
The abilityof the state governmentto continueto interveneinthe sector's policy-making,
however indirectly,is reflectedin the characterof the APERCitself,at least as reported
by consumeradvocates and otherswho have triedto participatein regulation.Evidently,
and in cc. trastwiththe Orissa commission, the APERCinitiallyoperated as if it were
'partof the state bureaucracy,'with none of the openness and transparencythat was
expected of it(forinstance,even the press were notallowedto participatein its hearings,
at first- interviewswithconsumer activistand consultant,July 27, 2000). Since then,
however,and perhapsin response to this criticism,its characterseems to have changed
noticeably.APERCnow has, a website, like all the other regulatorycommissions, and
introducedregulationson 'consumer's rightto information'that relates mainlyto their
relationshipwithlicensees, butcouldperhapsbe stretchedin interpretation as providing
consumers' standing for makingdepositions in regulatoryhearings.
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the IPP experience had proved more prob- has embarked on reforms with the assis- An examinationof the various loan
lem than panacea. But also, the IPP ex- tance of the Asian Development Bank, and documentsprovidesinsightsintotheWorld
perience demonstrated that there was far a number of other states are currently Bank'sapproachto theenvironmental and
too much scope for collective action fail- engaged in dialogue with donor agencies. social dimensionsof the reformprocess.
ures (including corruption,unfairnegotia- In one of these states, Haryana,the World Discussionof the environmentalimplica-
tions, cornering of markets) in the absence Bank loan was suspended because of the tions of reform is driven by the World
of a proper incentive structure, leading to state government's failure to fulfil its Bank'sinternal'safeguard'policies,which
a growing clamour for a stronger regula- obligations under the terms of the agree- aredesignedto ensurethatnegativeeffects
tory framework. Finally, the overwhelm- ment with the World Bank.92 However, areguardedagainstandmitigated.Within
ing consensus among bureaucratsand con- donor agencies continue to remain en- this policy framework, environmental
sultantsbecame thatthe Bank's model was gaged in dialogue in Haryana. impactsareconstruedrathernarrowly,to
essentially correct, and that the problem These states have followed the basic referto thedirectenvironmental impactof
had to be tackled from the distribution end parameters of the Orissa model, and in loan funds spent on physical infrastruc-
because poor revenues were the source of many cases have been guided by the same ture.As a result,all of these WorldBank
the crisis, not lack of generation capacity consultants as designed Orissa. However, loans are categorisedas havingno major
as such, which had been the dominant there have also been some key changes, environmentalimpact. Yet, the broader
belief in earlier years [Ahluwalia 1999]. based on lessons learnt from the Orissa regulatoryreformputin placethroughthe
In addition, the World Bank had been experience. First, power sector reform reformprocess will likely transformthe
steadilylaying the ground-workfor privati- efforts have been couched within the incentive frameworkfor investmentsin
sation-led reform of the SEBs through the broader framework (articulated in the thesector,withconsiderableimpacton the
1990s. The support for reforms by the World Bank's Country Assistance Strat- futureenvironmentalprofileof the sector
chief minister of a poor and low-profile egy) of state-level financial restructuring. [Kozloff 1998].Moreover,as some advo-
state, Orissa, helped keep the spotlight This is particularlytrueof AndhraPradesh catesof reformhaveargued,reformsmay
away fromthe reformsuntilthey were ready and Uttar Pradesh. As part of this broader lead to efficiency gains with consequent
for the public gaze. The Bank's guarded financial restructuring,the goal is to avoid environmentalimprovements.Whether
stance towards IPP policy and its strategy leaving the public component of the sector negative or positive, so far, there is no
of pursuing privatisation while not 'rock- with an unsustainable debt burden, as indicationof consideredattentionto the
ing the boat' helped promote the openness happened with Gridco in Orissa. This broader environmentalimplications of
to privatisation. The demonstration effect approach is relatively new for the World institutionalreform in the World Bank
of the Orissa reforms was intended to be Bank, since it involves providing a broad loans, and specifically, no attention to
a key piece of the puzzle, but one that did macroeconomic restructuring loan at the how reformscan provideincentivesfor
not live up to the Bank's hopes. The mixed state level rather than to a national gov- investmentinenvironmentally sustainable
achievements in Orissa have shown that ernment. Second, all but the UP loan are energyfutures.
structured as 'Adaptable Programme
privatisation is feasible. It has not, as yet, However,the WorldBankdid conduct
shown that it produces satisfactory results Loans' (APLs), which are structured to a separate,and substantial,overarching
within the required time frame. In this release small amounts of funds over many studyonenvironmental issuesinthepower
context, it was more of a sense that there years, each tranche release dependent on sector [WorldBank 1998b].95The study
were no alternatives, rather than a deep fulfilment of conditions. Compared to a notes that the sector is on the verge of
belief in the Orissa model, that has led to single large loan, this approachenables the massivechanges,butit explicitlydoes not
its acceptance by power sector bureaucrats World Bank to provide demonstration of address environmentalimpacts of the
and others towards the end of the 1990s. support early in the process, in essence a institutionaland managerialdimensions
down payment on future support, to assist of reform such as unbundlingor tariff
NextSteps by WorldBank restructuring by providing 'comfort' to liberalisation,nor at the implicationsof
creditors by signalling seriousness of in- changesin ownershipfrompublicto pri-
In the late 1990s, a number of other tent, and provides the World Bank flex- vate. Instead,the focus is on the environ-
states signalled their willingness to start ibility in adapting support to future con- mental impacts of implied changes in
down the path toward unbundling and ditions [World Bank 1997].93 technology and in price of electricity.
privatising their power sectors, and have The World Bank has not been the only Sources within the World Bank place
been working with donor support to do so. donor agency active in the sector in India. responsibilityfor the limitedscope of the
These efforts have been stimulated by The UK's department for international study with the governmentof India and
growing acceptance of the Orissa model development, CIDA (Canada),USAID and particularlyat the doorof the ministryof
at the centre, the demonstration effect - PHRD (Japan)have also provided funding power. Specifically, the ministry was
albeit partial - of the Orissa model's for elements of the reform. Of these, DFID concernedthata studyof this naturecould
political feasibility, and perhaps most has provided considerable funds for tech- lead the Bank to impose environmental
significant, no indications of abatement in nical assistance with the reformprogramme conditions,andalsowasconcerned thestudy
the crisis situation of the power sector in [World Bank 1999b]. Notably, much of would contributeto a consensus around
many states. The list of states that have DFID's contribution has been in the form the form of state-levelreforms,the con-
concluded loan agreements with the World of a grant rather than a loan. According toursof which by then were uncertain.96
Bank - Andhra Pradesh, Uttar Pradesh, to one World Bank observer, DFID's grant The researchprocesswas undertaken at
Harayana and Rajasthan - includes large support for basic technical work was criti- aroundthesametimeas theOrissareforms,
and politically significant states. Gujarat cal to implementationof reforms.94 and a reasonedlook at the environmental

3382 Economicand PoliticalWeekly September1, 2001

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All use subject to JSTOR Terms and Conditions
implications of alternative institutional
forms could have helped inform state
reforms.97 Other than encouraging atten-
tion to DSM, there is little evidence of the
impact of the study on the design of state-
level reformpackagesandassociatedWorld
Bank loans. This is indeed unfortunate,
since sources within the government do
suggest that World Bank studies - such
as an early study on long-term issues in
the sector, or an ongoing study on farmer
uses of electricity - are influential and
useful in internal debates. Thus, while the
environmental issues study does provide
useful information on the relative costs
and benefits of specific technological
measures, the inattention to institutional
changes is an opportunity lost.
