Reform in Practice: Rohit Chandra (IIT Delhi) on State Capacity in India’s Energy PSUs

What is one area of regulation in India that should be deregulated?

One of the areas I'm interested in thinking about deregulation is the way public sector companies, particularly in the energy space, do their contracting. Historically, India's energy system has been dominated by state-owned companies, whether it's in mining, power distribution, oil and gas. What's changed in the last 20, 30 years is they have started interacting with private sector companies much more, as subcontractors.

A company like Coal India, almost 50% to 60% of its production comes from private subcontracting companies. Now, what that means is companies like this need to ₹manage their contracts with private companies much more, whether it's clauses, relationships, how to hold them accountable when they're doing things wrong. That's a very different function from what they were doing 30, 40 years ago when they were part of frontline activity.

One of the chairman of Coal India I spoke to, when I asked him what his primary contribution was to Coal India as an organization, he said, "I improved contract management processes, which weren't as tightly in place earlier." I think that shows the value of being able to interact with the private sector in certain kinds of ways, both as a partner and also as a disciplining agent when necessary. Not all private actors do fantastic things, and you have to be able to enforce contracts, tell them that they're doing things wrong.

I think that's something that public sector companies still struggle with a little bit, partly because of the political economy of contracting. Often, large contracts go to politically connected players. Whether it's legal sophistication, whether it's commercial savvy, whether it's having more pre-bid meetings with private companies so that they're able to understand the nature of the contract much better, risk apportionment, not trying to squeeze your contractor for everything they're worth, and actually thinking of them as long-term partners. Sometimes these, at least in Coal India, these contracts can go on for 5, 7, 10 years sometimes.

Approaching business with that spirit of partnership rather than what has historically been a subsidiary relationship, where you have the state-owned company and a private company, which is lower on the hierarchy. I think things have evolved better in that direction, especially for companies like Coal India, NTPC, ONGC, which are large contractors and have been doing this for a long time. I don't think all of those norms have trickled into, for example, state-level companies, smaller PSUs, and all. I anticipate in the future, these companies will need a lot more of these kinds of contract management professionals. That's very different from the kind of hiring they've done in the past, which is primarily engineering professionals.

There's a cultural shift happening in these organizations where people with commercial knowledge, people with knowledge of law, people with knowledge of finance are actually becoming more important within the system. Even the engineers who are already in the system are starting to pick up some of these things as part of their skillsets. It's not just deregulation, but it's also organizational change. The fundamental DNA of what these organizations is doing is changing. I think that naturally leads to a deregulation where the private sector is more accepted as a willing partner in business activities. I think if Indian public sector companies could do that in the next 10, 15 years, India's energy sector should be in good shape.