Shock to the System

Fiona Woolf, head of the utilities practice at McKenna & Co, plugs into the project's history

Demand for electricity in India far outstrips supply and there is simply not enough cash available in the public sector to invest in the power stations that the country needs. Five years ago the Indian government attempted to encourage foreign or private sector investment by offering tariffs which provided an attractive rate of return for independent power projects (IPPs). This resulted in a spate of projects developed at state level by the State Electricity Boards on a negotiated basis. However, international competitive bidding never came into play and although negotiations were long and arduous, few of them have reached a successful outcome.

The problem lies with the State Electricity Boards

Most of the State Electricity Boards in India are insolvent and require the guarantee of the state government. The same can, unfortunately, be said of the state governments who have needed a central India government counter-guarantee. The Indian government has concluded that there is a limit to how many counter-guarantees it can issue and has indicated that after the first seven “fast-track” projects (of which Enron's famous Dabhol project is one) there can be no further counter-guarantees. Does this mean there is no way of finding finance for the investment in power stations India needs?

The ground-up approach

The previously adopted top-down approach of concentrating on private sector investment in power production is now being questioned.

Where will the money come from to pay the independent power producers once it is known that State Electricity has initiated a ground-up approach in the State of Orissa designed to bring the power sector into economic health? This means it can both afford to purchase the power from IPPs and can also supply the unmet need for power in a reliable manner and earn profits to become a contributor to the State economy.

Let Orissa be the model

In 1994 the World Bank initiated a reform and restructuring programme in Orissa, one of India's poorest states. The idea behind the rethink of the Orissa State Electricity Board is to divide it up into smaller, more manageable pieces and to put structures in place to improve efficiency and performance.

A legal and regulatory framework which will meet the needs of consumers and also attract private sector investment is now being created.

The object of the exercise is to make sure that decisions are made on commercial rather than bureaucratic or political lines; the power business is, after all, a business, much like any other. The Indian government has thrown the spotlight on this restructuring and the prime minister has said “Let Orissa be the model”.

The regulatory regime

The existing legal framework, held in legislation dating from 1910 and 1948, did not allow the reform to take place. New legislation in the form of the Orissa Electricity Reform Bill has been approved by the Ministry of Power in Delhi and, it is hoped, will achieve the presidential assent shortly. It will allow for the transfer of assets and staff to the new companies by operation of law and establish a regulatory regime to balance the interests of government, consumers, investors and the power companies.

The legislation is based on the best elements of the US and the UK regulatory systems but has been designed to be consistent with Indian culture. It is important that the regulatory regime should be credible and respected in Orissa.

Our work also includes training the regulators and their staff in addition to our traditional role of drafting the licences.

Regulation implementation

My work in Orissa has made me realise that the conventional role of a lawyer is to develop and negotiate the documents, hand them over to the client for implementation and then walk away to the next deal.

However, as project director of the Orissa Reform Programme I am responsible for actually implementing the words on the pieces of paper. The ideal contract is one which the parties know so well by the time it is signed that they put it in a drawer and never look at it again. I need to achieve the same end result but for a mountain of power purchase agreements, grid codes, interface agreements, licences, rules and procedures.

This means working with our Orissan counterparts and developing the words with them, again on a ground-up approach. They must take ownership of not just the words but of the entire reform programme. Words sent from London will never belong to them and they will never live by them unless we approach the task strictly on a joint venture basis.

Money matters

The question will undoubtedly arise as to who is paying for all this if the State Electricity Board is insolvent.

We have the World Bank and the Overseas Development Agency to thank for producing the cash and, above all, the commitment to the reform process in Orissa.