On social issues, the loan documents
suggest that the poor will benefit through
better fiscal management in the state.
Reforms in the power sector, the World
Bank argues, would free state funding for
'higher priority use in the social sectors'
[World Bank 1999c:27]. On the important
question of increasing access to electricity
services, loan documents state that the
commercial orientation introduced by the
reforms will lead to more modest targets,
but argue that enhanced efficiency of the
resultant institutions will lead to more
effective implementation on the ground,
more than compensating for the lower
targets [World Bank 1999c; World Bank
1996]. Finally, the importance of defend-
ing 'lifeline' rates for low income groups
in the face of price increases is emphasised
[World Bank 1999c; World Bank 2000;
World Bank 1997].
Other than placing issues such as obli-
gation to meet new demand and lifeline
rates within the legislative and regulatory
framework, the various state reform loans
do not build in project components to
ensure that they will be met. In particular,
it is not clear how these goals for the power
sector, which will continue to place bur-
dens on the state exchequer, can be rec-
onciled with a desire to free funds for
allocation to other priority sectors.
Ahluwalia (2000) notes, for example, that
if the provision of affordable electricity to
India's 81 million poor households is a
social goal, the potential for reductions in
the subsidy burden drawn by the state is
limited. The fiscal crunch is likely to be
furthercompoundedby the short-termneed
to restructurethe finances of state electric-
ity boardspriorto unbundling and privati-
sation, as the Gridco (Orissa) example
illustrates.In the absence of more specific
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programmes,thereis certainlyreasonto Theperformance towardthesegoalshas
beconcernedthatthesocialobjectivesthat been shoddyas best. While SERCswere
have historically been central to the established,few of them are fully func-
organisationof thesector,admittedlywith tional.On the politicallydifficulttask of
poor results,will be sacrificedin the in- removingcross-subsidiesfor agriculture,
terestsof short-termfinancialhealth. by 2001, only ninestateshadachievedthe
Rs 0.50 floor and none had achievedthe
Consolidation by 50 per cent of averagecost goal. Hence,
Central Government these goals were reiteratedin a second
chiefministers'meetingin February2000,
Over the latterhalf of the 1990s, the and a third in March 2001.98 At these
centralgovernmenthas become increas- subsequentmeetings the chief ministers
ingly engaged in state-level reforms. agreedto introducecompulsorymetering
Throughregularmeetingsof state chief of electricityforall consumersby Decem-
ministersand throughpassageof central ber 2001 which, if achieved,would be a
governmentlegislation,it has sought to significantmeasureto roll-backthe insti-
walkthe linebetweenassertingcontrolby tutional lock-ins that we have argued
puttingin placeanoverarching framework, plagues the sector. In addition,the chief
andallowingstatesa measureof flexibility. ministerscalled for energyaudits,elimi-
The acceptanceof the need for funda- nationof powertheft,upgradingof trans-
mentalstate-levelreformatthepoliticaland missionanddistributionand,in February
administrative levels at thecentreis strik- 2000, they ended with a statementthatif
ing.Thismomentumhassurvivedpolitical thesegoals appearunattainable withinthe
changes.In 1998, when a new BJP coa- existingframework,then"corporatisation/
litiongovernmentwas formedat the cen- cooperatisation/privatisationof distri-
tre,manyweresurprisedby the zeal with bution would have to be undertaken"
whichit encouragedprivateparticipation, [Government of India 2001]. As the
notwithstanding theideologyof economic wording of this statementsuggests, the
nationalismthat many of its members chief ministerswere at pains to not con-
shared.Fromits long experienceof being strainthechoicesopento thestates.At the
in theoppositionduringthereformperiod, most recent March 2001 meeting, the
the BJPandits allies hadalso recognised centralgovernmentagreedto orchestrate
the supportamongits constituenciesfor a 'one-timesettlement'of Rs 260 billion
quick and lasting change. The political owed by stateelectricityboardsto central
acceptanceof a reformistdiscoursewas utilities [The Times of India 2001].
enhancedby the waningpoliticalstrength The series of chief ministers'meetings
of the centre-leftparties,historicallythe do illustratea growingpoliticalconsensus
mainopponentsof large-scaleprivatisation. aroundreform,and particularlyan open-
nessto addressissuesthatwerepreviously
ChiefMinisters' Meetings politicalsacredcows, suchas agricultural
subsidies, open discussion of theft, and
One importantmanifestation of the restructuringof state electricity boards.
centralgovernment'scoordinating rolehas Nonetheless,therearegroundsto be cyni-
been a regularseries of chief ministers' cal of reformprocessesdrivenonly by the
meetingstocomeupwithacommonagenda slow accretionof politicalconsensus.As
on powersectorreforms.Such a meeting the governmentof India's own briefing
in 1996is repeatedlyinvokedas a turning documentnotes, progresson the agenda
point.Chiefministersagreedto a common items has been painfullyslow. The busi-
minimum action plan which included ness newspapers have been even less
handingover retailtariffsto stateelectri- sympathetic.They note that a Rs 0.50
city regulatorycommissions,anda deter- minimumagricultural tariffin2001 is only
minationthatwhile cross subsidesacross Rs 0.25 in 1996 currency.Thussix years
sectorswere to continue,they were to be later, the chief ministers are trying to
restricted.Specifically,no sector would implementa weakenedversionof a finan-
pay less than50 per cent of the average cialcommitmentthatwasinsufficienteven
cost of supply, with the exception of when it was proposed [Aiyar 2001].
agriculture,where an absolute floor of Moreover,commentatorssuggest that if
Rs 0.50 per kWh (considerablyless than theSEBsaregivena handoutat thisstage,
50 percentof averagecost) was set, to be they will simply use it as an excuse not
raisedover threeyearsto the 50 per cent to reform [Economic Times 2001]. These
benchmark[Governmentof India20011. arguments,and the poor implementation
3383
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recordof the chief ministers'meetings,
suggestthatcajolingby the centralgov-
ernmenthas not provedto be a substitute
forbuildingpoliticalmomentumone state
at a time. This, of course, has been the
WorldBank'sapproach;an astutereading
of the political landscape.
StateElectricity
Regulatory
Commissions
Legislativeactionhas led to somewhat
moreconcreteimplementation.In 1998,
The ElectricityRegulatoryCommission
Act was passed,creatinga CentralElec-
tricityRegulatoryCommissionandallow-
ingstatestocreatetheirowncommissions.
