Delhi Model Of

Distribution
Privatization
Jun 1, 2020 MKG 1
 Country Scenario
 Economic Axioms say that more property
the State has, the less well being the
population has.
 Over presence of the State brings more
inefficiencies and inequities.
 India has just 2% of the land while
population is 17% of the globe.
 And this population is increasing at the
rate of 2.1% every year.
 India’s POL requirements are increasing
@ 6%, while global average is 2%.
 We are importing 70% of our needs @
20Billion USD(80,000 Crores).

Jun 1, 2020 MKG 2

 Delhi Scenario
 On the eve of privatization DVB
was being rated as one of the
worst SEBs in the country.
 Initial thinking was to unbundle
DVB into Corporations for
Generation, Transmission and
Distribution businesses.
 But seeing the unmanageable
stage where distribution had
reached it was decided to start the
privatization process with
Distribution first.
Jun 1, 2020 MKG 3
 Delhi Scenario Contd---

 There were shocking tales of

growing corruption.
 Gap between cost of power
purchased and amount of
realization was widening year after
year.
 Increasing demand was adding to
the losses with each unit of power
purchased or generated and
inducted into the network.
Jun 1, 2020 MKG 4
 SEBs-Mounting Losses
 Not even a single SEB has been
yielding minimum 3% rate of return
as stipulated in Schedule VI.
 Huge financial liability became a
top national issue.
 Crisis management gave birth to
theories that unbundling of the
SEBs has become inevitable.
 DVB was no exception

Jun 1, 2020 MKG 5

 Corporatization And
Privatization

 Unbundling brought forth the concept

of branding the disciplines of
generation, transmission and
distribution of electricity as individual
business ventures.
 And formation of a corporation or a
company for each of these ventures.

Jun 1, 2020 MKG 6

 Orissa And Delhi
 Orissa, as the first and Delhi, as the Second State
in India, decided to go in for Privatization in
Distribution.
 Orissa Experiment had disheartened both foreign
and domestic entrepreneurs to the extent that in
the final round for Delhi privatisation,there was
not a single foreign company and the competition
was left only between the two domestic
companies, Reliance and Tatas.
 After serious debacles in the Orissa Model,
whole world is looking forward to Delhi
Experiment.

Jun 1, 2020 MKG 7

 Focus Areas In Delhi Model


 Valuation Of Assets

 Base Data

 T&D Losses

 Tariff Fears

 Billing And Collection Efficiency

 Package Deal

 Competition In Distribution

Jun 1, 2020 MKG 8

 Hearty Start To Process.
 Massive amount of preparatory
home work went into the project of
privatization of Distribution
Business in Delhi.
 Process commenced with Investors'
Conference chaired by LG and CM of
Delhi.
 Firm Commitment to achieve successful
conclusion.
 Total Transparency from day one.
 Unions, Associations and other bodies
taken into confidence .

Jun 1, 2020 MKG 9

 Hearty Start To Process Contd--

 Delhi Government and DVB

resolved to formulate Delhi Model
on scruples of :-
 Truthful base data.
 Truthful projection of T&D losses.
 Fairness in package deal with
bidders.

Jun 1, 2020 MKG 10

 AT&C Loss Reduction
 Delhi Bids were invited in two Parts.
 RFQ dealt with pre-qualification of the
porpective bidders.
 RFP, as the final Proposal was submitted
by the Parties prequalified in the RFQ
Process.
 The tender documents stipulated
reduction of AT&C(Aggregate Technical
& Commercial) Losses by 30 % in 5
years.
 But the only two parties who submitted
the RFP, declared that they can target
only 15 % reduction rather than 30% as
embedded in the tender.
Jun 1, 2020 MKG 11
 AT&C Loss Reduction Contd---
 But DVB and Govt. of Delhi had gone far
too ahead in the previous three years to
look back even though only two players
were left.
 Government had to make compromise to
the extent that AT&C Loss Reduction
Target was brought down to 17% from
30%, as even these two companies had
walked out. Both companies wanted the
target to be 15%. The compromise was
made at 17%.
 The year by year targets are displayed in
the next slide.

