Home >Home-page >States likely to convert loans to SEBs into equity

New Delhi: In an attempt to improve the financial health of state power distribution utilities, state governments may convert loans given by them into equity to ensure capital infusion and a boost in net worth as part of an exercise to ensure that India generates the energy it urgently needs to sustain economic growth.

Most state electricity boards (SEBs) make substantial losses and are either not able to raise money or can do so only at high rates of interest. There is growing concern about investing in the power generation sector due to the poor financial health of SEBs.

To start with, the Bihar government has informally decided to go ahead with the proposal, said Sushil Kumar Modi, deputy chief minister, who also heads the empowered committee of state finance ministers.

“A formal decision by the state cabinet will be taken later," he said.

While the present net worth of the utilities is a negative 37,107 crore, outstanding loans from the state governments amount to around 27,544 crore. India has 73 distribution utilities, which include private distribution companies.

The conversion proposal was floated by the Union government at the state power ministers conference held in Delhi in June.

“The states have agreed to consider our proposal," said P. Uma Shankar, Union power secretary.

According to a report prepared by Power Finance Corp. Ltd for 2008-09, of the 40 state utilities that have been unbundled from their SEBs, only 11 utilities are profitable, with the rest making losses after calculating the subsidy provided by the government. Also, only 18 of these utilities have a positive net worth, with the remaining 22 having negative net worth.

SEBs across India are saddled with losses due to power theft and technical losses to the tune of 28.44% during transmission and distribution (T&D), billing inefficiencies, and, more importantly, because they have to buy expensive power to tide over short-term deficits. Some SEBs have also failed to revise tariffs for many years, adding to losses.

The cumulative losses of the distribution utilities are around 75,000 crore, and if the present trend continues, projected losses in 2014-15 will be 1.16 trillion, according to a study conducted by energy consulting firm Mercados EMI Asia for the 13th Finance Commission.

A dependence on subsidies and the political compulsion of providing free power to farmers reflects poorly on the books of these SEBs. As agricultural power supply is unmetered, many utilities write off all losses from T&D as farm consumption. In addition, whatever tariff revisions that have been made are inadequate and the compounded annual growth rate (CAGR) of charges is less than the CAGR of power purchase costs. The poor financial health is also on account of non-payment of subsidy amounts by state governments and cross-subsidization beyond the approved range of +20% to -20%.

“The gap between average cost of supply and the average revenue realized is increasing," said Pramod Deo, chairman of the Central Electricity Regulatory Commission.

The government is worried about the funding scarcity facing the power sector, which threatens to worsen an energy deficit that is seen as a key bottleneck in efforts to sustain and boost economic growth. Since the health of the power distribution sector holds the key to the success of the generation projects, the government also plans to subsidize interest on loans taken by SEBs to cut distribution losses under the national electricity fund. The utilities are expected to avail of loans worth 25,000 crore in the first two years. Other measures to facilitate funding include a mandatory rating system for state-owned distribution firms to streamline lending to them.

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