Tuesday, May 5, 2009

Privatization in power distribution - report card

One of the most remarkable, but surprisingly less discussed, experiments with infrastructure privatization, has been that of three state electricity distribution utilities in the National Capital Region (NCR) of Delhi - NDPL, Reliance Jamuna and Reliance Rajadhani. The 51:49 divestment of state equity in these utilities to private entities through competitive bidding, with clearly defined performance outcomes and by retaining the existing government employees, is a tribute to the political commitment of the Delhi State and Central Governments. And given the odds stacked against such attempts, all three should be counted as successes in the privatization of infrastructure utilities.

By itself the privatization is a remarkable achievement, while the relative success of the privatized entity in reducing losses, improving quality and delivering better services, especially given the dismal scenario of electricity distribution in the country, makes it a shining example. However, the success glosses over several important issues relating to infrastructure service delivery that cannot be resolved by mere change of ownership pattern. And it is also an excellent example of how privatization need not necessarily lead to vastly improved performance. here is why.

For a start, there is a credible enough allegation that the baseline of losses in these three utilities before the privatization may have been inflated and/or wrongly determined (understandable given the dubious quality of data in government utilities). But even granted this, all the three utilities have achieved great success in steeply lowering their Aggregate Technical and Commercial (AT&C) losses, at a much faster rate than the national average. However, even after nearly a decade, their AT&C losses continue to remain very high at 20-25%, all the more surprising given the fact that they operate in the relatively easier jurisdiction of Delhi without any agriculture baggage and an excellent consumer and load mix. The massive investments in modernization would have brought down technical losses to a minimum of 4-6%. This means that the remaining 20% or so losses are commercial in nature. This is surely a unacceptably high loss figure after so mnay years in a private management.

More so, given the relative abundance of low lying and easily plucked fruits in the hugely inefficient and corrupt erstwhile utilities, even mild disciplining would have achieved quick wins in loss reductions and revenue improvements. To put this achievement in perspective, the reduced losses are far higher than those in some of the South Indian government distribution companies, even with their predominant rural and agriculture consumers. Interestingly, the AT&C losses in the equally large (in comparison to the Delhi utilities) urban sectors of these government utilities (Bangalore, Visakhaptnam, Chennai) are in the range of 7-10%.

So why have the performance of these privatized utilities not matched upto the expectations? Here is a possible explanation, which also partially explains why utility privatization need not necessarily improve performance beyond the initial quick wins.

The rennovation and technology investments made by these utilities over the past decade alone ought to have contributed substantially to loss reduction. The increase in collection efficiency and revamping of billing channels too would have contributed to substatial improvements in the bottomlines. The elaborate energy audit mechanisms (REL is probably the only utility to have full metering of all the Distribution Transformers), can help localize and identify the reasons for losses, from where remedial action is, in most cases, a short step. The typical distribution utility, grappling with the problem of theft and other types of commercial losses, have a problem in even identifying and localizing their losses.

Given the sensitive and political nature of such issues, the privatization effort took great care to retain the existing arrangement wherever possible. This meant that the privatized utilities focussed their attention on issues like improving efficiency and plugging leakages through Information Technology (IT) initiatives (SCADA, GIS, IVRS, ERP, IAMR etc), better human resource (HR) management practices, pro-active customer care interventions, and diversifying billing and collection channels and increasing their efficiencies. In the operational side, their interventions were largely confined to investments in network and equipment modernization and introduction of newer technologies.

It was relatively easy to focus on these areas and achieve pronounced efficiency improvements, especially given the virtual lack of such interventions in the old government utilities. The focus of the erstwhile utilities was confined to the task of delivering electricity supply - the operational side. In contrast, the focus of attention of the new entities was more on the aforementioned commercial side, understandable given the corporate character of the organizations.

However, the T&D (or AT&C) loss reduction in Indian distribution utilities is less a technical and more a commercial challenge. For a typical utility with 30% AT&C loss, the commercial losses can be beyond 20%. Therefore while there is still scope for reducing technical losses, commercial loss reduction can achieve windfall gains. These commercial losses arise from different types of theft and pilferage, suppressed readings arising from billing deficiencies and frauds, unmetered agriculture services, etc. Reducing these are massive challenges, far more formidable than the aforementioned commercial and technological interventions, and will require focussed managerial efforts.

Increasingly, state utilities too, like the aforementioned ones from South India, have implemented many of these initiatives on the techncology and commercial side, and reaped its benefits. However, they have gone beyond these, and have been successful in drastically reducing commercial losses which in turn reflects in their lower AT&C losses.


Aditya said...

This is an excellent analysis of the privatization model followed in Delhi. Interestingly, the supporters of privatization model and the Distribution Franchisee model are at loggerheads and the Distribution reforms are not getting implemented in this dilemma.

Ashok Patsamatla said...

A Distribution Franchisee model would probably yield better results owing to the loss reduction targets that can be imposed on the franchisee. This is a major factor in terms of risk mitigation and efficiency improvements from the Discom's point of view.