Power Sector Reform in India: A Critical Analysis of Unbundling and Private Infrastructure in Indian States

Recognising the necessity of increasing investment and improving efficiency in the infrastructure sector, the scheme of private infrastructure has been pursued even in developing countries since the emergence of privatisation in developed world. ‘Unbundling’ the sector is currently a popular way to utilise private infrastructure, aiming to separate monopoly parts from potentially competitive parts, while the theory tells both the advantages and the disadvantages. Unbundling is actively introduced to the power sector in India by the central government as the way to reform inefficient State Electricity Board. However, the outcome of reform programmes in Orissa and other Indian states shows that the performance of unbundled firms is far from a satisfactory level. From institutional perspective, unbundling exacerbates adverse effects arising from discordance among and opportunistic behaviour of unbundled firms that did not matter in vertically integrated structure. The examples of power sector reform in Indian states indicate that, especially in developing countries, there are often things to be done before unbundling. The government must play a positive role in institutional reform of the power sector - not only with structural reorganisation such as unbundling, but also with the broad-based change of incentive structure through active reallocation of power and rents.