Beyond state and market

PRAYAS

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THE broader national agenda of social, political and economic emancipation that came out of the freedom struggle remains unfulfilled even fifty years after independence. The electricity sector, like many others, has been seen as an instrument to achieve this broader agenda. Electricity creates opportunities for industrial entrepreneurship, which in turn generates goods, wealth and jobs. It facilitates irrigation, crucial for assured crops and for increasing farm productivity. It is a great gender-equalizer helping reduce household drudgery for women as well as the time and energy spent for backbreaking household work. It facilitates spread of education and supports health-promoting activities.

Finally, in the current era of knowledge-power, electricity is crucial to the spread of communication and information technologies. This key role of electricity in achieving the broader agenda of emancipation is often expressed in terms of the key social objective before the sector, viz., the objective of universal access to electricity, providing electricity to all, as a right, at affordable rates, and to the level required for ensuring secure, adequate livelihoods as well as a dignified life.

This article briefly presents a case for a paradigmatic shift in the governance of the electricity sector so that the sector can effectively contribute to the broader agenda of emancipation. This case is based on the experiences of the two paradigms – the state-centred paradigm and the market-centred or privatization paradigm – that have been tried for governing the sector, but failed to deliver on the key social objective mentioned above. We illustrate this case by focusing on the proposed review of the new Electricity Act as well as on the issue of rural electrification.

In the initial decades after independence, the Indian power sector was successful in recording significant achievements, contributing to the green revolution and industrial development. These achievements were the outcome of certain policies, institutions and financial systems evolved to build the sector. These measures were guided by a state-centred paradigm in which state ownership of utilities and state control over governance of the sector, served as the cornerstones.

 

 

However, alongside these achievements, the sector also faced many problems and saw many failures. At the end of the 1990s, the objective of universal access remained distant, with less than half of the households in the country electrified and only a limited percentage of farmers with access to electricity for irrigation.

These failures were rooted in many distortions – technical inefficiency, economic mismanagement, financial indiscipline, theft of electricity, corruption at all levels, and near-collapse of administrative and management systems. These distortions helped various powerful actors in the sector to benefit, though at the cost of others and of the social objective. As a result, by the end of the 1980s the sector had been gradually pushed to the brink of a crisis.

The crisis created space for a new process of sectoral reforms that started in the early 1990s. The reform process marked the introduction of a new paradigm for governance – the privatization paradigm – in which market forces and private enterprises were given key roles. The first twelve years of reforms in the electricity sector can be demarcated in the following two major stages (i) the IPP Policy or the policy for Independent (i.e., private) Power Producers; (ii) the World Bank (WB) sponsored Orissa model of sectoral reforms. The IPP policy resulted in expensive projects like Enron, whereas the WB model gave the people of Orissa severe and successive tariff hikes, without significant improvement in access or supply quality. In essence, the privatization paradigm further harmed the agenda of emancipation and the social objective of universal access.

Nevertheless, the supporters of privatization-oriented reforms were successful in initiating a third stage of reforms through enactment of the new Electricity Act 2003 (E-Act). The new act involves many comprehensive, fundamental, and largely irreversible changes with severe implications for the poor and hence for the social objective.

 

 

The new act unleashes many processes that are neither adequately analyzed nor fully understood even by architects of the act. However, three broad trends can certainly be discerned. One, it provides legal routes for the large industrial and commercial consumers to escape – fully or partially – the ‘burdens’ of extraneous or ‘stranded’ costs (including cross-subsidy for the poor), though they continue to enjoy access to the present grid. Second, it opens up new avenues for (especially the big two) private power companies in the country to reach customers in urban and other industrial areas who are big consumers and have high paying ability. Third, though the stated aim is to involve non-governmental actors to invigorate electricity availability in rural areas, the act, most probably, will open up new avenues for rent-seeking by rural political power-brokers.

