Asian Electricity Reform in Historical Perspective

James H. Williams and Navroz K. Dubash

Electricity and the Asian Developmental State he institutions of Asian electricity are in the midst of an uncertain transition. For decades, the technical and administrative features of Asian power sectors closely reflected state-centred approaches to nation building and development aid. Starting in the 1990s, Asian governments began to transform these arrangements along neoliberal lines, consistent with trends in the global economy and the worldwide electricity industry. After an initial burst of market-oriented changes, in many countries electricity reform has slowed or diverged substantially from its earlier course. From origins to outcomes, the trajectory of electricity reform in Asian countries has reflected the interaction of international and domestic political economy. The domestic side of this interaction is explored in detail in the case studies of China, India, South Korea and Thailand in this volume. The present historical overview considers the broad regional context of Asian electricity, with emphasis on the international forces that have shaped the sectors evolution. It starts with a historical sketch of the electricity industry in Asia during the Cold War, followed by a discussion of the origins of electricity reform as a global phenomenon. It then describes the course of electricity reform within Asia, with particular attention to the role of international actors such as foreign investors and the World Bank, and catalytic events such as the Asian financial crisis and the California electricity crisis. Finally, the case study findings and the international story are synthesized to arrive at some overarching reflections on the political economy of electricity reform in Asia. The Commanding Heights Prior to electricity reform, from roughly 1950 to 1990, electricity provision in Asian developing countries was an activity dominated by the state. Electricitys central role in industrialization and modern living standards made electrification an urgent priority of every national government, while the technical challenge of meeting the vast potential demand rendered it a heroic undertaking. In most countries, regardless of political system, government was seen as the appropriate vehicle for the construction and operation of national electric grids, and the only entity capable of mobilizing the necessary human and financial capital. Both Cold War superpowers 411

Pacific Affairs: Volume 77, No. 3 Fall 2004 supported the state-led approach, as did the World Bank and other multilateral agencies. In Asia as elsewhere, governments were considered the likeliest representatives of the broad public interest in making fundamental sectoral decisions, ranging from rural electrification and technology selection to tariff-setting and cross-subsidies. A core feature of the state-led approach in Asia was the establishment of state-owned utilities (SOUs) as the basic institutions of the sector. SOUs were usually organized as vertically integrated monopolies controlling all four stages of electricity supplygeneration, transmission, distribution and retail servicewithin a given geographical area. SOUs aside, there were important differences among Asian electricity sectors. Some reflected the vastly different physical challenges faced by different countries. Differences in population, geography, resource endowment, national income and pre-existing infrastructure led to wide variations in fuel and technology selection, scale and location of generating plants, and plans for the expansion and interconnection of local grids over time. Other distinctions were political and institutional in their origins. Differences in Cold War loyalties, economic system, development strategy and inherited technical capacity led to wide variations in sector finance, bureaucratic organization, relations with fuel supply industries, access to private capital and foreign aid, relative priorities among regions and between urban and rural areas, and the engineering culture of the industry. Most Asian countries had national energy ministries to conduct central planning and set tariffs, but the locus of power between centre and locality, and between ministry and SOU, differed among countries, and within countries over time. Electricity and National Ideology Electricity in Asia was more than a practical necessity of industrialization. It also played an important role in national ideology, symbolizing a new type of social compact between state and citizen. For post-colonial developing countries, electricity represented the good lifewell-illuminated homes and workplaces, modern factories and transportation, escape from the drudgery of manual labourthat had been denied the majority of people in the first half of the twentieth century. In propaganda and popular consciousness alike, images of a society with universal and affordable electricity became important tropes of state-led development; the conjoining of the electrification enterprise to the majesty of the state can be seen in the expression of Thai peasantsfay luang, the kings electricity. The promise of an electrified future served governments as a justification for social sacrifice in the present; for some, electricity was the vehicle carrying an entire package of industrial policies (see Byrne et al., this volume). Electrification projects involving massive public investment and labour mobilizations (such as the construction of large dams) became nation-building exercises, and upon 412

Asian Electricity Reform in Historical Perspective completion, symbols of development promises kept; for Nehru, dams were the temples of modern India.1 As one scholar has remarked, power projects were the spectacular facades upon which the nation watched expectantly as the image of its future was projected.2 Yet the implicit social compact was double-edged, insofar as the definition of electricity as a public good represented a long-term claim of citizens on the state for provision of electricity, and a potential source of discontent should this aspiration go unrealized. For better or worse, what were not main features of the ideological discourse of Asian electricity until recent years were economic concerns such as competition and profitability, environmental and social constraints, and governance issues such as transparency, accountability and public participation. Figure 1. Images of Electrification in Asia

Left: A Chinese propaganda poster of the 1960s, entitled Pointing to the Future, shows Chinas youth guided by a Party cadre and framed by two powerful symbols. On the hill in the right background is a high voltage electricity transmission tower, symbolizing modernization. On the corresponding hill in the left background is a white monument to the Maoist shrine Yanan, symbolizing Communist Party leadership. Source: the IISH Stefan R. Landsberger Collection, available at the Web site of the International Institute of Social History, at <http://www.iisg.nl/~landsberger/ vis.html>, last accessed 1 November 2004. Right: Multi-ethnic team of workers in Malaysia installs switchgear during national electrification. Source: Muzaffar Tate, Power Builds the Nation: the National Electricity Board of the States of Malaya and its Predecessors (Kuala Lumpur: National Electricity Board, 1989).
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1 Jawaharlal Nehru, Bhakra Nangal, July 1954 speech, in Sarvepalli Gopal, ed., Jawaharlal Nehru: An Anthology (Delhi: Oxford University Press, 1980), p. 214. 2 Sunil Khilnani, The Idea of India (New York: Farrar, Straus, and Giroux, 1998), p. 62.

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Pacific Affairs: Volume 77, No. 3 Fall 2004 The Role of the Superpowers The history of electricity in Asia is deeply intertwined with the agendas of the Cold War superpowers. Asian developing countries in the postwar, postcolonial period looked to the electricity industries in the US and the Soviet Union for standards of technology and service, and for models of industry organization and rapid national electrification. But superpower influence went beyond ideal types. Cold War competition shaped US and Soviet priorities for their relations with Asia, and the expression of these priorities led to direct involvement in Asian electricity sectors through bilateral, commercial and multilateral channels. These influences were, of course, refracted through local circumstances and the agendas of national elites. Nevertheless, what the US and the Soviet Union represented, provided and demanded with regard to Asian electricity profoundly shaped the sectors trajectory. American support for state-led electrification grew in part from the US experience. Although private firms historically played a larger role in US electricity than in most other countries, the public sector role was also fundamental.3 Half a century of political struggles over the industry from the 1880s to the 1930s resulted in an institutional patchwork that reflected a balance between domains of private and public dominance.4 Privately-owned companies dominated the supply of technology and fuels, and private investor-owned utilities (IOUs) controlled most urban electricity markets. In return for monopoly status within their service areas, IOUs were subject to federal and state regulation. State-level public utility commissions determined electricity tariffs and oversaw planning decisions, while federal agencies constrained utility financial arrangements and political activities. In a significant number of urban areas the utility franchise belonged not to IOUs but to publicly-owned municipal utilities. Rural electrification in the US resulted largely from the partnership of federal power projects and nonprofit rural electric cooperatives.5 Finally, it was the federal government that undertook the great basin-wide hydroelectric projectsthe Tennessee Valley Authority (TVA) and Bonneville Power Authority (BPA)that were not only major sources of electricity, but also the cornerstones of federally initiated economic development in poor regions of the country.6 The stable utility consensus that reigned from the New Deal to the Reagan era was grounded
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3 Thomas P. Hughes, Networks of Power: Electrification in Western Society, 1880-1930 (Baltimore: Johns Hopkins University Press, 1983). The private sector was also dominant in Germany and Japan. 4 David E. Nye, Electrifying America: Social Meanings of a New Technology, 1880-1940 (Cambridge, MA: MIT Press, 1990); Richard Rudolph and Scott Ridley, Power Struggle: The Hundred-Year War Over Electricity (New York: Harper and Row, 1986). 5 D. Clayton Brown, Electricity for Rural America: The Fight for REA (Westport, CT: Greenwood Press, 1980). 6 Thomas K. McCraw, TVA and the Power Fight, 1933-1939 (Philadelphia: J.B. Lipincott, 1971).

