The Shunglu panel, set up by the Planning Commission for state electricity board (SEB) reforms, has suggested a seemingly radical idea: create a special purpose vehicle (SPV)—majority owned by the Reserve Bank of India (the rest split up equally between Power Finance Corp. Ltd and Rural Electrification Corp. Ltd)—to which shaky loans of SEBs will be transferred. The argument goes that this move will take the risk off the books of power lenders and lessen any impact on the financial system at large.
The solution sounds neat. After all, distribution companies made a combined loss of some Rs 1.79 trillion in the five years to fiscal 2010, and it is high time to clean them up. But there are a couple of issues here.
For one, these are just recommendations and the Reserve Bank was not represented in the panel. As brokerage Prabhudas Lilladher Pvt. Ltd points out in a research note, these reforms could take three-four years to implement and the financial position of SEBs would continue to be shaky in the interim.
Secondly, it talks about restructuring the loans before these are transferred to the SPV. That means the lenders will have to negotiate and bargain with the state government and reach an agreement on interest rates, loan tenure and so on. That may lead to some lenders having to take indirect haircuts on their exposure to SEBs, though that is infinitely preferable to defaults. But what it also means is that the burden is passed on to the state governments.
Mint’s Ravi Krishnan says the Shunglu panel’s idea of creating a special purpose vehicle for the shaky loans of State Electricity Boards may not solve their immediate problems
According to the panel’s suggestions, the state governments will have to cough up the money in case SEBs default even after a loan is restructured. And that is not going to be an easy task. It calls for reforms, and preparing an operational plan to upgrade the distribution sector. After much huffing and puffing, some 14 states hiked power tariffs in 2011, perhaps the highest in recent memory. Not that they had much choice. The spiralling payables of SEBs, scarce and costlier fuel, increasing personnel and maintenance costs and the stark realization that the centre had its own problem of a rising fiscal deficit made them spruce up their act. They have also made the right noises on structurally reforming the distribution sector and cleaning up SEBs by computerizing accounts and allowing annual revisions etc. But the question is will they be able to continue with the reforms? A lack of political will was the reason why some states had delayed tariff hikes for as long as eight years.
That has also led to burgeoning receivables on the balance sheets of power generators and is one reason for slowing investment in that sector. Investors, for now, seem to be waiting for results on the ground. The stocks of Power Finance and Rural Electrification slid by nearly 5.5% each, underperforming the broader market, on Monday.
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