Download CHALLENGES IN PRIVATE STRUCTURE INFRASTRUCTURE

For ‘COMMENTARAO’ in “The Telegraph” of July 14 2003
CHALLENGES IN PRIVATE SECTOR ENTRYInto Electricity, Public Transport and Water and Sewage
By S L Rao
Private investment in infrastructure was sought from 1991. There were many
proposals especially for electricity. Others like toll roads and water supply also
evoked some interest. This has now reduced but the need has not because the
private sector is expected to bring superior efficiency and there is need for fresh
investment funds.
World Bank data shows that the maximum cancellations of private projects in
developing countries have been in these areas (excluding rail and coal).
Government dominance in them resulted from scarcity of resources, lack of a
thriving private sector and the superior ability of governments to raise large
resources.
Many believe that opening infrastructure to the private sector will hurt the poor
and sell “the family silver”. In the past some interested parties were bogus, without
expertise or even the finances and some used underhand means to influence
decisions in their favour. Private investors would it was feared exploit consumers,
raise tariffs, serve only prosperous customers, create private monopolies and
prevent competition. These fears have diluted enthusiasm for private investment in
infrastructure.
Private investors also see many risks. They might not get paid adequately or at all.
Public opinion distrusts private investment in infrastructure. Governments and
political parties are not vocally supportive.
Private investment requires an enabling environment and long-term commitment.
Governments must be willing to take unpopular actions like forcing higher tariffs,
stopping services to these who do not pay their bills, prosecuting thieves, etc.
Electricity is a right that many expect to be cheap and easily available.
Government ownership has led to overstaffing, gross inefficiencies, tolerance of
theft and collusion in theft, poor commercial and accounting practices, poor
investment in maintenance and modernization, and rising deficits. Distribution
and supply are the worst. Governments so far have been unwilling and unable to
take prior actions to clean the system.
The present private distribution licensees have performed better than SEB’s but
need to improve. Of the six licensees, CESC had 23.4 % T & D loss in 2000-01.
Three others had high losses. The trend has been upwards despite their serving
easier-to-serve urban areas and many bulk consumers. Manpower performance
and cost showed wide variation, from an average cost per man month of
Rs10200 in Noida to Rs. 5700 in Surat. Employee cost per unit sold varies from
Rs0.11 for Tata, a predominantly generating company, to Rs. 0.05 for Noida and
Rs. 0.21 for CESC. Capital investment (Rs. per unit sold) by CESC is Rs. 2.78,
the highest among distribution licensees and higher than the combined
investments for Bombay’s utilities. Yet power quality is worse in Calcutta than
in Bombay. Distribution costs also vary and are particularly high in Calcutta
and Bombay. The regulator also has been tardy (as in Bombay) in his readiness
to hear tariff revision applications. Neither the operations of the present private
distribution licensees nor the regulatory arrangements are a model.
Of the first distribution privatization to two companies in Orissa, only BSES
remains. AES has cancelled. The Orissa privatization was based on poor
information. BSES and AES entered despite this. Orissa is backward and
poverty-stricken, with relatively inefficient governments, tariff uncertainty, high
levels of losses, high collection risks, lack of paying capacity of many consumers,
problems of inherited staff, difficulties of imposing own management and
bringing in own employees (as happened to AES who did so and found
themselves unable to manage the enterprise).
After Orissa private investors are reluctant to take over hitherto state-run
distribution unless they get safeguards against risks and adequate returns. They
demanded a transition plan before privatization in Delhi and Karnataka. The
main elements of such a transition plan are:
 Multi-year tariffs and automatic pas-through of power
purchase costs, to enable licensees plan efficiency
improvements and investments.
 Licensees committing to a binding multi-year programme to
achieve the standard costs and efficiency parameters and
 Committed and funded subsidies during the transition period
to bridge the gap between targets and actual, any cash deficit
financed by government, a tariff plan from the Regulator, an
efficiency improvement plan from the existing distribution
company, a subsidy commitment from government and a
binding agreement among between all the parties.
The Enron-Dhabhol project had extremely high and
apparently heavily padded capital costs. There were also
suspicions about backhanders paid, inability of consumers to
pay resultant tariffs and high levels of public distrust. Enron
has been thoroughly discredited. Demand growth has been
much slower than forecasted for the project. The resumption
of the project with the same foreign parties as before is very
unlikely.
In the Coimbatore By-pass and Bridge Project the role of government in a
public-private partnership was unreliable. An additional bridge to make the old
two-lane into four-lane and a 27.77 km bypass were to be built on a BOT basis.
The cost was to be recovered through tolls on both bypass and bridge. The
contractors were allowed to charge tolls for twenty years on the bridge and for
thirty on the bypass. While traffic risk was with the contractors the risk due to
non-payment of tolls was with the government. Multiple users (state and private
buses, taxis, trucks) did not want to pay for each trip and others did not want to
pay when there had been no toll on the old bridge. Police support to collect tolls
was ineffective. After four years the contractors had lost Rs. 126 million. The
usage of the bridge is heavy and has been a great convenience to users. Only one
bidder, lack of preparation of public opinion to pay tolls, weak government
commitment were some reasons for the unhappiness of all parties.
Pune had high levels of unaccounted water, intermittent supply, low pressure,
limited sewage treatment, rising river pollution and need to extend services to
include an additional 0.8 million inhabitants. A water supply and sanitation
project with private investment was to remedy deficiencies and meet future
demand. Financing was to be from internal and external sources with Pune
Municipal Corporation guaranteeing one-third of the cost from public funds and
two-thirds to come from private funds to be arranged by the contractor. PMC
would create a special fund from octroi collections. Substantial tariff increases
were proposed. The project was cancelled because of loss of political support
despite being consistent with state policy on public-private partnerships for
infrastructure development, close consultations at all government levels, and
broad cross-party support.
On the other hand the Tirupur Water supply Project has reached financial
closure, with first phase completion in 2005. It was initiated by local industry.
Tirupur is the largest knitwear exporter from India. Insufficient water for
domestic use and for the industry, pollution and attendant problems, focused the
project on plugging the 25% leakage of water. There was local equity
participation. It has received wide funding support and is expected to make good
progress.
Viability of private investments in water supply and sewage depend greatly on
plugging leakages of water and collections. Many times this is not enough and
tariffs also have to rise. Capital investments required must be carefully
evaluated for their impact on tariffs and the prospect of their being accepted by
users. Public and political opinion must be mobilized in advance behind the
project.
Private entry is not a magic wand that will by itself resolve complex ills
especially in electricity, public transport and water and sanitation. It can work if
there is farsighted and effective governance, willingness to improve the sector in
advance, substantial initial preparation and transparent selection procedures of
the private parties. Governments will have to take earlier actions to clean up the
infrastructure enterprise and build public opinion for private entry and more
rational user charges. (1269)