Column: Cutting SEBs to size

To discipline them, the Centre should withhold part of the funds that it gives the states

After piling up losses of a staggering Rs 81,000 crore and accumulating debt to the tune of Rs 55,000-60,000 crore, the Rajasthan State Electricity Board (SEB) now wants to restructure a large chunk of its borrowings for a second time. It’s not as though the state hasn’t increased tariffs over the last few years, it has, but these haven’t been enough to bridge the revenue shortfall which in FY15 was Rs 13,000 crore. It’s not just Rajasthan, there are several other SEBs whose finances are in a shambles; accumulated losses of all SEBs together are estimated at close to Rs 2 lakh crore.

Power minister Piyush Goyal is right, the FRP (Financial Restructuring Programme), initiated in late 2012, hasn’t worked. The agreement was all carrot and no stick—SEBs got away lightly and banks were left unprotected. So, while short-term loans were restructured and SEBs were given moratoriums, there was nothing to ensure that tariffs must be raised periodically. A tally taken by ICRA in March showed that barely 15 out of 29 states had made the mandatory tariff filings whereas this process should have been completed in November last year. Rajasthan, for instance, has not filed for tariffs for FY16. That is a sorry state of affairs.

But while he has not passed up a single opportunity to rubbish the scheme, Goyal hasn’t come up with a credible alternative either. He needs to because otherwise banks are going to be in big trouble. RBI is unlikely to allow banks to classify the second-time restructured loans as standard assets; it’s firm on forbearance, there isn’t going to be more of it. So, a default of Rs 50,000 crore will mean a big hole in their balance sheets. The total exposure of state-owned banks to SEBs currently is 3.4% of their total loans, or roughly Rs 1.6 lakh crore, of which around Rs 72,000 crore, or 46%, has been restructured. For a small bank like Dena Bank, it is 9% of its loan portfolio, dangerously high. In fact, banks’ overall exposure to the power sector is high, at close to 10%, in itself undesirable.
Needless to add, the tariff hikes proposed by the others will prove to be inadequate; Andhra Pradesh, Gujarat, Maharashtra and Telangana have suggested very modest tariff revisions in the range of 3% to 8%. When the annual losses of SEBs are close to Rs 75,000 crore, there can be no justification for not raising tariffs. Goyal has said it is more important to prune ATC losses, skirting questions on whether he would be able to persuade BJP-ruled states to increase tariffs. To be sure, lowering ATC losses—now at an all-India average of 30%—will help a great deal but there can be no substitute for raising tariffs. Indeed, the government must resist any kind of a bailout because that will not just create a moral hazard, it means banks will need to take a huge haircut, and banks being at the receiving end for far too long now. That needs to stop.

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Which leaves the central government with just one option. That is to recover the dues of SEBs to the banks by withholding part of the funds that it gives the states, their share of tax revenues perhaps and hand that over to the banks to cover their annual repayments. This may sound difficult, impossible and not politically-correct, and may require some tweaking of rules here and there, but unless some drastic steps are taken to contain the crisis, it will only balloon into a bigger one. Unless this is done, it’s hard to see how SEBs are going to be disciplined. Allowing them to issue bonds, in lieu of outstandings, is a bad idea; banks need to be repaid now, not after 10 years.
The idea is not entirely a new one. In August 2002, a panel headed by Montek Singh Ahluwalia had recommended an agreement between the states and the Centre to help clear SEB dues of close to Rs 38,000 crore, to NTPC and Power Grid Corporation with leeway for the Centre to ‘adjust’ for any non-payments by the states. The adjustment was clearly inadequate but the idea needs to be implemeted in its spirit.

State governments are happy to help agricultural consumers by making good the difference between the cost of supply and the subsidised tariff to SEBs. But they don’t feel the compunction to get their SEBs to repay bank loans—what they don’t appreciate is that SEBs may not be able to meet agriculture demand the way things are going. Regulatory assets—the gap between the cost of power and what customers pay—needs to be brought down urgently in states such as Haryana and Tamil Nadu, for which they were estimated at Rs 12,600 crore and Rs 24,600 crore in FY14, respectively. The untreated gap in Punjab is Rs 4,400 crore (34% of ARR).

If state governments can, they should try and dispose of assets—generation or transmission—to rustle up funds. There are private sector producers who might be willing to pick up assets at attractive valuations. There’s no real need for them to be in the business of either power generation or distribution and private sector players should be able to do a better job of it.

Over the longer term, the distribution sector can be reformed by privatising parts of it; there have been a few experiments already and that way theft can be brought down. But there’s little point in boasting about how much capacity is being created when there are virtually no takers for power because SEBs are near-bankrupt. In the last four years, PPAs have been floated for just 8,500 MW whereas the capacity added has been some 30,000 MW. That cannot be a happy situation.

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