1. UDAY may not work as bailouts galore in power sector: Where’s the plug

UDAY may not work as bailouts galore in power sector: Where’s the plug

For the power sector, bailouts have turned into a somewhat recurrent feature even as the fundamental problems are clearly enduring.

By: | New Delhi | Published: November 11, 2015 8:11 AM
The government’s attempt to pull back distribution sector from a virtual precipice may not be enough as experts feel it is just a window-dressing of the losses.

The government’s attempt to pull back distribution sector from a virtual precipice may not be enough as experts feel it is just a window-dressing of the losses.

For the power sector, bailouts have turned into a somewhat recurrent feature even as the fundamental problems are clearly enduring. The NDA government’s UDAY scheme (Ujwal Discom Assurance Yojna), the third such intervention by the Central government over the last thirteen years, aims to paper over some of the inherent structural flaws in the country’s power sector, where the liberalised upstream generation business is held hostage by a tightly-regulated downstream distribution sector that is leaking like a sieve.

Each of these bailouts have attempted to throw in some money to pull back the distribution sector from a virtual precipice, but without anything tangible being done to plug the distribution sector leak in the long haul.

Before the latest scheme, the 2001 and the 2012 schemes to finance debt via state government backed bonds were replete with pre-conditions aimed at curbing unviable practices such as utilities not revising tariffs. Each of these schemes have been floated in the backdrop of the distribution sector threatening to pack up, hobbled with operational inefficiencies, discounted tariffs and high interest costs due to past debt.

The good thing this time around is that UDAY promises no grants or upfront write down of losses for the distribution utilities. While this is fiscally prudent, especially since the experience of the previous two schemes has been that good money invariably gets thrown after bad, the biggest question marks this time around though is whether the new scheme has enough incentives built in to draw state governments. Besides, the basic premise of the scheme — that of restructuring debt of the state power utilities “voluntarily” asking state governments to take over 50 per cent of the loans of state electricity boards (SEBs) by March 31, and 75 per cent by the end of FY17 — has come in for criticism on the grounds that this is just a window-dressing of the losses from the SEB books to the state government accounts.

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Critics also argue that states do not have sufficient incentives built in to do this. The upfront incentive offered for the states is that these taken-over loans will not be counted for the states’ Fiscal Responsibility and Budget Management Act (FRBM) limits for the current fiscal year and the next. The states, in turn, will have the facility of a concessional interest rate of about 9 per cent for servicing the loans, as against rates of over 13 per cent that is charged at present on SEBs’ outstanding debt. The states will issue bonds at 0.5 per cent above the G-sec coupon rate, to finance the restructuring.

The new scheme hinges on the premise that with loans off their books and improved balance sheets, SEBs will be able to sell the rest of their outstanding debt as bonds backed by state government guarantee. The stick for states is that the SEBs’ losses, if they continue, will gradually have to be taken over by the states from FY17 without any leeway on the FRBM limits.

In terms of the broader package, experts have largely hailed it as a shot in the arm for the beleaguered state-owned banks — who have high exposures to new generation projects that are struggling because discoms refuse to lift power — and those who have set up generation projects. “The coupon on bonds is around 350 basis points lower than the current lending rate, around Rs 4,300 crore of profit after tax will be shaved off annually till the bonds mature (till fiscal ending March 2017),” Crisil said. One basis point is 0.01 percentage point. “PSBs (public sector banks) will, however, benefit from a one-time provisioning write back of around Rs 5,000 crore on restructured discom loans converted into bonds,” Rajat Bahl, director, Crisil Ratings said.

The lingering problems, though, continue to be the issue of politically determined tariffs, free power and political patronage of the stealing of electricity. Additionally, it is unclear whether there will be a substantial number of states that would actually come forward for taking up this scheme, as long as it remains a voluntary one. At least three state government officials that The Indian Express spoke to on the issue indicated that the scheme does not have enough in it to incentivise states to adopt it.

According to Crisil, if the eight worst affected states were to take it up, the gross fiscal deficit of these states would increase up to 60 basis points in next two years because of the additional interest burden, coupled with absorption of losses, which could impact fiscal flexibility and reduce wherewithal for productive expenditure — something that could see little political will.

Ratings firm ICRA estimates that if the scheme is implemented, the aggregate relief to discoms is likely to be around Rs 88,000 crore per year by FY19, which translates into a reduction in losses by around Rs 0.95/unit on an all India basis, although the per unit impact on the most affected states namely Uttar Pradesh, Tamil Nadu, Rajasthan and Haryana are likely to be significantly higher.

It is important to note that the earlier financial restructuring scheme implemented by the Centre in six states in FY13 has not resulted in any material improvement in the financial position of discoms. This was mainly owing to continuance of non-cost reflective tariffs arising out of factors such as delays in filing of tariff petitions and issuance of tariff orders; non-implementation of periodic fuel cost pass-through mechanism; inadequate measures taken towards efficiency improvement, including reductions in AT&C losses; inability to meet operating and financial parameters set down by regulators; and also, delays in takeover of the debt by respective state governments.

As a result, the accumulated losses and debt levels for the affected utilities continued to mount even after the restructuring. This also resulted in a tightening of lending by the banking sector, which adversely impacted their ability to off-take power from the generation segment.

Overall, ICRA estimates the accumulated losses for state-owned discoms as on March 2015 at around Rs 4 trillion, which has largely been debt funded. A large chunk of these losses and debts are accounted by discoms in 6 states (Uttar Pradesh, Rajasthan, Tamil Nadu, Haryana, Andhra Pradesh and Telangana).

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