The political economy of electricity reform in Asia: introduction to Pacific Affairs special issue.

  "In developing countries, the California power crisis may be creating
  the impression that power reform is too risky. The power crisis in
  California does not justify this conclusion. Most countries simply
  have no alternative to a substantial and basic reform of the sector
  that almost always requires restructuring and privatization.
  --World Bank, 2001 (1)

  "The solution to this malaise, we discover, is not to improve our
  housekeeping skills, not to try and minimize our losses, not to force
  the state to be more accountable, but to permit it to abdicate its
  responsibility altogether and privatize the power sector. Then magic
  will happen. Economic viability and Swiss-style efficiency will kick
  in like clockwork."
  --Arundhati Roy, 2001 (2)

Introduction

This special issue of Pacific Affairs investigates electricity reform in Asia--its origins, its adoption, its implementation and its results to date--through the lens of political economy. Its aim is to provide readers with a broad, contextual understanding of what is happening in Asian electricity sectors, and why. Electricity reform is a perplexing matter to policy makers and the general public alike. Occasional legislative debates, public protests and episodes in the popular media notwithstanding, electricity reform has been for the most part an expert discourse dominated by economists. The shortcomings of the electricity sector, the prescriptions for reform, and the analysis of the problems encountered by reform have been approached primarily from the perspective of neoclassical economic theory. (3) While few would disagree that economic analysis is necessary, it is increasingly clear that economics alone is not a sufficient framework for understanding what is driving reform and its outcomes, or for governing the vital electricity sector. It is necessary to situate reform within political, institutional and social contexts, and to consider how these interact with the economic dimension.

Electricity reform is an inherently political process, from origins to outcomes. It entails changes in laws and regulations, which requires the development of a political consensus in favour of reform. The political actors that support or oppose it--in government, industry, finance, labour unions and civil society--are motivated to do so for reasons that may be irrelevant to economic theory but are often quite relevant to the shaping of the actual policies created. Policies are implemented within institutional contexts--utilities, markets, courts, regulatory bodies--that are profoundly influenced by political concerns. Finally, the impacts of reform are not confined to improvements in economic efficiency within the electricity sector itself, but can affect matters of broad public concern such as employment, concentration of economic power, distributive equity, services to the poor, dependence on foreign energy supplies and environmental pollution. Far from a dry techno-economic calculation, electricity reform is often an arena of conflict between competing interests that are of fundamental importance to society.

"Electricity reform" (along with other roughly synonymous terms such as electricity liberalization, restructuring and deregulation) refers to the dramatic changes that have swept the electric power industry worldwide over the last two decades, during which most countries have enacted market-oriented changes in the laws and institutions governing the sector. Common types of electricity reform have included corporatizing or privatizing state-owned utilities, permitting privately-owned companies to generate and sell power, dismantling vertically integrated utilities into separate components according to function, attempting to create competitive markets at both the wholesale and retail levels, and making changes in a country's legal, regulatory and financial systems in order to enable such reforms. Prior to about 1990, the electricity industries of most nations were government owned and operated; the United States was an exception, but its privately-owned utilities functioned within the limits of a governmental regulatory regime that set prices and oversaw planning and investments. Wherever it has occurred, electricity reform has changed these traditional arrangements in a way that shifts control over the sector away from public and toward private hands.

The motivations for electricity reform have varied from place to place, but the rationales given often include lower prices and more choices for consumers, better access to capital and higher returns on investment for the industry, and improvements in technology and service quality. In industrialized countries, reform is ultimately justified as a way of squeezing additional efficiency gains out of essentially well-functioning systems. From a public policy perspective, this is said to result in higher macroeconomic efficiency and industrial competitiveness. In developing (East and South Asian, African and Latin American) and transitional (Eastern European and Central Asian) countries, however, the ultimate rationale is more often stated in negative terms: the need to transform a state-owned system that is debt-ridden, insolvent, a drain on state finances, inefficient, polluting, corrupt or employed as a tool of political patronage. For most developing countries, electricity reform is said to be a prerequisite for attracting sufficient investment to allow electrical capacity to keep pace with national economic growth.

Electricity reform began in Asia in the early 1990s. State utilities once viewed as symbols of modernization were seen as impediments to, rather than engines of, rapid economic growth. Indeed, the power sectors of some Asian countries did perform poorly both technically and financially, providing unreliable service, low returns on investment, inadequate access for the poor, and large amounts of pollution. In response to industry conditions, international pressures and their own agendas, Asian governments initiated a range of electricity reforms, including privatization, foreign ownership, private power production and, in some cases, plans to restructure the industry and create fully competitive electricity markets. The legal, institutional and financial underpinnings of the electricity sector underwent significant transformations in one Asian country after another. These changes had an immediate impact. International capital flows entered Asian electricity as a favoured destination, totalling US$66 billion from 1990 to 1997, and major transnationals began building power plants. (4) The Asian economic crisis of 1997 quickened the pace of change in a number of countries when the International Monetary Fund (IMF) required power sector privatization as a condition of macroeconomic stabilization.

