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Lending in an unmetered way

Lending in an unmetered way
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First Published: Tue, Jun 21 2011. 01 15 AM IST
Updated: Sat, Jul 02 2011. 04 18 PM IST
The power ministry’s proposal to enhance the funds that a single borrower can access from lenders such as banks, Power Finance Corp. and Rural Electrification Corp. for a project in the power sector seems, on the face of it, only reasonable and expected (“Lending to power sector likely to rise, Mint, 20 June). The acute power shortages have propelled the Union government over the last few years to tender out four large-capacity generation projects under the ultra-mega policy banner. Each involves an investment of the order of Rs 16,000 crore where for every Rs 10,Rs 7 is sourced from lenders. Hence, the grave need for more lending space to see these projects fructify. Further, this momentum is being sustained—eight more are in the works. Good news so far.
The trouble, however, is with the bills that such large power sales will generate when these projects commence production in the coming years. It is likely to meet with large scale defaults, one triggering another. This morbid picture is well placed on the probability graph. This, since the pace of reforms that picked up in the early part of this century, has failed to deliver satisfactorily. The state-owned utilities, the near-monopoly bulk buyers, on average suffer from supply losses as high as 30%, when it was projected to be half this figure; tariffs have not been raised over the last three years.
The problem is twofold. First, the lighter one. It’s been close to a decade and the government still hasn’t collected the basic ingredient for a sound reform programme—accurate base line data on power distribution by utilities. It is only in the last couple of months that the Union government began spending big money to buy equipment that pinpoints leakages in the circuit connecting the utility to the end-user: miserably late, but finally on course. This will bring to sharp focus the allocation of sins in the distribution business—theft, inefficient equipment, non-payment of bills.
The second part is far tougher: raising farm and domestic tariffs, while reducing those paid by industry and commercial business. Fundamental to realizing this objective is the need for the political class to stop interfering with the regulators as they go about their job of fixing tariffs, setting loss reduction targets.
One reason why the magnitude of the problem has not yet reflected in payment defaults to generation companies is, perversely enough, the poor pace of capacity addition over the last two decades. That reason is set to evaporate in the next few years. And, if the pace of reforms does not match up to the impending crisis, the government will be looking at cluster bailouts for its lending agencies.
What should be done to improve the quality of lending to the power sector? Tell us at views@livemint.com
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First Published: Tue, Jun 21 2011. 01 15 AM IST
More Topics: Ourviews | Power | Electricity | Investment | Industry |