Jun 1, 2020 MKG 12

 AT & C Loss Reduction Targets For 5 Years
Are As Follows:

Opening Level 2002-03 2003-04 2004-05 2005-06 2006-07

AT & C Loss %
48.1% 0.5% 2.25% 4.50% 5.50% 4.25%
reduction

AT & C Loss
Target (at the 47.6% 45.35% 40.85% 35.35% 31.10%
End of FY)

Jun 1, 2020 MKG 13

 Unique Features Of Delhi Model.
 Valuation Of Assets.
 Allaying Tariff Fears.
 Regulatory Comforts.
 Bulk Supply Tariff Comforts.
 Transitional Support.
 Bidding Criteria.
 Companies To Start With Clean
Balance Sheet.
 Incentives For Performance.
 Transfer Policy.

Jun 1, 2020 MKG 14

 Unique Features Of Delhi Model
Contd----
 Delhi bids were invited on
efficiency improvement projections
for five years.
 Delhi bids were not sale of equity
as had been done in Orissa.
 Multi year tariff has to be placed
before ERC manifesting year wise
efficiency improvements.

Jun 1, 2020 MKG 15

 Joint Venture

 Delhi Privatization is in effect Joint

ventures of Private Players and the
State Govt.
 Majority stake @ 51% is with the
BSES Rajdhani Ltd., BSES Yamuna
and NDPL.
 49% is with the Delhi State.

Jun 1, 2020 MKG 16

 Valuation Of Assets
 Valuation of the assets has been
done on Business Value
Techniques and not book value or
physical value.
 Mind set has been set straight that
transfer of assets is not sale of
family gold or silver.
 Assets are going to licensed
companies who will not run away.

Jun 1, 2020 MKG 17

 Business Valuation

 After accounting for retail tariff,

drop in aggregate technical &
commercial (AT&C) losses and
future expenses,the assets have
been valued as viable business
venture.
 Business valuation method of the
assets enables the distribution
business self sustainable in
specified time period.

Jun 1, 2020 MKG 18

 Allaying Tariff Fears

 There are apprehensions that

privatization would lead to upward
tariff revisions.
 The manner of bid invitation and
bid evaluation would allay these
fears.
 Placement of a competent and
knowledgeable regulator would
ensure fair tariff models.
Jun 1, 2020 MKG 19
 Regulatory Comforts.
 In Delhi ERC was in place well
before the process of privatization
started.
 BSA (Bulk Supply Agreement)
laying bulk supply tariff for
purchase of allocated share of
power from Transco was in place
before closing of the bids.
 All non serviceable liabilities have
been parked in the Holding
Company.
Jun 1, 2020 MKG 20
 Transitional Support
 Rupees 3450 crores has been kept
aside as financial support to the two
Distribution Companies for first five
years to meet the gap between bulk
power purchase and retail sale.
 This step would depress tariff hikes.
 In 5 years, AT&C losses would go on
reducing, thus creating a balancing act.
 At the end of 5 years when Govt
Support is not there reduced AT &
Commercial losses would make up for
that.
Jun 1, 2020 MKG 21
 Bidding Criteria
 In Delhi bids were invited on percentage
reduction in aggregate technical and
distribution commercial losses for the
years 2002-2007.
 The tender documents stipulated 30%
reduction of AT&C losses in 5 years.
 The opening levels of losses would be as
notified in the Bulk Supply Tariff order of
the ERC and not as issued by the State
Govt.
 The sale would be to the bidder
committing highest collection
efficiency,maximum reduction in losses
year after year,& obviating the tariff
shocks
Jun 1, 2020 MKG 22
 Performance Incentives
 In case the Distribution Company
brings in more than the contracted
efficiency, the Company would be
entitled to retain certain component
 All receivables except those
pertaining to current billing shall
stand transferred to the Holding
Company.If the Distribution Company
is able to recover such receivables
,these will be shared 80:20, with 80%
going to Holding Company & 20% to
Distribution Company.

