FE Exclusive: Financial restructuring plan states seek 5 more years to rebuild discoms

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New Delhi | Updated: August 6, 2015 9:26:39 AM

If FRP support is withdrawn now, these states would need to progressively take over of the discoms’ bond liabilities, which could strain their finances.

discomIf FRP support is withdrawn now, these states would need to progressively take over of the discoms’ bond liabilities, which could strain their finances. (Reuters)

The eight states that had in September 2012 signed up for a centrally supported financial restructuring plan (FRP) for their power distribution entities could not efficiently use it to cut their distribution companies’ losses and outstanding debt and have now knocked the doors of the Union power ministry, demanding that the Centre fund their operational cash gap for another five years starting September.

If FRP support is withdrawn now, these states would need to progressively take over of the discoms’ bond liabilities, which could strain their finances. Citing this, the states have sought relaxations of the Fiscal Responsibility and Budget Management limits, even with the proposed extension of the package. They also proposed that the moratorium for principal repayment to banks by discoms be extended by another five years.

While states have been generally lax in their compliance with their FRP obligations — the package was linked to achievement of various milestones like timely tariff revision, reduction in aggregate technical and commercial losses and elimination of the gap between cost of supply of power and revenue — they have now sought workable state-specific targets.

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Under the FRP, discoms’ short-term liabilities amounting to Rs 51,200 crore were restructured by the lenders with the comfort of state government guarantees. These guarantees would increase the contingent liabilities of the states, the Reserve Bank of India had stated in its latest report on state finances.

Under FRP, the Centre has been funding operating losses of four “focus states” — Haryana, Rajasthan, Uttar Pradesh and Tamil Nadu — at a decreasing scale for three years, starting 2012-13. While the central funding — at a concessional interest rate — was for 100% in the first year, it went down to 75% in the second year and 50% in the final year, ending September this year.

In a presentation to a high-level committee on ‘Financial Viability of Discoms’ formed at the behest of the Prime Minister’s Office, the FRP states have said the Centre should fund the operating cash gap for five years from now “at a very reasonable rate”.

The Centre, these states, said, should provide them capital reimbursement support as soon as they took over the bonds issued by the discoms “sans any conditionalities”. Seeking lower interest rates on fresh bank loans to be taken by discoms, the states said that 2013-14 should be taken as the first year of FRP (rather than 2012-13 as now), adding that “at least 50% of operational losses should be funded by banks (until) FY2018-19”.

“The banks should subscribe to the bonds floated by discoms. These bonds should have a provision that the repayment will be made out of budgetary support from the state government. The interest on these bonds should not be more than 50 basis points over the G-Sec rate of 10-year bonds,” the states told the panel headed by power secretary PK Pujari.

To help the turnaround of discoms, the FRP states have also sought central government funds as interest subsidy to the states that have outstanding loans of more than Rs 40,000 crore (Rajasthan, Tamil Nadu and Uttar Pradesh) as on March 31, 2015.

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