Statesthushad an optionof creatingthe
commissionseither on the basis of the
centralAct or throughlegislationof their
own, as Orissadid.99 This was the first
overtformalsign by the centralgovern-
mentof explicitrecognitionof the signifi-
canceof the reformsin Orissa,and a late
attemptto providea templatefor reforms
by otherstates.The 1998 Act marked,in
a sense, the nationalcoming out of the
Orissamodel.
Since then, severalstates have created
state electricityregulatorycommissions
(SERCs)as independentbodieswithregu-
latoryoversighton the sector. Develop-
mentson otherfrontshave been equally
rapid.Six stateshaveapproached theBank
andotherdonorsfor assistancein restruc-
turingtheir SEBs, and many are imple-
mentingtariff reformin preparationfor
full-fledgedprivatisation.
The compositionof SERCs has been
moreorlessuniform,withaformerbureau-
crattypicallyasitschair,andtwomembers
with technical and financial back-
grounds, respectively.But one of their
most interestingfeaturesis theirremark-
able diversityof operationacross states.
Thus, some SERCs are termed 'mere
extensionsof government',atleastin their
regulatoryculture,because they do not
hold open hearingsand tend not to pay
attentionto stakeholdercommentor com-
plaints.100Inothercases,thereis anactive
interestin seekingtechnicalassistanceand
informalconsultationfrom analystsand
consumergroups,resultingin bold initia-
tives thateven seem to annoydonorsand
state governmentsbecause they may be
'tooindependent.'o0 Theroleof theCERC
is itself somewhathazy, because of its
interest in having oversight and the
states' strongresistanceto such an idea.
Thusfar,however,neithertheSERCsnor
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theCERCappearto takeseriouslytheidea didnotexplicitlyrequireprivatisation, but
of playinga proactiverole in any areaof gavethestatessomeflexibilityon theform
power sector regulationotherthan tariff of unbundling.
control.Thus,efficiency,renewablesand One of the more interestingdebates
even ruralexpansionappearto be remote takingplace over the bill is the extentof
questions 'to be tackled later' by most participatoryengagementin itsdesign.The
commissions. 102 bill has certainlybeen widely circulated,
Most significantis the zeal with which and severalactorsin the sectorhave had
membersof the public, including con- opportunityto comment,and have been
sumer advocates,environmentalists,the engaged in dialoguethroughworkshops.
media and even casual observers,have Those engaged in the drafting process
greetedthe new institutions.As bureau- note that this process of dialogue sets
cratsand consumeractivistsagree,there new standardsfor legislativeprocessesin
is keen interestamong membersof the India.105However,criticsof the process
public to 'democratise'the commissions chargethatwhile draftsare widely avail-
at an earlystage,througheffortsto inter- able, andcommentis invited,thatpartici-
venein all aspectsof regulation,including pationwouldhavebeen moreusefulat an
thoseissuesrelatingto publicbenefitsthat earlierstage.Specifically,despiteits wide
most expertswould ratherdeferuntilthe circulation,therewas insufficienteffortto
technical and financialproblemsof the havea broadpublicdialogueon principles
utilities are resolved. In one instance,a andobjectivesof reformbeforethe draft-
consumeradvocacygrouphas even been ing process began. Moreover,while the
aheadof theregulatorycurveandprovided more resourcefulplayershave been able
regulatorswith analysisof utilityperfor- to provide comments and insert their
mance.103 Yet,notall advocacygroupsare agendas into successive versions of the
equally well preparedto deal with the bill, consumeradvocates,environmentalists
complextechnicalcharacterof the sector andothersareill-equippedto engagewith
andare also hinderedby the pace of new the legal and technicalintricaciesof the
regulatorydevelopmentsandthelobbying bill.106
skills of industryconsultants. Before the bill could be introducedin
parliament,the whole effort received a
Electricity 2000 Bill dramaticsetbackdue to the unfortunate
demise of the power ministerKumara-
In 2000, the ministryof powerinitiated mangalam.Withouta championto shep-
the draftingof a comprehensivebill to herd it throughparliament,the bill has
replaceallexistinglegislationinthepower languished on the back burner.In the
sector.That such a radicalmove is even interim, the global debate over power
beingcontemplatedsignifiesthe depthof sectorrestructuring hasbeenrockedby the
theinstitutional changesinthesector.From tumultuous experience of competitive
all accounts,developmentof this bill was marketsin California.In late 2000 and
a nationalinitiative.A consultantfromthe early2001,California hasexperiencedprice
National Council of Applied Economic spikes,a burgeoningutilitydebtandroll-
Research(NCAER)draftedtheinitialbill, ing blackoutsacrossthe state.While it is
withsubsequentcontrolovercontentrest- beyondthe scope of this paperto analyse
ing withintheministryitself.Notably,the the Californiaexperience,it is important
WorldBankhasplayeda relativelyhands- to note that the Electricity2000 Bill has
off rolein thepreparation process,limiting been re-openedfor debateas a resultof
itselfto commenton drafts.Whileinitially theCaliforniascare.107Specifically,more
somewhatleery of nationallegislation,it ambitiousmarketstructuressuch as spot
warmedto the bill on findingit proposed marketsfor electricity have now been
to establishan enablingframework,and expunged,withanemphasison thirdparty
has been complimentaryaboutmore re- access and long-termcontractsas a way
cent drafts.104The originalbill required of facilitatingpower trading.108
states to unbundletheir SEBs, establish Perhapsin responseto the California
independent regulatory commissions, experience,therealsoappearsto beabroad
facilitate open access to transmission trendawayfromacceptanceof electricity
(wholesalecompetition),develop a spot provisionas a purelycommercialenter-
marketfor powerandmetreall electricity prise, and more willingness to re-insert
supply[Suri2000]. Notably,althoughthe social and economic developmentgoals
ministryof power now supportsprivati- within a broad frameworkof fiscal ac-
sationas a way to controllosses, the bill countability.
109Thusa concerteddialogue
Economicand PoliticalWeekly September1, 2001
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onruralelectrificationin thecontextof the VI the political level, and convincing key
ElectricityBill has been initiated,led by Conclusions membersof the powerbureaucracy of the
a ministerialcommittee.This committee need for reform. Equally important,it
is likelyto embracea systemof decentral- Powersectorpolicy in Indiaappearsto movedthe agendaalongin demonstration
isedlicencesmanagedby SERCsforrural have locked itself into adversearrange- states,andat thecentre,withoutattracting
electricityprovision,and introductionof mentsat leasttwicein its history.Thefirst negative attentionand withoutsparking
a system of subsidy auctions for those was when agriculturalconsumptionwas anti-reform mobilisation.Inaddition,some
willing to undertakeruralelectrification, de-meteredand extensivesubsidieswere of its researchworkin supportof reforms
inspiredby experiencesin Argentinaand offered; the second when IPP contracts has beenbeneficialin movingthe agenda
Chile. In additionthe ministryof non- withmajorfiscalimplicationsweresigned forward.Indeed,the Bank's success has
conventionalenergysourcesis pursuinga by SEBs. A third set of circumstances, rested.only in limited part on the brute
renewableenergy policy statement,al- with the potentialfor equally powerful forceof conditionality,andrathermoreon
though regrettablythere appears to be forms of institutionallock-in, appearsto skill in buildingwhatappearto be genuine
limitedcoordinationbetweenthetwo, and be in the makingwiththe reproduction of constituenciesfor reformamongbureau-
an Energy ConservationBill is under the Orissa model on the nationalscale. crats and politicians.
