Wires

RPT-INSIGHT-Punchups, kidnappings mar India's efforts to privatise power

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By Sanjeev Choudhary and Ross Colvin

NEW DELHI, Oct 8 (Reuters) - It is rough being an employeeof Torrent Power Ltd in the Indian city of Agra.Furious residents regularly take staff of the power distributorhostage or beat them up, stone-throwing mobs besiege the firm'shigh-walled compound, and one official recently had to behospitalised after he was hit on the head with a brick.

On some days there are more than 10 protests staged aroundthe city against Torrent, which won the franchise to supplypower to Agra in 2009. When it took over, rampant theft and afailure by authorities to crack down on defaulters meant that70 percent of electricity consumed in the city was not paid for.

But Torrent's efforts to make customers pay have triggered acity-wide backlash and a storm of claims that it over-charges,uses heavy-handed tactics against defaulters and deliberatelycurbs 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 hereceives up to 15 complaints a day from constituents unhappyabout the penalties. "If they don't attend to people, they willbe beaten up."

The company's defence - that it inherited a ramshacklenetwork suffering from years of under-investment and that theblackouts are beyond its control - has fallen on deaf ears.

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Torrent's woes in Agra, home to the country's most famousmonument, the Taj Mahal, illustrate how India's efforts tomodernise its economy are often thwarted by local politics thatfeed on fear of change.

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

Torrent's experience highlights the perils for companieshoping to benefit from the privatisation drive, as well as thechallenges facing India as it grapples with chronic energyshortages that stand in the way of its ambitions to become aglobal economic power.

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

The companies have racked up losses of more than $46 billionbecause of unrestrained power theft, leakage from a poorlymaintained network and state governments' reluctance to raisetariffs to meet higher generation costs. Politicians fear arevolt by voters, many of whom view free electricity as a right.

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

SHADY MIDDLEMEN, ILLEGAL HOOKUPS

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

To succeed means upending a deep-rooted culture ofnon-payment and getting the support of populist-leaning stategovernments, according to dozens of government officials,company owners, politicians and industry analysts interviewed byReuters.

Private power companies that dare to venture in face acomplex web of political patronage and deep-rooted corruptioninvolving shady middlemen who organise illegal hookups topower-lines, pay government officials to settle bills forsmaller amounts and, for a fee, will keep creaky transformersrunning.

"To bring about privatisation requires enormous politicalwill," said Torrent Director Murli Ranganathan during a Reutersvisit to the company's office complex in Agra. "Withoutpolitical will, without administrative support you will not beable to convert this model into success."

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

It was the biggest single corporate donor to the rulingCongress party and the main opposition Bharatiya Janata Party(BJP) between 2003-2011, according to an analysis of nameddonations to political parties by the Association for DemocraticReforms (ADR), a non-governmental group that campaigns forgreater transparency in politics.

Torrent Power, which has a market capitalisation of $1.5billion, is headquartered in Gujarat state and is perceived byopposition politicians there as being close to Chief MinisterNarendra Modi, a BJP leader who is viewed as a strong contenderto become the next prime minister.

Ranganathan sounded frustrated that things were not goingaccording to plan in Agra, in Uttar Pradesh state, and said hewas pushing the local government to set up special policestations and courts dedicated to prosecuting electricity theft.

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

"If the law is strong enough, then local politics doesn'tmatter," he said.

A few days before the interview, a group of stone-throwingprotesters had gathered outside the compound, the latest in aseries of such incidents. When Reuters visited, a guard standingbehind a heavy metal gate had body armour, a heavy stick and arifle piled nearby.

STAFF BEATEN, KIDNAPPED

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

Yadav, however, told Reuters he is renegotiating the termsof Torrent's contract to supply power to the industrial city ofKanpur because he does not "want a repeat of Agra". Despitewinning the contract in 2009, Torrent has not received the finalgo-ahead to start operations in Kanpur, the largest city in thecountry's most populous state.