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Asian Electricity Reform in Historical Perspective in these pluralistic institutional arrangements.7 These arrangements were implicit in the US model that was widely admired and exported abroad in the postwar years, though few developing countries had the capacity to duplicate the public-private checks and balances inherent in the American system. US government involvement in Asian electricity grew out of postwar reconstruction. The rebuilding of war-damaged electrical grids in Europe reflected the prevailing Keynesian consensus that government should direct investment in essential infrastructure. France and Britain nationalized their electricity industries in 1946 and 1948, respectively, and Western Europe, with Marshall Plan assistance from the US, soon surpassed prewar production.8 The success of the state-led approach in European recovery shaped American thinking as it turned toward promoting economic development in the former colonial world as a bulwark against communism. Electricity sector assistance to national governments in Asia was a central feature of both American bilateral aid programmes and those of the American-dominated Breton Woods international financial institutions.9 For decades, the largest single activity of the World Bank was power sector lending to developing country governments.10 Indeed, as historian Hugh Collier observed, [b]ecause electric power was one of the most important areas of lending from the start of World Bank operations, many of the Banks basic policies arose out its experience in this field.11 The first World Bank developing country loan, to Chile in 1948, was for hydroelectric dam construction; the first power loan in Asia was to India in 1950, for the Damodar dam project; the first loan to Japan, in 1953, was also for power plant construction (see table 2).12 By 1980, South and East Asia had accounted for 40 percent of all power sector lending, with India and Thailand being two of the top six recipients worldwide.13 In the 1980s, Indonesia was the largest single power sector recipient.14
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7 Richard Hirsh, Power Loss: The Origins of Deregulation and Restructuring in the American Electric Utilities System (Cambridge, MA: MIT Press, 1999), p. 11-31. 8 Michael J. Hogan, The Marshall Plan: America, Britain, and the Reconstruction of Western Europe, 1947-1952 (Cambridge, UK: Cambridge University Press, 1987); Leslie Hannah, Electricity before Nationalisation: A Study of the Development of the Electricity Supply Industry in Britain to 1948 (Baltimore, MD: Johns Hopkins University Press, 1979), p. 329ff. 9 Daniel Yergin and Joseph Stanislaw, Commanding Heights: The Battle for the World Economy (New York: Simon & Schuster, 1998), p. 79-80. 10 Hugh Collier, Developing Electric Power: Thirty Years of World Bank Experience (Baltimore: Johns Hopkins University Press, 1984), p. 19. 11 Collier, Developing Electric Power, p. 5. 12 World Bank, World Bank Group Historical Chronology, available at the World Bank Web site, at <http://siteresources.worldbank.org/EXTARCHIVES/Resources/Bank%20chronology.pdf>, last accessed 30 August 2004. 13 Collier, Developing Electric Power, p. 19. 14 Frances Seymour and Agus P. Sari, Indonesia: Electricity Reform Under Economic Crisis, in Navroz K. Dubash, ed., Power Politics: Equity and Environment in Electricity Reform (Washington, DC: World Resources Institute, 2002), p. 76.

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Pacific Affairs: Volume 77, No. 3 Fall 2004 The logic of development aid combined with domestic political logic to determine the essential features of electrification in many Asian countries. In addition to an institutional structure based on central planning and SOUs, most countries sought to construct a physical infrastructure characterized by a centralized grid and large central-station power plants. In countries with hydroelectric resources, large hydro projects often became the centerpieces of development strategy. The TVA model of hydro-led development was extremely influential, and American engineers and administratorsepitomized by David Lilienthal, the liberal visionary who headed the TVA and later the Atomic Energy Commissionwere deeply involved in the planning and construction of electricity systems in Asia, from Afghanistan to Korea, in river basins from the Yangtze to the Mekong to the Indus.15 The legacy of American influence starting in the 1940s remains profound to the present day, in engineering culture as well as physical patterns of development. For example, the first serious planning studies of Chinas Three Gorges Project were led by American engineer John Savage, chief designer of the Hoover Dam, in the mid-1940s under Nationalist auspices.16 Chinese engineers trained in the US during this period became the backbone of the project in Communist China. US involvement in Asian electricity reflected the liberal idealism of the New Deal and the Marshall Plan, but also served more narrow agendas, including counter-insurgency and the commercial benefit of American companies. Asian developing countries were important business frontiers for manufacturers of power system equipment such as General Electric and Westinghouse (which had begun selling generators in Asia in the 1880s), and engineering and construction firms such as Bechtel and Morrison Knudsen. The Export-Import Bank aggressively supported US businesses with large loan guarantees, notably for nuclear reactor sales to South Korea and Taiwan.17 Aid and commerce were entangled with Cold War strategies; US bilateral aid to South Koreas power sector was a direct consequence of its front-line position. Sector organizations that were socially progressive in the US domestic contextfor example, the National Rural Electric Cooperative Association (NRECA)sometimes became instruments of anticommunist foreign policy. The TVA model was described by Arthur Schlesinger as a weapon, that properly employed, might outbid all the social ruthlessness of the Communists for the support of the peoples of Asia.18 Electricity assistance through NRECA and USAID was not only driven by
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15 Nick Cullather, Damming Afghanistan: Modernization in a Buffer State, Journal of American History 89 (Sept. 2002), p. 512-537. 16 William C. Kirby, Technocratic Organization and Technological Development in China: The Nationalist Experience and Legacy, 1928-1953, in Denis Simon and Merle Goldman, eds., Science and Technology in Post-Mao China (Cambridge, MA: Harvard University Press, 1989). 17 Peter Hayes and Tim Shorrock, Dumping Reactors in Asia, Japan-Asia Quarterly (Tokyo), vol. 14, no. 1 (1982), pp. 30-35. 18 Arthur M. Schlesinger, The Vital Center: The Politics of Freedom (London: Deutsch, 1970), p. 233.

