EPFO, LIC to back power utility bailouts

The Employees’ Provident Fund Organisation (EPFO) and state-run insurer Life Insurance Corporation of India (LIC) will assist states to clean up the books of their bleeding power utilities.

EPFO, the state-run retirement fund manager, and LIC will subscribe to the bonds to be issued by five state governments to raise ₹ 60,000 crore under the debt recast scheme, Ujwal Discom Assurance Yojana (Uday), launched on 5 November.

The money will be used to retire debt owed by the utilities to Rural Electrification Corporation and Power Finance Corporation, top government officials said.

The government wants to turn around debt-ridden distribution companies by letting states take over their collective debt of ₹ 4.3 trillion, so that their ability to purchase power improves—a key requisite to incentivise fresh investments in power generation, including in renewable energy.

India has set itself the target of creating capacity of 175 gigawatts (GW) of renewable power by 2022 from 4.5 GW at present.

Power minister Piyush Goyal said that provident fund organizations and insurance companies have shown a great deal of interest in the bonds to be issued by states under Uday.

“Uday bonds will largely be subscribed by these agencies, which will also allay fears expressed from some quarters,” Goyal said.

Some bankers were worried that states taking over discom debt could be construed as a loan-restructuring exercise. This would mean that these loans would need to be classified as bad loans, putting more pressure on the balance sheet of banks. Under existing rules, any account restructured for a second time should be classified as a non-performing asset (NPA).

A government official, who asked not to be named, said that Uday, a scheme approved by the Union cabinet, was binding on all agencies including the Reserve Bank of India.

The earlier two debt restructuring attempts of discoms—the last was by the Congress-led United Progressive Alliance government in 2013—did not work out in the absence of adequate reforms in power tariffs.

The finance ministry has allowed the five states that have signed up for the debt recast scheme to issue bonds, which will not be counted towards their fiscal deficit ceiling of 3% of state gross domestic product.

These states have committed to take over a collective debt of ₹ 1.05 trillion, representing 75% of their discom’s debt burden, in two years. The balance will be retired with fresh state-guaranteed debt.

Bihar is the latest to sign up for Uday (it did so on Monday), joining Rajasthan, Uttar Pradesh, Chhattisgarh and Jharkhand. Gujarat’s discoms are financially healthy, but the state has joined the scheme for other benefits such as billing efficiency and the possibility of cutting power theft. The government expects Andhra Pradesh, Punjab, Haryana and Uttarakhand to join soon.

States will be able to borrow at about 7-9% compared with the 12-13% interest cost that utilities pay considering their poor credit worthiness.

“Bihar government would take over ₹ 2,332 crore of discom debt, being 75% of the total debt of ₹ 3110 crore outstanding as on September 30 2015, as envisaged in the scheme,” said an official statement issued by the power ministry on Monday.

The scheme also provides for the balance debt of ₹ 778 crore to be re-priced or issued as state guaranteed discom bonds, at coupon rates around 3% less than the average existing interest rate, said the statement.

“As the quantum of the (Uday) debt to be placed is large, the state governments may seek alternate buyers for these bonds, and pension funds which seek secure long-term instruments, could find them interesting,” said Kameswara Rao, leader of the energy, utilities and mining practice at PricewaterhouseCoopers India.