Overall, it is apprehended that the act will result in a fragmentation of our society in four segments. The first segment comprises large industrial and commercial consumers who will be able to obtain handsome gains. The second comprises urban consumers, especially in metropolitan areas, who will be ‘taken over’ by the ‘regulated’ monopolies mostly owned by the two big private power companies in the country. The gains and losses of these two segments are not discussed here.

The third segment consists of consumers from small towns and rural areas. They will continue to remain captive to the new ‘unbundled’ utilities owned by the state government. The situation in rural areas is already precarious. As a result of the act, most of these new rural utilities may soon end up in a vicious cycle of ‘low revenue – no investment – bad systems – supply of bad quality and reliability – no growth – low revenue.’ Few state governments have the financial muscle necessary to pull these utilities out of this cycle of doom.

The act envisages entry of NGOs, cooperatives, panchayati raj institutions (PRIs) like zilla parishads, and private franchisees, which are expected to help the rural areas out of this grave situation. It is feared that this may prove nothing more than wishful thinking. None of these institutions have financial credibility, managerial acumen, administrative fitness and, above all, technical capability required to run even small scale electrical systems in a viable manner. The experiences of rural credit cooperatives or those of local institutions like water users’ associations (or WUAs) and watershed committees need to be critically investigated. Similarly, a study of the experience of PRIs in shouldering additional responsibilities like the Sarva Shiksha Abhiyan will also provide many insights.

 

 

The act also provides for the delicensing of rural ‘stand alone’ systems, which would, at best, be able to supply electricity – possibly with more reliability and at substantially higher tariffs – to selected well-off consumers in rural areas. Further, these two sets of provisions, together, can give rise to a new breed of local electricity-lords (like landlords) out of the local power brokers. There is danger that these electricity-lords will enjoy near exclusive control over the local electricity networks through dual means. One, they will exercise decisive influence on the local utilities owned or operated by local PRIs, NGOs, cooperatives or local private franchisees. Second, the local electricity lords will directly or indirectly own the local ‘stand alone’ systems.

Neither the act nor the discussion paper on rural electricity policies published by the Union government demonstrate that the government is seriously engaging with the complexities or the centrality of the institutional and governance dimensions of rural electricity.

 

 

The bureaucracy in the central government – following its usual practice – has been happy with pushing the act and policies under the act without consulting or even informing people in general or civil society organizations. However, the results of the recent elections have forced the political establishment to take cognizance mainly of the noise made by the trade unions in the sector. The Common Minimum Programme (CMP) of the new United Progressive Alliance (UPA) promises a review of the new E-Act. Though the scope, nature and other details of the proposed review are not spelt out, one can treat this as a window of opportunity to highlight the serious implications of the act for the social objective.

This shift is found to be an imperative in view of, on one hand, the scale and complexity of the implications of the act for the social objective and, on the other, the evident limitations, if not failure, of the underlying privatization paradigm in fulfilling this objective. We wish to suggest a fundamentally different approach towards the process and content of the review as also a shift in the very paradigm guiding this act.

We begin by presenting our diagnosis as well as prescription to the crisis situation. This would lay the foundation for a brief and partial articulation of one key component of a new paradigm that may take us beyond the current privatization paradigm.

It is now well-accepted that the financial crisis of the sector is primarily rooted in a crisis of performance that manifests in the form of various functional distortions mentioned earlier. Further, according to the prevailing wisdom, this performance crisis is rooted in the two evils, viz., state monopoly and state ownership. The prescription – the unbundling of integrated public-owned utilities and their subsequent privatization – flows from this diagnosis.

However, we argue that it is incorrect to identify state monopoly and ownership as the ultimate cause of poor performance. We need to further investigate the failure of the state to govern the economic sectors like electricity so that they contribute to an agenda of emancipation. Instead, some sections who exercised control – legitimate or not – over governance of the sector managed to secure handsome benefits for themselves. In other words, state control was distorted to serve certain vested interests at the cost of the social objective and agenda of emancipation.

