States need to feel the pain: Extending FRBM alone won’t help discipline SEBs

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Updated: September 15, 2015 2:29:16 PM

The only way to ensure states get the message and work on both cutting transmission losses along with getting customers to pay the true value of electricity – minus an explicit subsidy given by the government – is to make sure states feel the pain.

state electricity boardThe only way to ensure states get the message and work on both cutting transmission losses along with getting customers to pay the true value of electricity – minus an explicit subsidy given by the government – is to make sure states feel the pain.
(Reuters)

Though Prime Minister Narendra Modi will take a final call next week, one of the suggestions most acceptable to state governments – in their discussions with the power ministry – confronted with the likelihood of their electricity boards defaulting on bank loans is that the Centre simply extend their targets under the FRBM Act. If this is to be done, say a Rajasthan, can simply issue a bond, raise some money and, in turn, use this to pay off the bank that the Rajasthan state electricity board (SEB) owes money to. Ironically, most of the bonds issued by the states will be subscribed to by the very banks that the SEBs owe money to, making it quite like the ever-greening that the RBI so strenuously objects to when banks do it for corporate India. Given that a sample of 15 PSU banks are owed Rs 1.6 lakh crore, of which Rs 72,000 crore has already been restructured and could be in danger of becoming an NPA as the SEBs default, this is a solution that the banks will immediately welcome, indeed some of them have been pushing hard for this ‘solution’, a win-win on the face of things. The problem with such win-win solutions or financial jugglery is that they have all been tried before, and have failed miserably – that is why, from Rs 75,000 crore in FY11, the losses of SEBs have risen to Rs 1,05,000 crore in FY13; things have reached such a stage, with SEBs too bankrupt to even buy power, generation units are being forced to back down their power production which, in turn, jeopardizes not just their profitability, it hits their ability to repay banks.

Any solution that hopes to work has to recognise this reality. The only solution that has worked, and this was done only for a part of the SEB problem, was a tripartite solution that envisaged giving RBI the power to deduct, from the money the Centre gave it to transfer to the states, the dues to PSU utilities like NTPC – this is what ensured NTPC faced no major default over the last decade, and since this agreement is expiring next year, NTPC is anxious to ensure it gets extended. It should be, but the government would do well to ensure a similar agreement for private producers as well if it wants to ensure private investment in generation continues.

The only way to ensure states get the message and work on both cutting transmission losses along with getting customers to pay the true value of electricity – minus an explicit subsidy given by the government – is to make sure states feel the pain. And the only way to do that is to combine the FRBM extension with some hard budget constraints. So if a state wants Rs 20,000 crore more of headroom for bonds, give it half the amount with Rs 2,000 crore of cuts to be made each year by the RBI through a tripartite agreement. A pure FRBM extension theoretically caps the problem since, once the limit is exhausted, the states will not be able to issue more bonds to fund their loss-making SEBs, but who’s to guarantee this ‘one-time’ extension will not be given again, and again? Indeed it can make states and SEBs more profligate since the bonds will have a lower interest rate than SEB loans have right now, and so will give them more time to carry on without reforming. And then, there should be a time-limit – 10 years? – after which, the bonds have to be extinguished and tighter FRBM limits be re-imposed. Anything short of this will be kicking the can down the road, much like what previous governments have done.

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