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Asian Electricity Reform in Historical Perspective anti-communism in an abstract sense, but by very specific counter-insurgency demands that dictated the characteristics of rural electrification in such countries as Thailand, Indonesia and the Philippines.19 The Soviet model of centrally planned electrification also had a significant influence on Asian electricity. The State Commission for the Electrification of Russia (GOELRO) was the first planning body in the Soviet Union, established in 1920. Lenins famous equation Communism is Soviet power plus the electrification of the whole country placed the highest priority on electrification, forging a lasting bond between engineering modernizers and the Party.20 The completion in 1932 of the Dnieprostroi hydroelectric project, Europes largest at the time, was widely considered to be the greatest achievement of the First Five Year Plan under Stalin.21 Under planning, exploitation of hydroelectric and fossil fuel resources proceeded rapidly, so that by the 1950s the USSR was second in the world in electrical capacity and production.22 The challenge of electrical transmission over long distancesa necessity given the vastness of Soviet territoryled to innovation (for example, Russia still operates the worlds highest-voltage AC transmission lines) and a robust technical capacity in power engineering. During the Cold War, electricity was a vital strategic resource; excess generating capacity in the Urals region enabled the Soviets to conduct electricity-intensive enrichment and separation of uranium and plutonium needed for nuclear weapons. This lesson was not lost on China, which located its facilities near Yellow River dams.23 The Soviet Unions role in postwar Asian electricity was, like that of the US, motivated by Cold War competition for friends in the region. The Soviets promoted state-led development with an emphasis on large infrastructure projects, and provided an institutional model, power system equipment and technical assistance in return for strategic and trade benefits.24 Close allies China and North Korea replicated many elements of the Soviet model, such as state-owned utilities, central planning, large labour mobilizations, and an emphasis on engineering education. Soviet engineers and administrators were involved in electricity system planning and the construction of dams and power plants in many socialist and non-aligned countries, such as India. The USSR had a strong influence on engineering culture in Asia, through
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19 Walden Bello et al., Nuclear Power in the Philippines, Review of Radical Political Economics, vol. 15, no. 5 (1983), p. 59. 20 Jonathan Coopersmith, The Electrification of Russia, 1880-1926 (Ithaca: Cornell University Press, 1992), pp. 151-257. 21 Anne Rassweiler, The Generation of Power: The History of Dneprostroi (Oxford: Oxford University Press, 1988). 22 United Nations, World Energy Supplies in Selected Years, 1929-1950 (New York: UN, 1952). 23 John Wilson Lewis and Xue Litai, China Builds the Bomb (Stanford: Stanford University Press, 1988), p. 125. In the US, these processes were conducted at the Oak Ridge and Hanford nuclear facilities to take advantage of surplus TVA and BPA hydropower (see McCraw, TVA and the Power Fight, p. 159). 24 Roy Medvedev, China and the Superpowers (London: Blackwell, 1986), pp. 22-28; Sidney Gould, ed., Sciences in Communist China (Washington, DC: AAAS, 1961), pp. 3-23, 741-770, 805-820.

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Pacific Affairs: Volume 77, No. 3 Fall 2004 its technical assistance programmes and education of engineering students from abroad. Among the Chinese power engineers educated in the Soviet Union were several members of Chinas top leadership, including former premier Li Peng. The abrupt collapse of the North Korean electricity sector following the dissolution of the Soviet Union attests to the importance of Soviet assistance there.25 Asian Electricity in the Postwar Period In 1950, Asia accounted for only seven percent of world electricity production, and of that more than three-quarters was Japanese (see table 1). Excluding Japan, Asian per capita consumption was less than 10 kilowatthours per year, one two-hundredth that of the US. Commercial electricity had begun in Japan in the 1880s, and by 1900 electric lighting companies had been established in Tokyo and other Japanese cities plus Hong Kong, Shanghai, Manila, Bangkok, Calcutta, Bombay, Madras and Colombo.26 For the first half of the twentieth century, electrification remained a phenomenon of urban areas, plus certain industries such as mining. Utility franchises were granted to private companies, both domestic and international, with patterns reflecting colonial relationships. Table 1. Growth in Electricity Generation 1929-1990, Selected Countries
Generation Population 1929 1950 1990 annual annual generation generation generation growth rate, growth rate, (billion kWh)a (billion kWh)a (billion kWh)b 1950-1990 1950-1990 2.1 1.2 1.5 0.0 13.3 0.2 0.2 0.1 0.2 18.9 92 249 4.3 5.1 0.4 0.1 44.9 0.9 0.4 0.6 1.0 59 329 872 590 276 100 44 822 24 47 24 83 2172 3024 11326 13% 10% 15% 16% 8% 9% 13% 10% 12% 9% 6% 7% 1.8% 2.1% 1.8% 2.6% 1.0% 2.6% 2.0% 2.7% 2.4% 1.9% 1.2% 1.8%

Country China India Korea Thailand Japan Malaysia Indonesia Philippines Taiwan Asia US World

Sources: a United Nations, World Energy Supplies in Selected Years, 1929-1950 (New York: UN, 1952). b Energy Information Agency, International Energy Annual (Washington, DC: US Department of Energy, 2002).
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25 James H. Williams and David Von Hippel, Fuel and Famine: Rural Energy Crisis in the Democratic Peoples Republic of Korea, Asian Perspective, vol. 26, no. 1 (2002). 26 Muzaffar Tate, The Power Behind the State (Kuala Lumpur: Tenaga Nasional Berhad, 1999), p. 9.

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Asian Electricity Reform in Historical Perspective In the postwar period, with a few exceptionsnotably Japan, Hong Kong and Manilaprivate utilities were nationalized and consolidated into large, vertically integrated SOUs (see table 2). In conformity with international thinking at the time, these SOUs followed a steady trajectory of expansion Table 2. Asian Electricity Industry Pre-Reform Characteristics
Year First World established/ Sector Bank power Structural Main utility nationalized ownership sector loan features Provincial electricity ministries 1950 Central government runs large generating plants; provinces operate grids Public 1950, Central governDamodar ment runs large Dam generating plants; states operate grids Public 1981 Vertically integrated monopoly Public 1957, EGAT generation Yanhee monopoly; PEA Dam and MEA distribution monopoly Private 1953, Nine regional Kansai vertically power integrated project monopolies Public 1958, Three regional Cameron vertically Highland integrated Dam monopolies Public 1969, Vertically Jakarta integrated distribution monopoly Public and 1957, Binga NPC large generaprivate Dam tion; Meralco private distribution monopoly Public 1968 Taipower monopoly on generation and transmission Public 1984, Lubuge Dam

Country China

India

State electricity boards

1948

Korea Thailand

KEPCO EGAT

1961 1968

Japan

Nine regional companies TNB

1951

Malaysia

1963

Indonesia

PLN

1950

Philippines NPC

1960

Taiwan

Taipower

1945

Sources: Collier, Thirty Years of World Bank Experience; Tate, Power Builds the Nation; World Bank, World Bank Group Historical Chronology; Dubash, Power Politics.