 

 

To extend this analysis, it is pertinent at this stage to ask how these vested interests managed to hijack governance of the sector and draw illegitimate benefits. How and why did the system of checks and balances fail to deter these vested interests? Clearly these sections were successful in bypassing, subverting or circumventing the controls that were instituted in the form of provisions (rules, mechanisms and procedures) for transparency and accountability of those who govern and provisions for participation of the ‘governed’ in governance. Probably because these provisions for transparency, accountability and public participation (or TAP) were inadequate or limited in their scope, indirect (i.e., to be exercised by people through some other agents), and discretionary (or non-mandatory). Moreover, civil society organizations (CSOs) did not have the necessary perspective and capability to make effective use of the available TAP- related provisions.

This new diagnosis – significantly different from the diagnosis based on the privatization paradigm – traces the performance crisis in the sector not to state ownership or monopoly but rather to a crisis of governance which, in turn, is rooted in the failure of the TAP-related provisions and a lack of capability with civil society organizations.

 

 

Our prescription recommends elimination of the illegitimate control of governance by vested interests and establishment of people’s or public control over governance. Only this can ensure that the electricity sector is governed to serve the social objective. The elimination of the control of governance by vested interests can be achieved by establishing mandatory, direct, compelling and specific provisions for TAP and implementing these provisions effectively. This may end the governance crisis, which, in turn, can end the performance and financial crises.

The causes underlying the limitations of the prescription under privatization paradigm can be clearly seen from this perspective. The privatization prescription does not address the core malady underlying the crisis – viz., control of governance by vested interests. All that changes in ownership and structure – under the privatization prescription – can achieve is a shift in the location of the governance crisis within the sector and in the composition of the coalition of vested interests that caused this crisis. The crisis of governance will continue even after privatization, as would the plunder by a new coalition of vested interests at the cost of the social objective.

The prescription of people’s or public or social control of governance is conceptually ownership-neutral. This implies that under all forms of ownership of the executive agencies, social control of governance is necessary. Transcending the usual discourse of state versus market, this prescription takes the debate and action in the electricity sector to a new level. In other words, the prescription of social control over governance creates space for a new, post-privatization paradigm.

 

 

This new paradigmatic vision may help in outlining the process of reviewing the new act. Considering the critical nature of the act, the review process needs to be inclusive and ensure meaningful and effective participation of all stakeholders, including the non-consumers, who are yet to get an electricity connection. In other words, while providing space for participation to all, special efforts to enhance capabilities of civil society organizations to meaningfully participate in the process and effectively represent the interests of weaker sections as well as of the society as a whole are needed.

In addition, complete transparency is a crucial precondition for the review process. This transparency should come with no strings attached. Further, the process should be guided by an instrumentality (for example, a committee), which is truly autonomous and accountable to members of the public through various means. Moreover, in order to be fruitful, the process will have to be systematic and stepwise.

In brief, we suggest the following concrete measures for conducting a review of the E-Act as promised in the CMP.

* Appointment of a ‘reference group’, comprising the representatives of various stakeholders. The role of the reference group should be to ensure inclusiveness, transparency, accountability, participation, and autonomy aspects and, thus, enhance the credibility and acceptance of the process by a wider range of stakeholders.

* Appointment of a Act Review Committee (ARC) by the government based on recommendations by the reference group. The main role of the ARC should be to conduct the actual process by adhering to the framework set by the reference group.

* The process of the review should be systematic and have four substantive stages: background analysis of the sector problems, analysis of the implications of the E-Act, assessment of options available, and finalization of recommendations on options.

* At the beginning of each stage, the ARC should come out with a discussion document, collect reactions and suggestions on the discussion document in written or oral form before preparing the final document to be used as a base for preparing the discussion document for the next stage.

This new paradigmatic vision also requires that the current treatment and understanding of the issues of rural electricity – as evident in the act and the discussion paper – should undergo a complete overhaul.

