The Indian government on Monday approved an ambitious plan to bail out beleaguered state electricity distribution companies, or discoms, through a restructuring of their short-term loans.
The electricity distribution firms owned by the state governments are finding it difficult to raise working capital and owe a staggering Rs2 trillion to banks and financial institutions. They are servicing the interest on existing loans through fresh borrowings, an indicator of the ongoing crisis in India’s power sector.
According to the contours of the bailout package proposed by the Union power ministry to avert such a situation, while “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”.
The proposal was approved by the cabinet committee on economic affairs in an evening meeting.
P. Uma Shankar
, the power secretary, confirmed that the bailout plan had got the government’s approval. “This will be implemented in the form of a scheme. The states will now work on it,” he added.
Apart from new conditionalities such as making the state governments part of these tripartite agreements, other conditions to be met by the discoms include reduction of losses arising from theft, transmission and billing from the present levels of 27%, and regular tariff revisions.
However, concerns remain about the efficacy of the scheme given the requirement by the states to acquire the discoms’ debt which may breach their Fiscal Responsibility and Budget Management (FRBM) limits, as reported by Mint on 24 August. Mint reported the initial proposal on 16 August 2011.
The problem started when Indian banks started lending to the state discoms to meet working capital requirements. Given the mounting losses of the discoms, the finance ministry issued a directive to the banks to stop such lending, triggering fears that there could be defaults on outstanding loans.
Many distribution utilities are saddled with losses arising from theft, besides transmission and billing inefficiencies. Some regularly buy expensive power to tide over short-term deficits, and several haven’t revised rates in years. The poor financial health of these distribution firms means they cannot raise money at all.
The political compulsion to provide free power to farmers has also taken a heavy toll. As agricultural power supply is unmetered, many utilities write off all their losses from transmission and distribution as farm consumption.
In addition, tariff revisions are inadequate as the average increase falls behind power purchase costs. The poor financial health is also on account of non-payment of subsidy amounts by the state governments.
The cumulative losses of the distribution utilities increased from Rs1.22 trillion in 2009-10 to Rs1.8 trillion as of March 2011. Interestingly, according to a study conducted by energy consulting company Mercados EMI Asia for the 13th Finance Commission, the projected losses in 2014-15 were expected to be Rs1.16 trillion.