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Pacific Affairs: Volume 77, No. 3 Fall 2004 in generating capacity and electricity access. Under state leadership, by 1990 Asian electricity production had grown by a factor of 40, reaching 20 percent of the world total. Neoliberalism and Electricity Reform The origins of electricity reform lie in the oil shocks and economic malaise of the 1970s, and the neoliberal revolution that followed. In a decade, criticism of Keynesian policies and championing of free markets moved rapidly from a few academic citadels and conservative think tanks into concrete policy under the Reagan and Thatcher administrations. Deregulation, privatization, free trade and unrestricted capital movement moved into the mainstream of political thought, embraced by Democrats and Labour as well as their conservative opponents. Departing drastically from established New Deal and social democratic traditions, these neoliberal policies became the framework of the new globalized economy that arose at the end of the Cold War. The New Global Economy In the 1980s, the developing world was battered by the collapse of the petrodollar-driven lending boom of the previous decade. The consequent debt crisis was met by demands from industrialized country creditors for economic policy reform.27 Public international financial institutions such as the World Bank and the IMF, once champions of state-led development, came to advocate and enforce a neoliberal solution that focused on shrinking the state and unleashing market forces. Economy-wide liberalization was coordinated through the vehicle of structural adjustment loans (SALs). Such loan-linked policy persuasion exploded over the course of the 1980s, from seven percent of World Bank lending during 1980-82, to about 25 percent between 1984 and 1992.28 By 1990, the policy agenda associated with SALs had converged to a short list: sound macroeconomic management; removal of barriers to foreign investment; privatization of state enterprises; and deregulation to promote competition. This list was dubbed the Washington Consensus, reflecting both the ultimate origins of the agenda and the homogeneity of the policy prescriptions being offered to developing countries.29
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27 Stephan Haggard and Robert R. Kaufman, The Politics of Economic Adjustment: International Constraints, Distributive Conflicts, and the State (Princeton: Princeton University Press, 1992). 28 Devesh Kapur, John P. Lewis and Richard Webb, The World Bank: Its First Half Century, vol. 1 (Washington, DC: Brooking Institution Press, 1997), p. 520. Adjustment lending peaked at over 50 percent of total lending in 1999. 29 John Williamson, The Political Economy of Policy Reform (Washington, DC: Institute for International Economics, 1994).

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Asian Electricity Reform in Historical Perspective The Washington Consensus approach aroused strident criticism and opposition. Civil society groups, NGOs and even United Nations organizations challenged it as a cookie-cutter application of economic orthodoxy, with little regard for the human and environmental consequences.30 Moreover, adjustment lending was accused of undermining democracy by shifting government accountability from domestic constituents in the global South to donors and creditors in the industrialized North. Perhaps not surprisingly, the controversy surrounding SALs came to absorb a disproportionate amount of time and nervous energy of the World Banks senior management.31 Neoliberal Experiments in Electricity The electricity sector was not among the early targets for neoliberal reform, since acceptance of the public utility approach was widespread. However, developments in the US, the UK and Chile led to a global revolution in the industry. As a result, by the early 1990s, policy prescriptions for Third World electricity sectors were well aligned with the Washington Consensus mainstream. The first dramatic changes occurred in the US. The mid-century American electricity modelregulated monopolies with tariffs based on cost of servicebegan to unravel in the 1970s. Oil price shocks, the problems of nuclear power, and the emergence of the environmental movement resulted in public distrust of utilities and fractured the longstanding utility consensus.32 The passage of the Public Utilities Regulatory Policies Act (PURPA) in 1978, which required utilities to purchase privately generated electricity from facilities they did not own, signalled the beginning of the end of the old model. PURPA was intended to spur development of renewable energy resources and encourage energy efficiency.33 But by creating a proto-market in wholesale power and spawning an industry of independent power producers, PURPA undermined a key economic argument for the traditional modelnamely, that electricity utilities are natural monopolies.34 By the late 1980s, following deregulation in airlines, banking, telecommunications and natural gas, a potent political convergence in favour of electricity deregulation developed between large industrial consumers (who wanted cheaper power than nuclear-indebted utilities could provide) and merchant generators (who could produce inexpensive power from natural gas turbines and wanted to
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30 Giovanni Andrea Cornia, Richard Jolly and Frances Stewart, Adjustment with a Human Face (Oxford: Oxford University Press, 1988); Paul Mosely, Jane Harrigan and John Toye, Aid and Power: The World Bank and Policy-Based Lending (London: Routledge, 1995). 31 Kapur et al., First Half Century, p. 517. 32 Hirsh, Power Loss, pp. 55-70. 33 Walt Patterson, Transforming Electricity (London: Earthscan, 1999), pp. 72-73. 34 Hirsh, Power Loss, pp. 119-131.

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Pacific Affairs: Volume 77, No. 3 Fall 2004 sell it). Attuned to the new thinking, economists produced blueprints for competitive electricity markets.35 Under these influences, the Energy Policy Act of 1992 was passed, enabling the creation of wholesale power markets. The question of whether and how to deregulate was left to individual states to decide. It was Chile and the UK, however, that provided the first global models of electricity reform. Driven partly by ideology and partly by a desire to reduce state expenditures, Pinochets Chile (advised by University of Chicago economists) corporatized its state-owned electric utility in 1981, restructured the industry in 1982, and sold most of it to private investors starting in 1985.36 In 1990, the UK took an unprecedented step toward full wholesale competition.37 Instead of the traditional method of dispatchbringing power plants on line in order of increasing cost of productionthe UK established a power pool in which generators made bids into the market.38 The result was an astonishingly complex system that attempted to balance competition with reliability and consumer protection. Despite experiencing problems from the outset, for several years the UK power pool was the most widely emulated global model of competitive wholesale market reform. Both Chile and the UK also introduced a form of retail competition known as direct access, in which large consumers were permitted to purchase electricity directly from a generator. The Chile and UK experiments were radical. Before these countries initiated their reforms, there was near unanimity in the electric power world that transaction costs and technical requirements made competition unfeasible. UK reformers admit that even as they promoted competition, they had no clear idea of how competitive structures should be established.39 Instead, in both countries, reforms were driven by an ideological commitment to private enterprise, amplified in the case of the UK by Prime Minister Thatchers desire to make changes in the industry that would break the power of the British coal miners union.40 Electricity Reform and Developing Countries The decade of the 1990s saw a global stampede toward neoliberal electricity reform. Country after country experimented with various permutations of privatization and competitive markets. In 1998, the World
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35 Paul Joskow and Richard Schmalensee, Markets for Power: An Analysis of Electric Utility Deregulation (Cambridge: MIT Press, 1985). 36 Tooraj Jamasb, Reform and Regulation of the Electricity Sectors in Developing Countries, DAE Working Paper WP 0226 (Cambridge, UK: Cambridge University, August 2002), p. 60. 37 Patterson, Transforming Electricity, p. 78. 38 R.W. Bacon, Privatization and Reform in the Global Electricity Supply Industry, Annual Review of Energy and Environment, vol. 20 (1995), pp. 119-143. 39 Hunt et al., Competition and Choice. 40 Bacon, "Privatization and Reform," pp. 119-143.

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Asian Electricity Reform in Historical Perspective Table 3. Developing Countries Taking Key Reform Steps in the Power Subsector, 1998 (sample of 115)
Pass a new Independent electricity Establish power Privatize Privatize Corporatize law regulator producers Restructure generation distribution 51 (44%) 38 (33%) 33 (29%) 46 (40%) 40 (35%) 24 (21%) 21 (18%)

Source: Energy Sector Management Assistance Program (ESMAP), Global Energy Sector Reform in Developing Countries: A Scorecard, ESMAP report 219/99 (Washington, DC: World Bank, 1999).