Yet, despite the rapid adoption of new laws and the large initial investment flows, electricity reform has travelled a rocky path, and its future is an open question. The former state utility framework has been irrevocably changed in many countries, but the framework to replace it remains in transition. Liberalization outcomes have often failed to live up to expectations, and doubts are now widespread within Asia, as in other regions, about the goals, scope and methods of market-based reforms. Especially since the 2000-2001 California electricity crisis, many countries have postponed implementing their reform plans, and others have turned reform in directions quite unimaginable to its advocates of a decade ago. As of 2004, electricity reform in Asia is a phenomenon in flux.

This special issue explores the political economy of electricity reform in four Asian countries: China, India, South Korea and Thailand. These four countries represent not only the majority of Asia's population--some 2.3 billion people--but also a representative spectrum of national and electricity-sector characteristics. Some of these are described in table 1. The countries are geographically distributed through North, East, Southeast and South Asia. There are two giants in area and population, and two smaller nations. South Korea is a relatively wealthy nation with OECD membership, while India is still one of the poorest in per capita terms. Correspondingly, South Korea is fully electrified, while as many as five hundred million people in rural India, and fifty million in China, still lack electricity. Thailand and South Korea have nationally integrated electrical grids, reflecting their smaller areas and unitary governmental structure, while the power grids of China and India are organized at the provincial level, reflecting their federal structure. Decision-making processes and public participation in the sector reflect the fact that China remains a Leninist state, while the others are electoral democracies of various kinds. The bureaucratic structures and engineering cultures of the four sectors derive in part from their very different colonial and Cold War legacies. China and India are largely self-sufficient in the energy resources used to generate electricity, while Thailand and South Korea are more dependent on imports. Nuclear power is extremely important in South Korea's fuel mix, a small component in China and India, and absent in Thailand. Importantly, the pre-reform conditions of the industry, and the scope, timing, goals and context of electricity reform in the four countries have been quite different.

[FIGURE 1 OMITTED]

The case study authors, who combine expert technical knowledge with area studies expertise, have provided only as much technical information as necessary for clear understanding by the lay reader (analyses that focus on technical and economic factors can be readily obtained elsewhere in the literature). Instead, they focus on the political economy of electricity reform as it has unfolded historically. While the structure of each paper differs, reflecting differences in author emphasis and variations among the country cases themselves, all describe the key issues, actors, institutions and processes of reform and explore their linkages to the dynamics and structures of the larger political economy. In addition to the case studies, the special issue begins with an historical overview that focuses on the international context of electricity in Asia as a whole.

Readers of Pacific Affairs have several reasons to be concerned about electricity reform in Asia, beginning with its economic implications for the region. Electric power is not just another commodity, but a vast industry upon which every modern economy rests. It is one of Asia's largest industries in terms of total asset value (over US$1 trillion) and annual revenues (over US$300 billion). Because of its backbone role in economic growth, anything that substantially affects the economic performance and strategic direction of the electricity sector is prima facie a political concern. It is widely assumed that in Asia as a whole demand for electricity will double between 2000 and 2020, requiring well over US$1 trillion in investment to expand supply; the International Energy Agency predicts that US$3.5 trillion will be needed by 2030. (5) This investment is expected to constitute two to three percent of GDP in China and India. Reform is predicated on enabling industry to meet such requirements. Whether it does, and the terms of the financial arrangements governing such massive cash flows, will greatly impact the development prospects of Asian countries, and in turn their political stability and fate.

For readers concerned with the global environment, the implications of electricity reform for Asian energy efficiency, technology choices and fuel mix are both highly significant and poorly understood. The Asian electricity sector constitutes more than one-fourth of the world's electrical capacity and production, comparable to that of the US. With coal as its principal fuel and electricity generation as its main source, Asia is quickly surpassing North America and Europe as the world's largest regional emitter of carbon dioxide. While climate change is a back-burner political issue for most of the world in 2004, any upsurge of climate concerns in coming years will place the governance of Asian electricity on the global centre stage. Local environmental concerns such as air pollution, resettlement and habitat conversion for hydroelectric reservoirs, and resource extraction patterns also stand to be affected by reform.

