Discom Privatisation Challenged: Insufficient Planning Or Tactical Move?

What is surprising is the apparent unpreparedness of the centre and the Chandigarh discom in anticipating the challenge.

Electricity transmission poles and cables. (Photographer: Dhiraj Singh/Bloomberg)
Electricity transmission poles and cables. (Photographer: Dhiraj Singh/Bloomberg)

On May 16, 2020, the Minister of Finance, Nirmala Sitharaman, announced that electricity distribution companies or distribution licensees in the Union Territories would be privatised, stating that consumers should not be burdened with the cost of the discoms’ inefficiencies. This was announced as part of the Government of India’s economic stimulus package as a response to Covid-19.

It was a welcome move. Privately-owned discoms tend to be more efficient, with distribution losses at 8-11%, potentially half those of public sector discoms. Also, as private discoms are regulated entities on the one hand and need to make a profit on the other, the risk of them being subject to political economy considerations and moral hazard, for instance in acting against defaulting customers, are lower.

Discom Privatisation Challenged: Insufficient Planning Or Tactical Move?

Tactically, it was astute of the Government of India to start with the union territories, over which it has greater administrative control. This would allow the government to have a greater say in the privatisation process and, if successful, provide a template for discom privatisation elsewhere in India. In fact, the Minister of Finance had stated that this could provide “a model for emulation by other utilities across the country” leading to better customer service and improved operational and financial efficiency.

Following the announcement in May, the central government issued standard bidding documents on Sept. 20, 2020. These provided options ranging from the sale of 26% to as much as 100% of the government’s equity in a discom. Draft formats for various documents required for the privatisation process were also issued, including requests for proposals, shareholders’ and share acquisition agreements, policy guidelines, and bulk supply agreements. On the critical issue of employee protection, it was provided that the employees of the existing discom be transferred to the successor entity.

The Chandigarh Tender And Challenge

On Nov. 10, 2020, the Electricity Wing of the Engineering Department of the UT of Chandigarh became the first discom to issue a tender under this initiative. 100% of the shares in the discom were offered for purchase, with the last day for submission of bids being Dec. 31, 2020.

This move had its critics. Following public protests in conjunction with some citizens’ associations, the UT Powermen Union filed a petition against the privatisation in the Punjab and Haryana High Court. On Dec. 3, 2020, the Court issued a stay order on the privatisation process, remarking “we feel that the matter will require detailed deliberations as it touches the employment scheme of the society in general”. It also stated that case would come up for hearing within six months after the court resumed normal functioning post-Covid. Unconfirmed reports at the end of December suggest that the government may look to challenge this stay in the Supreme Court of India.

Issues raised by UT Powermen Union had included the following:

  • Electricity prices for consumers would go up as a consequence of the privatisation, as the new private sector owners would be driven by the profit motive;
  • The quality of supply in Chandigarh was good, distribution losses were around the government target of 15% and the discom was profitable, so privatisation was not required;
  • As part of the privatisation process, the union territory government had not conducted a consultation with stakeholders, including consumers and employees;
  • No provisions had been made for reservation of jobs for OBCs, sports personnel, ex-army personnel, etc; and
  • The privatisation was not permitted by law, as the Electricity Amendment Bill, 2020, which envisaged and provided the statutory basis for the privatisation, had not yet been passed.

Let us look at these objections one by one.

First, it is not axiomatic that electricity prices will increase as a consequence of privatisation. These prices are based on tariffs set out in power purchase agreements executed by the discom, which would be inherited by its successor entity. Further, any changes to tariffs would have to be approved by the state electricity regulators.

Second, even if the performance of the Chandigarh discom was adequate, this does not prohibit privatisation. The government could legitimately believe that privatisation was justified on the basis that performance would improve and losses would be even lower than at present.

Third, if an appropriate public consultation process was not in fact conducted, this was a mistake by the government and should be remedied. Public consultations go a long way towards legitimising such processes, are routinely conducted in similar situations, and might even be mandated by law in certain cases.

Fourth, any job reservation provisions would only be required if mandated by law and it is not clear if a successor discom would be bound by such provisions. However, it would be expected that any the employment of any employees in reserved jobs would be protected through the privatisation process.

Finally, while ideally the enabling legislation should have been passed in advance, the privatisation process could have—and might actually have—been made subject to the passing of the Electricity Amendment Bill, 2020.

Privatisation 101

The fact that the Chandigarh discom privatisation process was challenged came as no surprise. Selling 100% of a public utility, deeply rooted in a complex political economy with many embedded vested interests, is bound to ruffle quite a few feathers. Many past privatisation initiatives in India have been challenged and, very recently, the Government of Uttar Pradesh suspended its plans to unbundle and privatise the Varanasi discom in the face of employee protests. It is to be expected that employees who have effectively been government employees with jobs for life would be concerned for their futures. What is surprising is the apparent unpreparedness of the central government and the Chandigarh discom in anticipating the challenge.

Any move to transform the ownership of a publicly-owned utility requires careful planning. The process begins with an analysis of existing laws and regulations to examine, as a threshold issue, whether the planned initiative is permitted by the law. If the answer to this question is no, the next step would be to propose and pass appropriate legislation to enable the initiative to go ahead.

On the other hand, if the initiative is indeed permitted by law, the next step is usually to conduct a detailed mapping of all required approvals and all relevant stakeholders. This enables the government entity in question to secure such approvals, engage in stakeholder engagement, and then design a structure for the initiative to be implemented, together with all associated agreements, bid processes and the like. As part of this process, an assessment is also made of potential legal challenges. This is done both to analyse the legal sustainability of any challenges and to evaluate whether any interested parties are actually likely to launch a challenge in practice. Such analyses not only greatly reduce the possibility of legal challenge but also better equip the government to deal with any challenge that may actually arise.

If this analysis was not done in Chandigarh for something as important as the union territory discom privatisation initiative, this could be characterised as a serious planning failure by the government authorities in question. As there is often a great deal at stake for various vested interests, court challenges are used as a mechanism to delay, if not stop, the process from going ahead. The government would have known this. As a consequence of the challenge by the UPU, the privatisation process will at the very least, be delayed by many months, though it has been reported that the government is planning to contest the stay. In any event, not the ideal start for a high-profile programme.

But perhaps the government did not mind that this matter went to court? Perhaps anticipating that such challenges would be inevitable, the government authorities in question actually prefer to let the matter be decided by the courts? In some ways, this could take the pressure off the government on a potentially politically sensitive matter and might allow robust legal precedents to be set for other UT privatisations, such as the one announced in Dadra and Nagar Haveli and Daman and Diu on Dec. 8, where bids with a last date for submission of Feb. 3, 2021, have been invited for the acquisition of a 51% stake in the discom there.

It will be interesting to see how this plays out.

Akshay Jaitly is President - 262 Advisors; and co-founder of Trilegal. This article first appeared on his Substack newsletter.

The views expressed here are those of the author, and do not necessarily represent the views of BloombergQuint or its editorial team.