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Stop using the consumer as a fig leaf

The regulator and the government’s failure to keep pace with ground realities has come at a severe national cost

Last week the apex power regulator, the Central Electricity Regulatory Commission (CERC), ruled that Adani Power Ltd will be allowed to temporarily increase tariffs to compensate for the additional fuel costs it had unexpectedly incurred on the coal imported from Indonesia. From within the Commission and elsewhere, justifiably or otherwise, there were howls of moral indignation about the decision, especially since the company had specifically ignored an automatic escalation clause in its winning contract to supply power to two state electricity utilities.

Ignoring the temptation to succumb to this compelling moral hazard argument, it would be obvious that the problem lies elsewhere—with the regulator and the government. Ostensibly, with the consumer as the focus, both agencies have always approached bidding for infrastructure projects with the intent of minimizing user fees. Laudable no doubt (and politically very correct), but fundamentally flawed; it worked in an era, in the 1970s, when things were scarce and prices were regulated.

Ever since the country began its journey in the 1980s towards a market-based economy, this is increasingly out of sync with ground realities. The failure of the regulator (itself a relatively new phenomenon) and the government to keep pace with this process, even while the consumers (more of this later) have taken to it like duck to water—willing to pay provided they got value for the service—has come at a severe national cost.

By imposing the criterion of lowest user fee, the bidding process is weighed towards making astonishing claims; a review of the big infrastructure projects, whether it be in airports, power, ports or roads, shows that several of them have run into problems with the winner unable to deliver on promises and seeking creeping relief—often inviting, and in some cases rightly so, charges of crony capitalism. This is not to make a case for unwarranted user fees; thanks to consumer courts and the regulator, this is no longer an easy option.

Instead, while the intent of providing low user fees is laudable, it should have come with a simple caveat that the tariff has to cover the economic cost. And this is not rocket science, it is common sense, at least outside India. An airport regulator, when posed with this query, told me that in Australia the institution that organizes the bid comes up with an economic cost, which is kept confidential (“Not like in India; where confidential means that everything is public," he said in passing.); only bids within the economic cost band are considered further and any bid which is abnormally lower is set aside for a detailed investigation. Consequently, he added, there is almost never any stress about a winning bidder seeking a revision of the contract terms even before the project is initiated.

The political economy of ignoring such business wisdom is the 1970s mindset that continues to grip the bureaucracy and the average politician. But what it does is a complete travesty on a market-determined bid process; not only does it lead to misallocation of resources, not necessarily tapping the best expertise and worse creating the perfect menu to foster crony capitalism—something, which, as Prime Minister Manmohan Singh has repeatedly flagged over the last eight years, has been India’s bane in the last three decades.

If one factors in all these additional costs, the effective cost for the consumer (who is often also the taxpayer) is prohibitive. Instead, they would have been much better off if required to pay the economic cost. And indeed as Mint reported last week, the Indian consumer has indeed exhibited the willingness to walk this talk.

An analysis conducted by Deloitte Touche Tohmatsu India Pvt. Ltd for Mint revealed that consumers in 16 states are paying at least 4 per unit for power and in some cases even more; the tariff comparison was made for domestic households consuming 300 units (kilowatt hours, or kWh) on an average every month on a minimum load of 4 kilowatts. Reinforcing this fact, the same study found that 23 states and five Union territories increased electricity tariffs in 2012-13; and surprise, surprise—Left-ruled Tripura raised tariffs by 73% while the self-professed champion of the aam admi, Mamata Banerjee, used to oversee the highest domestic tariff in the country at 6.02 per unit.

The implicit message from the consumer is that availability (and obviously quality) is more important than affordability. Old time Delhiites would recall spending most summer afternoons without power; and of course including a voltage stabilizer along with every acquisition of a consumer good like a television or refrigerator—wait for some time and don’t be surprised if they are hawked as antiques. The consumer has clearly moved on.

But ironically, the government and the regulator continue to wallow in an era long gone. Worse, they continue to justify their actions using the consumer as a fig leaf. It is still not late. India is deficit in almost every kind of infrastructure, we are not even halfway there; we have to build schools, roads, bridges, ports, airports, power plants and so on. So instead of wringing our hands and seeking imaginary political brownie points, it is time that we revisited our approach to infrastructure. At least stop taking the consumer for granted; and, the politician should remember that the consumer is also a voter and, in urban India, can pack a punch.

Anil Padmanabhan is deputy managing editor of Mint and writes every week on the intersection of politics and economics. Comments are welcome at capitalcalculus@livemint.com

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