Bank produced a scorecard that described the rapid movement toward market reforms in developing country power sectors (table 3). Why did the model forged in the UK and Chile spread so rapidly to the developing world? Industrial countries such as the UK already had viable state-run electricity systems, but hoped the rigours of competition would wring out additional efficiency gains to make the country more economically competitive. In Chile, the power sector was also functional, and privatization was seen as a solution to public debt. In much of the developing world, however, both the conditions and the needs were different. In the 1980s, developing country electricity sectors faced an international environment marked by high fuel prices, high inflation and high interest rates. Utilities frequently suffered from high transmission and distribution losses, low efficiency and plant availability, intermittent service and poor power quality. Poor financial performance was also common, as measured by low rates of return and self-financing ratios. Electricity tariffs often remained constant or fell, while fuel and other costs grew, putting utilities into a downward financial spiral.41 Yet sector performance, and the nature of the problems faced, varied widely by country and region, as indicated by table 4. In East and Southeast Asia, the challenge was often for capacity to keep pace with economic growth. In South Asia, electricity systems were dysfunctional in many ways, and called out for sound administration. In South Asia and Africa, vast portions of the population did not have access to even an ill-functioning electricity system. Neoliberal electricity reform was never designed specifically to deal with these problems, except as a matter of faith that the invisible hand would solve them. That the model ascended to the status of a new orthodoxy within a decade had less to do with the model itself than with the struggle for financial resources in developing countries, and the array of forces that supported the new approach.
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41 World Bank, The World Banks Role in the Electric Power Sector (Washington, DC: World Bank, 1993), pp. 19-29.

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Pacific Affairs: Volume 77, No. 3 Fall 2004 Table 4. Electricity Sector Performance Indicators, Selected Asian Countries, 1987
Country Korea Malaysia Thailand China Philippines India Pakistan Sri Lanka Bangladesh Generation per capita (kWh) 1,906 983 567 465 408 273 227 165 56 Total system losses (%) 6 16 10 9 17 24 25 16 37 Consumers per employee 292 84 92 118 n/a n/a 38 51 39 Rate of return (%) 15 10 11 6 10 4 12 8 2

Source: Jose R. Escay, Summary Data Sheet of 1987 Power and Commercial Energy Statistics for 100 Developing Countries (Washington, DC: World Bank, March 1990).

International development banks and the IMF played a major role in strategizing, legitimizing and even compelling the electricity reform wave. By the early 1990s, development banks sent strong signals that they would no longer be able to provide the financing to expand electricity capacity in developing countries at projected rates. To meet its electricity needs, the Third World would have to turn to the private sector. The banks became extremely reluctant to provide loans for electricity systems with a poor financial record, or to improve the performance of public utilities. In 1993, the World Bank put in place a new power sector lending policy that formalized this reluctance, making electricity loans subject to conditions that would lead them down the path of Chile and the UK. To obtain World Bank money, countries would now have to establish regulatory regimes; commercialize and corporatize the electricity sector; permit foreign ownership; and encourage private investment.42 This policy shift was echoed by the Asian Development Bank in 1994.43 Development bank prodding alone likely would not have produced such a stampede effect, however, had it not intersected with other elements of the great economic boom that Joseph Stiglitz has dubbed The Roaring Nineties: new commercial interests, aggressive persuasion by Northern governments, and unprecedented capital flows.44 All of these elements had
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42 World Bank, The World Banks Role, pp. 55-76. 43 Asian Development Bank, Bank Policy Initiatives for the Energy Sector (Manila, Philippines: Asian Development Bank, 1994). 44 Joseph Stiglitz, The Roaring Nineties: A New History of the Worlds Most Prosperous Decade (New York: Norton, 2003).

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Asian Electricity Reform in Historical Perspective specific manifestations in the electricity sphere. US deregulation led established utilities, merchant generators and oil and gas companies to look for power sector opportunities overseas; liberalization in Europe and Australia further swelled the ranks of transnational electricity corporations. This resulted in an international rush for electricity market share, accompanied by a burst of corporate mergers and buyouts.45 Electricity transnationals saw great opportunities in developing countries, where rapid projected growth in electricity capacity contrasted favourably with flattening demand growth in the industrialized world, and high rates of return beckoned.46 The major obstacles to exploiting these markets were public monopoly ownership of electricity and electricity laws that maintained the sector in public hands. Government agencies such as USAID, the Treasury Department, and the Export-Import Bank joined the development banks and the IMF in encouraging developing country governments to revise their legal frameworks to open the electricity sector to foreign investment and ownership.47 Domestic forces were also important. Privatization appealed to governments needing quick infusions of capital to address fiscal crises.48 In many countriesKorea, Thailand, Taiwan, Argentinathe process of democratization replaced statist military leaders with new liberal business elites who not only believed in markets but saw reform as a way of breaking down old patronage networks. But the ultimate engine of The Roaring Nineties was vast capital flows, often short-term and speculative in nature, that had been liberated by new trade laws and financial market deregulation.49 Once open to these flows, developing country electricity sectors experienced both the rapid rise and sudden fall of the new global bubble economy. As figure 2 shows, private investment flows to electricity grew from negligible amounts in the 1980s to tens of billions of dollars per year by the mid-1990s. Asiaespecially East Asia, and to a lesser extent South Asiareceived a sizeable portion of these flows (for example, 52 percent in 1995 and 33 percent in 1997). By the peak in 1997, private investment flows to developing country electricity sectors were over US$40 billion annually, rivalling all public multilateral finance for all sectors combined.
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45 EIA, Privatization and the Genesis of the Multinational Power Company, in Privatization and the Globalization of Energy Markets (Washington, DC: U.S. Department of Energy, 1996), pp. 37-55. 46 EIA, Multinational Power Company, p. 37. 47 Greg Palast, Democracy and Regulation (London: Pluto Press, 2003), pp. 162-183; Brendan Martin, In the Public Interest?: Privatization and Public Sector Reform (London: Zed Books, 1992), pp. 57-83; Stiglitz, The Roaring Nineties, pp. 202-268. 48 Alfred Schipke, Why Do Governments Divest?: The Macroeconomics of Privatization (New York: Springer-Verlag, 2001), pp. 1-7. 49 Stiglitz, The Roaring Nineties, pp. 214-224.

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Pacific Affairs: Volume 77, No. 3 Fall 2004 Figure 2. Private Investment in Developing World (Non-OECD) Electricity Sectors

Source: World Bank, Private Participation in Infrastructure Database, available online at the World Bank Web site. at http://ppi.worldbank.org/; data in this table accessed 1 July 2004.

After 1997, the flood receded rapidly. In the years that followed, investment declined nearly to pre-1990 levels. The course of electricity reform in Asia is closely tied to this narrative of boom and bust. Electricity Reform in Asia Electricity reform in Asian countries has varied widely in the timing, scope and sequence of changes (see table 5). In the region as a whole, reform has undergone three stages, which have followed three important developments: the widespread introduction of independent power producers (IPPs) in the mid-1990s, the Asian financial crisis of 1997-98, and the California electricity crisis of 2000-2001. Investment conditions in the industry and the course of reform itself were profoundly affected by these events. The IPP Fiasco In the early 1990s, Asian governments worried that power shortages would sooner or later undermine economic growth. Unfortunately, this concern was usually framed in terms of whether state utilities could build sufficient generating capacity; more complete analysis might have revealed that much of future demand could be met by improving system and end-use efficiency. For example, in India, the focus on new generation was severely misplaced 426

