American agency Fitch Ratings said on Thursday that the success of India's UDAY debt restructuring scheme for power distribution companies will depend on efficiency gains registered by the discoms and frequent tariff revisions.
American agency Fitch Ratings said on Thursday that the success of India’s UDAY debt restructuring scheme for power distribution companies will depend on efficiency gains registered by the discoms and frequent tariff revisions.
In a report published from Singapore, the agency said the Indian central government’s Ujjwal Discom Assurance Yojana (UDAY) has seen a large number of important states signing up for the programme.
Twenty Indian states and one union territory (UT) gave in-principle approval for UDAY and 16 have already signed up for the scheme.
According to Fitch, the committed states and UT accounted for almost 77 per cent of the total fiscal in 2014 net cash losses reported by discoms, and around 58 per cent of the total debt outstanding at end-September 2015.
“Tamil Nadu stands out among those which have not opted for UDAY, and accounted for 25 per cent of FY14 net cash losses of all discoms,” the agency said.
“However, the immediate relief provided by interest-expense reduction, while beneficial to the cash flow positions of the discoms, is inadequate to turn these entities profitable,” Fitch said.
“Achieving this goal by March 2019 as per the plan is highly predicated based on the ambitious efficiency improvements, coupled with tariff increases that are politically sensitive in India,” it added.
UDAY envisages taking over 75 per cent of discoms’ cumulative debt. States would issue loans against the debt at prevailing market rates. The balance 25 per cent would be issued as sovereign backed bonds by discoms.
The scheme also envisages access to cheaper coal, modernising transformers to cut distribution losses, as well as a provision to revise tariffs, which has been criticised by the AIADMK government in Tamil Nadu.
As per the report, UDAY is an improvement on previous debt restructuring packages for its four-pronged strategy that targets not only a reduction in interest burden but also operational efficiency improvement, reduced cost of power purchased and financial discipline.
According to Fitch, the aggregate technical and commercial (AT&C) loss in the Indian power sector is very high – ranging from 11 per cent to 71 per cent.
“For the majority of states, tariff increases are required to reach break-even status even after the other savings to which they are committed,” Fitch said
“A meaningful improvement in discoms’ economics will especially benefit power generation companies through higher utilisation and timely clearance of dues,” the report said.
The current low capacity utilisation of power plants is driven primarily by stressed discoms, which are unable to buy electricity because of weak financial positions, it added.