Privatization Of The Indian Vitality Sector Economics Essay

The vitality sector in India has observed tremendous advancements the previous 4-5 years, the road forwards however isn't clean. There are plenty of challenges to defeat due mainly to the implementation problems faced in our country and the difference that is accessible between what is actually planned what is implemented. This term newspaper highlights some of these gaps and makes an attempt to analyze the problem. We analyze the potential risks prevalent on the market, and the steps required to overcome these. The federal government contribution and control over this sector has been huge and must be researched in great fine detail. We've then taken the truth of the Orissa Point out Electricity Mother board and sketch conclusions on how it was applied and also identify the key lessons that would benefit in the future implementations of your electric power sector privatization.


The electric power sector overall can be divided into three parts Era, Transmission and Syndication. India has the fifth largest era capacity on the globe with an installed capacity of 152 GW as on 30 September 2009, which is less than 5% of the global vitality generation. The installed capacity of India as of July 2008 was 167278. 36 MW. The energy generation in India is basically fuel based of which thermal power era dominates. The graph below shows the many means used to generate ability and also that thermal electric power for which coal is a excellent input.


Though the emphasis is definitely there on the energy sector through federal government spending and the five year plans, the implementation of power jobs have always been a problem. The planned targets have scarcely been achieved. The Indian federal has allocated huge costs and place ambitious goals to accomplish in the 11th plan, which if successful could lead to a huge extension in the power generation. However, over time we have always seen a mismatch between the planned goals and the successes. This craze can be viewed from the graph below -


Already the focuses on for the first few years of the 11th five time plans havent been achieved. A number of the reasons can also be related to the shortage of petrol for generation of vitality. Even in the transmitting and distribution sector there has been investments planned to take care of the excess capacity.


There was an over-all belief that the energy sector had to be vertically integrated with the technology, transmission and syndication being controlled by a monopoly player. Since, electric power was vital for the economical growth, it needed to be in the hands of the government. So in India also, the whole electric power sector was managed by the federal government through the state of hawaii Electricity Planks and Central Agencies. The energy sector had a very low show of private players working. The graph below shows the circulation of the installed capacities -


In the era space, from the overall capacity of 152 GW, the talk about of central and status utilities stands at 49. 8 GW and 76. 6 GW, respectively; which of private sector stands at 25. 8 GW. Even, of the 78. 7 GW organized capacity additions during the 11th five-year-plan, central and condition utilities mutually are estimated to include nearly 63. 7 GW. In the same way, transmission and syndication is also dominated by Ability Grid Corporation and Talk about Electricity Planks.

The conditions prevalent early on and existence of high restrictions, this sector had not been beneficial for the private players to enter into this sector. There have been entry barriers, considerable licensing rules set up by the government which averted private players in participating in the industry. Also, the price tag on establishing a generation vegetable or a syndication network was quite high.

Also, because of the vital dynamics of power, Federal had to cross subsidize the power between different consumer classes. This made the market inefficient and therefore, a deterrent to the private players. However, during the recent times, there has been a style reversal and the private players have made an admittance into this sector. We've seen huge corporate and business properties like the ADAG Group, Birla Group foraying into this industry in India. We've also seen a few success stories with the private players in this set up. One such case will be reviewed later in the paper.


The industry as a whole faces some difficulties which need to be tackled before we see great improvements in this sector. The below table summarizes the problems faced and some of the methods that could be adopted to defeat the troubles.

The conditions that could creep up receive in the causing issues column along with the key drivers for success.

How privatization would solve the problem of increasing technology capacity would be talked about within the next couple of portions. Fuel availability is a grave nervous about the industry dependent on gas and coal. Some of the players curently have bought coal mines outside India, however the demand-supply gap still exists. There were some problems in this regards as well. The primary international market for coal resource to India - Indonesia might change its polices towards international countries. The organized focuses on from captive coal mines in India also have not been achieved. The only real other option in this respect is to look at other forms of energy like the nuclear energy. This however, has a long way to visit before it becomes the key supplier of power in India. The place equipment shortage also is out there as the government jobs are usually with the already burdened general public sector products like BHEL which is struggling to complete projects on time. This has impacted in the capability building strategies of Federal government another reason why the federal government should move towards privatization. Setting up large generation, distribution items require land which is difficult to get anticipated to bureaucracy and other government regulations.

With regards to manpower shortage, there's a general notion that talent lack in the energy and infrastructure sector is a long-term problem and is likely to continue to motivate up project costs and hazards. The flow of has been gradually minimizing up as individuals have sought an alternative and more profitable career options. THE FEDERAL GOVERNMENT, which sponsors most the capital jobs hasn't done enough to address this issue. Training the graduates is the most viable option even though this may thrust up the project costs to a certain degree.