Asian Electricity Reform in Historical Perspective Table 5. Reform Chronology, Selected Countries
Country China Key reforms Electricity law State Power Corporation (SPC) created IPP law SPC breakup into 5 GENCOs, 2 GRIDCOs Independent regulator (SERC) created Electricity Act (1948) Amendment IPP law Independent regulator law Orissa distribution privatization Electricity Act (2003) KEPCO privatization plan (IMF agreement) Restructuring and privatization plan KEPCO breakup into 6 GENCOs Privatization postponed Privatization halted Electricity law amendment Privatized subsidiary (EGCO) IPP law EGAT privatization plan (IMF agreement) Power pool and restructuring plan Power pool abandoned National Champion model Privatization postponed Electricity law TNB corporatization TNB partial privatization IPP law Power pool and restructuring plan Power pool abandoned Year 1995 1997 1997 2002 2002 1991 1992 1998 1998 2003 1998 2000 2001 2002 2004 1992 1994 1996 1998 2000 2003 2003 2004 1990 1990 1992 1994 1997 2001

India

South Korea

Thailand

Malaysia

Sources: Case studies, this volume; Jamasb, "Reform and Regulation of the Electricity Sector"; Jaafar, "Greener Energy Solutions."

in a context of decaying infrastructure and mismanagement of the distribution end of the industry (see Kale, this volume). Rising concern with generating capacity coincided with warnings from the development banks that countries must turn to private sources of capital for their power sector needs. Aware of phenomenal economic growth rates in Asia, capital was quite willing to oblige, as figure 2 indicates. As soon as Asian countries completed their enabling legislation, IPPs rushed to bid on projects. In Thailand, IPPs submitted 30 bids amounting to twice the projected power needs (see Greacen and Greacen, this volume). In India, 427

Pacific Affairs: Volume 77, No. 3 Fall 2004 the government received 190 proposals for new power plants within a fiveyear period, which would have more than doubled Indias entire generation capacity (see Kale, this volume). One reason for investors enthusiasm was the generous terms Asian governments provided. Power purchase agreements (PPAs) were typically structured as take-or-pay contracts, which guaranteed IPPs a minimum purchase, whether the electricity was needed or not. In Thailand the government established a mechanism that automatically passed the risk of fluctuations in fuel prices directly to consumers. In India and the Philippines, PPAs were shielded against foreign exchange risk, and prior to the Asia crisis, the Thai government indexed PPAs to the dollar. These measures, with their overriding emphasis on attracting foreign capital, were of a piece with the Washington Consensus. Export credit agencies of industrialized countries, such as the US Export-Import Bank, provided complementary guarantees and co-financing for IPP projects. Together, incentives from Asian customers and their own governments minimized the risk borne by Western investors. Whether it was despite or because of these unrealistic safeguards, the story of IPPs in Asia rapidly morphed from overnight sensation to fiasco. The experience with a few high-profile projects made it clear to politicians and the public alike that the generous terms on which IPPs were attracted to Asia were not financially viable. Perhaps the most notorious was Indias Dabhol Power Project, developed by Enron, which received such generous terms that purchase of Dabhol power threatened to bankrupt the state utility. A cloud of suspicion and resentment hovered over the project due to alleged corruption in gaining project approval, muscular intervention by the US government on Enrons behalf, and charges of human rights abuse perpetrated against citizens protesting the plants construction.50 In Indonesia, the massive coal-fired Paiton project was one of several IPP deals signed after non-transparent bidding processes, which critics claimed involved close connections between project developers and President Suhartos family and friends.51 The Asian Financial Crisis By 1997, when the Asian financial crisis struck, many Asian countries were already committed to buying large quantities of expensive IPP power denominated in costly dollar terms. With the post-crisis economic slowdown, demand for power decreased, leaving public utilities with few options for recouping their heavy financial commitments. In the Philippines, for
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50 Abhay Mehta, Power Play: A Study of the Enron Project (Hyderabad: Orient Longman, 1999); Human Rights Watch, The Enron Corporation: Corporate Complicity in Human Rights Violations (New York: Human Rights Watch, 1999). 51 Seymour et al., Indonesia, p. 79.

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Asian Electricity Reform in Historical Perspective example, long-term power purchase obligations simply entered the utilities books as long-term debt. By further weakening the finances of public utilities, the IPP experiment hastened the advent of the full neoliberal reform model, featuring privatization and competitive power markets. After the Asian crisis, high levels of public debtwhether a function of unfavourable PPAs or simply accumulated through years of operating losses and reckless borrowing (in the case of South Korea for nuclear power) made electric utilities prime targets for restructuring. Power sector restructuring and use of privatization sales to buy down debt became a condition of IMF and World Bank adjustment lending programmes; this process is described for Thailand and South Korea in this volume.52 In many smaller countries, a hurried-up restructuring process was facilitated by rapidly undertaken studies conducted by highly paid international consultants, including the Enron-tainted Arthur Andersen. In China and India, whose economies were less affected by the Asian crisis, reform was a more complex process. India and China were able to exercise greater latitude vis--vis IPPs than their smaller neighbours. The Maharashtra state government, backed by the national government, voided the Dabhol contract. In China, which had a power surplus for several years after the Asian crisis dampened demand, take-or-pay IPP contracts were often not honoured, to the consternation of investors.53 When they turned to sectorwide reforms, the Asian giants debated and enacted reforms at the national level, but as a consequence of their size and federal systems, they conducted experiments primarily at the sub-national level. In India, unbundling of the public utility and privatization of distribution was initiated in one state, Orissa, as part of a larger World Bank economic restructuring programme. In China, limited wholesale competition in generation was attempted in five provinces and the city of Shanghai. The results of these initial experiments were not promising. The period following the Asian crisis was one of currents and countercurrents. On the surface, commitment to the neoliberal orthodoxy of privatization and markets became as pervasive as commitment to the stateled model had once been. Developmental goals that had characterized the post-colonial period, such as universal access, became incidental to the goal of operating electricity as a commercial enterprise. But countervailing forces were also at work, not least a precipitous decline in foreign investment, and growing labour and public opposition to various features of the reform package.
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52 Government of Thailand, Letter of Intent to IMF, (14 August 1997), available at the IMF Web site, at <http://www.imf.org/external/np/loi/081497.htm>, last accessed 1 September 2004. 53 Philip Andrews-Speed and Stephen Dow, Reform of Chinas Electric Power Industry: Challenges Facing the Government, Energy Policy, vol. 28, issue 5 (May 2000), p. 340.

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Pacific Affairs: Volume 77, No. 3 Fall 2004 The California Electricity Crisis In 2000-2001, manipulation of Californias newly deregulated electricity market resulted in blackouts, skyrocketing prices and utility bankruptcies, bringing an economic superpower to its knees.54 The California crisis shocked the world and halted the momentum of electricity reform in many locales. In 1996, California had taken bold steps toward a fully competitive electricity market, requiring its former utility monopolies to divest most of their generating capacity and purchase power through a pool in which prices were based on bidding. These arrangements proved highly vulnerable to market manipulation. Taking advantage of already tight electricity supplies in the fall of 2000, Enron and other suppliers created artificial scarcity in order to force up spot market prices.55 Physical withholding of generation, strategic bidding and the creation of phony congestion on transmission lines led to rotating outages and drove wholesale prices to ten times the average price of previous years, with peaks over one hundred times the previous average.56 By January 2001, Californias largest utility was bankrupt, and the second largest averted bankruptcy only by a state bailout. Soon the power pool was disbanded, electricity rates to consumers were raised, and the state took over buying power on behalf of its utilities, purchasing long-term supply contracts at exorbitant prices. For Asian governments, the California crisis offered harsh lessons in the political economy of electricity reform. One was that regardless of the technical and financial resources available to create well-functioning markets, the political power of vested interests could produce fatal distortions. Economists have argued that Californias crisis originated in a flawed design, with inadequate forward contracting and retail price caps being principal culprits.57 However, flawed market design was itself a consequence of political compromise among the key playerslarge industrial consumers, merchant generators and utility companieswithout which deregulation would not have happened. For example, Californias politically powerful utilities refused to support deregulation until a mechanism was provided for them to recover US$20-30 billion in stranded costsinvestments that would be uncompetitive in the new market.58 The deal struck fixed retail rates and allowed utilities to pocket the difference between the retail rate and wholesale prices, which were expected to decline under deregulation. This turned out to be a
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54 An excellent account is Timothy P. Duane, Regulations Rationale: Learning from the California Energy Crisis, Yale Journal on Regulation, vol. 19, no. 2 (summer 2002), pp. 471-540. 55 New Tapes Reveal More Evidence of Power Scheming by Enron, Los Angeles Times, 15 June 2004, C2. 56 Paul Joskow, Californias Electricity Crisis, Regulatory Policy Program Working Paper RPP2002-05, p. 1. Spot market prices peaked at US$3800 per megawatt-hour; see Duane, Regulations Rationale, p. 517. 57 Sally Hunt, Making Competition Work in Electricity (New York: John Wiley & Sons, 2002), p. 382. 58 Duane, Regulations Rationale, pp. 501-504.

