Politics and economics spark discord in discom privatization

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Authored by Abhishek Nath Tripathi and Anura Gupta

The poor economic health of state-owned electricity distribution companies (discom) is a key factor in the troubles of the power sector. Previous remedial measures, including Ujwal DISCOM Assurance Yojana (UDAY), the financial turnaround and revival package for discoms initiated by the government, and the covid-19 relief package of ₹900 billion (US$12 billion), have failed to effect material change. Discoms with private sector participation (PSP) have been performing much better than their state-owned counterparts for some time. While this should have settled the debate, the issue remains politically sensitive.

Electricity is in the concurrent list in the constitution, which gives the central government considerable influence in electricity policy. Sensing an opportunity, the Ministry of Power recently issued draft standard bidding documents (DSBD) and invited public comments. Though the draft states that it is being shared with the ‘aim of initiating discussions and soliciting inputs from stakeholders’, many believe it to be the start of PSP in power distribution.

Discom privatization, as set out in the DSBD, is intended to improve the quality, security and reliability of power supply and services delivered to consumers, achieve global standards in aggregate technical and commercial (AT&C) losses, and offer affordable and reasonable electricity prices. Improvements in the quality, security and reliability of power supply may result in increased consumer tariffs in many states in the short term, but reductions in AT&C losses should help in managing retail tariffs eventually.

The DSBD envisages privatization through share sales, thus making discom corporatization mandatory. To attract bids, the businesses of discoms will be transferred to new acquirers on a clean balance sheet basis, i.e. free from accumulated losses and unserviceable liabilities. The acquirers will gain the assets of the discoms, except land, which will be leased to them at nominal rents. However, the proposals for lock-in restrictions on the 51% shareholding of investors for 10 years, and a limit of two consortium members may restrict the number of bidders, particularly institutional and financial investors.

For discoms in densely populated urban clusters, 100% of equity will be transferred to the successful bidders; for discoms in rural-urban mixed clusters the government will retain 26% of equity. This is to ensure that bidders do not cherry pick only profitable clusters. However, discoms with predominantly rural networks may find it difficult to find takers, unless they are reorganized into a better rural-urban mix. Existing power purchase agreements (PPA) of the discoms will remain the same and must be honoured by new acquirers as a whole, except where there is a significant gap between the aggregate revenue realized and the aggregate cost of supply. For historical reasons most PPAs charge varying prices. Neither the bidders nor state governments will be enthusiastic about PPAs that are costly. Isolating such expensive PPAs prior to privatization is likely to be contentious. Eventually, such PPAs may need to be terminated, and managing the costs of termination by state governments and discoms prior to privatization will be important.

The success of discom privatization will depend significantly on the treatment of employees during the process. The DSBD proposes that employees will move with the businesses and that the service conditions of employees shall not be inferior to their existing terms. As labour laws are gradually relaxed, convincing employees with the security and comfort of government jobs that private employment will be as lucrative will be difficult. Moreover, the privatization process may lead to a loss of jobs for many who are presently employed as contract labour. Employee discomfort is already apparent in some key states. Managing the political fallout of such changes will be important for the political establishments in the states. Another contentious issue is the long term lease of land at nominal rents, which may raise concerns over the sale of public assets cheaply. However, any increase in costs for the bidders by valuing land at full market value is likely to result in higher tariffs.

The social utility of electricity intricately links electricity reforms to politics. Business as usual for discoms will only worsen the situation for the sector as a whole. PSP appears to be a solution worth considering. However, political acceptance of the process will be essential not only for the process to begin, but also for its long-term viability.

Abhishek Nath Tripathi is the managing partner and Anura Gupta is a principal associate at Sarthak Advocates & Solicitors.

Published at India Business Law Journal.

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