SEB bailout: Throwing good money after bad

New Delhi: Every move by the Congress led-United Progressive Alliance government is being tagged “reform”, given the current political atmosphere in the country. The bailout plan for beleaguered state electricity distribution companies, or discoms, however, is in keeping with the government’s tradition of throwing good money after bad.

add_main_imageWhile the plan for the restructuring of short-term loans will come as a breather for the electricity distribution firms owned by the state governments that are finding it difficult to raise working capital, it has only postponed the doomsday finale of the ongoing crisis in India’s power sector.

Many would argue that the distribution sector holds the key to revenue to sustain the entire power sector ecosystem, thereby making such a step necessary, but this is not the first time that the “power” of such arrangements is being hailed as the panacea for all ills. This is the second such bailout for the Indian distribution sector in a decade; the first one failed to incentivize the states to act.NextMAds

Apart from the obvious difficulties in its implementation, given the states’ inability to acquire the debt as this would breach their fiscal responsibility and budget management limits, as reported by this paper earlier, the plan is based on the premise that the same set of stakeholders that have earlier landed the sector in this mess will behave in a rational way after signing agreements. Even as the policy wonks look hopeful, given the fact that even the recent massive power transmission failures of India’s grid that left around 700 million people without electricity failed to persuade the states to mend their ways, such a task looks like a tall order.

So what changes now? The package comes with new conditionalities such as making the state governments part of these tripartite agreements, reduction of losses arising from theft, transmission and billing from the present levels of 27%, and regular tariff revisions.

While the plan proposes that “50% of the outstanding loans and payables for power purchase for funding of accumulated losses of discoms is to be taken over by the state government and converted into bonds with a moratorium of three-five years, the banks on their part would allow a three-year moratorium on principal repayments for 50% of the working capital loan amount without foregoing their interests”, thereby putting additional burden on state finances. It comes at a time when even necessary actions such as energy audits and metering of consumers have not taken place.

Also, apart from the role played by the utilities that purchased power at high rates but didn’t pass on the tariff increase to the customers due to their governments’ populist compulsions, the banks are equally to blame. They indiscriminately loaned money to the state discoms to meet working capital requirements, at a time when their net worth was decreasing, triggering fears that there could be defaults on outstanding loans. The cumulative losses of the distribution utilities increased from ₹ 1.22 trillion in 2009-10 to ₹ 1.9 trillion as of March 2011. So much for prudential lending!

While there have been some successes stories, the aggregate technical and commercial losses vary from as high as 73.04% in Arunachal Pradesh to 14.24% in Himachal Pradesh. This is not the first time that this government has tried its hands at reducing distribution losses. It launched the Accelerated Power Development and Reform Programme (APDRP) scheme in 2002-03 to reduce the losses to 15%. Even as the programme was ineffective in reducing losses, it went ahead with a re-structured APDRP (R-APDRP) in 2008 with a ₹ 51,577 crore corpus. According to the 12th Plan paper on energy, there have been delays even in the R-APDRP.

With the distribution sector alone projected to require an investment of ₹ 3.06 trillion, the gap between the cost of electricity procurement and tariff realization should be bridged through “improved tariff implementation and adoption of multi-year tariff framework”. However, the poor managerial and operational practices of the discoms leave a lot to be desired.sixthMAds

Bridging the gap is easier said than done. The package is based on recommendations made by a panel headed by V.K. Shunglu, Comptroller and Auditor General in 2011, which were later examined by another committee headed by B.K. Chaturvedi, member of India’s Planning Commission, which suggested this strategy on the financial restructuring of discoms. However elaborate the exercise may have been, its success depends entirely on the acceptance of the scheme by the states. This seems a tough task given the political formation in “power” in states such as Uttar Pradesh, Madhya Pradesh and Punjab, which account for substantial distribution losses in the country.

Many are already calling it a “bailout in good faith”. Well, a bailout it certainly is and faith is an issue best left untouched at this time.