preparation. Thesecircumstances mayyieldfavourable Nonetheless,it is problematicthat the
Withregardtothebroader reformagenda, institutions,like democraticandtranspar- Bank's dexterityin constructinga political
thedebateappearsto haveshiftedfromthe ent regulation, but may also result in strategyto keep reformsmovingin a low
lofty goals of institutingcomplex spot unfavourableones, such as locking out profilemannerled to theadoption,without
marketsto usingthe ElectricityBill 2000 integratedresourceplanningor scaling broadpublicdebate,of afar-reaching trans-
to achieve more prosaicends. These in- back programmesto expandservices to formationof a critical sector. In recent
cludethe long-standinggoals of metering ruralareas. years, as more states have undertaken
all consumers,increasingtariffs and re- This reviewof theIPPprocesssuggests reformsintheirelectricity sector,proposed
moving cross subsidies, and reducing that the ratherhasty decision to attract measureshavecomeunderpublicscrutiny
transmissionand distributionlosses. In foreigncapitalonalmostanytermshashad and the debate has been fully joined.
addition, there is growing recognition a numberof implicationsfor the future Nonetheless,bythetimereformwasserved
that whetherthe physical infrastructure developmentin thesector.TheIPPprocess up to the nationin the form of the Elec-
remainsin publichandsor is privatised, delayedconsideration of morefundamental tricityBill 2000,manyof thekeydecisions
the debt overhangthatclouds the future reforms in the sector, postponingSEB hadbeenmade.Indiahastoolonga history
of stateelectricityboardswill have to be reformuntilthesituationhasbecomeeven of misguided at best, and purposefully
workedout. more dire. Ten years later,the proposed self-servingat worst,policyinitiativesled
Implementation of this agenda costs solutionhas takenthe formof moredeep- fromaboveto be sanguineatthisprospect.
money.Whetherruralelectrification,sub- rootedprivatisationefforts,in partdue to A broaderdebateaboutthe ultimategoals
sidies,metering,efficiencyimprovements a growingsense in the sectorthatoptions of policy change and the best means to
anddebtreduction,all will takesubstantial have run out. It remainsan unanswered achievethesegoalswouldnotonlybroaden
funds to achieve. While the Electricity question if the IPP and the Bank-led the rangeof ideas, but also mobilisenew
2000 Bill providesan open-endedframe- privatisation approaches foreclosedexplo- actors to play a role in the regulatory
work,thecourseof actualreformswill be rationof an alternativeroute,namely,re- process,andserve to builda constituency
dictatedby the availabilityof financing. regulationin the sector. for reform.The WorldBankand its sup-
In thiscontext,theWorldBank'spolicyof While politics at the state government portershave arguedthatopeninga debate
makingfunding conditionalonprivatisation level was the maindriverin the firsttwo condemnedthe sector to paralysis.And
takeson renewedsignificance (although situations, the third, although initially theymayeven be right.Butthe backdoor
the ADB, as of now, does not appearas drivenby donorsagencies, appearsnow approachhas limitedparticipationin the
committedto privatisation).Only states to be determinedby manymoreactorsin debate to a few technicaland financial
that signal willingness to privatisewill the arena.While thatimprovesthe possi- experts.Indeed,the goalpostsof success
haveaccessto externalfunds.Fundsavail- bilitythatmorestakeholdersareinvolved in thesectorhavemovedperceptibly,from
ablenationallythroughthepowerfinance in decision-making,severallegaciesfrom electricity as a vehicle for social and
corporationor throughthe budgetalloca- thepastremainto be settled.Inparticular, economic developmentto narrowfinan-
tion processare unlikelyto be sufficient. agricultural de-metering and,insomestates, cial success.Withoutfinancialhealth,the
For advocates of attention to public IPP contractswill continueto affect the argumentgoes, we cannotaffordto think
benefits, then, there are two important newreformprogramme insignificantways. about a more expansivepublic agenda.
channels throughwhich to pursue this The World Bank did, indeed, play a Yet, it is by no meansclearthata long-
agenda.First,the Electricity2000 Bill, as centralrole in moving the sector to the termsocial andenvironmentalvision can
the overarchingframeworklegislation thresholdof a new organisationalform. be subsequentlywoven into the fabricof
withinwhichstateswill reform,musthave TheBankforcefullyarguedthatthesector reformsonce the cloth has been takenoff
the appropriatetriggers and supporting hadreachedtheendof its currentroad,and the loom. Nor is it fully clear thatsocial
mechanismsfor incorporationof public backedup this assertionby statingthatit and environmentalbenefits are always
benefits.Second,given the importanceof wouldonlyfundstatesthatagreedtomarch coterminouswith the techno-managerial
those who hold the purse strings, close down one particular,and different,path. vision of the sectorbasedon privatisation
scrutinyof the specificsof donorloans is Italsodemonstrated considerablepolitical anda measureof competition.Indeed,the
necessary. skill in buildinga supportfor change at historyof agriculturalsubsidies and the

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All use subject to JSTOR Terms and Conditions
IPPdebacleshouldteachus how expedi-
ent choices in the presentconstrainour
collective future.
It is troublingthat internationaldonor
agenciesthatarelargelyunaccountableto
the Indianpublic should play a shaping
rolein the futureof thepowersector.Yet,
domesticpolicy-makers,intellectualsand
technocratshave failed to independently
breakthe logjamin the sector, and must
alsoaccepta measureof responsibilityfor
thisfailure.Now thatdramaticrestructur-
ing of the SEBs has been placed on the
politicalagenda,thereis spacefor domes-
tic actorsto buildon the precedentof the
Orissaexperienceandshapeit in a manner
that preservesand promotes the public
interest.
Looking forward, considerable hope
seems to rest on the new autonomous
governancestructureof the regulatory
commissions.Much is expectedof inde-
pendentregulatorsto reducethe scope for
interferencefrom elected leaders. That
expectationis thusfartenuouslysustained
by the experiencein some states,but it is
less robustin others.That regulatorsare
political entities in .their own right has
becomequiteevident.However,theirpoli-
tical powerremainstentative,depending
ontherelativeeasewithwhichstategovern-
mentscouldcontinuetolegislateoverthem,
and their commitmentto allow external
scrutinyandallowthepublicto holdthem
accountableis stilltobefirmlyentrenched.
Withregardto activelyshapinga vision-
ary future,independentregulationso far
does not hold out much hope for oppor-
tunitiesto promotepublicbenefits.While
enablinglegislationprovidessome room
forinterpretation,
regulatorsseeminclined
to definetheirjob narrowly,an inclination
that is reinforced by the international
consultantswho train them. A conser-
vativeandnarrowregulatoryculturecould
be a particularsignificant institutional
lockinthatwill shapethe futuredevelop-
ment of the sector.
