India: Getting Power to the People

As it lets private outfits compete with state utilities, will foreign players return?

With demand for home appliances booming among India's swelling middle class, Frizair Corp. partner Darshan Bhatia doesn't lack a rationale for expanding his air-conditioner factory in Hyderabad. But he does face a practical problem -- obtaining reliable, affordable electricity. It's a handicap that has long bedeviled industry in India, where most of the 27 state power boards are too broke to build new plants.

Help may finally be on the way. A law passed this summer after three years of debate allows private companies to generate and distribute power nationwide. "I'm fed up with the state power monopoly," says Bhatia. "Competition will be a godsend." New providers are rushing to secure licenses and to sign contracts to buy and sell electricity. India's biggest private supplier, BSES Ltd., controlled by Reliance Industries Ltd., has been lining up potential customers in four states. Reliance has had little trouble finding government-owned plants in other states willing to sell electricity. Why? Because they have trouble collecting from customers at home. "Can you imagine that some state governments offered us a 3% discount on their power because they knew we'd pay in full?" says BSES Chairman Anil Ambani. BSES plans to invest up to $8 billion over the next decade for distribution licenses and new capacity.

If deregulation works, India could go a long way toward repairing its reputation among foreign investors. Confidence was shattered by bitter legal battles involving two dozen multinationals lured by India's first deregulation effort in the '90s. Those failed projects lost some $4 billion. The biggest debacle: Enron Corp.'s 2,184-megawatt plant, idled by a contractual dispute and Enron's financial scandal. India still desperately needs capacity: Just 56% of India has access to electricity. Economists reckon even if the existing power sector functioned properly, it would add at least 1% to gross domestic product.

Electrifying the whole country by 2012, the official goal, is a tall order. State power boards, long used by politicians as a source of jobs and free power for constituents, have accumulated $65 billion in losses. Nearly half of all power generated is stolen by local users. So boards are in no shape to pony up the $200 billion needed to double India's current 105,000 megawatts of capacity.

"THE RIGHT DIRECTION." Opening the sector to competition may put things on a sounder footing. By June, 2004, power boards in each Indian state must split themselves into separate commercial entities to generate, transmit, and distribute electricity. For a fee, any private company can access the state's distribution network. Or they can build their own generators and distribution lines. That should make it easier to ship electricity from eastern states with surpluses to the power-starved south. And theft or tampering with a meter can lead to jail or stiff fines. "Finally, it's a move in the right direction," says World Bank energy specialist Sameer Shukla.

Implementing the law may be harder. The legislation still contains "weaknesses and loopholes that will delay the program by three to five years," contends Gajendra Haldea, chief infrastructure adviser at New Delhi's National Council of Applied Economic Research. He notes, for example, there is no deadline for states to open their distribution grid to rivals. There's also the big issue of what to do about states that subsidize power to farmers or remote villages.

But while such questions remain unresolved, private operators are pushing ahead. "It's a tightrope walk between political and social reform and having a profitable power business," says SSKI Securities power analyst Rahul Singh. This time, India's political system seems determined to see deregulation through. There is little alternative if India is to keep growing -- and undo the fiascoes of the '90s.

By Manjeet Kripalani in Bombay

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