Institutional and Regulatory Economics of Electricity Market Reforms: the Evidence from India, Pakistan, Bangladesh, Nepal, and Sri Lanka
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Institutional and Regulatory Economics of Electricity Market Reforms: the Evidence from India, Pakistan, Bangladesh, Nepal, and Sri Lanka by Bipulendu Singh A Dissertation submitted to The Faculty of Columbian College of Arts and Sciences of The George Washington University in partial fulfillment of the requirements for the degree of Doctor in Philosophy May 17, 2015 Dissertation directed by Gerald W. Brock Professor of Telecommunication and of Public Policy and Public Administration The Columbian College of Arts and Sciences of The George Washington University certifies that Bipulendu Singh has passed the Final Examination for the degree of Doctor of Philosophy as of 18 February 2015. This is the final and approved form of the dissertation. Institutional and Regulatory Economics of Electricity Market Reforms: the Evidence from India, Pakistan, Bangladesh, Nepal and Sri Lanka Bipulendu Singh Dissertation Research Committee: Gerald Brock, Professor of Telecommunication and of Public Policy and Public Administration, Dissertation Director Christopher Carrigan, Assistant Professor of Public Policy and Public Administration, Committee Member Davida Wood, Project Manager, World Resources Institute, Committee Member ii © Copyright 2015 by Bipulendu Singh All rights reserved iii Dedication I dedicate this work to Monika and Zev. iv Acknowledgements I am greatly indebted to many people for helping me in this journey. My professors at Wabash College, Ms. Joyce Burnette, Ms. Joyce Castro and Mr. William Placher (Late) were instrumental in inculcating a love of learning and scholarship in me. My supervisors at the Asian Development Bank, Mr. Sultan Hafeez Rahman and Mr. Sungsup Ra made me appreciate the links between economics and development and inspired me to continue my studies in this field. My dissertation director at The George Washington University Professor Gerald Brock introduced me to New Institutional Economics and has been a source of constant support and guidance ever since I was admitted to the program. I am indebted to my committee members Prof. Christopher Carrigan and Ms. Davida Woods for their guidance and support through this process. I must also thank Prof. Donna Infeld for her inputs to my dissertation proposal. My father Dr. Narsingh Narayan Singh has been a wonderful parent and a source of inspiration. He has taught me to work hard, be determined and be true to my intellect. My mother Ms. Viveki Singh (late) was unconditional with her love and generosity and always encouraged me to put in my best effort. v Abstract Institutional and Regulatory Economics of Electricity Market Reforms: the Evidence from India, Pakistan, Bangladesh, Nepal, and Sri Lanka Five South Asian countries– India, Pakistan, Bangladesh, Nepal and Sri Lanka – embarked on electricity market reforms in the 1990’s. The dissertation uses the framework of New Institutional Economics to assess the effects on electricity sector performance of both observables elements of reform (i.e. privatization, unbundling, establishment of independent regulatory agencies etc.) as well as the unobservable elements (informal beliefs, habit, norms and culture of the actors involved in reforms). The first part of the dissertation – econometric analysis of the relationship between observable electricity market reform measures and performance indicators – finds that for the most part electricity market reforms in South Asia are having a positive impact on the performance of the sector. This is particularly the case for reforms that have increased private sector participation in generation and distribution and have vertically unbundled utilities into generation, transmission and distribution entities. Many of the reforms are positively correlated with higher tariffs, indicating a cost to the consumers from the reforms. The relationship between independent regulation and performance indicators , however, is not established. The second part of the dissertation - analytical narrative of the reform experiences of Gujarat and Nepal – examines the informal elements (such as beliefs, norms, culture) that motivate behavior and explains how and why reform outcomes differed in these two places. The dissertation finds that the strength of formal institutions rules and the nature vi of social norms and customs have a significant influence on the outcome of reforms. Aided by the strength of its formal institutional framework and more evolved social norms and customs that encouraged people to follow formal rules, reforms in the Indian state of Gujarat were a success. The weakness of the formal institutional framework and the predominance of relation-based norms and customs in Nepal that led to limited compliance with formal rules, by contrast, limited the success of power sector reforms there. Efforts to reform the electricity sector in South Asia undertaken by governments with the assistance of development agencies such as the World Bank and the Asian Development Bank have focused to a large extent on getting the content of electricity market reform measures such as unbundling, privatization, and establishment of a power market right. The analysis in this dissertation suggests that such measures will be more successful in places with relatively robust formal rule based systems. Countries that are planning to carry out significant reforms in the electricity sector will benefit from the explicit consideration of the informal norms, habits and customs of the actors that will be affected by the reforms. vii Table of Contents Dedication………………………………………………….……......................................iv Acknowledgement………………………………………………………………………...v Abstract ...……………………………………………………………...…………………vi List of Figures……………………………………………………………………………xii List of Tables..…………………………………………………………………………..xiii Table of Abbreviations………………………………………………………………….xiv Chapter 1 - Introduction and Background…………………………………...……………1 Section 1: Power Sector Reforms ................................................................................... 3 Section 1a: Organization of the Power Sector ............................................................ 3 Section 1b: Deteriorating Performance ....................................................................... 7 Section 1c: Global Developments and Roadmap ........................................................ 7 Section 2: Evolution of Policy and Institutional Reforms ............................................ 12 Section 2a: India ....................................................................................................... 14 Section 2b: Pakistan .................................................................................................. 17 Section 2c: Bangladesh ............................................................................................. 20 Section 2d: Nepal ...................................................................................................... 23 Section 2e: Sri Lanka ................................................................................................ 25 Chapter 2 - Theoretical Perspectives…………………………………………………….28 Section 1: New Institutional Economics ....................................................................... 29 Section 1a: Nature and Role of Institutions .............................................................. 30 Section 1b: Transaction Costs ................................................................................... 35 Section 1c: Alternative Modes of Governance ......................................................... 38 Section 1d: Regulation .............................................................................................. 42 Section 2: Privatization ................................................................................................. 45 Section 2a: Addressing Bureaucratic Inefficiencies ................................................. 45 Section 2b: Incentivizing Efficiency ......................................................................... 48 Section 2c: Competition ............................................................................................ 51 Chapter 3 - Literature Review……………………………………………………………54 viii Section 1: Econometric Studies .................................................................................... 55 Section 1a: Determinants of Reform ......................................................................... 55 Section 1b: Reforms and Performance ..................................................................... 56 Section 2: Case Studies ................................................................................................. 65 Section 2a: Performance of Reforms ........................................................................ 65 Section 2b: Reform Preconditions ............................................................................ 69 Section 2c: Contracts ................................................................................................ 72 Section 2d: Local Context ......................................................................................... 78 Section 2e: Implementation ...................................................................................... 82 Section 2e: Political Economy .................................................................................. 86 Section 2f: Distribution ............................................................................................. 87 Section 2g: Country Specific Issues ........................................................................