It is late,butnotyet, perhaps,too late to
havean informedpublicdebateaboutthe
futureof the sector.Such a debateshould
activelyconsiderincreasedaccesstoelectri-
city, social pricing,and the promotionof
sustainableenergyfuturesas concernsto
be integratedintoreforms.It may well be
thattheresultof thosedebatesis a decision
to pursueshort-term financialmotivations
first,asthosewhohaveledreformsthusfar
suggest.But it is also possiblethatbroad
dialoguewill bothenhancescrutinyover
andthe effectivenessof existingreforms,
3386
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and suggest ways to achieve both short-
termfinancialhealthandlonger-term social
goals. Eitherway, in a democraticpolity,
withoutexplicit attemptsat bringingdi-
verse groupsinto the debate,the political
sustainabilityof policyreformwill always
hang in the balance. Il
Notes
[This paperwas writtenas partof a collaborative
projecton powersectorreformandpublicbenefits
indevelopingandtransitioneconomiescoordinated
by the World Resources Institute.The project is
a collaboration between research institutes and
NGOs from six countries.For furtherinformation
contact Navroz K Dubash at navrozd@wri.org.
The authorsare grateful to ShantanuDixit, Kari
Nyman, Michael Rosenzweig, Girish Sant, and P
Suvrathanfor reviewing the paper and providing
critical feedback. In all cases comments were
provided in a personal capacity, and were in no
way representativeof the views of institutionsthat
reviewersareassociatedwith.Moreover,reviewers
bear no responsibility for the views expressed
here. While reviewers comments considerably
enrichedthe paper,all responsibilityfor the final
paper rests with the authors.]
1 See, for instance, World Bank (2000).
2 See, for instance, CPUC (2000).
3 Interview with former senior member of
Planning Commission on July 18, 2000.
Throughoutthis paper,unlessused in context
to indicate other sources, short phrases in
quotes refer to private conversations with
senior bureaucrats,plannersand others who
were closely involved with the power sector
during the reforms.
4 Various annual CEA power surveys.
5 Throughoutthis paper,we reserve the word
'institutions' to stand for practices, habits,
rules, etc, following the convention of New
InstitutionalEconomics [e g, North 1991].
The self-reinforcingnatureof certain types
of practices or rules can lead to 'lock in,'
wherebyitbecomesveryexpensiveinpolitical
terms to revert back to prior institutions.
Examples of institutional lock-in are
frequentlyfoundin fiscalpolicy;forexample,
when taxes are reduced during times of
prosperity,itbecomespoliticallyverydifficult
to raise them again if necessary to combat
deficits.
6 Interviewwithseniorbureaucrat,
July20,2000.
7 ArunSwamy, personalcommunication.The
move in TamilNadu,he argues,was a typical
case of 'sandwich politics,' on the part of
theADMK,whichbeinginclose competition
with the DMK, was tryingto form alliances
between the rich and poor communities
againstthemiddle,upwardlymobileor 'kulak'
groups.Similartacticswere not used in other
states. 'However, after the 1980 elections,
in whicha DMK/Congressallianceswept the
nationalelections and then lost narrowlyto
ADMK in the stateelections several months
later,thechief ministerof TamilNadustarted
to expandthe provisionof freeelectricityout
of (a misplaced) fear that he was losing
farmer's votes.' See also Swamy (1998).
8 See Prayas(1999: 5), where it is pointedout
that the transactioncosts resultedfrom 'the
Economicand Political Weekly September1, 2001
All use subject to JSTOR Terms and Conditions
high cost of metering(due to the geographic
spread) and low revenue (due to low
consumption).'
9 See, for instance, P S Verma (1999): 'Many
dalit leaders raised their voice against the
decision of giving free power to farmers...
as it had created a wide gap between the
farmingcommunityandthose living in urban
areas and dalits. Some dalit leaders, among
others,also threatenedthatlandlessresidents
would start taking direct electricity supply
unless the state gave at least 100 units free
to all landless households as farmerswere
being given free electricity for irrigation.'
(Dalits refer to those in extremely poor,
backwardcommunities,the 'victimsof being
untouchable,...the Indian expression of
apartheid,' www.dalits.org).
10 The Karnataka ElectricityBoard,forinstance,
hadshown steadilyimprovingT andD losses
and increasing agriculturalconsumption in
its annual reports until around 1997. In an
independentstudy, the InternationalEnergy
Initiativeshowed how the actuallosses were
likely to be much higher than reported,and
the
agricultural consumption,
correspondinglylower [ReddyandSumithra
1997]. In fact, extremely high transmission
and distribution(T and D) losses, and not
subsidies,were responsibleforthe Karnataka
SEB's financialdifficulties. It turnsout that
this practice of 'hiding behind agriculture'
was widely used in states with significant
agriculturaluse and was later exposed by
consultantsin the course of preparingSEBs
for privatisation.An interestingquestion, in
the present reform scenario, is how much
'gaming' in the otherdirectionis likely when
setting a high baseline level for losses would
be advantageous to private distribution
companies.
11 Almost any indicatorof groundwateruse in
India is alarming. The number of shallow
tubewells doubled roughly every 3.7 years
between 1951 and 1991. Several states are
witnessing problems of increased salinity,
fluoridecontamination,and/ordecliningwell
yields and increasing pumping costs from
deepeningof wells. Harvestyields fromfields
dependenton groundwaterarealso depleting
in regions where problemsof drawdownor
water quality are prevalent [World Bank
1998].
12 In some cases, the sum of state governments
transfersand industrialcross-subsidies did
not cover SEB technicallosses and theftand
the subsidies requiredfor agriculture.Note,
however, that in 1991-92, many SEBs that
later underwentreforms, including those in
Andhra Pradesh, Karnataka, Orissa, and
Haryana,showed profits after subsidy from
their state governments [TERI 1993]. See
also http://www.indiapoweronline.com.
13 As reportedby Reddy and Sumithra(1987),
this may have been possible had T and D
losses been substantiallysmaller than they
actually were. Thus, theft and excessive
technical losses were responsible for
exacerbating the revenue drain from the
agriculturesector.
14 Interview with senior bureaucrat,July 20,
2000. In the early 1990s, the World Bank
actuallycancelledfive outof six loanstargeted
at SEB improvements.
15 Interviewson July 18 and July 20, 2000.
16 Whatwasworryingaboutthepeakingshortage
problemwas that even though the installed
capacityin 1990-92 was nearly70,000 MW,
the system could only provide about 37,000
MW of peak power out of a total demand
of 44,000 MW [World Bank 1993c]. This
meantthatthe system load factorwas as low
as 53 per cent, largely because of poor load
dispatch, regional disparities in generation
capacity, inadequate transmission systems
andothersystem inefficiencies.This peaking
shortfall of between 15-20 per cent has
remained through the 1990s despite some
overall system improvementsand enhance-
ments in capacity. See also Roy (1993).
