ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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Power Reform : Market Structures, the Key

Will bankrupt State Electricity Boards (SEBs) reform, if state governments are bribed to carry out such reform? The prime minister, the union power minister and 14 chief ministers who attended the special meeting convened by the central power ministry on March 3 would appear to think so. They have agreed to undertake power sector reform predicated on one-time settlement of the SEBs’ dues to central utilities, which stood at Rs 26,000 crore as of October 2000. This, of course, comes on top of the increased outlay for the Accelerated Power Development Programme announced by the finance minister as part of his budget for 2001-2002, under which the centre will fund state-level attempts at reform along the lines of a memorandum of understanding entered into between the centre and borrowing state governments. The model of reform, thus, is of the centre egging the states on to undertake structural reform of the SEBs and offering special central assistance as incentive. This model is unlikely to succeed. Central legislation to enable private distribution of power – as an independent economic activity rather than as a licensed operation on terms set by SEBs, as happens now – is likely to work better.

Will bankrupt State Electricity Boards (SEBs) reform, if state governments are bribed to carry out such reform? The prime minister, the union power minister and 14 chief ministers who attended the special meeting convened by the central power ministry on March 3 would appear to think so. They have agreed to undertake power sector reform predicated on one-time settlement of the SEBs’ dues to central utilities, which stood at Rs 26,000 crore as of October 2000. This, of course, comes on top of the increased outlay for the Accelerated Power Development Programme announced by the finance minister as part of his budget for 2001-2002, under which the centre will fund state-level attempts at reform along the lines of a memorandum of understanding entered into between the centre and borrowing state governments. The model of reform, thus, is of the centre egging the states on to undertake structural reform of the SEBs and offering special central assistance as incentive. This model is unlikely to succeed. Central legislation to enable private distribution of power – as an independent economic activity rather than as a licensed operation on terms set by SEBs, as happens now – is likely to work better.

There are two kinds of problems with the model of reform through conditional lending by the centre. One is the insufficiency of conditional lending to effect policy changes. Conditional lending to advance definite policy goals is not exactly new. The World Bank and the International Monetary Fund have been trying to secure policy reform in developing countries with the help of conditional loans for two decades now. The experiment has been evaluated and found wanting. The general consensus is that conditional lending does not work unless the borrowing entity genuinely wants, for its own autonomous reasons, to implement the package of conditions that accompanies the loan. When such motivation is missing, the borrower finds various devious means to take the money on offer and yet not implement the conditions securing which is the lender’s objective. It often happens that such lending programmes are discontinued after the first few tranches of funds are released and it is discovered that the borrower has failed to implement the conditions agreed to. Conditional lending by the centre to the states is not likely to produce any different results.

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