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Asian Electricity Reform in Historical Perspective fatal assumption. Wholesale prices instead spiked and utilities were forced to absorb losses rather than pass the costs on to consumers. Another lesson was the potential of deregulated electricity markets for manipulation by hostile political forces, with devastating political consequences. With spot markets out of control and utility debt mounting, Californias Democratic governor appealed to the Republican Bush administration to intervene with the Federal Energy Regulatory Commission (FERC) to impose regional wholesale price caps. The administration steadfastly refused. Only the threat of pending legislation in Congress brought administration action; FERC finally issued regional price caps in June 2001, returning wholesale prices to pre-crisis levels.59 By that time, irreparable damage had already been done. California taxpayers and ratepayers faced more than US$30 billion in overcharges, bailouts and overpriced long-term contracts.60 Though he had not presided over deregulation and received little help from Washington, Governor Gray Davis paid a severe political price. His handling of the electricity crisis has been repeatedly cited as the main argument for his unprecedented removal from office by recall election in October 2003; the other commonly cited argument, his stewardship over a US$15 billion budget deficit, was at least partly a fiscal consequence of the crisis.61 Electricity Reform After California For proponents of the neoliberal model, Californias problems demonstrated the need for staying the course and hewing more closely to reform prescriptions. A World Bank report warned developing countries that events in California should not be taken as an excuse to back away from a substantial and basic reform of the sector that almost always requires restructuring and privatization, even while acknowledging the need for caution in implementing electricity markets.62 Subsequent events were to reinforce the message of caution emanating from California. In the wake of California, the US electricity industry went into a severe financial tailspin, experiencing a precipitous fall in stock values and credit ratings.63 In the fall of 2001, Enron, the worlds leading corporate promoter of electricity deregulation, collapsed in an accounting scandal. Many other top electricity firms declared
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59 Duane, Regulations Rationale, pp. 532-533. 60 State of California, Attorney Generals Energy White Paper: A Law Enforcement Perspective On The California Energy Crisis (Sacramento, CA: State of California, April 2004), p. 6; Foundation for Taxpayer and Consumer Rights, How Deregulation Let the Power Industry Steal $71 Billion From California (Santa Monica, CA: FTCR, 17 January 2002), p. 2. 61 Phillip Matier and Andrew Ross, Energy crisis pulled plug on Davis, San Francisco Chronicle, 27 July 2003, A19. 62 World Bank, California Power Crisis, p. 2. 63 Alex Berenson and Richard Oppel, Energy Industry Shudders Again, The New York Times, 18 December 2001, C1.

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Pacific Affairs: Volume 77, No. 3 Fall 2004 bankruptcy, sold assets, fired executives or were criminally indicted.64 At present, industry financial strategies have returned to a more conservative, pre-Enron model.65 Further deregulation remains in limbo at the federal level, and in the majority of states. Electricity liberalization in other advanced economies produced mixed results. Several high-profile competitive experimentsincluding Norway and the provinces of Ontario and Albertarequired government imposition of price caps and other measures to stabilize prices and curb market power.66 In 2001 the vaunted UK power pool that served as the worlds most frequently copied model for wholesale markets was abandoned in favour of a bilateral trading scheme. Even in locales that claimed efficiency improvements under deregulationPennsylvania and New England in the US, and parts of Australia and Western Europeit remained unclear whether market mechanisms would produce the necessary long-run investment in reserve margins and transmission capacity to ensure reliability; this concern was highlighted by major blackouts in North America and Europe in the latter half of 2003.67 By 2004, reform experience had demonstrated a variety of conditions that do not favour satisfactory competitive outcomes, including small geographical area, fragmented markets, rapid demand growth, preexisting capacity constraints, limited sites for new generation, lumpy capacity, hydroelectric dominated systems and inadequate regulation.68 Many developing countries share one or more of these characteristics. In Asia after the California crisis, these developments, in combination with rising domestic opposition, undermined the neoliberal model and its focus on competition and privatization. By late 2001, plans for power pools were being abandoned as too risky in Thailand, Malaysia and China; in the understated comment of one Malaysian scholar, recent unpleasant events in economies that have adopted the electricity pool mechanism have caused the Government to shelve its earlier plans . 69 A more recent casualty has been privatization, postponed in Korea, Thailand and Taiwan in 2004; labour opposition has been a key factor (see this volume). Without wholesale competition and privatization, the rationale for industry restructuring has diminished; some countries that have divided their state utility into separate
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64 Mitchell Benson, Energy Traders: Worst is Over? Wall Street Journal, 29 May 2002, A6. 65 Julie Creswell, Power Failure, Fortune, 9 December 2002, p. 187. 66 Chi-Keung Woo, Debra Lloyd and Asher Tishler, Electricity Market Reform Failures: UK, Norway, Alberta and California, Energy Policy, vol. 31, issue 11 (September 2003), pp. 1103-1115. 67 John Casazza and George Loehr, eds., The Evolution of Electric Power Transmission under Deregulation: Selected Readings (Piscataway, NJ: IEEE, 2000); Eric Lerner, Whats Wrong with the Electric Grid, The Industrial Physicist, vol. 9, issue 5 (October/November 2003), pp. 8-13. 68 Maurice Huneault, Electricity Deregulation: Doubts Brought On by the California Debacle, IEEE Canadian Review (Spring 2001), p. 26. 69 M.Z. Jaafar, W.H. Kheng and N. Kamaruddin, Greener Energy Solutions for a Sustainable Future: Issues and Challenges for Malaysia, Energy Policy, vol. 31, issue 11 (September 2003), p. 1068.

