An Overview of the ADB's Support for Energy Sector Reform
The ADB is the leading promoter of energy privatization in Asia and the Pacific. Through energy sector reform programs, the ADB requires countries to privatize state-owned electricity utilities and promote foreign investment in energy generation, transmission and distribution. The ADB believes that private sector participation in the energy sector will relieve governments' debt burdens and allow scarce resources to be allocated to social sectors such as health and education. Yet in India, Indonesia and the Philippines, the ADB's advice has led to escalating energy costs for consumers, increased debt burdens for the government, and increasing windfalls for the private sector. In the energy sector, multinational corporations are the only ones that seem to benefit from the ADB's advice.

The basics of energy sector reform

While the IMF and World Bank promote structural adjustment of national economies, the ADB has tended to focus on sectoral adjustment to facilitate privatization and foreign investment in individual sectors such as energy, transportation and communications. The ADB has promoted energy sector reform in countries throughout the region, including the Philippines, Indonesia, India, Pakistan and Tajikistan. The ADB's energy sector reform loans require governments to enact new laws and policies facilitating private sector participation, splitting generation, transmission and distribution into separate companies, privatizing state-owned enterprises and abolishing tariff subsidies.

Central to the ADB's advice is encouraging private companies to invest in and construct power plants. They have argued that involving the private sector better distributes economic risks among those who can best absorb them, and that cash-starved government gain benefits at little risk.

This strategy, however, has largely failed. In order to attract private capital, governments have signed agreements with independent power producers (IPPs) in which economic risks and responsibility are unevenly borne by governments. In some cases, governments have signed contracts that guarantee payment even if there is no demand for electricity, and stipulate that payment will be made in foreign currency regardless of fluctuations in foreign exchange rates. In effect, economic risk has been transferred to the consumers who are forced to subsidize private investment through levies, taxes, price increases and debt repayments. The private sector, in these cases, has received a disproportionate share of profits and privileges.

The ADB argues that privatizing state electricity companies and separating control over power generation, transmission and distribution will lighten the financial burden of governments and improve efficiency. However, the debt burden of state electricity utilities is, in fact, passed onto the government because the often-staggering debts of these utilities make them an unattractive investment for the private sector. Eventually, this burden is transferred to consumers through increases in electricity tariffs.

Contrary to the ADB's claims, energy sector reform loans increase the financial burden of governments, detract from government spending on basic social services, and increase tariffs, making electricity unaffordable for low-income communities. Rather than alleviating poverty, the ADB's push for sector reform threatens to impoverish those most marginalized in society.

Rising power costs in India

In India, the ADB's promotion of energy sector reform poses serious financial threats to Indian citizens. In Madhya Pradesh, poor citizens have already had their power cut off and tariff subsidies to farmers have been abolished as a result of energy sector reforms mandated by the ADB.

The promotion of IPPs in India has led to huge increases in electricity tariffs. The Maheshwar Dam on the Narmada River, a proposed private sector project, is expected to produce power at the rate of about $0.15 to $0.21 per kilowatt-hour, several times higher than power currently produced by the state. The project is expected to receive financing from the Power Finance Corporation, which is funded by the ADB and the World Bank.

The impacts of ADB-funded power sector reform will soon be felt throughout India. In October 2000, the ADB approved a loan of $250 million for the establishment of a national grid for interstate power transmission and extended a partial credit guarantee for raising another $120 million from commercial banks. The ADB's support of Powergrid, the state company overseeing the unification of the national grid, is part of a move to encourage private sector involvement in the power sector. In December 2000, the ADB approved two loans totaling $350 million to implement sweeping reforms of the power sector in the western Indian state of Gujarat.

Reforming Power Sector in India's Madhya Pradesh State

The Asian Development Bank (ADB) has approved loans totaling US$350 million to help restructure the power sector in the central Indian state of Madhya Pradesh.
The loans will help to create a more efficient, competitive, commercially run, and financially viable power sector to support the economic and social development of one of India's larger states. Evidence shows that economic growth is the most effective path to poverty reduction in India.

ADB will provide a policy loan of US$150 million and an investment loan of US$200 million to support a sector development program for the first phase of reforms.
The program will:

• improve the policy environment and governance in the sector;
  
• help establish a competitive business environment to increase efficiency and reduce system losses;
  
• enhance the viability of the Madhya Pradesh State Electricity Board through financial restructuring;
  
• introduce a computerized information and revenue management system;
  
• corporatize and commercialize the generation, transmission and distribution functions of the Madhya Pradesh State Electricity Board through the establishment of new companies in the power sector.

These policy initiatives will be supplemented by investments to reduce system losses, improve operational and financial performance through more effective billing and collections, and strengthen transmission and distribution networks.

The project is part of ADB's strategy to help Indian states reform their power sectors as part of changes in macroeconomic management. Madhya Pradesh is the second state to receive such assistance, following Gujarat.

The total cost of the investment project is US$318.9 million and the government and state electricity board of Madhya Pradesh will provide US$118.9 million equivalent in local currency. The ADB loans will be from its ordinary capital resources under its LIBOR-based lending facility. The policy loan will have a term of 15 years, including a grace period of 3 years. The investment loan will be repayable in 20 years, including a grace period of 5 years.

For further details, please surf the site at: http://www.adb.org