Delhi's power privatisation & public interest litigation

Published: The Economic Times, November 12, 2007

By Pradeep S Mehta

It is not the business of government to be in business. Hence privatisation has been one of the reforms adopted with a slew of measures since the 1990s to unlock the capital in public sector units and hand them over to the private sector.

Alas, in India, the word privatisation sounds foul and so we call it disinvestment. In the current government, there is much less appetite today than in the past due to political economy constraints. But, in many such past cases, such as Centaur Hotel in Mumbai or the IPCL, eyebrows have been raised, thus the whole process has come into questioning.

The latest to hit the headlines is the privatisation process of the Delhi power sector. It was challenged by Gajendra Haldea, a civil servant, who filed a writ petition before the Delhi High Court, as soon as the privatisation happened in 2002. The scathing judgment stopped at undoing the privatisation, as the clock cannot be turned back. An appeal before the Supreme Court is yet to be resolved.

Haldea’s petition rested on the report of the Comptroller General of Accounts and Audit and the Public Accounts Committee of the Delhi legislature, which found the whole process dirty and said that the actions taken by the Delhi government were without due diligence. Haldea used these reports as the basis of his petition.

Though the court has made it clear that, at this stage, it is not feasible to turn the clock back, but has addressed all the issues in depth after a long trial. These include functional autonomy of regulatory body, poor negotiations during bidding process, huge concessions offered to private companies and faulty valuation of assets.

It provides important lessons for the other states, which are in the process of further restructuring the power sector in their respective states. For example, the electricity regulator was not consulted at all, and the government decided on its own the core regulatory parameters such as the level of energy losses, rate of return (RoR) on capital and depreciation rates. All these parameters are key determinants of tariff payable and should have been decided by the regulatory body.

During the bidding process, it seemed that the government had surrendered before the private players to ‘speed up’ the process. This is because, initially, the loss reduction target, offered at 20% for five years for the period from 2001-02 to 2006-07, was reduced to 17% in the post-bid period. Like this, the amount of concession loan payable to transmission company (Tranco) was increased from Rs 2,600 crore to Rs 3,450 crore for bulk supply subsidy. The purpose of this loan was to prevent tariff hikes in the transition period.

The valuation of DVB assets for privatisation was also questioned. Assets were valued on the basis of unaudited DVB accounts for many years. Further, valuation took place on the basis of book value that was quite low than market value or replacement cost of the assets. Asset valuation alone has deprived the public exchequer of over Rs 3,000 core. At the expense of public exchequer, Rs 5,119 crore was spent to give post-bid concessions. This shows the huge wastage of scare economic resources at the public cost.

In another CAG report it was stated that private distribution companies have misutlilised the funds and failed to achieve the target of reducing energy losses. The loss levels in some circles of Delhi were reported to be in the range of 44% to 73%. Observing so many other irregularities, PAC has demanded an enquiry of officers involved in the bidding process and responsible for poor recordkeeping.

PAC has also expressed its concern over the functioning of DERC. It has says in the report that instead of protecting consumers’ interest, DERC appeared to be acting as a hidden hand of the government as well as private distribution companies. It has lost its independence, autonomy and credibility. Expressing its limitation to examine technical matters, the Court has instructed the Government to act in a more transparent and accountable manner. So what Haldea could not do proactively for the Delhi power privatisation, he has done through the tool of public interest litigation.

The author is Secretary General, CUTS International, a leading research, advocacy and networking group and can be reached at psm@cuts.org

This article can also be viewed at: http://economictimes.indiatimes.com/

Elementary, dear policymaker

Published: The Financial Express, November 05, 2007

By Ramrao Mundhe

If the government restricts the entry of big retailers, both foreign and domestic, to the Indian retail arena, it would be bad economics. Promoting competition in a sector is important for its efficient functioning, sustainable growth through innovation and consumer welfare. It has been evident that encouraging competition by allowing easy entry into and exit from a market is good for growth of that sector in particular and the Economy in general.

With their large operations, big retailers benefit from economies of scale. Given healthy competition, each firm tries to make products available at the lowest possible prices. This would induce retailers to buy agricultural products, for example, directly from farmers. For this, they will establish their own chains for such purposes to minimise cost. By thus eliminating middlemen in the supply chain that are responsible for the sector’s well-documented inefficiencies, they help the entire sector turn more efficient and competitive. This process will ensure that products are available at lower prices in comparison with what the consumer is paying at her local small retailer at present. The money saved by the consumer would again go into the Economy, either in the form of savings (which would probably be invested) or expenditure (this would increase aggregate demand). This, in turn, would spur economic growth.

As the retail sector matures, new possibilities of investment in cold supply chains for agricultural products will be opened by retail agencies to cater to growing market demand. Such cold supply chains will help bridge the current gap between marketable surplus and marketed surplus in the agricultural product sector. Wastage in transit will fall sharply, and prices will even out across large geographies. Given India’s climate, the advantages of modern cold chain infrastructure can’t be understated. Of course, the assurance of sustained power supply is critical to the success of cold chain networks. This represents a big challenge for the government.

Many have argued that if the retail sector is opened up to big business, millions of small retailers—and estimated 12 million in all—would face unemployment. Since retailing for most small retailers is their only source of income, they might find it hard to recover from such a displacement. Any large change in any sector, technological or otherwise, has its losers and gainers. However, the question is whether the overall gains to the Economy and its people are larger than such losses, and the answer in this case is yes.

In the 1980s, when computers were introduced by the government to modernise the Economy, trade unions, bank workers and railway employees strongly opposed the change on fears that livelihoods would be lost. Today, the IT sector is the backbone of the modern Indian Economy, and the issue was merely one of adjusting to new technology. Modern large-format retail, at its most sophisticated, presents a similar transformation. It is better to adapt to it than resist it.