From the above mentioned dialogue, we can plainly observe the need to try out something different to benefit the energy sector and the choice available in the vision is privatization. A number of the evident benefits of privatization are -

Implementation issues of power assignments could be solved

Technological progression through increased R&D spend to gain competitive advantage

Increased investment - Foreign investments

Improves revenue realization making the service more efficient

More players to hide for the deficit

It is usually assumed that private players would do the jobs with greater efficiency and therefore, the implementation issues could be resolved. There would be better ventures in this sector to derive the best and gain a competitive advantage while making the business viable. Hence, the technology used currently could go through a revamp and make great growth through better spend in research and development. The overseas player who are keen on investment in India's progress story could generate better technology, investment and the expertise to handle large power jobs. This would also generate higher efficiency and consequently of privatization we're able to see greater number of player competing. The energy deficit currently encountered by the united states could be resolved because of the existence of large numbers of players and also there may be an increase for the consumers through price wars and existence of any competitive market.


The government in addition has realized that there surely is a scope for improvisation and recognizes the advantages of privatization. Since, this is a greatly regulated sector Federal regulations play a huge role in driving a vehicle the privatization. It has now undertaken some activities that could pave the way forward for the privatization of the sector and encourage higher ventures from the private sector. Some others like the Land Acquisition Charge are yet to be transferred but currently facing some political resistance. The reforms considered by the government are -

Electricity Act, 2003 can be an historical legislation, which not only combines the previous three Works, but will go beyond in attempting to create a competitive environment.

Consumer is the central point of this legislation and the main features are

Promoting competition for advantage of the consumers.

Effective system for redressal of consumers' grievances

Regulatory oversight for transparency

Measures to regulate robbery of power

Special options for power in rural areas

Facilitates Investment by creating competitive Environment

Entry Barriers removed/reduced

Generation de-licensed

Freedom to captive era including group captive.

Recognizing trading as an unbiased activity.

Open gain access to in transmitting already set up.

Open usage of consumers above 1 MW within five years commencing from 27th January, 2004 (day of enforcement of amendment of Electricity Take action).

Multiple licenses in circulation.

Regulatory Commissions - to develop market; fix tariff

The key reforms which were a turning point towards privatization were

Removed the necessity for license

Competition through international competitive bidding

Unbundling - Transmission viewed as a separate activity

The other procedures and key reforms performed were

Unbundling of SEBs

Tax Benefits

National Tariff Insurance policy of 2006

Allocation of captive coal blocks to private companies

Accelerated Power Development and Reform Program (APDRP) for distribution, permission for trading of vitality, etc.

The Ministry of Ability had signed an MOU with the International Energy Firm in Apr, 1998 for assistance in the power sector. With many of these steps undertaken, the government has paved method for privatization and the energy sector is set to grow at a rapid pace. We have seen success in the case of Orissa Condition Electricity to an degree as well as the Delhi Syndication Privatization.



Orissa is the 9th most significant express in India, and is the eleventh most significant by inhabitants. The coast collection and the natural reources of Orissa form its very best strengths. At the same time, Orissa's contribution to the GDP of India has been less than 2 percent. Infact, the rate of development in Orissa has been very less with GDP development touching a maximum of 7%(YoY) in the first 1990s.

As an outcome, the state's overall development was crippled and being majorly an agricultural current economic climate, it faced a major challenge in conditions of development. Their state remained poverty stricken and the federal government was looking at opportunities by which development could be achieved, to lift the state from its present problems.


In the year 1992, the federal government of India, opened up its markets for international trade and investment. Point out governments and administration owned businesses were encouraged to get the support in terms of finances and technology to improve the sick state of their enterprises.

It was for this level that several sectors found a flurry of ventures in various sectors. Governments became more open to the idea of sharing their monopoly, especially in industries which their knowledge was limited.

The administration of Orissa during that period considered electric power reforms as one of the primary method of getting away from this capture. By inviting know-how into their power sector, they seemed to the opportunity as a means of providing quality service and at the same time encourage development.


The electricity sector in Orissa was been able entirely government whatsoever three levels, viz. production, syndication and the transmission. The Orissa Talk about Electricity Board supervised the entirety of these operations. An lack of cost plus tariff led to low income and higher loan capital. OSEB's tariff level was low and industrial sector's share in total consumption declined from 69% in 1960/61 to 31% in 1996/97. There is high T&D reduction in the form of specialized and commercial deficits (unauthorised connection, faulty meters and misclassification of consumers).

The vitality sector in Orissa experienced from

high transmitting and distribution losses,

inadequate accountability for various sections (generation, transmitting, and circulation),

poor financial performance, low quality of service and manpower related issues

There was a pressing need to resolve the financial problems of Orissa Status Electricity Table (OSEB) as well. There was also a pressing need to meet up with the projected demand of cash for investment in era, transmission and syndication system. The National Economic Policy announced in 1991 envisaged liberalisation and private involvement in infrastructure development, and this looked like the life line for the federal government itself.

Beginning of Electricity Reforms in Orissa

The first extensive restructuring and reform exercise was completed by Orissa Express Electricity Plank (OSEB) in India and was the pioneer in South East for the same. Several leading management consultants and multilateral organizations like World Loan company, Office of International Development (DFID) - Government of UK, Asian Development Bank or investment company. The experience of Orissa would in future end up being ideal for the formulation of reforms in other says aspiring to do the same.

