Not Convincing Enough

No one who heard the prime minister, Mr Deve Gowda speak at the Assocham meeting on October 16 can doubt any longer his unflinching determination to drag power producers to India, and India into the global market. Faced with the urgent need to create at least 80,000 mw of additional power generating capacity in the next 10 years, the Deve Gowda government has at last taken firm control of policy making in this sector and has realised that without rapidly decentralising the process of decision making itself, there is no way in which the country can meet this target.

To a large extent the turnaround reflects the growing ascendancy of the prime minister, who is also the minister for power, and his growing familiarity with the multitude of problems and challenges that the Indian state faces. That Mr Deve Gowda has decided to take the power sector in hand personally became apparent at the first meeting of state power ministers held in Delhi on October 16. During his address, he pushed aside the prepared speech and spoke extempore. He told the listeners bluntly that the Centre was clearing the way for them to take decisions on power. Whether they actually generated more power or not would depend on them. It was up to them to make their SEBs viable, to restructure them and privatise all or parts of them to attract private investment. The Centre would not hold their hands any more.

 

The spate of decisions taken was outlined recently in New York, Washington, Houston and San Francisco, by the minister of state for power, Mr Venugopalachary, at meetings with power producers and bank representatives. Although much of the discussion revolved around issues of detail, his responses made the change of government strategy very apparent. The Deve Gowda government has decided that all decisions concerning power generation must in future be taken by the state governments. To make this possible, it has decided to reduce drastically the role of the Centre, and confine it mainly to dealing with issues that affect more than one state. Its first step is to clear the backlog of projects left by the Congress government. To do this it has speeded up the clearance of the seven fast track projects that were formulated by the central government under Narasimha Rao, and became the slowest track projects in the country. The Congress had been able to complete the clearance process for only one of these. The Deve Gowda government has cleared four more, and has asked the state governments to complete drawing up the power purchase agreements for the remaining two by the beginning on November so that the Centre might give its counter guarantee to the investors.

The withdrawal of the Centre is taking place simultaneously in all the areas of decision making. The government recently announced that in future no techno-economic clearance would be required from the Central Electricity Authority (CEA) for projects with investment of up to Rs 1,000 crore. In effect, this means that projects designed to generate 250 to 300 mw of power can be cleared directly by the state government. The CEAs clearance had become one of the principal hurdles to the implementation of the 200 or so private power project proposals that have so far been cleared.

Foreign investors have also been worried by the fuel linkage requirements of the central government. At present, the policy requires them to commit themselves to using naphtha as the transitional fuel in gas-based plants until the very expensive gas handling facilities, including port, storage and refrigeration, transportation and regasification facilities have been built. The Centre took this decision because there has traditionally been a surplus of naphtha that is regularly exported. But it has been apparent to the investors for some time that if even half of the approved projects come up there will simply not be enough naphtha to go around. A large question mark has therefore hung over this issue that has effectively deterred many of them from pursuing their plans further. During persistent questioning, the minister disclosed that the government had calculated that there would be enough naphtha for about 10,000 mw of additional power generation. Beyond that, power generators would necessarily be allowed to make other arrangements.

Another announcement that was well received was the governments decision to amend the Electricity Act to pave the way for the privatisation of transmission and distribution. The minister said that this was likely to be introduced in the next session of Parliament. The Centre, he said, had also delegated the issuing of environmental clearances to the states for all but very big projects. Lastly, to help speed up the drawing up of PPAs the Centre has drawn up a model agreement that has been circulated to the state governments.

For the very large projects, that still come to the Centre for their clearances, it has set up an empowered committee of secretaries to give a single-window clearance. The various departments that have to deal with the project have been asked to co-ordinate appraisal among themselves. Mr Venugopalachary explained that the simplification process had been on for some time. Initially, there were 17 clearances to be obtained, these had been reduced by the Congress to four. The UF government had reduced it to one.

The central issue that remains is the viability of the SEBs. Investors and financiers at the meetings expressed considerable disquiet at the prospect of not receiving central counter guarantees for future projects. As one of them explained, the very least this meant was a higher risk assessment by the banks to whom they went for loans, and consequently a higher interest rate. As these were long gestation projects, with even longer payback periods, this could add a great deal to both the capital and operational project costs. The minister explained that while there would be no more counter guarantees, the government was taking steps to restructure the SEBs and to make them raise their tariffs. In this it had had considerable success already. In all, eight state governments have raised tariffs for agriculture and the domestic sector. These increases will wipe out approximately Rs 1,500 to 2,000 crore, or about a quarter of the current deficit of the state governments. Several have made a start in privatising the management of distribution and have seen a sharp rise in their revenues as power theft has come down. With restructuring and some other methods of giving limited counter guarantees, the government hopes that this hurdle too will soon be crossed.

If there is still a serious lacuna in the reform of the power sector, it is that incremental reform is still too slow. But Mr Deve Gowda has left no one in any doubt that when this becomes apparent to him, he will not hesitate to take the steps that will be needed.