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 ri Lanka’s
power-sector reforms have been moving at a slow pace, primarily because of
differences between the government and trade unions over key issues
pertaining to the restructuring of the Ceylon Electricity Board (CEB).
Consequently, the government has not yet implemented the Electricity
Reform Act of 2002, which provides for the unbundling and privatisation of
the CEB.
Such
teething problems are not unique to Sri Lanka, however, and every
developing country initiating power-sector reforms has faced them. These
issues take time to resolve, but utilities can adopt alternate models
during the transition phase to achieve the desired results.
 When India initiated power-sector reforms
in the early 1990s, some of the key problems – which are also pertinent in
the Sri Lankan context – were the growing demand-supply mismatch;
transmission bottlenecks; high transmission, distribution and commercial
losses; and uneconomic cost recovery, which led to heavy financial losses
in the utilities. Worse, the state governments’ rising fiscal deficits
resulted in a vicious circle – whereby the lack of investments led to a
further financial deterioration.
India initially experimented with The
World Bank’s model of unbundling and privatisation. However, the
experience in Orissa and other states suggested that this would not be the
cure for all ills. The theoretical standpoint of reforming the sector by
introducing competition and promoting efficiency was sound, but
implementation was not easy. The key shortcoming of this approach was its
inability to assuage the various stakeholders’ apprehensions and create
buy-in.
Realising that the reform path would be
time-consuming, a parallel set of reforms was initiated to address the
problems. The approach was two-pronged: the central government entered
into a memorandum of understanding with the utilities, to improve their
financial and operational performance by creating profit centres; at the
same time, the centre and the states assumed some of the sector’s past
liabilities to clean up the utilities’ balance sheets.
The profit-centre approach aimed to bring
in efficiency, accountability and a commercial orientation in the utility
– without any unbundling or corporatisation to begin with. The key was to
define various units within the organisation, so as make them financially
sustainable. In the Indian context, a limited initiative was made in the
distribution sector, as distribution reforms were identified as being key
to the entire sector’s viability.
Under this, each 11KV feeder was
identified as an operational profit centre. Through performance-based
grants and soft loans, the government encouraged 100 per cent metering.
The officer in charge and his team were treated as a profit centre, and
were accountable for the energy flow through their feeder and the proper
billing of all consumers. This helped bring down technical and commercial
losses, translating into significant financial gains. For example, from
2000 to 2003, the financial losses of 11 prominent states fell by US$
1,680 million, from US$ 4330 million. About 12 states are expected to
start making profits by 2007.
This model can be successfully
implemented across all segments of the power sector. The key steps are as
follows.
IDENTIFICATION OF PROFIT CENTRE:
This can be done functionally and geographically. For example, generation
plants can be segregated on the basis of their type (hydro or thermal) and
geography – such as ‘Hydropower – North Genco Unit’. Similarly,
transmission units can be divided along voltage levels and geography,
while distribution may be divided along circles.
 SEGREGATION
OF THE IDENTIFIED UNIT:
Each identified unit must be clearly demarcated in terms of its
financial, operational and human resources. The units should be segregated
on a business-accounting basis, with clear prin-ciples on the input energy
handled and sold, revenue realised from sales and cost incurred on input
purchases, as well as the expenditure incurred. A detailed
management-information system providing for an energy audit and cost and
revenue accounting can enable this. The utility will also need to develop
transfer-pricing mechanisms.
ESTABLISHING OBJECTIVES AND PERFORMANCE PARAMETERS:
The next step is to establish clear performance metrics for each
identified unit, which will serve as a basis for review and subsequent
release of funds. Each functional unit’s objectives should be clearly
spelt out, as this will help direct its investment plans. An objective and
impartial year-on-year review mechanism holds the key to any
incentive-based plan. The table suggests some objectives and the
performance benchmarks for the functional units.
REVIEW AND
FUND RELEASE: Each unit
must prepare an investment plan in the form of a Detailed Project Report (DPR).
This should contain a techno-economic evaluation of options, a
cost-benefit analysis and a sensitivity analysis on critical parameters
assumed for the project’s financial viability. The DPR should also
indicate the methodology and time schedule for executing the works,
fund-flow requirements and the assessment parameters. The government
should appraise the DPR, and the quantum of funds released should depend
upon this appraisal and the previous year’s performance. In order to
promote transparency and objectivity, the government could designate an
independent agency to conduct the performance review.
The key advantage of the profit-centre
approach is that it is geared towards creating a commercial orientation,
improving efficiencies, building capabilities, and implementing
performance-oriented schemes and systems.
These are the key building blocks of any
reform process – rather than structural reforms, which require a long time
to create buy-in.
– CONTRIBUTED BY CRISIL/EDITED BY LMD
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