research institute for compassionate economics

Public Private Partnership of a Different Kind

Written by Avinash Kishore on October 25th, 2011
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Lack of adequate power supply constrains economic growth and affects quality of life across India. But nowhere is the problem as severe as it is in my home state, Bihar. Bihar, a state of more than a 100 million people, consumes much less electricity than a satellite city like Gurgaon. Bihar State Electricity Board (BSEB) sold only 5.5 billion units of electricity in year 2010-11, which amounts to annual consumption of 55 units/person in the state. 55 units of electricity cannot even light a 40-watt bulb for 4 hours every evening for a year. Less than 5% of this electricity is generated by the BSEB itself.

The problem of low availability of power is compounded by poor maintenance of the transmission and distribution network. There are power cuts even when power is available. Most villages barely get any power supply. Towns and cities get power for 6-18 hours every day—less in summer, more in winter.

So, how do people cope with the problem? The same way as they do with bad public provision of other essentials like health, education and water. The poor suffer through it while those who can afford, go to private providers for “power back up”. The private provider generates electricity from diesel generators (DG sets) and supplies it using his own distribution system. He promises his consumers—households and business enterprises—to supply electricity when there is a power cut from the public utility company. The consumer pays a flat monthly fee based on the connected load for this service. Thus, a consumer with power back up pays two electricity bills: i) to the utility company based on the number of units of electricity he consumes and ii) a flat fee to the private provider.

The private provider makes more money on a day when power supply from the utility is better because he has to run his DG set for fewer hours. The variable cost of generating power from a DG set is high and a forms a high fraction of the total cost. High variable cost combined with flat tariff creates a strong incentive for the private provider to ensure better power supply from the utility in his service area. Any time there is a power cut due to some fault in the utility distribution line, the private provider makes sure that it is repaired fast. He bribes and cajoles the linesmen and the engineers to repair fast. If needed, he even provides his own men to help workers from the utility. As a result, areas that are served by private power sellers are also served better by the utility.

Each private power seller serves a limited area of a few square kilometers. High distribution losses and the need to monitor pilferage restrict the area he can serve profitably. So, there are a number of private providers in each town and they jostle with each other to keep the utility company on their side—to provide better maintenance and to ensure that there is less power cut during peak hours and more during non-peak hours in their service area. A DG set consumes more diesel when the load is higher and so the running cost is higher during peak hours.

I am not sure of the aggregate impact of private providers on the quality of power supply by the utility company. Many suspect that private power suppliers have vested interest in keeping power supply poor in Bihar. This is an obvious conclusion anyone would reach knowing that private power sellers would lose their business if power supply condition improves substantially. But it’s not true. Total power available for Bihar, from its own generation and imports, is so low that the state has to live with long hours of power cut. And the situation is unlikely to improve much in the next few years. Private power sellers can do little to change this larger reality. Given the constraint of limited power availability, it is in the interest of private sellers that the power supply to consumers is as smooth as possible. As of now, private power sellers of Bihar complement the utility (BSEB) rather than competing with it. They charge high prices (Rs.15 or 30 cents/unit); they pollute environment; and they run an illegal business – but I doubt if they are sabotaging the utility services to make money. In fact, I suspect they are improving it.