17 Reddyet al. ( 1991).DEFENDUSwasa unique
Integrated Resource Planning approach
because it emphasisedaccess and equity. It
modelled its frameworkon energy services
by examining supply expansion as well as
efficiency improvements,and allowed for
environmentalcosts to be internalised.
18 See also Desai (1999).
19 Reddy and d'Sa (1999) also refer to explicit
warningsfrom the donor community about
theglobalconstraintson theavailabilitymulti-
lateralfinance: 'The World Bank had stated
in 1989 that requests from the electricity
sector of developing countries added up to
$ 100 billion per year. In response, only
about $ 20 billion was available from
multilateralsources, leaving a gap of about
$80 billion [Churchilland Saunders1989].'
This point was re-emphasised in a later
Roundtablewith Electricit6 de France on
power sector reforms [WorldBank 1993a],
but the donors' potential contributionwas
reducedeven further,to 10 per cent of the
requirement.In concert with the country's
lowered credit rating, it appears that there
were clear signals from the international
financial community that earlier levels of
debt-basedpublic financed development in
the sector would no longer be realisable.
20 Interview with senior bureaucrat,July 20,
2000.
21 Abhay Mehta (1999) reports, for instance,
thatthe Enronteamsigned an MoU with the
Mahaharastrathree days after it visited the
state and reviewed potential sites in 1992,
calling it 'an extraordinarydeviation from
all established convention in similar cases
the world over' (p 22).
22 Following the assassinationof Rajiv Gandhi
in 1991, the Indian polity has functioned
primarilythroughcoalitiongovernments.The
NarasimhaRaogovernment,whichwas itself
a minorityCongressPartyin power between
1991 and 1996, was replacedby the 13-party
United Front government,which had three
successive prime ministers in 1996-1998,
beforebeingreplacedby the25-partyNational
DemocraticAlliance in 1998. Many states,
including those that are undergoingpower
sector reforms, have also been witness to
similar political upheavals during the past
decade.
23 http://ippai.org/about.html.
24 Interviewwithseniorbureaucrat, July20,2000.
25 Inone recordedinstance,a state-levelbureau-
crat who refused to provide environmental
clearancefor a powerprojectwas threatened
with suspensionand had to resign. There is
a sprinklingof anecdotes concerning other
bureaucrats at the state and central
governmentwho foundthemselvesin similar
situations.
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26 Interview with former power sector
bureaucrat,July 13, 2000.
27 However, the power ministry was also not
a monolith, and there appearsto have been
stronglyheld, if not very vocally expressed,
disgruntlementwith the IPP policy by some
civil servants.
28 Naphthais a low densityandvolatile product
of petroleumrefining and is used typically
as a feedstockfor the petrochemicalindustry
and almost never as a fuel for power
generation. However, uneven petroleum
productdemand in India (high demand for
diesel, motor oil and kerosene) had created
a relative surplusin naphtha,the petroleum
ministry decided in late 1996 to allocate it
andheavydistillatesto meettherequirements
of about 12,000 MW of power generation
capacity. This was proposed as part of a
general policy to speed up the increase in
capacity through 'short-gestation'projects.
29 A numberof 'barge-mounted'projectswere
included in this group. This itself is an
interestingcategorybecause they were to be
set up off the coast as 'partiallyremovable
assets' and, in case of SEB default, could
literally be floated away. by their owners!
Againsttheprotestsof severalenvironmental
groups,a few barge-mountedplantsreached
'environmentaland financial closure' and
are under construction in southern India.
30 This was an idea thatthe Bankhad initiated,
accordingto PillaiandKrishnamurthy (1997:
73).
31 Many thermalpowerprojects,includingone
by Cogentrix and the Mangalore Power
Corporation in Karnatakaand numerous
barge-mounted projects, seemed to have
gottenarbitrary clearancesby stateandcentral
government environmental departments
because there was no clarity on how the
environmentalimpact assessments were to
be evaluated (see footnote 32 below and
Rajan 1997).
32 Public interestlitigations were filed against
theCogentrixprojectin Karnataka ongrounds
of violationsof environmentaland planning
norms. The Supreme Court appointed a
commissionof enquiryinvolvingtheNational
Environmental Engineering Research
Institute, which subsequentlycriticised the
environmentalclearancegrantedtotheproject
by the Ministryof Environmentand Forests.
33 Even at the time of this writing'(July2001),
thereare daily dramaticshifts in the 'sordid
saga [whose] lastchapteris yet to be written.'
[Mehta 1999:176]. Mehta (1999) provides
the most detailed account, with exhaustive
references to other analyses and
commentaries.Forearlieranalyses, see Sant
et al (1995), Reddy and d'Sa (1995). The
Godbole CommitteeReport(2001), submit-
ted to the chief minister in April 2001,
essentially confirmsthese findings. See also
thewebsitethathasbeenmeticulouslytracking
the story: http://www.altindia.net/enron.
34 Vergin (1993) (reportedin Mehta 1999, and
reproducedinhftp:/www.altindia.net/enron).
35 The international news media, financial
institutionsand credit ratingsagencies have
repeatedlymadestatementsthatputenormous
pressureon the stateandcentralgovernments
to fulfil the termsof the PPA. The following
remarkby an analyst at Moody's Investor
Service is a comment on recent events, but
it exemplifies a long-standinginternational
posture on Dabhol: 'The dispute indicates
that India's governmentmay not be willing
All use subject to JSTOR Terms and Conditions
to live up to its contractualobligations...this
would furtherdeterforeigndirectinvestment
fromcoming intothecountry,'ReutersNews,
June 1, 2001, 'Moody's 'Disappointed' in
India's Fiscal Effort.' http://
investor.cnet.com/investor/news/newsitem/
0-9900-1028-6159822-0.html.
36 For instance,the companyrepeatedlyevaded
the Central Electricity Authority's (CEA)
queries for a detailed breakdownof capital
costs andeven repliedonce that'[TheCEA's]
requestfor moredetailedcosts of equipment/
systems/works ... cannot be supportedand
is not deemed necessary.' With directorders
coming from high-level officials, the CEA
was forcedto providea clearancebased only
on the technical aspects of the plantand not
its economics [Mehta 1999].
37 See Godbole Committee Report, Report of
the Energy Review Committee, April 10,
2001 (http://altindia.net/enron/Homefiles/
doc/godbole/godbole-report.doc).
38 Merchantproducers,sometimesalso referred
to as 'outside-the-fence'captive generators,
are independent power producers that
specialise in delivering power directly to a
small set of users, but who may use the grid
and pay wheeling charges.
39 In the mid-1990s, attempts to privatise the
telecommunicationssector were forestalled
when a corruptionscandal involving extra-
ordinary levels of cash transfers was un-
earthed.Public confidence in the ability of
the government to manage privatisationat
a large scale was unmistakablydamagedby
this experience, but whether such impres-
sions were transposedto the different form
of restructuringtakingplace in the electricity
sector (where no sale of assets as such was
yet being proposed) is not well established.
Indeed, two instances where corruption
charges were levelled against government
concerning IPP contracts were never ulti-
mately resolved in legal or political terms.