The state accountant-general, meanwhile, said in June he hadfound irregularities in the way the 20-year contract was awardedto Torrent.

Politicians are perceived to be riding the wave of populardiscontent, which stems not just from the new reality of beingforced to pay for electricity, but also from the steep penaltiescharged for theft. Torrent says the penalties are mandated bythe state but that it is now looking at ways of reducing them.

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

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

Torrent officials said some staff raiding homes todisconnect consumers for non-payment had been taken hostage byresidents, usually for several hours at a time. Others had beenheld to highlight complaints about delays in dealing with powercuts. Yet more employees had been beaten or punched.

Torrent is focused on dealing with customer complaints muchmore promptly. It is also rebuilding the electricity network byreplacing all transformers and putting wires underground toensure a more stable supply and curb illegal hookups.

"Once people understand the fruits of privatisation ... theyare going to latch onto it," said Ranganathan.

THE OTHER SIDE OF THE STORY

Agra, however, is only one side of the story of India'sexperimentation with the distribution franchise model. The otherhalf 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-mindedpolicymakers in India won acceptance because of Torrent'ssuccess 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 40percent of the electricity it consumed. Three-quarters ofconsumers were not accurately metered and transformers failedfrequently.

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

Bhiwandi does not provide a picturesque backdrop for one ofIndia's biggest privatisation success stories. Its rutted roadsand rotting buildings blackened by pollution belie the fact thatit is one of the country's main textile hubs.

About 600,000 power looms are packed into factoriessometimes little bigger than garages and tended to by sweatingmen stripped to their waists. The rhythmic whirring and clackingof the weaving machines spills into the surrounding streets.

When Torrent arrived, it faced a wall of opposition fromfactory owners, politicians and residents who objected to newmeters being installed and having to pay bills in full for thefirst time.

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

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

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

"In this state the political leadership decided to givepolitical support for every activity for the reduction of loss,"said Ajoy Mehta, managing director of the Maharashtra StateElectricity Distribution Company. "They have said very clearlywe 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 servicegiven by the government need not be paid for," he said.

In Bhiwandi, power-loom operators now enjoy 20 hours ofsupply 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 theBhiwandi Padmanagar Powerloom Weavers Association, saidproduction at his factory has jumped 30 percent in six years.

It is a tale of two cities: in Agra, Torrent is dealing withmany poor residents who see no financial benefit to owning up tonot paying for electricity and are angry that, since the companytook over, their power supply has deteriorated. Torrent blamesthe blackouts on unscheduled loadshedding by the state operator.

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

PROBLEMS WITH MODEL

Torrent's triumph in Bhiwandi persuaded several other statesto adopt the model. But to date Bhiwandi remains the onlysuccess story.

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

The winners have mostly been companies with no experience indistribution. Bigger players with deeper pockets are more riskaverse 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 convincingbanks to lend to us due to the newness of the franchise modeland (the central bank's) diktat to decrease exposure to thepower distribution sector," said Kaustubh Dhavse, seniorvice-president at Spanco, which started a franchise operation inthe Maharashtra city of Nagpur more than a year ago.

With the franchise model, companies offer a price at whichthey would buy power from the state utility to supply cityconsumers at a tariff decided by the state regulator. Thecontract goes to the highest bidder, who makes a profit bycurbing theft and other transmission losses.

Less than 200 miles from Agra is Kanpur, a major industrialcity that is home to tanneries and hosiery and food processingfactories. Distribution losses are sky-high and power cutsfrequent.

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

Heavy-handed tactics to clamp down on electricity theft willnot work in Kanpur, warned Manmohan Rajpal, head of the IndiaIndustrial Association in the city.

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

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

((ross.colvin@thomsonreuters.com)(+91-11-41781015)(Reuters

Messaging: ross.colvin.thomsonreuters.com@reuters.net))

Keywords: INDIA POWER/