How crucial is foreign investment to develop the power sector in India?

India should not depend only on foreign investment in the power sector. Too much dependence on foreign savings can create balance of payment problems. You don't need foreign investors to run your powerplants. They are here to make money. They will make money and pull out.

Foreign investors are needed only to change the way things are done in the sector. They bring best practices for the local industry to emulate. In the long run, foreign investment in power should not be more than 15 per cent. Most of the money for power should be raised from domestic resources. Any reforms in the power sector is closely linked with reforms in the financial sector. You should create conditions where it is possible for domestic power companies to raise money from the markets, pension funds, insurance funds, financial institutions. Unless a power company becomes a good investment this will not happen. With the demand for power running so high, most power companies will do well, if their returns are assured. Malaysia funded all its power expansion with local funds. Therefore it is also in a better situation than other countries like Indonesia.

Does this mean that the public sector will play the dominant role in powersector?

No. The public sector must be privatised and made to compete with domestic private sector. In Bolivia this was called capitalisation. They sold 51 per cent of the stake in PSUs to the highest bidder. The rest was given to social institutions like pension funds. They made a market for the shares. The idea is to create a lobby which will work for improving the profits of the power company. Instead of a lobby which is against increasing tariffs, you have lobby in favour of it. Make the shares of the company a marketable instrument.

Unless subsidies are reduced, returns will not improve. The Government plan is to make the states pay cash compensation for subsidies. Will it work?

When the subsidy figures are very high then the system of cash repayment will not work. The Government will not be able to manage it. A better way to do this is to talk to the subsidy receivers and tell them that they will get different quality of power based on the prices. If you pay extra we will guarantee youpower. A step like this will encourage the habit of paying for what one receives. Some people will always be willing to pay more for better quality.

How do rate the private sector in India?

There is no privatisation of power in India. There is only public procurement. You may have private power companies generating and selling power, but the the buyer is the Government. It is a monopoly. Unless the seller of power can negotiate directly with the buyer of power, true privatisation would not have occurred. Because there is public procurement, the private sector is not willing to take risks. They want the Government to cover all their risks. To ensure that private monopolies do not replace public ones, introduce more players. Competition is more important than mere privatisation. The buyer of power must have a choice of sellers to pick from.

For this to happen, the purchase and distribution monopoly of state electricity boards should be done away with. This will also allow steps to reduce theft andlosses. To begin with bulk private distributors can be appointed on a competitive basis. Then more players can be introduced. When the income of the distributor depends on the electricity revenue, he will ensure that the theft and losses are minimum.

The Government hopes that the regulator will set rational tariffs and introduce competition.

In all my years, I have not seen an independent regulator. The best regulation is to make the decision making process open and participative. In Canada tariffs are decided by a commission which are equal representation from housewives, farmers, industries and other bodies. They thrash out the issues and taken the decision. The Government just accepts it and implements it.