Friday, April 24, 2009

Where are the entreprenuers in electricity distribution?

Technology intensive sectors presents unique opportunities for upcoming entrepreneurs. The success or otherwise of these entrepreneurs depends on their ability to spot opportunities, tailor a product or service, successfully demonstrate its utility and superiority (over rivals), and then use it to vault into the larger market. There are no scarcity of opportunities and there are also large numbers of competing new and untested products, especially in technology related sectors. But the biggest challenge for entrepreneurs is in successfully demonstrating its product by using the platform of one of its larger clinets for such services/products.

In electricity distribution, the scope for such innovations is immense - simple and automatic metering, meter readings and billing solutions, collections channels, data communication technologies, sub-station devices and equipments, distribution transformers, energy audit and other application softwares etc. Over the past year, I have personally witnessed presentations by numerous entrepreneurs on new and innovative products and services, many of which would undoubtedly add considerable value to the distribution utility and increase revenues and reduce losses.

Since all these are untested products, it is understandable that the distribution utility would be wary of its functional effectiveness and therefore expect the entrepreneur to bear the associated risks. The platform and opportunity offered by the distribution utility to the entrepreneur in testing out and perfecting its product, would in any market command a price. The product offers different attractions for the utility and its seller. The utility benefits by way of the possibility (not certainty) of a new product improving its functional efficiency, whereas the entrepreneur benefits by way of an opportunity to perfect and a platform to demonstrate (effectively get a certification) his new product, and thereby get a head start in an emerging market.

In fairness, the entrepreneur can expect the utility to pay the actual costs incurred in assembling the product, minus the sunk costs incurred in developing it and the oportunity cost of the entrepreneur's time. It may also be fair to have an arrangement where the entrepeneur gets compensated with a "success fee" on the successful demonstration of the product. But it may be unreasonable to expect the utility to pay its portion of the sunk costs and entrepreneur's time reward on a a product whose utility is not proven. This distinction assumes significance, especially in the context of such sectors, with numerous such new products proliferating in the market.

Unfortunately, my experience with such "entrepreneurs" seeking entry into the electricity distribution sector, has been disappointing, with most (if not all) of them expecting the utility to bear their risks and pay an unreasonably high price for the product, including sunk costs and entrepreneur opportunity cost. Even incentivization by way of deferred "success fee" on successful demonstration has not managed to cut much ice with them. And APEPDCL has traditionally been one of the most fertile gorunds for catalysing innovations in electricity distribution sector!

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