Stalled Reform in a Politically Competitive State: Uttar Pradesh’s Electricity Distribution Sector

By Jonathan Balls
Regulatory Assistance Project
8 June 2017

The electricity distribution sector in Uttar Pradesh has, since the late 1980s, faced the persistent problem of poor performance by its public electricity distribution companies (discoms), which are crippled by high levels of debt. Following years of discussion and at a time of fiscal crisis, in 1999, the government of Uttar Pradesh, supported by the World Bank, initiated a reform programme for the distribution sector. Multiple discoms were to be set up, which were to operate commercially and independently before being quickly privatised. Investment in infrastructure was planned, and the process of tariff-setting was to be depoliticised. While five new discoms were created, they have not since been privatised, and the state of the distribution sector has seen little improvement. A gap has opened between how the sector should operate on paper and how it operates in practice.

A number of factors help to explain the situation in Uttar Pradesh, and suggest that improvements in the financial performance of public discoms will be difficult in the coming years. First, in the context of competitive state politics, successive governments have pursued populist policies in regard to the electricity sector, and have been unwilling to see tariffs increase significantly for agricultural and domestic consumers, or to oversee a crackdown on theft. While governments have at several times pushed for the privatisation of discoms as a solution to the sector’s problems, union opposition and practical challenges have stalled any plans. Second, the structural mix of domestic, agricultural, and industrial consumers served by public discoms has become increasingly unfavourable for any attempted financial turnaround. Over the last 30 years, large numbers of domestic and rural consumers have been connected to the electricity grid, from whom discoms collect little revenue. At the same time, industrial consumption, which provides the revenue that cross-subsidises domestic and agricultural customers, has flatlined at a low overall level.