Power minister does well to ensure SEBs pay for electricity they buy & to insist on reforms before giving them funds
It is early days yet, but the power ministry has made a good beginning by telling state electricity boards (SEBs) that they will not be supplied electricity—even by government-owned electricity producers—unless they produce a letter of credit (LC) for the value of the purchases. So, on the due date of payment, the SEB can either pay the power supplier and then rollover the LC, or refuse to pay, in which case, the suppliers asks the bank for its payment. Since no SEB is going to risk not getting supplies, this means, for electricity supplies since August 1, at least, there will be no delays in payment, much less a default.
The dues of around `77,000 crore till August 1, of course, will also need to be sorted out since, if power suppliers don’t get this money, they will be unable not just to run their businesses, but even to repay banks for loans taken; while `49,000 crore comprise dues to conventional power suppliers, dues to non-conventional energy suppliers are `9,600 crore, and another `18,000 crore of claims that are pending with various regulators for ‘change-in-law’ reasons will have to be paid.
While power minister RK Singh is cracking down on SEBs—a long overdue crackdown—by insisting on LCs, it is unlikely such a big move would have taken place without the explicit backing of prime minister Narendra Modi since all state governments are involved. It remains to be seen whether the insistence on LCs will become standard protocol or whether, over time, states are able to convince Modi that he needs to ask Singh to back off.
Even more reformist is Singh’s plan to mandatorily link funding from central government financial institutions, like PFC and REC, to reforms. Based on newspaper interviews by Singh, SEBs will have to either privatise their distribution systems—as Delhi has—or start operating via franchisees; it is not clear what time-frame Singh will give for this, but it is clear that involving the private sector is an important first step in cleaning up the sector. It is only when private sector money is at risk that it will try to ensure losses come down, billing/collection efficiencies rise, and state electricity regulators are pressured to get consumers to pay for legitimate increases in costs.
Since India has been talking about the need for power-sector reforms for decades, everyone knows what needs to be done; indeed, the Electricity Act of 2003 was reformist enough to mandate various ways to ensure there was enough competition. What Singh plans to do, really, is to enforce the Act. But, while the required reform steps were well-known, the implementation has always been patchy.
When the UPA did its power-sector bailout, the second part of this—the required reforms—were never insisted upon. Even the NDA’s Uday focussed on giving SEBs massive relief through financial restructuring of loans; under Uday, SEBs benefitted from banks converting their 14-16% interest-bearing loans to SEBs into state government bonds which had an interest rate of around 8-8.5%. Various concessional finance schemes were also put in place to strengthen transmission and distribution networks; while this was an important prerequisite to cleaning up the sector, it was never going to be enough without tighter control over SEB access to funds.
Not surprisingly, the results show, by and large, that Uday didn’t deliver either. It is to be hoped that Modi-Singh are more serious this time around, and will ensure that the power sector mess is fixed as quickly as possible. Should this happen, while the action may be below-the-radar, it will represent a big reform measure in Modi 2.0.