 

 

This brings us to the fourth segment of Indian society that will be created by the new act, which was not discussed earlier with the other three segments. This fourth segment consists of all non-consumers or all those households which do not have electricity connections, and all farmers who require an electricity connection for agriculture but do not or cannot have one. These non-consumers form a significant portion of the Indian population. Recent data from official sources indicates that about 7.8 crore or 56% of rural households in the country do not have an electricity connection. The Union government is talking of providing connections to all these households in the next five to eight years, i.e. at least one crore households per year.

 

 

The past performance of the government in the last decade indicates that it can manage to do about one million households every year. The gigantic scale of the required effort is further complicated by the complexity of physical, natural, socio-cultural, institutional and political difficulties. Such an effort also requires financial resources to the tune of Rs 8000 crore per year. Governments at the Centre have been promising adequate funds for this task. But even if we take this claim at face value, no bureaucratic machine of conceivable size and efficiency could successfully handle the task of such a scale, complexity and difficulty.

This does not mean that we should not aspire to ensure connectivity to every household and farmer – only that we need to make a paradigmatic shift in our thinking and action and transcend the bureaucratic approach of the old state-centred paradigm as well as the market-led approach of the in-vogue privatization paradigm. The perspective of a post-privatization paradigm can lead us to an approach which draws relevant components from both the former paradigms and uses them appropriately. Not rejecting the role of the state or of the private players, it will begin from the more decentralized and participatory local institutions. While thinking about the managerial and procedural issues – as was done in the discussion paper – it will lay emphasis on building capable local institutions and robust systems to ensure public control of the governance of these local institutions. Thus, the focus will be on improving the functioning of public-owned utilities that are going to shoulder the responsibility of rural electricity. Simultaneously it will examine technological options that are economically viable, environmentally friendly and, to the extent possible, draw on local resources.

 

 

In order to handle the challenge of rural electrification in the manner appropriate for a post-privatization paradigm, we need a country-wide participatory process on the lines of an ambitious campaign wherein government agencies will work with scores of local NGOs, PRIs, cooperatives, and private entrepreneurs. All these actors together will have to create different technical, economic, financial, organizational, institutional and governance models and then adapt them to a multitude of different local contexts.

The first concrete suggestion to the new government on the process and mechanisms to handle this challenge is to establish a Peoples’ Mission for Rural Electrification for undertaking this unprecedented effort. Second, the effort should begin with a detailed, systematic, comprehensive and participatory process of deliberation and consultation among different stakeholders.

The issues for deliberation and debate facilitated by the peoples’ mission could be divided in various categories such as technical, economic, financial, governance-related, institutional, political and strategic. Since economic and financial concerns are invariably given preference even as discussion on technical issues remains focused on the mainstream options, some key issues from the oft-neglected categories are suggested for further discussion.

Oft-neglected technical issues:

* Avoid a gadget-driven and technology focused approach and adopt a need-driven, institution focused approach towards renewable energy and rural electricity.

* Transparent comparison of conventional and non-conventional options on the basis of reliability, viability, hidden costs, hidden subsidies, and implications for environmental sustainability and social equity.

* Control of green technologies by MNCs which create a threat of exotic and expensive green options.

* Capability of local institutions to make informed choice of technologies.

Institutional and governance issues:

* Limitations of bureaucratic as well as private-led institutional models.

* The design of the hierarchy of institutions from national to local levels and their interrelationships.

* Building capable and robust local institutions.

* Social control of governance of these different types of institutions.

 

 

The example of rural electrification is highlighted to emphasize the need for a paradigmatic shift not only in the governance of the sector but in the thinking and action of all stakeholders in the electricity sector. Though urgent and critical, a paradigmatic shift is unlikely to happen soon or in one great leap. Nevertheless, the promise of a review of the new Electricity Act in the CMP should be seen as an opportunity to take the first step in making this paradigmatic shift.

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