Quick fixes wont work

Written by Noor Mohammad | Noor Mohammad | Updated: Oct 31 2012, 05:45am hrs
Licence-based PPP model would avert need for future bailouts

After arranging a R1.90-lakh-crore bailout package for ailing state-owned power distribution companies (discoms), the Centre should now try to get states embrace deeper power sector reforms like change in ownership and management control of utilities to prevent them from slipping back into a financial morass. This is because under normal circumstances state governments try to avoid a tariff hike for fear of political backlash if the discom is state-owned. But if the discoms ownership changes, it will be free of political pressure to operate along commercial lines.

If that happens, state governments will get rid of their power sector liabilities which drain their scarce financial resources and let financial management go haywire. The Shunglu committee, which studied factors impacting the financial health of power discoms, has also recommended measures like a change in ownership and management control to ensure the long-term viability of the sector.

Discoms remain black holes in state finances. State governments, for instance, will be required to take over half of their discoms short-term loans under the R1.9 lakh crore debt-restructuring plan agreed by them with the Centre. Although the scheme has taken cognisance of the fiscal responsibility and budget management (FRBM) targets and allowed states to take over liabilities in phases over two to five years, according to the fiscal space, states where discoms have accumulated unmanageable debts could still breach their FRBM targets.

Projected fiscal deficit of Madhya Pradesh, Punjab and Uttar Pradesh in FY15 is very close to the Thirteenth Finance Commission targets. Although the impact of debt restructuring on states deficits is not large, any fiscal slippage due to either revenue slowdown or expenditure mismanagement would lead to states breaching fiscal deficit targets, India Ratings and Research, a Fitch Group company, said in a recent report titled, Financial Restructuring of State Discoms.

Significantly, this is not the first time discoms have been provided financial assistance to prevent their financial collapse. In 2003, too, the Centre had to extend a similar package to bail out discoms from potential default on power purchase from central utilities like NTPC and NHPC. At the time, states issued power bonds worth R28,984 crore to the central sector generators as payment towards their outstanding dues on power purchased by electricity boards from them. By end-March 2012, power bonds worth R11,520 crore were still outstanding on the books of state governments.

If states could get rid of their loss-making discoms, they would save a lot of money which could then be used for financing social infrastructures like roads, highways and ports.

The franchisee model, which would entail a change in management control, has been successfully experimented at places like Bhiwandi and Agra. That has encouraged states like Bihar and Jharkhand to embrace the model. Jharkhand has recently given power distribution rights for the Jamshedpur circle to Tata Power. Bihar plans to appoint franchises in its major power distribution circles like Patna and Muzzaffarpur.

But the franchisee model is just a halfway house given that ownership and management control still rest with the concerned discom. The real solution can be found by adopting a public-private partnership (PPP) based on the Delhi model of power distribution reform, according to industry experts.

The state government continues to hold minority stakes in Delhi discoms even after private players have taken over the management and operational control of power distribution business. Delhi is seen as the first successful example of privatisation of power distribution after the botched attempt in Orissa.

We believe that despite several criticisms from the countrys top constitutional bodies, distribution reforms implemented by the Delhi government had been quite effective, unlike what is seen in states like Orissa. Post-transition period (2002-2007), we feel the distribution reform implemented in Delhi has been a boon to all the stakeholders, said SBICAP Securities Ltd, a leading equity broker, in a recent update on the Indian power sector.

Compared to the franchisee model, a licence-based PPP model holds more advantages like (i) involvement of experienced players which provides a long-term viable business solution for the distribution operations, (ii) timely audit of capex leading to reasonable addition in fixed cost, (iii) complete transfer of power purchase risk (accounts for 70% of total cost of supply of the discoms) from the state discoms, and (iv) use of scientific valuation of assets method which is based on future benefits, better than the book value of assets method used. We therefore prefer licence-based PPP model to the franchisee-based model for the long-term viability of the discom sector, the brokerage noted.