Scholars of Asian politics will also find much of interest in this special issue. For those concerned with neoliberal economic reform generally and the fate of state-owned enterprises, electricity reform and the transformation of state utilities constitute important special cases. Electricity reform provides a new window on such issues as privatization, market liberalization, and elimination of subsidies, and on their impacts on the distribution of costs, benefits and risks within society and across national borders. It constitutes an important stage for battles over public investment, labour rights and the geopolitics of competition for energy resources. At the country level, electricity reform also provides unusual perspectives. For example, the China case study evaluates electricity reform in the light of competing demands on the Chinese Communist Party leadership to balance national and regional economic interests, social welfare and its own parochial agenda. The Thailand study explains how the peculiar course of electricity reform there has interacted closely with the neo-nationalist policies and rhetoric of the Thaksin administration. In India, we learn how sea changes in electricity policy arise from the interaction of global ideological shifts with the competition between urban and rural economic interests; the upset Indian election results of spring 2004 demonstrate that electricity subsidies to agriculture remain a fundamental political issue. The electricity reform story in the Korean case illustrates the importance of labour and environmentalists in influencing a liberal government of which they are key constituencies. Those interested in electricity reform for its own sake will also find this special issue to be of interest. The case studies provide important data points for the status of electricity reform worldwide, along with insight into political dynamics that are often treated as "barriers" or black boxes by those in the industry.

Table 1. Asian Electricity in 2001, Selected Countries

                           China     India      Korea    Thailand

Population 2001 (million)  1,285     1,033         47         62
  (a)
GDP 2001 (US$ billion)     1,176       479        427        116
  (b)
Generating capacity 2001     318       112         52         21
  (GW) (c)
Electricity generation     1,420       533        291         98
  (billion kWh)
  2001 (c, d, e)
Coal % of generation 2001     76%       78%        39%        19%
  (d, e)
Gas % of generation 2001       0.4%      4%         8%        70%
  (d, e)
Hydro % of generation         19%       13%         2%         6%
  2001 (d, e)
Nuclear % of generation        1%        3%        40%         0%
  2001 (d, e)
Electricity consumption      893       365      5,288      1,508
  per capita 2001
  (kWh/pers) (b)
Estimated population          20-50    500-600      0          2-3
  without electricity
  (millions) (f, g)
C[O.sub.2] emissions 2001    866       275        118         49
  (million tonnes C)
  (b, c)
C[O.sub.2] per capita 2001     0.7       0.3        2.5        0.8
  (tonnes C/pers)
  (b, c)

                           Japan    Asia       US           World

Population 2001 (million)    127    3,434         285        6,167
  (a)
GDP 2001 (US$ billion)     4,176    7,596      10,020       31,192
  (b)
Generating capacity 2001     235      876         813         3365
  (GW) (c)
Electricity generation     1,037    3,966       3,719       14,851
  (billion kWh)
  2001 (c, d, e)
Coal % of generation 2001     23%      52%         51%          39%
  (d, e)
Gas % of generation 2001      25%      14%         17%          18%
  (d, e)
Hydro % of generation          9%      13%          6%          17%
  2001 (d, e)
Nuclear % of generation       31%      12%         21%          17%
  2001 (d, e)
Electricity consumption    7,237    1,016      11,714        2,159
  per capita 2001
  (kWh/pers) (b)
Estimated population           0    1,000-          0        1,600-2,000
  without electricity                  1,100
  (millions) (f, g)
C[O.sub.2] emissions 2001    322    1,949       1,558        6,608
  (million tonnes C) (b,
  c)
C[O.sub.2] per capita 2001     2.5      0.6         5.5          1.1
  (tonnes C/pers)
  (b, c)

Sources: (All sources available through the Web sites of the authoring
organizations.)
(a) United Nations, Demographic Yearbook 2001, table 5.
(b) World Bank, World Development Indicators Database, 2004.
(c) Energy Information Agency, International Energy Annual, 2002.
(d) OECD, Energy Balances of Non-OECD Countries, 2000-2001.
(e) OECD, Energy Statistics of OECD Countries, 2000-2001.
(f) International Energy Agency, World Energy Outlook 2002, chapter 13.
(g) World Bank, Rural Energy and Development: Improving Energy Supplies
for 2 Billion People, 1996.

1 World Bank, Energy and Mining Sector Board, The California Power Crisis: Lessons for Developing Countries (Washington, DC: World Bank, 2001), p. 2.

2 Arundhati Roy, Power Politics (Cambridge, MA: South End Press, 2001), p. 49.

3 A classic study is Sally Hunt and Graham Shuttlesworth, Competition and Choice in Electricity (New York: John Wiley and Sons, 1996).

4 Ada Karina Izaguirre, "Private Participation in the Electricity Sector--Recent Trends," note no. 154 (Washington DC: World Bank, 1998).

5 Asia Pacific Energy Research Centre (APERC), Energy Investment Outlook for the APEC Region (Tokyo: APERC, 2003). APERC estimates the Asian component of Asia-Pacific requirements at US$1.4 trillion between 2000 and 2020; International Energy Agency (IEA), World Energy Investment Outlook 2003 (Paris: Organization for Economic Cooperation and Development (OECD), 2003), p. 343.

James H. Williams and Navroz K. Dubash*

* The authors gratefully acknowledge the support of the World Resources Institute during the early part of this project, and in particular financial support for an authors' workshop held in Bangkok, Thailand, in December 2003.

University of California, Berkeley, U.S.A. and National Institute of Public Finance and Policy, New Delhi, India, September 2004