The plan was to market the outstanding dues by converting them into securities, a task which was to have been carried out by the concerned PSUs, and hawking them to customers. The securities were to have had medium-term tenures of between three and five years. As a safety measure, these instrument were supposed to have a central guarantee cover for easier marketability.

Though it was the finance minister who announced the innovative scheme, it was his ministry which back-tracked on providing the critical central cover. The ministry argued that the cover could only be given if, in case of default or at the time of maturity, the Government is in a position to deductthe devolution on the Centre from the central plan assistance to state governments.

While North Block's argument was reasonable enough, the Planning Commission and state governments rejected the offer. Reason: Already, 15 per cent of central assistance to state Governments, which owe dues to CIL, NTPC. NHPC and Powergrid, was being deducted to pay for the outstandings until December, 1996. This deduction will go on for the next several years.

So, in case central cover is provided on the securitisation of the post 1996 dues, which works out to around Rs 18,000 crore, the notional deduction from central plan assistance will have to go well beyond the 15 per cent mark.

Such high levels of deductions had been found unacceptable both by the state governments and the Planning Commission.

North Block did try several other options, keeping within the 15 per cent deduction provision. One suggestion was to extend the tenure of the securities to between seven and 10 years so that the central cover could be keptwithin the 15 per cent norm as the current spate of deductions would have been completed by then. But potential buyers found the tenure too long, especially in the context of the absence of a well defined secondary market for such debt.

The ministry tried offering other sops, including a tax-free status and adjustments against statutory liquidity ratio (SLR) requirements. But then most banks are holding liquidity positions above SLR levels and the tax-free nomination was not found to be incentive enough.

Clearly, in making the budgetary announcement, Yashwant Sinha under-estimated the underlying problems with securitisation.

Given the poor financial health of SEBs, the energy PSUs end up supplying feedstock and power without letters of credit. An occasional threat to discontinue supplies is silenced through political pressure. The end result is mounting unpaid dues and severe financial squeeze for the PSUs concerned. According to estimates (after taking into account proposed central plan deductions and`surcharges' on dues), NTPC is owed Rs 7,500 crore, NHPC Rs 3,000 crore, Powergrid Rs 2,000 crore and CIl Rs 3,000 crore. Behind the rosy balancesheets, therefore, hides a potential financial bomb.

A promise too hard to fulfil

The proposals

* Securitise Rs 18,000 crore worth of outstandings.

* Medium tenure securities of 3-year to 5-year duration. Later sought to be extended to 10 years.

* Adjustments against SLR holdings.

* Central government cover and tax-free status.