Current unviability of SEBs main cause for worry

Following is the Executive Summary of the Report of the Expert Group on the Settlement of SEB Dues submitted by Planning Commission member, Montek S Ahluwalia to the Union minister for power, Suresh Prabhu, on May 11, 2001:

The Chief Ministers’ Conference held in March 2001 discussed the state of the power sector and emphasised the urgency of power sector reform as a necessary requirement for ensuring rapid growth of the economy and for preserving the health of State finances.

The Conference noted that the large amount of dues owed by the SEBs (state electricity boards) to the CPSUs (central public sector undertakings) was a major impediment to reforms and resolved to constitute an Expert Group to (a) recommend a one-time settlement of outstanding dues, and (b) recommend a programme for medium-term capital restructuring and reform of the SEBs. The present Expert Group was constituted in pursuance thereof.

This report of the Expert Group deals with item (a) above. The Group was informed that the dues of the SEBs have accumulated to Rs 41,473 crore consisting of Rs 25,727 crore of principal and Rs 15,746 crore of interest/surcharge. The Group noted that these dues have arisen not because of some exceptional event, or because of problems that arose in the past and are no longer operative, but because of the continuing non-viability of the current operations of the SEBs. A settlement of past dues alone would not solve the basic problem facing the SEBs; and unless the problem of current unviability is speedily addressed, overdues would mount again.

The Group has, therefore, sought to present a scheme for settlement of outstanding dues, linked to a mechanism that would ensure payment of current dues in future. The Group’s recommendations include a package of incentives and disincentives linked to commercial discipline and initiation of a process of reforms. The Group recognises that the proposals presented in this Report do not amount to a full-fledged programme of reform and restructuring. This is a complex matter and will be addressed in a report that is being submitted separately. However, the proposals in this Report do establish some linkage between the settlement of dues and the start of a reform process.

The main features of the scheme recommended by the Group are as follows:
* For the States participating in the scheme, the Group recommends that 50 per cent of the surcharge/interest on delayed payments be waived. The rest of the dues amounting to the full principal amount as well as the remaining 50 per cent of the interest/surcharge, aggregating Rs 33,600 crore should be securitised through bonds issued by the respective State Governments. Taking into account additions arising out of conversion of old bonds, as well as incentives for better managed SEBs, to be partly offset by reductions resulting from settlement of disputes, the Group estimates that the total securitisation under this scheme may be about Rs 35,000 crore.

* The bonds should be issued through the RBI (Reserve Bank of India) at a tax-free interest rate of 8.5 per cent per annum. The term of the bonds should be structured to achieve a moratorium of 5 years on repayment of principal with the entire principal being repaid between the 6th and 15th year. These bonds should be identical to bonds issued in connection with the market borrowings of State Governments, with the attendant discipline in repayments. The bonds will be subject to lock-in restrictions that will allow release of only 10 per cent of the bonds in the secondary market each year.

* For ensuring timely payment of current dues in future, defaults in current payments for power/fuel should attract a graded reduction in the supply of power from central power stations and in coal supplies. Where such defaults exceed 90 days from the date of billing, the Ministry of Finance should recover these dues through adjustment against releases due to them from the Centre. The Group recognises that such adjustments from the State Governments’ accounts are an exceptional measure which should not normally be resorted to, but given the circumstances prevailing in the power sector, such a measure is needed in the interim before longer term efforts to reform bear fruit.

* In order to initiate steps towards reform of the sector, the Group recommends that as part of the scheme, SEBs should accept reform-based performance milestones such as setting up of SERCs (state electricity regulatory commissions), metering of distribution feeders and improvement in revenue realisation. The milestones should be specified in the MOUs (memoranda of understanding) to be signed with the Ministry of Power.

* The States should be offered incentives for complying with the scheme. If SEBs do not default on their current dues and adhere to the performance milestones, CPSUs should pay them, during the first four years commencing from 1.4.2001, bi-annual cash incentives equal to 2 per cent of the value of bonds. Further, if SEBs open and maintain LCs (letter of credit) till the end of December 2001, CPSUs should pay them a one-time cash incentive equal to 2 per cent of the value of bonds. These incentives could add up to Rs. 6,300 crore. In addition, States undertaking reforms should also be assisted through APDP grants and discretionary allocation of power.

This scheme should enter into force only after one-half of the States that have an annual billing of over Rs 500 crore per annum from CPSUs give their consent, and should be effective in respect of the States that give such consent. The States that withhold their consent beyond 60 days after this scheme enters into force should be denied any share in the discretionary allocation of 15 per cent from the power stations of CPSUs as well as any assistance under APDP (Accelerated Power Development Programme) . If the overdues of such States exceed Rs 50 crore in respect of any CPSU, they should also attract reduction in power and coal supplies, as applicable to the States participating in this scheme.

The scheme seeks to balance the benefits and burdens relating to different stakeholders, and modifications aimed at reducing the burden on one of the stakeholders will only increase the burden on others. The Group wishes to stress that there should be no relaxation in the various disciplines prescribed in the scheme as this would seriously compromise the integrity of the scheme.

The Group wishes to emphasise that these actions are the basic minimum required for moving towards a commercially viable power sector. There are other substantive issues related to reform and capital restructuring that need to be resolved for ensuring the sustainability of the sector. The Group proposes to address these issues in a separate Report.