Jun 1, 2020 MKG 23

 Transfer Policy
 The transfer of assets and
personnel to the successor entities
have been done through a
Transfer Scheme notified under
the Reforms Act and duly gazetted.
 Transfer Scheme indicates
opening balance sheets of
successor Companies
 In order to enable the Companies
to start with clean balance sheets,
gap between corporatization and
privatization has been kept as nil.

Jun 1, 2020 MKG 24

 Enterprise Efficiency
 Tariff is sustainable only if there is
efficiency by private companies or
Government Discoms..
 There has to be enterprise efficiency even in
Govt.. utilities as in case of EDF France,
NTPC India.
 Budgetry Support is not going to be
perpetual.
 State and Private utilities both have to
improve.
 Public can no more be mute to rapid and
massive tariff shocks.

Jun 1, 2020 MKG 25

 Energy Intensity
 Energy consumption in production streams
has to be economised.
 The intensity of power input for
manufacturing of any product has to be
optimized.
 In India energy intensity is 3.7 times when in
countries like Japan it is just 1.5.
 We face stiff competition in export markets
from countries like China, Taiwan.

Jun 1, 2020 MKG 26

 Comparison of Orissa & Delhi
Models.
 Orissa was the first State in the country
to go in for reforms.
 Delhi is the second State in the country.
 OERC was set up WEF 1.4.96.
 DERC was set up in 1998
 Orissa Model and reforms were
conceived by the World Bank and funded
by DFID .
 Delhi Model was implemented fully with
the help of native conultants and
domestic revenue streams.

Jun 1, 2020 MKG 27

 Comparison of Orissa & Delhi
Models Contd----
 The Agenda of privatization of both orissa
and Delhi focussed on running the
electricity industry in an efficient and
competitive manner.
 Asset valuation was unrealistic at the time
of transfer to corporations.
 Method of privatization was asset-based in
Orissa while Delhi Model adopted Business
valuation technique.
 Orissa Reform Scheme was vitiated by
sharp upvaluation of assets at the time of
transfer to utilities.
 Delhi Model was totally transparent.
Jun 1, 2020 MKG 28
 Comparison of Orissa & Delhi
Models Contd----
 So the transfer costs were high in Orissa
in comparison to the true value of assets.
Transfer Policy did not stipulate any goals
for loss reduction.
 Delhi Model stipulates loss reduction by
17 % in 5 years.
 Average tariff has increased considerably
in Orissa without corresponding
customer service.
 Delhi tariff has increased within
reasonable limits and with ample increase
in quality and continuity of supply.

Jun 1, 2020 MKG 29

 Comparison of Orissa & Delhi
Models Contd----
 Distribution companies, Gridco and
Generators have all become financially
broke in Orissa
 Delhi scenario is entirely different.
 Loss reduction targets have been met by
NDPL more than the mandate.
 In Orissa, Discoms default to Gridco, which
in turn default to Gencos, who are facing
inadequate cash realization.
 In Delhi there is no default on the part of
any of the Companies, private or
Government .

Jun 1, 2020 MKG 30

 Comparison of Orissa & Delhi
Models Contd----
 T&D losses remained to be
massive with 46.94% in 1995-96
and 46.63%after 5 years, in 2002.
 The concept of Delhi Model is
based on returns coming out of
efficiency, performance as an
enterprise, fair tariff, consumer
satisfaction rather than cost plus
returns.
Jun 1, 2020 MKG 31
 Conclusions
 Delhi Model will show that privatization is
feasible.
 It would demonstrate benefits.
 It has been achieved without World Bank
or any other Multilateral Agency.
 It has fully been done by local and native
consultants and talent.
 It has been achieved within 3 years.
 World Bank or other Multilateral
Agencies would have taken 5 to 6 years
and at astronomical costs.

Jun 1, 2020 MKG 32

Jun 1, 2020 MKG 33