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Insight: Punchups, kidnappings mar India's efforts to privatize power

An employee works inside a power generator manufacturing workshop on the outskirts of New Delhi September 12, 2012. It is rough being an emp
An employee works inside a power generator manufacturing workshop on the outskirts of New Delhi September 12, 2012. It is rough being an emp

By Sanjeev Choudhary and Ross Colvin

NEW DELHI (Reuters) - It is rough being an employee of Torrent Power Ltd in the Indian city of Agra. Furious residents regularly take staff of the power distributor hostage or beat them up, stone-throwing mobs besiege the firm's high-walled compound, and one official recently had to be hospitalized after he was hit on the head with a brick.

On some days there are more than 10 protests staged around the city against Torrent, which won the franchise to supply power to Agra in 2009. When it took over, rampant theft and a failure by authorities to crack down on defaulters meant that 70 percent of electricity consumed in the city was not paid for.

But Torrent's efforts to make customers pay have triggered a city-wide backlash and a storm of claims that it over-charges, uses heavy-handed tactics against defaulters and deliberately curbs the number of hours of electricity a day to save money.

"Torrent is cheating people and that has made them angry," said Ram Shankar, the member of parliament for Agra, who says he receives up to 15 complaints a day from constituents unhappy about the penalties. "If they don't attend to people, they will be beaten up."

The company's defense - that it inherited a ramshackle network suffering from years of under-investment and that the blackouts are beyond its control - has fallen on deaf ears.

Torrent's woes in Agra, home to the country's most famous monument, the Taj Mahal, illustrate how India's efforts to modernize its economy are often thwarted by local politics that feed on fear of change.

It is also a cautionary tale for the Indian government, which has unveiled a bailout plan for debt-ridden electricity distribution companies - most of which are owned by states - and made it a condition for them to look at adopting the distribution franchise model to help slash massive losses.

Torrent's experience highlights the perils for companies hoping to benefit from the privatization drive, as well as the challenges facing India as it grapples with chronic energy shortages that stand in the way of its ambitions to become a global economic power.

The electricity distribution companies are at the heart of the power crisis and were blamed for one of the world's worst blackouts in late July, when three of India's five transmission grids collapsed, cutting electricity to states where 670 million people live - more than half the country's population.

The companies have racked up losses of more than $46 billion because of unrestrained power theft, leakage from a poorly maintained network and state governments' reluctance to raise tariffs to meet higher generation costs. Politicians fear a revolt by voters, many of whom view free electricity as a right.

If tariffs had risen in line with other household expenses over the five years to March 2010, the distributors would have turned a profit of 100 billion rupees instead of an aggregate loss of 873 billion rupees over the same period, according to CRISIL, the India unit of rating agency Standard & Poor's.

SHADY MIDDLEMEN, ILLEGAL HOOKUPS

Privatization, in particular the franchise model, is seen by many as key to solving the crisis. But as Torrent's experience in Agra shows, it is hugely risky and a hard way to make money.

To succeed means upending a deep-rooted culture of non-payment and getting the support of populist-leaning state governments, according to dozens of government officials, company owners, politicians and industry analysts interviewed by Reuters.

Private power companies that dare to venture in face a complex web of political patronage and deep-rooted corruption involving shady middlemen who organize illegal hookups to power-lines, pay government officials to settle bills for smaller amounts and, for a fee, will keep creaky transformers running.

"To bring about privatization requires enormous political will," said Torrent Director Murli Ranganathan during a Reuters visit to the company's office complex in Agra. "Without political will, without administrative support you will not be able to convert this model into success."

On the face of it, media-shy Torrent Power seems to be acutely aware of the political environment in which it operates.

It was the biggest single corporate donor to the ruling Congress party and the main opposition Bharatiya Janata Party (BJP) between 2003-2011, according to an analysis of named donations to political parties by the Association for Democratic Reforms (ADR), a non-governmental group that campaigns for greater transparency in politics.

Torrent Power, which has a market capitalization of $1.5 billion, is headquartered in Gujarat state and is perceived by opposition politicians there as being close to Chief Minister Narendra Modi, a BJP leader who is viewed as a strong contender to become the next prime minister.

Ranganathan sounded frustrated that things were not going according to plan in Agra, in Uttar Pradesh state, and said he was pushing the local government to set up special police stations and courts dedicated to prosecuting electricity theft.

Similar set-ups in the states of Gujarat and Maharashtra had proven successful, he said.

"If the law is strong enough, then local politics doesn't matter," he said.

A few days before the interview, a group of stone-throwing protesters had gathered outside the compound, the latest in a series of such incidents. When Reuters visited, a guard standing behind a heavy metal gate had body armor, a heavy stick and a rifle piled nearby.

STAFF BEATEN, KIDNAPPED

Ranganathan insisted the company was happy with the support it had received from Uttar Pradesh's new chief minister, Akhilesh Yadav, whose party won a sweeping electoral victory in the state this year and like all Indian parties is protective of its support base, or "vote bank".

Yadav, however, told Reuters he is renegotiating the terms of Torrent's contract to supply power to the industrial city of Kanpur because he does not "want a repeat of Agra". Despite winning the contract in 2009, Torrent has not received the final go-ahead to start operations in Kanpur, the largest city in the country's most populous state.

The state accountant-general, meanwhile, said in June he had found irregularities in the way the 20-year contract was awarded to Torrent.

