Make Distribution Reforms a Top Priority, says New World Bank Report

June 24, 2014

NEW DELHI, June 24, 2014: Power distribution in India needs sweeping reforms if it is to bring back the country to a high growth trajectory and meet its goal of expanding access to electricity to all by 2019, says a new World Bank report. Today, India’s annual per capita power sector consumption at around 800 kWh is among the lowest levels in the world.

More Power to India: The Challenge of Distribution, launched in New Delhi today is a review of the Indian power sector across key areas of access, utility performance, and financial sustainability. The study, conducted at the request of the Government of India, has identified electricity distribution to the end consumer as the weak link in the sector. The report recommends freeing utilities and regulators from external interference, increasing accountability, and enhancing competition in the sector in order to move it to a higher level of service delivery.

While making an urgent call for reform, the study recognizes the many impressive strides that the sector has made over the years. Generation capacity has tripled between 1991 and 2012, boosted by the substantial role played by the private sector.  A state-of-the-art integrated transmission grid now serves the entire country. Private distribution utilities in Kolkata, Mumbai, Surat, and Ahmedabad, which have been owned and operated by the private sector since before Independence, point to potential gains from private participation. Grid-connected renewable capacity has risen from 18MW in 1990 to 25,856 MW in March 2013. And more than 28 million Indians have annually gained access to electricity between 2000 and 2010.  

However, according to the report, the financial health of the sector is fragile, limiting its ability to invest in delivering better services. Total accumulated losses in the sector stood at Rs 1.14 trillion (US$ 25 billion) in 2011. These losses are overwhelmingly concentrated among distribution companies (discoms) and bundled utilities – State Electricity Boards (SEBs) and the State Power Departments, says the report. Sector losses have led to heavy borrowing – power sector debt reached Rs 3.5 trillion (US$ 77 billion) in 2011, as much as 5% of India’s GDP.  The problem is concentrated in a handful of states. By tackling the losses through a focused approach, it should be possible to notice a marked difference in sector performance, the report adds.

Over the last two decades the sector has needed periodic rescues from the central government -- a bailout of Rs 350 billion in 2001 and a ‘restructuring package’ of Rs 1.9 trillion (US$ 19 billion), that was announced in 2012.   

“Two decades after the initiation of reforms, an inefficient, loss-making distribution segment and inadequate and unreliable power supply are major constraints to India’s aspirations for growth,” said Onno Ruhl, World Bank Country Director in India. “Revitalizing the power sector, by improving the performance of distribution utilities, and ensuring that players in the sector are subjected to financial discipline is the need of the hour.”

Poor Performance of Distribution Sector

Several factors have contributed to the losses in the distribution sector, the report says. The cost to discoms of purchasing power has risen faster than revenues, primarily due to fuel shortages and the need for expensive fuel imports by generators but also due to generation inefficiencies; rising interest expenses have contributed to rising costs; also, tariffs have not kept pace with costs over the years. Finally, there are factors that are well within the control of utilities – such as under-collection of bills and delayed collection of payments, along with the fact that more than one-fifth of electricity purchased is collectively ‘lost’ by the utilities, so does not generate revenues for them.

Projections show that even if tariffs rise 6% per year to keep up with the cost of supply, annual losses in 2017 will likely amount to Rs 1,253 billion (US$ 27 billion).

“The crux of the matter is that distribution utilities are not run on commercial lines. Despite corporatization, their boards remain state-dominated and are rarely evaluated on performance. Regulators have not pushed them sufficiently to improve performance, in part because of limited regulatory accountability and also the difficulty of regulating a state-owned entity. And a history of state rescues has meant that lenders do not pressure distributors to improve their operational and financial performance, expecting to be paid back by the state,” said Sheoli Pargal, Economic Advisor, World Bank and author of the report.  

Other facets of sector performance highlighted by the report include:

  • Over 60% of the sector’s accumulated losses in 2011 came from the states of Uttar Pradesh, Madhya Pradesh, Tamil Nadu, and Jharkhand. Uttar Pradesh alone accounted for 40% of the sector’s accumulated losses.
  • While grid connectivity has increased, over 200 million people without power live in “electrified” villages.
  • Today, it takes seven procedures and 67 days to get a power connection for a commercial establishment in India. In China it takes 28 days, in Thailand 35, and in Singapore 36 days.

Mounting Subsidies: High Opportunity Cost, Weak Targeting

Utilities face pressure to provide below-cost power to agricultural and rural residential consumers for which they are reimbursed through subsidy payments by state governments. However, currently, 37% of the subsidies booked by state utilities are not paid to them. Since 2003, in fact, subsidies booked have grown by 12% per year, and subsidies received by 7% per year; the cumulative gap between them was Rs 466 billion (US$10 billion) for 2003–11. This has had a crippling effect on the already struggling financials of the utilities, the report says.

“State financial support, which has become essential to keep many utilities afloat, has a high opportunity cost. Our study estimates that 15,000 hospitals and 123,000 schools could have been developed in 2011 if the power sector had not pre-empted these funds. Our recommendation is that states should compensate their utilities if they are required to provide free or below cost power to specific consumer categories,” said Sudeshna Ghosh Banerjee, Senior Economist and co-author of the report.  

The report also highlights the need for better targeting of domestic subsidies.  Lack of effective targeting of such subsidies has led to anomalies such as economically weaker sections of the population ending up paying more for consuming less power. In fact, in 2010 some 87% of the domestic electricity supplied India-wide was subsidized. Over half of subsidy payments (52%) India-wide went to the richest 40% of households in the country in 2010, the report says.

Key recommendations

State governments should pay subsidies transparently, fully, and on time, when they mandate free power supply. They must also improve the targeting of subsidies so resources are not wasted and actually reach the poor.

Utilities must be freed from government interference and their management professionalized. Despite corporatization, utility boards remain state-dominated and are rarely evaluated on performance.

Banks/lenders should hold utilities accountable for efficient operation and not lend to those that are not credit-worthy.

Regulators should transparently revise tariffs in line with efficient costs, hold utilities to service standards, and create a predictable environment for decision-making.

Consumers need to pay for the power they use, and hold regulators and state governments accountable for quality of power they supply.

Central government should pledge no future bailouts, give regulators autonomy and adequate resources, and hold them accountable for their performance. It should also allow competition to create pressure for efficient operation, and promote rural access to electricity in a financially responsible manner.

Link to the report:

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