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India's power sector faces tough road ahead

India will find it hard to sell equity in loss-making utilities to foreign firms because of better opportunities elsewhere and problems faced by US firms Enron Corp and AES Corp in the country, a British aid agency official said.

"International appetite for private investment in the power sector in India is probably less now than what it was two years ago," Peter J Davies, senior adviser, energy, at The Department for International Development, said on Thursday.

He said power shortages in developed markets such as United States and consolidation of the energy sector in Europe had opened up investment opportunities for global power companies, making countries such as India less attractive.

DFID, a department of the British government, is working with the World Bank to guide power sector reforms in India. A fifth of its over 100 million pounds annual grant to India is spent on the power sector.

The Bank and DFID are involved in reforms in the eastern state of Orissa, the northern state of Haryana and the southern state of Andhra Pradesh, with a commitment of $1.56 billion from the World Bank.

India is trying to reform its loss-making state electricity boards by hiving off their generation, transmission and distribution arms into separate firms and selling a part of their equity to domestic or foreign companies.

State utilities, which have a monopoly in power distribution in almost every part of India, are likely to report combined losses of $5.1 billion this year because of large-scale theft and free or subsidised supplies to farmers.

Sector troubles

A bankrupt utility in western India defaulted on payments to Enron Corp, prompting the company to say it wants to sell its 65-per cent stake in the $2.9-billion plant at Dabhol.

The eastern state of Orissa took the lead in reforms and gave AES Corp 49 per cent equity in the generation firm and 51 percent stake in the distribution venture.

But the US firm got mired in a payments problem and recently threatened to walk out of the distribution venture unless it was paid its dues, allowed to raise tariffs and given a better operating environment.

The problems faced by Enron and AES have created a perception that India was a difficult place to do business in, Davies said.

But Davies said officials in the government, the Bank and the DFID had learnt from problems with the reform programme in Orissa and would use the lessons in dealing with other states.

He said even if AES decided to walk out of Orissa, it should not be seen as a failure of the privatisation model in India.

"There are benefits from the current reform model. There is a lot more clarity about issues on tariffs and costs, there have been improvements in management and information systems."

Davies said India's power sector reforms had thrown up more challenges than they had expected.

"The ground realities are different; losses of the state utilities are very high, there are political pressures and there are lobbies who take benefit from free or very low cost power."

He said if the government wanted it could push for more reforms and make reluctant customers pay higher rates for power.

"I think governments very often are over sensitive about pricing," he said. "Willingness to pay is not a problem, but possibly a willingness to charge is a problem."

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