The financial position of the electricity distribution sector has been a concern for over a decade now. The inability of the State-owned distribution utilities to remain financially and commercially viable is putting at risk the significant investments being pumped into the electricity sector by private and public players.

The accumulated loss of all State distribution utilities has been estimated at Rs 1.9 lakh crore as of March 31, 2011. The Government, taking note of the fact that urgent affirmative action is necessary to ensure viability of present and future investments, has recently approved of a scheme for financial restructuring of State distribution companies (Discoms).

FEATURES OF SCHEME

The scheme includes several measures to be implemented by State Governments and Discoms for achieving financial viability. The heart of the package deals with restructuring the burgeoning short-term debt of Discoms. Support under the scheme will be available for all participating State-owned Discoms on fulfilling certain mandatory conditions, as outlined.

The scheme focuses attention on the short-term liabilities of Discoms and requires the State Government to take over 50 per cent of these liabilities in the form of bonds duly guaranteed by it.

The liability of repayment and interest on these bonds need to be taken over by the State Government, as and when they become due. Financial institutions, who have provided the debt funds and are on the verge of treating them as NPAs, will take steps to restructure the balance 50 per cent by rescheduling, providing moratorium on principal and re-setting the best possible interest to ensure viability of this effort.

In order that the effects of these actions are sustained, the restructuring of loans has to be preceded by concrete action by the Discoms/States to improve their operational performance and accelerate reforms measures.

As an incentive, the Central Government has committed to provide a matching grant equal to the value of additional energy saved by reduction of distribution losses beyond the levels agreed between the Centre and the States earlier. In addition, the Centre will also provide capital reimbursement support of 25 per cent of principal repayment on the liability taken over by the State Governments under the scheme.

STRUCTURAL IMBALANCES

The restructuring plan, though timely, raises a few important considerations which should not be lost sight of. The first is that the scheme targets the short-term liabilities of the sector, which comprise short-term loans and working capital.

Undeniably, these loans carry a higher interest rate than their long-term counterparts. Given that the tariff is determined on cost-plus approach, higher interest costs are passed on as higher tariff.

Stagnant revenue realisation by Discoms, in most cases due to non-revision of tariff, thereby leads to a growing gap between operating costs and revenues, resulting in higher losses and almost no cash left for repayment of interest and principal.

The restructuring scheme seeks to break this vicious cycle by reducing the interest burden on utilities and thereby reducing, and eventually eliminating, the operating gap. The second, and perhaps more defining issue that needs attention, is the fact that the loan portfolio of Discoms almost exclusively comprises short-term liabilities.

The obvious inference is that borrowings for investments are almost negligible. This trend needs to be reversed as soon as possible, as financial turnaround of Discoms also requires additional investments to augment capacity in addition to financial reengineering.

Thirdly, there has been a recurrence of the problem of handling short-term liability by the distribution sector. It is necessary to recall another such measure a decade back.

THEN AND NOW

The implementation of the Montek Singh Ahluwalia committee recommendations to restructure outstanding power dues of the then SEBs was meant to avoid recurrence of the situation. However, mere financial measures will not have the effect of sustaining viability in the long run; it has to be supplemented and complimented with reforms at the distribution level.

It is useful to compare the two packages for the distribution sector spread over a decade (see table).

It is evident that the key determinants of the two packages have more or less remained the same. While the State Governments, post-2002 package, did issue SLR bonds in favour of central power-generating companies and thereby took over liabilities upon themselves, they perhaps did not implement reforms that were critical for their sustenance. In fact, the issue of SLR bonds, with its attendant risk of direct debit from the State’s account with the RBI in case of default on power purchase, could be one of the driving factors for the exponential increase in appetite for short-term loans. Such loans provided an easy way to pay off power dues and avoid default of SLR bonds. That said, the report card of most States on the distribution side has been not very bad.

On the reforms front, though all States have scored high on institutional issues such as setting up and operationalisation of regulatory commissions and unbundling of SEBs, the thrust on germane issues such as regular filing and fixation of tariffs, issuance of multi-year tariffs, and promulgating open access regulations has been skewed and inadequate.

Similar has been the approach on critical issues such as energy auditing and accounting, feeder segregation, privatisation, etc. The present package makes it expedient for the States to accelerate these activities. Linked intricately to this effort is the need to usher in managerial transformation in Discoms, which the package rightly lays emphasis on. The oft-repeated practice of frequent changes at the managerial level needs to be replaced with a more stable and professional management.

The need for second bailout package in a decade points to the fact that the reform measures are not getting to the crux of the matter. It is necessary, therefore, for the policymakers at the Centre and the States to realise that such restructuring packages cannot be a substitute for long-overdue reform measures.

The inefficiencies in the sector are having an adverse effect on economic growth, in addition to triggering public outrage. A serious effort needs to be made to ensure that the distribution sector becomes financially sound.

(The author is Programme Officer, Compliance Assistance Programme, OzonAction Programme, UNEP. The views are personal.)

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