Power sector reforms remain an unfinished story. In the absence of meaningful reforms, electricity utilities are always in a near-crisis state. When water crosses the danger mark, the government appoints a new committee; ecommendations—mostly a rechauffe of those made by similar panels appointed earlier—flow. Some are accepted and other, more difficult ones, ignored. And the wheel completes one full circle.
In July 2010, the Planning Commission appointed a panel led by V.K. Shunglu to look into the financial problems of state electricity boards and suggest corrective steps. The panel submitted its report recently. Its recommendations on solving the financial problems of electricity distribution companies make for interesting reading. If implemented in a half-baked fashion, as are most power sector reforms, they are likely to create more problems rather than offer a lasting solution.
The committee found that losses of distribution companies in 2009-10 alone accounted for Rs 57,000 crore and accumulated losses over five years amounted to Rs1.79 trillion. These amounts don’t take subsidies into account; they are lower if subsidies are factored in. Had state governments not been the owners of these utilities, these companies would have sunk a long time ago.
A large part of these losses will fall on the banks due to their imprudent lending to this sector. But perhaps it is not fair to blame the banks as ultimately the Union government is their owner and very often conflicts of interest due to ownership accentuate this problem. That, however, is another issue. At the heart of the Shunglu panel’s recommendations is the creation of a special purpose vehicle (SPV) that will take over a part of the banks’ liabilities subject to certain conditions. These include state governments agreeing to higher tariffs; banks negotiating with state governments/utilities a revised repayment schedule; agreeing to an operational plan to improve technical and operational performance and franchising of distribution function.
This is where the problems will kick in. State governments would be more than happy to have a Reserve Bank of India-backed SPV—after all, this will amount to a balance sheet clean-up without harsh measures. They are certain to resist frequent (and upward) tariff revisions and privatizing distribution. These measures make for good economics, they make very poor politics. Unless this root issue is addressed, nothing workable is likely to emerge.
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