The Centre’s debt-restructuring package for state electricity boards (SEBs) provides light for the beleaguered power sector at the end of a long, dark tunnel.

The package aims to provide liquidity support to SEBs groaning under accumulated losses of 1.9 trillion. The intent is good, but is easier said than done.

If states accept this scheme, they would take over half the short-term loans repackaged into bonds and pay interest on this portion. But the first question is whether they will be able to bear this burden without breaching their fiscal responsibility and budget management targets?

Even if they do so, the benefits may not be immediately visible on SEB cash flows. As Emkay Global Financial Services Ltd points out, state governments coughed up only 22,000 crore of subsidy they owed to distribution companies versus the 34,000 crore booked by the latter in fiscal year 2011. So what guarantee is there that states will reimburse interest payments made by SEBs on time?

In any case, interest costs amount to about one-tenth of the effective power cost of SEBs. The biggest reason why SEBs are bleeding is because their power purchase costs have outstripped revenue. In the last six fiscal years, the costs for state power utilities have increased at an average annual rate of 17%. For the end-consumer, power rates have gained by 5.4% yearly at the same time. Thus, even if debt till 2012 is taken care of, losses could still pile up if tariff hikes aren’t sufficient. That is a political decision and isn’t easy when you consider that in terms of purchasing power parity, Indian power rates are costlier with the average rate almost double that in the US.

Of course, the Centre has provided some incentives and grants to support SEBs; but those are conditional on states reducing their aggregate technical and commercial losses. Earlier programmes such as the accelerated power development and reform programme have failed miserably in this regard. Leaving political shenanigans aside, an estimated 3 trillion worth of capital expenditure is required to modernize distribution infrastructure and cut technical and commercial losses. Where is the cash going to come from?

The upshot is that the benefit for listed power producers may take quite some time in coming. Sure, if cash flows get freed up, however marginally, it would lead to quicker payment of power producer dues. But an increase in the ability of SEBs to buy more power is some time away.

In any case, power producers have enough headaches with fuel scarcity. With thermal plant load factor seen so far this fiscal year (72.12% till July) the lowest in at least eight years, it’s not as if they can service any rising demand. Thus, the recent run-up in stocks is more a play on sentiment rather than any drastic improvement in fundamentals. The same holds true for suppliers of power equipment, who aren’t likely to seen a sudden boost in orders.

What about power financing companies and banks? Power Finance Corp. Ltd and Rural Electrification Corp. Ltd have about 5,000 crore short-term exposure to SEBs, according to Prabhudas Lilladher Pvt. Ltd estimates. Thus, they benefit to the extent that SEBs’ debt-servicing ability might improve.

For banks, things are still a bit hazy. Although this scheme does away with the fear of non-performing assets and releases some capital, lenders have already recast a fair chunk (about 40%, say estimates of some brokerage firms) of loans to utilities. But it is still unclear whether they will have to settle for a lower interest rate on bonds issued by SEBs, a not unlikely scenario since these will be backed by state government guarantees. If that happens, it could lead to a write-down in the value of the debt they have issued.

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