However,the fact thatthesecases were taken
up at all by higher courts seemed to have
resultedin some consternationamongmiddle
class supportersof the IPP policy, although
manyfelt angrytowardsthe plaintiff-citizens
for needlessly causing delays [Desai 1999].
40 In a workshopconvened by the WorldBank
on the Indianpower sector in Jaipurin 1993,
the countrydirectoroffered, in the medium-
term,to make 'imaginativeuse of the Bank's
guaranteepowerstocatalyseimprovedaccess
to capital market funds from inside and
outside India[for] the stronger,moresolvent
sector units.' [World Bank, 1993c: 232].
The Bank had also expressed its willingness
to provideguaranteesfor IPPprojects,citing
theexampleof Pakistan's HubPowerproject.
However, a recent evaluationof the Bank's
energy lending strategiesover two decades
avoids any referenceto the 1991 IPP policy
and its aftermath,even by way of describing
the background of subsequent state-level
institutionalreforms [World Bank 1999b].
41 More recently the Bank has been more
forthright on this point. Indeed, a recent
World Bank document writtento reflect on
the implicationsof the disastrousCalifornia
experiencewith restructuringfor developing
countries notes that 'starting power sector
reform with a legacy of high priced PPAs
is like starting a race with a 20 kilogram
weight on each leg [World Bank 2001].
42 According to the power ministry, close to
1,00,000 MW of capacity are required,but
3387
 onlyabout5,000 MWhasbeencommissioned
so far (September 2000), and another
5,000 MW are under construction.
43 TheBank'sinterestin applyingtheUK model
in LatinAmericahad alreadybeen criticised
by energy analysts: 'In the absence of new
stateactivity,theWorldBankproposalscould
be interpretedas a recipe for foreign capital
to earn substantialand secure profits from
ownershipof significanttractsof developing
country power systems' [Oliveira and
MacKerron 1992:162].
44 At the same time, EdF felt that if serious
attemptsto improve a regulated integrated
monopoly were not feasible, some level of
competitionat the generationlevel could be
envisaged. 'Thisformof competition[would
be] compatiblewith long-termcoordination
of investment choices, which is critical to
efficiency in the power sector...[and] would
not requirerestructuringthe sector, with all
the difficulties that would entail.' [World
Bank 1993a:45].
45 In addition, the Bank offered assistance in
design and implementation of a reform
agenda, support for demand-side manage-
ment and more environmentallysound op-
erationof generatingcapacity,and use of the
Bank's guaranteefacility to improve access
to capital markets [World Bank 1993c].
46 Oneversionis thatwhileonechief ministerwas
a reformer,his successor stopped the pro-
gramme. According to other sources, the
Bank explicitly told the finance ministerof
Haryanathat the state would have to raise
tariffs by 50 per cent in one shot to get the
promisedfunds.When he suggested achiev-
ingthesameeffectby shufflingbudgetsaround,
'theBanksaidno, andbasicallypulledback'.
47 Interviewwith senior state officials, July 20,
2000. This account is also confirmed by A
Thillai Rajan (2000).
48 Ironically, senior World Bank staff were
among those most sceptical of the depth of
the chief minister's sustained support for
reforms (interview with World Bank staff,
July 6, 2000).
49 Interview with senior retired government
official, July 25, 2000.
50 Interviewwith powersectorofficial, July 14,
2000.
51 Interviewwith Orissa state official, July 20,
2000, and interview with former national
power sector official, July 18, 2000.
52 Interviewwithformernationalpublicofficial,
July 18, 2000.
53 Interviewwithformernationalpowerofficial,
July 18, 2000, interviewwith public official,
July 20, 2000, and interviewwith academic,
July 26, 2000.
54 Interviewwithpublicofficials, July 18,2000,
July 20, 2000, July 25, 2000.
55 InterviewwithOrissapublicofficial, July 25,
2000 and World Bank (1996).
56 Interview with NGO, July 22, 2000.
57 Interview with academic July 26, 2000.
58 Interview July 18, 2000.
59 Interviewwith Orissa power sector official,
July 15, 2000.
60 Interview with donor agency staff,
December7, 2000.
61 Interview with international consultants,
September 13, 2000.
62 Indeed,the Bank adoptedthe 'reformmantra
'Failureis not an Option' ... to emphasise
the importanceof relentlesspursuitof reform
implementation at times of difficulties.'
World Bank (1996, Annex 5.3 p 5).
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63 InterviewwithOrissapublicofficial, July20,
2000 and July 25, 2000 and interviewwith
former national power sector official, July
27, 2000.
64 Interviewwith reformconsultant,September
13, 2000.
65 Interviewwith Orissapublicofficial, July26,
2000.
66 Interviewwith Orissapublicofficial, July25,
2000.
67 Interview with nationalconsultant,July 15,
2000.
68 Interview with academic, July 26, 2000.
69 Interviewwithnationalpowersectorconsult-
antsJuly12,2000,andJuly15,2000,and inter-
view withOrissapowerofficial July 15,2000.
70 Interview with international consultant,
September 9, 2000.
71 As the Bank's Staff Appraisal report says,
'thereformprogrammewouldindirectlyhelp
the poor by freeing up state funding for
higher priority use in the social sectors.
[World Bank 1996: 32]. The test of this
assertionwill have to wait a few moreyears.
72 A review was commissioned by the World
Bank, but the result is widely seen as a
disappointinglygeneral overview of reform
possibilities that lends few insights into the
Orissa specific experience.
73 As one consultantput it, to reformthe public
utility requirescertain 'control techniques'
in place.Specifically,one has to presumethat
managers 'are concerned if you take their
money away.' In Orissa, he suggested, the
structureof the system did not provideeven
this basic incentive (September 13, 2000).
74 The specifics are rather complex
[Mahalingam,2000]. Whentransmissionand
distributionwereunbundledfromgeneration,
theformerwereleftwithliabilitiesofRs 2,400
crore. In an unprecedentedmove for a state
electricity board, assets were re-valued
upward based on depreciated replacement
cost [World Bank 1996]. In addition,
receivables from the state governmentwere
transformedinto equity leaving GRIDCO
with a cash crunch [Gol 1999]. The goal of
theexercisewas to provideGRIDCOacapital
base of a sufficient size to absorbdebt to be
used for future technical upgrades.
75 Indeed,AES was 'persuaded'by the govern-
mentto purchasethiscompanybecausethere
were no other bidders in the first round.
Although BSES bid for the fourth zone in
a second roundof bidding,it was not selected
'in orderto introducea degreeof competition
among the various distribution zones'
[Mahalingam 2000: 96]. The prevailing
explanationfor AES being allowed to have
stake in both generationand distributionin
a supposedly unbundled and competitive
post-reform situation is that thef was the
most expedient solution to the problem of
privatising the fourth zone, CESCO.
Evidently,therewasa broadconsensusamong
reformadvocatesthatby takingover CESCO
afterforminga separatebusinessentity,AES
would find it in its best interest to ensure
that revenues would flow smoothly to its
generationbusiness. Indeed, although AES
had secured a counter-guaranteefrom the
government,there is some speculation that
it may have considered it 'prudentto take
over CESCO' undergovernmentpressureto
ensure that its guarantee would not be
jeopardised [Mahalingam 2000:97].
