In a recent report on India's energy sector, the WB has made it amply clear that India's economic growth and the welfare of its people will continue to be hampered as long as the country's power supply constrains industrial development and the financial losses of the power sector remain a burden on public sector finances.

According to the report, India's power sector is plagued by capacity shortages, resulting in frequent blackouts, poor reliability and deteriorating physical and financial conditions. The source of the state power sector's ailments is poor operational efficiency of the state electricity boards (SEBs) which form the foundation of India's power system.

``Due to subsidised tariffs to residential and agricultural consumers, low investment in transmission and distribution systems, inadequate maintenance and high levels of distribution losses, theft and uncollected bills, SEBs are continually in severe financial distress and have been unable to provide quality supply and efficient service to their customers," the report said. Narrating the present state of SEBs, the report said that commercial losses of SEBs and state generating companies, which together generate around 70 per cent of India's electricity supply and provide most of the distribution to consumers, has been nearly one per cent of country's gross domestic product (GDP) and continue to rise.

In most states, the power sector is a major drain on already limited state budgets. Closer examination of the losses of SEBs show that there is often significant underreporting. In the case of the ailing Maharashtra State Electricity Board (MSEB), the transmission and distribution losses have been mounted at 31.6 per cent instead of just 17 per cent reported during the recently-concluded hearing before Maharashtra Electricity Regulatory Commission.

The sector's heavy reliance on increasingly tight state budget resources has been key obstacle to expanding access to electricity to consumers and upgrading systems. SEB losses and power subsidies are also a major drain on state budgets and crowd out public spending on critical sectors such as health and education.

"Power sector reforms are critical for providing the impetus to states' economic growth and for redirecting public spending to priority areas," the report said. Furthermore, the financial weaknesses of the SEBs has also been one of the major stumbling blocks in achieving financial closure of independent power producers (IPPs). Despite government steps to introduce private sector investment into power generation, as of July 1999, only six independent power plants have come into operation, totalling just over 2,000 mw far below what is needed to keep pace with industrial growth.

"Nationwide, the shortfall in energy supply is conservatively estimated at 11 per cent and 18 per cent during peak hours, although among states the variation is substantial," the report said, adding that the government of India with World Bank assistance, has been encouraging the states to undertake in-depth power sector reforms.

However, the report said this involves distancing the state government from operation of the power sector, establishing an independent regulatory framework for the sector, progressively reducing subsidies and restoring the credit worthiness of the utilities through financial restructuring and cost recovery tariffs and divesting existing distribution assets to private operators.

The World Bank has praised the reform process launched by various states such as Orissa, Andhra Pradesh, Haryana, Uttar Pradesh. However, it has expressed serious concern over slow pace of such reforms by Maharashtra whose electricity board is incurring a daily loss of nearly Rs 5 crore.The World Bank has made it clear that it would support power generation projects that supply power to inefficient, loss making distribution entities. Institutional reform that eliminates director political control over the process of industry tariffs should be a fundamental criteria for bank support of power generation projects.