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Asian Electricity Reform in Historical Perspective companies, such as Korea, may eventually rebundle.70 In much of Asia, the current trend appears to be toward managed markets with regulated tariffs, in a sector that is operated commercially but remains state-led. In an internal review completed in 2003, the World Bank determined that the empirical results of private sector-led electricity reforms were poor.71 Asia as a whole performed particularly badly: investors had fled South Asia, and East and Southeast Asia were left with a legacy of financial and political risk. The review concluded that there is no universal blueprint for the electricity sector. An emerging international consensus has de-emphasized the Washington Consensus focus on privatization, competition and capacity investment in favour of such general goals as improvements in service, regulation, and management of the distribution sector, and a more pluralistic approach toward the policies to achieve these goals. But in Asia, the key development is that the foreign investment that drove earlier reforms is no longer present. State utilities are off the auction block, governments chastened by the IPP experience of the 1990s offer less generous deals, and there is little investor interest in the messy, low-margin business of electricity distribution. While the language of neoliberal reform remains pervasive notably in the Indian Electricity Law of 2003it appears that for the moment, the evolution of the sector will be more responsive to local capital and local concerns. Conclusions International capital and ideology have played a dominant role in defining the institutional arrangements of Asian electricity since the colonial period. The transition from a state-led development model to one emphasizing private ownership and competitive markets was less a targeted response to specific conditions in any Asian countrys power sector than a reflection of the Washington Consensus belief that the private sector should be primary and the state secondary in all areas of the economy. To be sure, Asian countries were not passive participants in the rapid embrace of neoliberal reforms and their subsequent fate. Worried by national fiscal crises and debtburdened state utilities, and prompted by multilateral donors, Asian governments initiated tectonic changes in sector laws and institutions in the pursuit of international capital. Susceptibility to international pressure has been in part a function of a countrys place in the international order, as illustrated by the case studies in this volume. The Asian giants India and China have had more latitude to withstand the prodding of donors and multinational corporations, and to conduct reform experiments at the
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70 Poten and Partners, LNG in World Markets (June 2004). 71 Rafael Dominguez, Fernando Manibog and Stephan Wegner, Power for Development: A Review of the World Bank Groups Experience with Private Participation in the Electricity Sector (Washington, DC: World Bank, 2003).

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Pacific Affairs: Volume 77, No. 3 Fall 2004 subnational level, than have Thailand and South Korea. At present, the orthodox neoliberal model of the 1990s has lost its momentum, due less to political opposition than to failings on its own economic terms. Foreign investment has been reduced to a trickle and confidence has been bruised by experiences in Asia (the IPP fiasco, resentment of IMF and World Bank conditions) and internationally (California and other worrisome reform outcomes). Competitive electricity markets have receded to the distant horizon. Yet the old state utility model is also gone; laws, institutions, financial arrangements and public expectations have all changed too much in the last decade to permit reversion to pre-1990 conditions. For much of Asia today, the situation is a hybrid featuring managed markets, regulated tariffs, and commercially oriented, partially privatized regional utility monopolies. For better or worse, it continues to be the state, not the market, that holds the sectors commanding heights. Differences in the domestic political economies of Asian countries have produced quite different reform trajectories. Many countries were internally split among neoliberals and defenders of the state model, each motivated variously by ideology, constituency politics and financial gain. Greacen and Greacens study of Thailand illustrates how this struggle has led to an explicit rejection of neoliberal reform in favour of something that might better be called neo-nationalist reform. Byrne et al. inform us that South Korea, failing to find solutions to its energy conundrums in the neoliberal model, has put its reforms on indefinite hold. Kale describes how India has passed a sweeping neoliberal electricity law at the national level (albeit with implementation politically deadlocked), despite having, in many ways, the least salutary experience with reform to date. Where all this leads in the future will be up to individual Indian states to decide. As the study by Yeh and Lewis indicates, China, of all countries in Asia, appears to have suffered least from external pressure to adopt a cookie-cutter style reform, and instead to have fashioned policies reflecting the state and the Partys attempt to reconcile their many competing interests in the sector. If these policies reflect a Western form but a Chinese essence, that at least is a time-honored approach in China. The case studies illustrate two serious dilemmas in the political economy of Asian electricity reform. In Asias poorer countries there is a continuing linkage between the problem of increasing utility revenues to sustainable levels and the problem of improving access and service; the public will not long tolerate having cost recovery performed on their backs without a commensurate improvement of service. The problem of electricity subsidies in India and the significant role these played in Indias 2004 elections, in which the ruling party was unexpectedly removed from office, underscores this point. In the richer and faster growing countries, a worrisome development is the blurring of public and private interests, quite opposite to the neat separation that neoliberal reform is supposed to engender. In China and Thailand, commercializing the sector under weak regulation has 434

Asian Electricity Reform in Historical Perspective concentrated control in very few hands, and those hands are often quite close to the levers of political power, as in the case of Chinas Li Xiaopeng. Thai Prime Minister Thaksins semi-privatized national champion model for EGAT raises the prospect of a firm that wears a private hat while engaging in speculative business abroad, knowing that by wearing its public hat it can pass potential losses along to captive ratepayers at home. Such arrangements also threaten to extend domestic inequalities to the regional level. Both EGAT and Chinas new power corporations are looking to finance or build a series of large dams in the Mekong region that would mainly benefit consumers and shareholders in Bangkok and urban China, while the rural poor living in the reservoir areas in Vietnam, Laos, Cambodia, Burma and Chinas interior would suffer the consequences of displacement and environmental damage. In most Asian countries electricity reform has neither prioritized nor delivered improvements in environment or social equity, reflecting the predominant focus on finance. For such public benefits to be consistently incorporated in policy will likely require an openness to public input, and a democratization of sector decision making, that has not been seen to date. To the extent that the public has been a partner in the reform process, it has done so at its own invitation, in the form of protest movements like those surrounding Enron/Dabhol in India and the Prachuab Kirikhan IPP projects in Thailand, and the anti-nuclear movement in South Korea. Whether these movements remain ad hoc success stories of issue-based interventions, or become the foundations of democratic institution building in electricity policy, is an open question. In a related vein, regulatory arrangements that allow the public to hold all utilitieswhether publicly or privately owned to high standards of transparency and accountability are scarce. Given the weaknesses in the supporting environment that effective regulation requiresnot only formal legal foundations but an adversarial tradition that includes competent and empowered public advocatesthis may remain an Achilles heel of reform for years to come. The involvement of organized public interest groups in the regulatory process in the Indian state of Maharashtra is a hopeful development in this regard. As hopes of a neoliberal miracle cure fade, the challenges facing Asian electricity sectors remain enormous. Where will trillions of dollars of investment to meet future demand come from? How will more than a billion people escape energy poverty? How can demand be met without vastly increasing greenhouse gas emissions? Since the 1980s, the neoliberal response to all these questions has revolved around sending the correct market signals by getting the prices right. This accords with the faith of economists, but the experience in Asia to date demonstrates the difficulties that arise when this faith is used too literally as a guide to policy. Naively constructed electricity reforms have already undermined governments at the polls and the barricades, produced new methods of concealing the 435

Pacific Affairs: Volume 77, No. 3 Fall 2004 dubious entanglements of public and private interests, and failed by oversight and design to promote the general welfare. Despite being aimed at attracting investors, they have not gained investor confidence. Harnessing market forces may be one of the tools used to improve the functioning of Asian electricity sectors, but this is likely to be sustainable in the long run only with parallel improvements in social and state capacity. One glimmer of hope at present is the absence of hegemonic models. With the public power model a fading memory, and the neoliberal model withering on the vine, Asian countries today face both fewer certainties and more possibilities regarding the institutional arrangements of electricity than existed in the past. To the extent that the greater array of choices leads to more open contestation over this vital sectors future, this may itself help to create the basis for more sustainable and accountable reforms, in electricity and elsewhere in Asian societies. University of California, Berkeley, U.S.A., and the National Institute of Public Finance and Policy, New Delhi, India, September 2004

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