Power Reform, Private Investment and Regional Co-operation

Modern infrastructure, particularly electricity, is critical to economic development. Deficits cause shortages that constrain total output, magnifying the return to their elimination. South Asia, faced with inefficient and bankrupt state-owned vertically integrated electricity supply industries, was under strong pressure to reform. An imperfect diagnosis encouraged private investment in generation to address shortages, with IPPs selling power under long-term contracts to the largely unreformed state electricity boards (SEBs). Buying IPP power at prices above retail tariffs when the SEBs could not even cover the cost of under-priced electricity from state-owned generators exacerbated financial distress and was a recipe for conflict. Reforming the SEBs, though unbundling, full metering, effective accounting and management structures creating commercial discipline, under multi-annual regulation insulated from clientalist political pressures, is an essential first step. Privatisation of the distribution companies once they are properly “enterprised” should then follow to sustain reform. Reducing losses, both non-technical and technical, and increasing plant load factors yield far higher returns than generation investment, where India and Pakistan already appear above predicted levels of electric intensity, perhaps because of low effective prices, and could eliminate most shortages. The Indian Electricity Act 2003, requiring metering, multi-annual regulation and regulated third party access to the national transmission grid, is a useful start. Private investors will require assurances that the contracts needed for IPPs are honoured, that legal disputes are efficiently and fairly resolved, subject to fall-back international arbitration, and that their purchasers are credit-worthy. This is easier with cheap gas, which is available to Bangladesh, but scarce in India. Regional energy trade would therefore do much to improve the investment climate, and a South Asia Energy Charter could underwrite increased energy trade. The European Energy Charter has helped integrate the transition countries of Central Europe and stimulated FDI in the power sector, and might have similarly stimulative effects in South Asia, quite apart from creating profitable trade opportunities and increasing regional security of supply and greater resilience against external oil shocks. 1 Paper commissioned by the World Bank for the SAARC Business leaders Conclave: South Asia Regional Integration and Growth, Nov 17-18 Delhi, India with support under ESRC project RES152-25-1002 Towards a sustainable energy economy. The paper reflects the views of the author and not necessarily that of the World Bank. It concentrates on India, Pakistan and Bangladesh, but includes Nepal and Bhutan in discussing regional trade issues. Sri Lanka and the Maldives are not covered. I am grateful to James Cust for research assistance, and Joel Ruet, Anoop Singh and Vladislav Vucetic for helpful comments.