Restructuring the Power Sector

The World Loan provider agreement for Ability Sector restructuring in Orissa consisted of

Unbundling and corporatization of OSEB

Privatization of generation, Grid Company, and distribution

Creating Competition for new era capacity

Establishing a Separate regulatory body

Tariff Reform

At the center of the reform process was to envisage more autonomy for the web host utility and participation of the private sector in electric power sector development. The role of the federal government would thereby be more passive and there is a need for the Orissa authorities to shift from its previously dynamic role.

Reform Process

The reform process that was started in Orissa was carried out in a phased manner. The original stage was setting up of the regulation commission namely the Orissa Electricity Regulatory Fee. It was chose that the setting up of this table would be very important and thus the assignments were identified.

The role of OERC was to

Take methods to ensure that an successful electricity industry is established in the State

Issue licenses for transmitting and syndication and set in place tariff

Safeguard the pursuits of consumers

Ensure that monopolization was removed from the system

Reforming of electricity tariff at the bulk power, transmission, and retail levels

Reform Phase I

The first phase of the reforms was to be began with the unbundling and corporatization process of the many departments in the erstwhile OSEB.

Unbundling and Corporatization

Three Government-owned corporate utilities were created with agreement ensuring full autonomy with result from 1st April 1996. Their functions and obligations were well defines using their independent boards. These were

Orissa Hydro Electricity Organization (OHPC) - accountable for hydro vitality generation

Grid Company of Orissa (GRIDCO) - accountable for transmission and distribution functions

Orissa Power Technology Company (OPGC)- In charge of thermal vitality generation

OPGC Divestment

In the entire year 1998, 49% of the shares of OPGC were divested by the Orissa Federal towards a mechanism to include international companions through strategic bidding. The AES bid, at Rs 6. 03 billion ($ 144. 5 million), was the highest among bids from firms like the UK's PowerGen Plc, local company BSES, and Tata, Reliance and Hindalco group companies.

By an in depth shareholders contract, 41% of the show were moved by the federal government of Orissa to the AES organization and another 8% were allotted to them in the name of their subsidiary in Mauritius.

Reform Period II

In the next phase of the reform process, it was made a decision that the privatisation of the distribution activiites would be carried out by the company

Privatisation of Syndication Expenses

The procedures were carried out in the following steps by the federal government of Orissa

Govt. of Orissa moved the distribution possessions and properties along with employees of GRIDCO to four circulation companies CESCO, NESCO, WESCO and SOUTHCO

Through an activity of international competitive bidding, GRIDCO disinvested 51% show to Private Sector Buyers keeping a show keeping 39% with it and 10% talk about for Employees Welfare Trust.

GRIDCO purchases vitality from independent technology resources e. g. NTPC, OHPC, OPGC, IPPs, CPPs and it to four privatised distribution companies who subsequently cater to the need of customers.

The new shareholding pattern of the many parts of the new structure is complete below.

S No


Government (%)

Private (%)








51(Bombay Suburban Electricity Resource Company













51(AES Transpower)




49(AES Transpower)

Impact of Reforms

There have been negative and positive areas of the reforms which have taken place in Orissa.

Following the energy sector reform, the net cashflow for Federal of Orissa has improved upon significantly

The total electrified area in their state has increased by 13% during the last decade.

Orissa has been constantly registering a YoY upsurge in GDP of typically 12% during the last 6 years

However at the same time, there have been a few questions of the whole divestment process that has been carried out by the express of Orissa. Few figures show the true and true state of affairs in Orissa.

The T&D deficits that were assumed to be 39. 5%, were actually higher than 50%. OERC established their Tariff Order considering 35% T&D losses, leading to an additional T&D loss of 15% being consumed by GRIDCO as deficits.

Private syndication companies are unable to pay GRIDCO and therefore have brought on shadow on the overall reform exercise.

Non metered source to most agriculture consumers managed to get impossible to estimate the true amount of the T&D losses

Even though 100% Collection Efficiency was assumed by FY98, the actual collection was 83% in FY99

Political Context

However, despite all the reason why given by the government to go for a divestment, there have been questions on the genuine motives of the same.

The restructuring activity completed by Orissa government on the compulsive guidelines from the globe Bank, which in those days indicated that it could fund tasks only where restructuring was carried out as a prerequisite.

The then main minister of Orissa, Biju Patnaik evidently noticed the impending bankruptcy looming in the power sector. He found the entire world Banking institutions' proposals as the only way out.

Thus we can see that political gains were also at the top of the governments in those days and thus there were several vested passions as well.


The express of Orissa was the first to move forward with a reform program in response to the planet Bank's offer. While its estimated percentage of T & D losses was high and collection of charges was low, their state had the benefit of a comparatively small agricultural load and hence it needed a lesser agricultural subsidy.

To make distribution more attractive 75% of the shared financial liabilities were used in the publicly organised transmission sector. Generation was made more attractive by increasing the price costed to GRIDCO, which however was not allowed to spread the purchase price increase to the syndication companies. Thus GRIDCO developed gigantic liabilities that undermined its long-term viability.

Revenues from privatisation weren't ploughed back to the sector but assimilated into the federal budget for other purposes.

Subsequently substantive tariff boosts were imposed on the general public but with few advancements in service, leading to growing public discontent.

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