76 Interviewwith formerOrissapower official,
July 25, 2000.
All use subject to JSTOR Terms and Conditions
77 Interview with Xavier Institute of
Management,July 26, 2000.
78 Interview with representativeof consumers
group, July 25, 2000.
79 Forananalysisof GRIDCO'stariffproposals
andthe Commission's responses,see Sankar
and Ramachandra (2000). Note that
privatisationof distributionin Orissa led to
the sudden recognition that T and D losses
could no longer be clubbed with subsidies
but had to be computed accurately. Thus,
while pre-reformestimates of these losses
were in the order of 15 per cent, by 1997,
GRIDCOwas claiming these were as much
as 41 percent, while the OERCwas allowing
it to assume losses of only 35 percent, which
had been GRIDCO's earlier estimate.
80 Interviewwith public official July 20, 2000
and with consultant, September 13, 2000.
81 T N Seshanis a formergovernmentbureaucrat
who rose to prominence as chief election
commissioner by promising and
implementing sweeping changes in the
country'selection procedures.Note thatthis
is not trueof all the regulatorycommissions
thathave been set up in variousstates, some
of which have established a tradition of
working in a relatively non-transparent
fashion.
82 In one encouraging sign, the OERC has
responded directly to this criticism by an
NGO to make mandatorypublic procedures
for approval of PPAs (interview with
regulator,July 20, 2000).
83 Interview with regulator,July 20, 2000.
84 Interview with former public official, July
20, 2000.
85 Interview with international consultant,
September 13, 2000.
86 Interview with international consultant,
September 13, 2000.
87 Interview with former Orissa official, July
25, 2000.
88 Interview with international consultant,
September 13, 2000, interview with donor
agency staff, July 17, 2000.
89 Interviewwith reformconsultant,September
16, 2000.
90 Interviewwith reformconsultant,September
16, 2000.
91 A 'disinvestmentcommission' was set up by
the coalition United Front government in
1996 to provide recommendationsfor the
privatisationof 43 public sector companies.
Successive governmentshavetakenqualified
action on about 15 of these, and are being
criticised by business for not moving faster
on others, including the Power Grid
Corporation,NTPC and NHPC.
92 The WorldBanksuspendedthe loanin March
2000 becausethe Haryanagovernmentfailed
to act on key legal provisionsof the loan that
required transfer of the Haryana SEB
responsibilities to new unbundled entities
[Sharma 2000].
93 For example, the AP AdaptableProgramme
Loan was structured around five sets of
conditions:(i) pass a reformbill and reform
tariff setting; (ii) notify the bill, establish a
regulatory commission and unbundle the
SEB; (iii) partially privatise distribution;
(iv) further privatise distribution and list
shares of the generations company on the
stock market; (v) private distribution
completelyandlist sharesof the transmission
company [World Bank 1999c].
94 Interview with World Bank staff, July 6,
2000.
3389
 95 The study develops a methodology which is Overview', Economic and Political Weekly, Sankar, T L and U Ramachandra (2000):
applied for two states, AndhraPradeshand Vol XXXIV, No 23, June 5. 'Electricity Tariffs Regulators: The Orissa
Bihar. Echeverri-Gent(2000): 'Politicians'Incentivesto Experience', Economicand Political Weekly,
96 InterviewwithWorldBankstaff,July6,2000. Reform:Globalisation,PartisanCompetition, May 27, XXXV (21/22:1825-1834).
97 More recent applications of the study andthe Paradoxof India'sEconomicReform', Sant, G and S Dixit (1996): 'Beneficiariesof IPS
methodology being conducted at the state- unpublished paper, http://www.people. Subsidy', Economic and Political Weekly,
level reportedlydo addressinstitutionalissues. virginia.edu/~jee8p/smuart2.htm. December 21.
98 At this thirdmeeting, two significant states,Ghosh, Arun(1997): 'Dismantlingof the APSEB Sant, G, S Dixit ancdSWagle (1995): 'The Enron
Punjan and Tamil Nadu, refused to even - No Lightat the Endof thisTunnel',Business Controversy:Techno-EconomicAnalysis and
entertain this commitment. Line, July 15, p 24. Policy Implications', Prayas, Pune.
99 Ramachandran(1999) observes that the Government of India (1980): Report of the Sharma,Navneet (2000): 'World Bank Suspends
centralAct would have a weakerhold on the Committeeon Power (chairedby V G Rajya- Loan, ChautalaDumps Reforms', The Indian
creationandsustenanceof commissions than daksha), Ministry of Energy, Departmentof Express, March 9.
wouldstatelegislation.Intheformerinstance, Power. Standing,(2000): 'BraveNew Words?A Critique
a state governmentcould easily revoke the - (1999): 'PowerSectorReformandRestructuring of Stiglitz's World Bank Rethink', World
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differencehas produceda tenuousnessin the November 29. Powerline, April (10-16).
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opposed to others. Ministers: Agenda Notes', March 3. and the Absence of Mass Political Violence
100 Interviewson July 27, 2000 with consumer Gutierrez,Luis(1993): 'InternationalPowerSector in South India' in Amrita K Basu and
advocate and consultant. Experience: A Comparison with the Indian Atul Kohli, (eds), CommunityConflicts and
101 Donor interviews, July 15-17, 2000. Power Sector' in Conferenceon Power Sector the State in India, Oxford University Press,
102 Interviews with donors, consultants and Reforms in India, Jaipur,India, October 29- Delhi.
former and present commissioners, July 31, ESMAP, Washington, DC. The Economic Times (2001): 'No Full Stops in
15-17, July 27, 2000. Kozloff, Keith (1998): The EnvironmentalImpli- India', March 7.
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sustainableenergy issues, was referredto by MahalingamS (2000): 'PowerReformsinTrouble', Vergin, Heinz (1993): Letter to M S Ahluwalia,
SERCs and the CERC as a credible NGO Frontline, March 17, pp 94-98. Secretary, Ministry of Finance, Government
actor in the sector. - (1996): 'Shock Therapy:Restructuringof the of India, April 30.
104 InterviewwithWorldBankstaff,July6,2000. Power Industryin Orissa,' Frontline,June 14, Verma,P S (1999): 'Akali-BJPDebacle in Punjab:
105 Interviewwithreformadvocate,July12,2000. pp 83-87. Wages of Non-Performanceand Fragment-
106 Interview with civil society group, July 22, - (1997): 'Unbundling Trouble', Frontline, ation', Economic and Political Weekly,
2000. October 17, pp 94:98. December 11-17.
107 The World Bank has produced a summary North, D C (1991): Institutions, Institutional World Bank (1991): India - Long Term Issues
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fordevelopingcountries[WorldBank2001 ]. Cambridge University Press. -(1993a): 'PowerSupplyin DevelopingCountries:
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3390 Economicand PoliticalWeekly September1, 2001

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