The World Bank and India

The World Bank involvement in India's energy sector started in 1950 with a loan of $18.5 million to the Damodar Valley Corporation. Since then, 37 WB loans totaling $7.2 billion and 20 IDA credits of $2.4 billion have been advanced for power projects in India. The International Finance Corporation too has made five investments totaling $203 million during 1989-1991.

The Bank's lending program in the energy sector has been of particular concern to many. Energy has become the Bank's biggest single lending sector in recent years, accounting for 18.1% of all Budget loans.

In India, the current path of energy development is a dead end. Already, the modern approach to energy sector development, which heavily relies on large-scale projects, has left hundreds of thousands of Indians homeless, inundated lakhs of hectares of arable land and left the Indian economy burdened with billions of dollars in increased foreign debt. Nearly 30% of Plan expenditure is devoted to the energy sector in India. Despite large inflows of foreign loans from the Bank and other financial institutions, the electricity shortage has shown little improvement, remaining at around 10% of demand.

The World Bank approach to India's energy can be understood from the following statement of Mr. Trevor Byer, Chief of the Energy Policy and Strategy Division of the Bank. He argues:

"I think consumers (in India) have got to the stage where they are now fed up with low cost power... The demand of higher cost power is always there if it accompanied by high efficiency power the consumer will be willing to move to that full economic cost."

This quotation graphically demonstrates the vision of the World Bank—since that the poor don't consume electricity even if that is an increasingly successful endeavor of the government. The country produces most expensive electricity in the world. We have seen how Bank lending to this sector, 1980 onwards, increased more than six times compared to the preceding period—from $1247.00 million to $7878.70 million. With this increase in its loans, has come its diktat to privatize, increase tariff rates and make power utilities more efficient. It is also true that State Electricity Boards (SEBs) and other, central power utilities have been functioning extremely inefficiently.

To privatize, lucrative offers must be made. With its gaze fixed on the affluent middle class consumer, the government conceded to an assured 16% rate of return to the foreign investor—calculated in dollars and guaranteed against inflation. This, over and above a five-year tax-holiday, starting from the year of generation. The poor, inefficient SEBs were not able to even recover 3% in rupees. It was due artificially low rates of electricity that they were forced to supply. Of course, they had a somewhat different set of consumers to cater to. The remedy therefore is going to be by all counts, worse than the disease.

"I think consumers (in India) have got to a stage where they are now fed up the low cost power"

-Mr Trevor Byer, The World Bank

In the meantime, the World Bank is seeking to establish a private power deve-lopment fund for India—along with a comprehensive reform of the SEBs.

The response of pampered MNCs will replace inefficient SEBs preying on consumers to the Indian government's generous gesture has been truly moving. Several big companies are lining up to give a "helping hand". Prominent among them are giants like ENRON of USA, ABB of Switzerland, National Power of UK, JLPC—comprising four German companies, and many others.

The World Bank is seeking to establish a private power development fund for India - along with a comprehensive reform of the SEBs.

The Government of India has gone ahead to make far reaching changes in existing laws, relating to electricity but mining as well, since these TNCs would be producing coal based power. This is being done despite the declared Indian government policy of encouraging development of alternative energy sources. It is after all common knowledge that reserves of minerals like coal are limited and non-renewable.

It is reported to be processing four loans worth $850 million which aim at promoting greater private sector participation and improved SEB functioning. A $30 million loan as technical assistance for private power development is also likely which would be used to provide "consultancy" to the Ministry of Power on various vexed issues regarding the sector. What this "consultancy" would be is anybody's guess.

Legal changes to lure MNCs

Under the Bank's pressure, the Indian Electricity Act, 1910 and the Electricity (Supply) Act, 1948, were amended to create a new legal, administrative and financial environment for private enterprise in the energy sector.

• Private sector can set up thermal projects (coal/gas and hydel projects and winds solar energy projects of any size).
• Electricity projects both in public and private sector where the total outlay does not exceed Rs 25 crores need not be submitted to the Central Electricity Authority for concurrence.
• All private companies entering the energy sector hereafter will be allowed a debt-equity ratio upto 4:1.
• 100% foreign equity participation can be permitted for projects set up by foreign private investors.
• The condition of dividend balancing by export earnings applicable foreign investment upto 51% of equity is waived for foreign investments in the power sector.
• With the Governmental approval, import of equipment for power projects will also be permitted in cases where foreign supplier(s) or agency(ies) extend concessional credit.
• The customs duty for import of power equipment has been slashed to 20%. It has also been extended to machinery required for modern-isation and renovation of power plants.
• A five year tax holiday has been allowed in respect of profits and gains of new industrial undertakings set up anywhere in India for either generation and or distribution of power. The five year tax holiday will begin with power generation.

For power generating companies the following incentives are offered :

• Normative parameters under which generating companies will operate (comparable to international standards) providing for 16% rate of return have been notified on March 30, 1992.
• Generating companies can sell power on the basis of a suitably structured two part tariff.
• On a case to case basis, the Government may consider extending a counter guarantee for the payment obligations of State Electricity Boards to the private power companies on the specific request of the concerned State Government.

Despite energy sector loans to India totaling nearly $8.5 billion over the past ten years, not a single dollar has gone towards improving the efficiency.

However, we believe that India needs to shift course off this catastrophic path as soon as possible. There are many ways to do so. The government should shift focus from large thermal power projects to small, non-conventional sources of energy in tune with its professed policy. Besides, taking certain step to drastically improve the efficiency of energy production, transmission and consumption without stifling economic growth. This strategy with heavy emphasis on efficiency improvement also offers the opportunity to achieve at a lower cost economic and social developmental objectives.

Unfortunately, the increased reliance on energy efficiency has made little or no impact on the Bank's Indian loan portfolio. Despite energy sector loans to India totaling nearly $8.5 billion over the past 10 years, not a single dollar has gone towards improving the efficiency with which energy is consumed.

For further details contact:PIRG (Public Interest Research Group) 142, Maitri Apt, Plot No 28, Indraprastha Ext. Delhi 110092. India. Ph: 2432054 Fax: 2224233 email: kaval@pirg.unv.ernet.in

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