If we look at the bigger picture of costs and benefits to various stakeholders, it would be clear that the gainers would be farmers, who would welcome disintermediation and better renumeration for their produce, which would induce them to invest more in their farming operations. Besides, big retailers would help develop India’s processed foods industry, which would create millions of new jobs. In general, any sector that undergoes such thorough modernisation tends to have a ripple effect in terms of allied/secondary services and jobs.

All said, it is now up to India’s policymakers to decide whether the interests of 12 million retailers or the welfare of over a billion consumers and a huge number of farmers. Not to be ignored is the fact that the new retail revolution is expected to generate around 2 million new jobs in just a couple of years, and many more over time. The employment generated in agro-based industries could be still higher. A boost to agricultural growth will not only alleviate poverty but also increase demand for various industrial goods, which will further generate secondary employment.

Yet, the myopia of our politicians, vested interests and lack of initiative have been holding this retail revolution back. Many states have failed to follow the guidelines laid down by the model APMC Act, which encourages private players to buy agricultural products directly from farmers. Bihar has scrapped the Act, and the UP government has recently withdrawn the agriculture investment policy under which private players could directly buy products from farmers. Such inconsistency in policies will only discourage investors and hurt regional development. Political leaders, who speak about alleviating poverty through development, need to demonstrate their support for a long-term vision that involves creating an efficient and effective regulatory framework for the retail sector.

The writer is an assistant policy analyst with CUTS Centre for Competition, Investment & Economic Regulation, Jaipur, and can be reached at rm6@cuts.org. These are his personal

This article can also be viewed at: http://www.financialexpress.com 

Fair competition vigilance

Published: The Financial Express, November 03, 2007
 

By Pradeep S Mehta

As India is now in a position to operationalise its new Competition Act, 2007, it is worthwhile revisiting some of the drivers for it. The need for a competition law becomes vital when a country adopts economic reforms aimed at converting a command economy into a market-oriented one in which the private sector plays the lead role. India adopted economic reforms in the early 1990s by shifting to market economics. We have moved in the right direction, though at a slower pace than required, which has meant that markets are still not as vigorously competitive as they ought to be.

One should not confuse a free market with a free for all. Regulation remains essential, the objective being to ensure competitive markets so that the best possible choice, quality, prices and supplies of goods and services are offered to consumers and businesses.
Accordingly, changes are being made in the economic governance system. These include changing government policies and measures, amending existing legislations or enacting new ones such as the new competition law, and establishing dedicated regulatory bodies in utility sectors such as telecom and electricity. All such measures are designed to ensure that markets function well under the new economic policy regime and yield the desired results. But new policies and laws alone are not going to help much, unless the key stakeholders (consumers and businesses) are familiar with competition and regulatory issues and the nature of prevailing market practices. The lack of understanding of the nature and extent of anti-competitive practices in prevalence poses a major challenge.

In 2006-07, we at Cuts developed an India Competition Perception Index to assess the understanding that informed stakeholders have of competition and related regulatory issues. The findings are that perceptions of competition in the country are neither too good nor too bad. If the “informed” score only moderately well on competition perception, you can picture the awareness of lay people who are also market participants. Even after the one and a half decades of reform, progress on competition and regulatory issues is slow, and anti-competitive practices still prevail in the market at large.

Stakeholders are more familiar with the level of competition prevailing in the market than with the nature of market practices, regulatory bindings and competition rules, effectiveness of competition and regulatory authorities, and the impact of government policies and measures on competition.

The reason for this difference may be that the level of competition is relatively tangible, while other parameters surveyed are not that easy to understand. Competition can be felt in the market in various ways that are observed to increase consumer welfare, such as greater choice and lower prices.

Yet, only 26% of respondents are aware that unfair trade practices have been omitted from the purview of the Competition Act (academia: 19%; business: 32%; CSO: 18%; government officials: 27%; media: 34%; others: 35%). Only 6% respondents are aware that mergers above a certain threshold would come within the purview of the Competition Act, and that pre-merger notification was voluntary (academia: 11%; business: 4%; CSO: 17%; government officials: 1%; media: 2%; others: 7%). This has now been made mandatory under the 2007 Act.

The reason for low awareness scores on parameters like nature of market practices (35.84) and awareness of competition and regulatory issues (39.39) may well be that since key provisions of the competition law have not yet been brought into force in India, there have been no cases taken up for public discussion. This is serious, because ignorance about the nature of prevailing anti-competitive practices may lead to the exploitation of stakeholders. Advocacy and effective regulation can play an important role to ensure that this does not happen, and there is certainly room for improvement. To take full advantage of the Act, consumers and businesses have to be familiar with various competition and regulatory issues, and this is a task for various government and non-government agencies.

The survey also indicates that, so far, competition and regulatory authorities have not been effective in controlling anti-competitive practices. In many cases, these agencies have not even been effective in enforcing their own orders at local levels. A solution is to give the agencies the requisite autonomy and qualified staff.

The task of providing a level playing field to both the public and private sectors is an important one, and here too, much needs to be done. While the need for a competition policy and law is now much better recognised, progress towards scoring real achievements has been slow and haphazard. Evidence of anti-competitive behaviour is found in virtually every sector of the Indian economy. With the adoption of the Competition Act, hopefully, awareness levels will scale a new peak, and as enforcement processes get going, consumers and businesses will, at the very least, begin to identify anti-competitive practices prevailing in the market.

The author is Secretary General, CUTS International, a leading research, advocacy and networking group and can be reached at psm@cuts.org

This article can also be viewed at: http://www.financialexpress.com