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World Bank sceptical about India’s power sector bailout

World Bank official says it will take 6-12 months for bailout results to be visible; calls it more of a banking sector crisis

The central government announced a bailout plan in September 2012 for power distribution companies, which included regular tariff revisions as part of the conditions to be met. Photo: Priyanka Parashar/Mint  (Priyanka Parashar/Mint )Premium
The central government announced a bailout plan in September 2012 for power distribution companies, which included regular tariff revisions as part of the conditions to be met. Photo: Priyanka Parashar/Mint
(Priyanka Parashar/Mint )

New Delhi: The World Bank is sceptical about India’s ambitious bailout plan for state government-owned distribution companies announced in September last year.

Ashish Khanna, lead energy specialist for the World Bank, said that while bailouts are an opportunity in crisis, “the proof of the pudding is in eating it".

Speaking with reporters on Tuesday check at the launch of a report related to rural electricity supply, Khanna said it would take six months to a year for the results of the bailout plan to be visible and termed it more of a crisis for the banking sector than for power companies.

Electricity distributors owe 2 trillion to banks and other financial firms.

Under the bailout plan, state governments are to take over half the outstanding loans of state electricity distribution companies, or discoms, and convert these into bonds, which would then be issued to banks backed by state-government guarantees. The remaining 50% debt is to be restructured by banks with a three-year moratorium, or a repayment holiday on principal repayments.

The World Bank has long been associated with the Indian power sector. Over the last decade, it has provided support to Union government entities for generation, transmission and renewable energy investments, and to selected state electricity boards for investments associated with sectoral reform.

Energy sector projects worth $3.5 billion are currently being funded by the World Bank and proposals amounting to $1.5 billion are in the works.

While the financial restructuring of four state discoms—of Tamil Nadu, Uttar Pradesh, Rajasthan and Haryana— amounting to 95,252 crore has been finalized, special dispensation has been taken up for Jharkhand, Bihar, Andhra Pradesh and Karnataka.

Khanna said the World Bank had shared its views with India’s power ministry. “While the contours are there, the question is how seriously you implement it," he added.

Performance parameters for the scheme include regular tariff revisions, reduction of aggregate technical and commercial losses, and reduction in the gap between annual realized returns and the average cost of service.

Distribution losses, which occur due to theft and inefficiencies in transmission and billing, have been estimated at about 27%. This is despite 10-year-old government schemes that aim to cut distribution losses to below 15%.

This is the second such bailout for the Indian distribution sector in a decade; the first one failed to incentivize the states to act.

The Union power ministry has already circulated the model State Electricity Distribution Responsibility Bill, 2013, on the lines of Fiscal Responsibility and Budget Management Act, to be adopted by the states to enforce discipline in the working of the beleaguered state power distribution companies.

On supplying electricity for agriculture consumers, the World Bank in its report said it had found that separating the supply systems for such users led to better quality of power for rural consumers. The finding came from a study conducted in Gujarat and Rajasthan.

The report—Experience of Rural load Segregation Schemes in States—recommends feeder separation, but suggests that metering of all rural consumers also be considered and data collected from the separate feeders be used to better manage power supply.

“According to the survey, prior to feeder segregation, more than 80% consumers in both Gujarat and Rajasthan complained of low voltage problems, which came down to 6% after segregation; more than 80% domestic and over 50% agriculture consumers complained of frequent power outages, which reduced by less than half in both the states," the World Bank said in a statement summarizing the report.

The government requested the World Bank to conduct the study to analyse different approaches to rural feeder segregation across India. Many Indian states, including Andhra Pradesh, Haryana, Punjab, Karnataka, Maharashtra, Madhya Pradesh, Rajasthan and Gujarat, have already taken steps to separate their supply systems for agricultural and other consumers.

“While electricity linkage is critical for growth and poverty alleviation, a ‘one-size-fits-all’ approach will not work," said Khanna, who co-authored the report. “There is need for a national guidance framework outlining the broad principles that will help make rural electrification economically viable. Each state should prepare their rural power supply improvement proposal based on their specific needs, keeping the national framework in mind."

Utpal Bhaskar
"Utpal Bhaskar leads Mint's policy and economy coverage. He is part of Mint’s launch team, which he joined as a staff writer in 2006. Widely cited by authors and think-tanks, he has reported extensively on the intersection of India’s policy, polity and corporate space.
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Updated: 03 Oct 2013, 09:57 PM IST
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