Politicians are perceived to be riding the wave of popular discontent, which stems not just from the new reality of being forced to pay for electricity, but also from the steep penalties charged for theft. Torrent says the penalties are mandated by the state but that it is now looking at ways of reducing them.

Ram Shankar, the Agra member of parliament, boasted of organizing violent protests outside Torrent's offices.

"We camp at their office. Most employees run away. Those who are left behind get beaten up," he said.

Torrent officials said some staff raiding homes to disconnect consumers for non-payment had been taken hostage by residents, usually for several hours at a time. Others had been held to highlight complaints about delays in dealing with power cuts. Yet more employees had been beaten or punched.

Torrent is focused on dealing with customer complaints much more promptly. It is also rebuilding the electricity network by replacing all transformers and putting wires underground to ensure a more stable supply and curb illegal hookups.

"Once people understand the fruits of privatization ... they are going to latch onto it," said Ranganathan.

THE OTHER SIDE OF THE STORY

Agra, however, is only one side of the story of India's experimentation with the distribution franchise model. The other half of the tale involves the same company but a different city, Bhiwandi, on the outskirts of Mumbai, the financial capital.

Given Torrent's travails in Agra, it is one rich in irony. The franchise model now being championed by reform-minded policymakers in India won acceptance because of Torrent's success in dramatically cutting distribution losses in Bhiwandi, a grimy textile town of less than a million people.

When Torrent took over in 2007, Bhiwandi paid for barely 40 percent of the electricity it consumed. Three-quarters of consumers were not accurately metered and transformers failed frequently.

This changed dramatically in just four years: 99 percent were metered and losses shrank to less than 20 percent. Torrent's success lay in extensive security of the network and vigilance that curtailed theft. Investment in infrastructure ensured quality of supply.

Bhiwandi does not provide a picturesque backdrop for one of India's biggest privatization success stories. Its rutted roads and rotting buildings blackened by pollution belie the fact that it is one of the country's main textile hubs.

About 600,000 power looms are packed into factories sometimes little bigger than garages and tended to by sweating men stripped to their waists. The rhythmic whirring and clacking of the weaving machines spills into the surrounding streets.

When Torrent arrived, it faced a wall of opposition from factory owners, politicians and residents who objected to new meters being installed and having to pay bills in full for the first time.

In a foretaste of what was to come in Agra, mobs attacked the company's offices and staff were assaulted.

But that is where the similarity with Agra ended, because unlike Uttar Pradesh, the government of Maharashtra, India's richest state, is much tougher on electricity theft.

Arrests were made and police deployed in large numbers to protect Torrent's offices. The political backing gave the company the space it needed to rebuild the electricity network. Once it was able to demonstrate results with a better power supply, opposition began to fade.

"In this state the political leadership decided to give political support for every activity for the reduction of loss," said Ajoy Mehta, managing director of the Maharashtra State Electricity Distribution Company. "They have said very clearly we are not here to protect dishonest and law-breaking citizens. That is the main reason (Bhiwandi) succeeded."

"The whole concept is correcting the psychology. Somewhere, historically, we've made our people believe that any service given by the government need not be paid for," he said.

In Bhiwandi, power-loom operators now enjoy 20 hours of supply compared with 12 hours when Torrent took over in 2007.

A more reliable supply has been a boon for business. Purushottam Vanga, who owns 64 looms and is president of the Bhiwandi Padmanagar Powerloom Weavers Association, said production at his factory has jumped 30 percent in six years.

It is a tale of two cities: in Agra, Torrent is dealing with many poor residents who see no financial benefit to owning up to not paying for electricity and are angry that, since the company took over, their power supply has deteriorated. Torrent blames the blackouts on unscheduled loadshedding by the state operator.

In Bhiwandi, the biggest consumers of electricity are the power loom operators who have experienced the financial benefits of a more stable power supply.

PROBLEMS WITH MODEL

Torrent's triumph in Bhiwandi persuaded several other states to adopt the model. But to date Bhiwandi remains the only success story.

A main constraint for bidders has been the reliability of government data on consumers, billing and losses, said Rahul Bagdia, co-founder of utility consultancy pManifold.

The winners have mostly been companies with no experience in distribution. Bigger players with deeper pockets are more risk averse and have refrained from final bids or quoted low. Companies have also struggled to get working capital from banks.

"We faced tremendous amount of difficulty in convincing banks to lend to us due to the newness of the franchise model and (the central bank's) diktat to decrease exposure to the power distribution sector," said Kaustubh Dhavse, senior vice-president at Spanco, which started a franchise operation in the Maharashtra city of Nagpur more than a year ago.

With the franchise model, companies offer a price at which they would buy power from the state utility to supply city consumers at a tariff decided by the state regulator. The contract goes to the highest bidder, who makes a profit by curbing theft and other transmission losses.

Less than 200 miles from Agra is Kanpur, a major industrial city that is home to tanneries and hosiery and food processing factories. Distribution losses are sky-high and power cuts frequent.

This is the next big test for Torrent and the franchise model. With its reputation dented by the trouble in Agra, the company will have to move fast to improve power supplies to win people's confidence, businessmen and politicians said.

Heavy-handed tactics to clamp down on electricity theft will not work in Kanpur, warned Manmohan Rajpal, head of the India Industrial Association in the city.

"If they do that here, they will be beaten up," he said.

(Additional reporting by Sharat Pradhan in LUCKNOW; Editing by John Chalmers and Robert Birsel)

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