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View Points | October 2015

DFs | The Partnership Model

In the distribution business, ´partnership´ always remains the last priority for any state government. This is mainly due to-competition. The priority of state governments is to safeguard the interests of its state electricity boards (SEBs), and thus most put the distribution franchise (DF) model on the back-burner to avoid future competition,.

However, the much anticipated Public Private Participation (PPP) in the distribution reform which was implemented in Delhi, where the government picks up a 49 per cent stake and private players take up 51 per cent, requires deliberation. In the interim, DFs are the way to go for states governments.

The first franchise model in Bhiwandi was successful due to the excellent approach adopted by all stakeholders-investors, discom and state government. The basic benchmark rate was competitive enough to create a challenging environment for an investor and only companies with power experience were invited to participate in the bidding process. The Bhiwandi DF success has created competition in Maharashtra, which has in turn helped MSEDCL improve its performance. What we now require in the distribution sector is increased efficiency.

Torrent Power, due to its nine decades of experience was well equipped managerially and technically to analyse what needed improvement and the state government was also extremely supportive, as this was the first experimentation on PPP in the power distribution sector.

Consumers looked forward to private sector participation as they faced five hours of scheduled power cuts, besides another six hours of unscheduled ones, due to the dilapidated network. With all stakeholders having common goal to improving services to consumers, the task of the undersigned as Bhiwandi in-charge was made easier during the implementation process.

However, the stringent criteria was diluted. When following the Bhiwandi success, non-power companies were permitted to participate. This, coupled with the upwards revised basic benchmark rate left a low margin for investors, who now had to take the risk of investing, reducing losses and also servicing capex through improvement. Though initial enthusiasm from investors, especially non-power companies participating in the franchise model was good, the realities of the business soon came to light.

Thus, the real reason for DFs being in shambles is the participation of non-power companies. It seems that aggressive bidding by non-serious players in various circles took its toll on this once financially viable option, which can easily wake any state government from its slumber.

However, the entire sector has been marred with non-power companies who are lobbying at the state government´s door and cornering serious players in the business. Hence, the state governments have to be vigilant in gauging and separating the serious players from those who are only in this for the money. Now that a serious player like us, with the lowest T&D loss of 2.5 per cent, has taken over the Gaya franchisee in Bihar, which has a high loss level of 70 per cent; we expect the losses to be brought down to less than 15 per cent in the next two to three years, with cooperation of all stakeholders.

Another major setback for DFs was the dilution of qualification criteria, which is still incomprehensable to me. The government could have easily removed the benchmark price or modified it keeping in mind the profitability a private player can earn after taking up a circle, instead. However, they failed to understand that profitability earned by DFs would pass on to the consumer in terms of better facilities and infrastructure upgradation etc.

Besides, the government also had an option to come out with bids based on best tariffs. Ergo, this would happen only when a private company has know-how of the power sector. It is difficult for any non-power company to bid at a price without having expertise, especially in the DF business. The current DF model with benchmark price is allowing non-serious players to bid at any value, which is not financially viable for a serious player in the industry.

To sum it up, it is extremely important that a reasonable balance is maintained at the benchmark rate, investors´ expectation on investment and the qualification criteria for the success of the future distribution franchisee in the country. At this moment, it is important for any state government to consider DF as its partner and not a competitor.

The state government should also avoid giving step-brotherly treatment to DFs. If the state governments decide that the losses incurred by SEBs are a national issue, implementing DF will solve their problems. It gives them a required and respected partner in this sector.

Furthermore, various central government schemes under R-APDRP, the Rajiv Gandhi Gramin Vidyut Yojona and the Deendayal Upadhyaya Gram Jyoti Yojana should be made available to the franchisee on identical terms as those availed to discoms, as it is the consumers who would benefit through reduction in the loss levels.

By Shrirang Karandikar, CEO, IPCL

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