1. Powering up for discom revival

Powering up for discom revival

While the new discom package is welcome, much will depend on whether the states play ball

By: | Updated: December 9, 2015 1:48 AM

After failing twice to revive the loss-making state-owned power distribution companies (discoms), the central government has made yet another attempt to revitalise this crucial link in India’s energy chain. In a significant departure from the earlier plans though, the Ujwal Discom Assurance Yojna (UDAY) would hold states responsible in case their discoms continue to be in the red post FY17, with the states having to take on the losses in their books, thereby impacting their fiscal outlook.

UDAY, if successful, would dramatically alter the power landscape in the country and  serve as a booster shot for the overall economy. Its basic contours  are similar to the earlier two schemes, implemented in 2002 and 2012. State governments which agree to participate in the scheme would take over 75% of the short-term liabilities of their respective discoms (as in September-end 2015)—taken together, this amounts to an estimated R4 lakh crore of debt.

The debt take-over will be staggered: 50% of debt is to be taken over in the current fiscal and the remaining 25% in FY17. To make it easier for the states, the extra financial burden of these two years would not be taken into account for fiscal deficit purposes. In the discom revival scheme launched three years ago, the participating states were mandated to take over 50% of the debt.

While the scheme has been designed for eight states—Haryana, Tamil Nadu, Uttar Pradesh, Rajasthan, Bihar, Jharkhand, Andhra Pradesh and Telangana—that account for nearly 70% of the total outstanding discom debt, any other state-owned discom is free to participate in it.

The scheme aims to relieve discoms of the high interest payments they make on their accumulated loans. The interest rate for discoms’ borrowings works out to 13-14%, which has been a drag on their performance, and has masked improvement they have shown on certain parameters. The total losses for discoms is projected to be nearly Rs 60,000 crore for FY15 (see chart).

Gr11

Relieved of interest payments on three-fourths of their debt under UDAY, discoms would be able to buy more electricity, thus putting in motion a virtuous cycle that boosts generating companies that have been struggling to find buyers despite latent demand for power. For the remaining quarter of their outstanding debt, the discoms would have to issue state government-backed bonds. This would lower the interest cost for the discoms by 3-4 percentage points.

What proved the undoing of the last two discom packages was the absence of deterrent provisions for states that failed to adhere to the road map laid down. UDAY has addressed this anomaly. In case a discom continues to bleed after FY17, the state government concerned would have to take over its operating losses, gradually—by 5%, 10%, 25% and 50% over FY18-FY21.

The scheme puts in place two main milestones to ensure discoms don’t slip into the red again. One, the aggregate technical or commercial losses (AT&C)–electricity lost primarily due to lack of billing efficiency and theft—have to be brought down to 15% by FY19. While the national average for AT&C losses hovers around 23%, states like Uttar Pradesh and Bihar lose nearly half of their power under this head.

Two, UDAY mandates discoms bridging their cost-revenue gap by FY19—currently, the discoms lose 90 paise per unit of power supplied. As with AT&C losses, the national average for the cost-revenue gap has been steadily falling but some states have failed to make any dent in it. Political expediency has long been blamed for this sorry state of affairs, with governments shying away from tariff hikes that reflect the actual cost of supply. Participating governments have now been mandated to ensure tariff rationalisation on a quarterly basis.

There are incentives in store for adherence to the road map, with UDAY mandating an increase in allocation under central grants for the performing states. The central grants would be made through two schemes : the Integrated Power Development Scheme for urban centres and the Deen Dayal Upadhyay Gram Jyoti Yojna (DDUGJY) for rural areas, with a combined budgetary outlay of Rs 1.4 lakh crore. These schemes would disburse financial help to states to upgrade their distribution network and improve billing efficiency by introducing IT applications.

“This scheme offers discoms a chance to break out of the vicious cycle of operational losses being funded by bank debt, by transferring debt to the state governments, reducing aggregate technical and commercial (AT&C) losses and lowering the gap between average cost of supply and average revenue per unit,” India Ratings says. The focus of the mission is on improving the internal efficiencies of discoms instead of passing on the inefficiencies to consumers through tariff hikes, it adds.

The Centre has also announced flexibility in coal linkage rationalisation norms which, if implemented strictly, would likely reduce the inherent inefficiencies in the power sector. For example, a state would be allowed to divert coal to its more efficient plants. Furthermore, Coal India (CIL) would supply 100% washed coal of G10 grade and above at plants more than 500 km away from mines by October 2018. This would improve the quality of coal supplied which has been a bone of contention between CIL and power producers for long. Addressing the supply side inefficiency would also help bring down the cost of power for consumers.

Despite the comprehensive nature of the scheme, doubts persist regarding the states’ willingness to comply with its provisions, especially as power happens to be in the concurrent list. To take one example, it is uncertain how far will Uttar Pradesh—one of the main culprits when it comes to discom indebtedness—go given that Assembly polls are due there in 2017. Fitch Ratings says that while it sees UDAY as a positive step, the commitment of the states to addressing discom inefficiencies would prove make-or-break for the scheme. Also, it feels, the new package does not address tariff reforms directly— politically a very sensitive subject.

Since the revival of the discoms is its goal, UDAY’s implementation would have some adverse impact on the lending institutions. However, given that loans to discoms had a huge risk component, experts believe that this may not be such a bad thing. “The profitability impact will be around Rs 4,300 crore per year, which works out to ~8% of the estimated profits of PSBs for fiscal 2017. PSBs will, however, benefit from a one-time provisioning write back of ~Rs 5,000 crore on restructured discom loans converted into bonds,” Rajat Bahl, Director, CRISIL Ratings says.

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