Beginning Of The End
The government has announced a power bailout package yet again. Will
it help discoms recover or will we be back to square one in five
years’ time?
KANDULA SUBRAMANIAM

There’s a popular T-shirt slogan, “It’s déjà vu all over again.” It
might as well have been a commentary on the Indian power sector and
what ails it. In 2001, based on the roadmap drawn by the Montek Singh
Ahluwalia committee, the government outlined a bailout package for
cash-strapped state power utilities. The intention was to ensure that
the dues owed to central public sector enterprises such as NTPC, NHPC
and Coal India, amounting to over Rs 41,000 crore, were repaid.

“For years, there has been no increase in tariffs. Distribution
companies borrowed to tide over shortages"—VS Ailawadi, Former
Chairman, Haryana Electricity Regulatory Commission

For its part, the Centre pitched in by waiving almost 50% of the
interest due. The remaining 50% plus the principal due — another Rs
33,000 crore — was to be securitised through tax-free bonds issued by
the state governments. There was also a five-year moratorium on the
repayment of principal. Of course, there were strings attached. States
that availed this bailout had to mandatorily change their attitude
towards the power business. They would have to follow a
milestone-based reform programme that included measures such as
setting up regulatory commissions, metering power supply, improving
revenue collection and so on.
Eleven years after the initial plan was announced, the accumulated
losses of the state power utilities is now close to Rs 1.9 lakh crore.
And now there’s another bailout package, announced by the Centre in
September, a similar scheme with bonds worth Rs 60,000 crore and a
moratorium on principal repayment to be issued by the state
governments. The first attempt was a big flop. The question is: will
it work this time around?

Then and now

Essentially, this is the current plan: state governments will take
over half of the short term loans of discoms as on March 31, 2012 and
convert them into long-term bonds. They will also stand guarantee for
the remaining half, which banks will reschedule to longer repayment
tenures as well as give a moratorium on repayment of principal. And,
just like last time, there are caveats on states to commit themselves
to power sector reform if they are to avail of the bailout.

Eleven years after the Earlier bailout, the accumulated losses of the
state power utilities is now close to Rs 1.9 trillion

The problem in 2001 was a combination of several factors: low tariffs,
non-payment of subsidies to discoms by state governments and high
distribution losses. Now, there’s an added problem: the high cost of
power purchase. Essentially, the gap between the average cost of
supply (ACS) and the average revenue realised (ARR) has been steadily
increasing, from under Rs 1/unit a decade ago to over Rs 1.5/unit by
2010. Now, discoms are being incentivised to reduce the gap between
ACS and ARR — they will get a grant if the gap for the year is reduced
by at least 25%, keeping FY11 as the benchmark.
Of course, states can’t be compelled to reform — electricity is a
subject on the Concurrent List, after all. So, the Centre is offering
another carrot: if the states implement reforms that bring down T&D
losses (for which it is anyway offering a grant for every percentage
point reduction), reduce the gap between ACS and ARR, and take over
their mandated 50%, the Centre will pick up 25% of the principal
repayment. And given their fiscal responsibility and budget management
commitments and the cap on the extent of guarantees a state can give,
states have been granted a window of two to five years to take over
their share of discoms’ short-term loans.

Reality bites

But why wasn’t the 2001 bailout successful? Quite simple, says VS
Ailawadi, former chairman of the Haryana Electricity Regulatory
Commission. “For years, there has been no increase in retail tariffs
in many states. And distribution companies kept borrowing from banks
to tide over their revenue shortages.” Indeed, in December 2011, the
VK Shunglu committee on distribution utilities pointed out that “over
70% of the [financial losses of the power sector] is financed by
public sector banks”. With distribution companies not in a position to
repay banks and even state guarantees being inadequate, the problem
climbed up the supply chain to hit generation companies as well, which
in turn began depending on banks to fund their working capital
shortfalls.

“We started doing too many things at the same time, without
concentrating on replicating success stories"—SL Rao, First Chairman,
Central Electricity Regulatory Commission

Clearly, the checkbox approach to power sector reform hasn’t worked.
Losses have only climbed, tariff hikes haven’t kept pace with expenses
and the state electricity regulatory commissions (SERCs) haven’t
really made a tangible difference. Since 2001, various studies to rank
states on power efficiency invariably give high ratings to states that
corporatised their power companies and appointed SERCs. But a power
ministry note on the current turnaround package points out that the
desired objective of depoliticising tariff setting through these
appointments hasn’t been achieved. SL Rao, the first chairman of the
Central Electricity Regulatory Commission, says the trouble was that
“we started doing too many things at the same time, without
concentrating on replicating success stories”. Those included the
privatisation of power distribution in Delhi — which went through its
share of teething troubles but is now held up as a model to be
emulated. Instead, says Rao, “we get carried away with concepts and
ideas that cannot be implemented in the country at this stage”,
referring to issues like open access and removing cross-subsidies.
With a few notable exceptions, transmission and distribution losses
haven’t been drastically reduced since the last bailout. And the lack
of adequate tariff revision for several years has led to a situation
where the bonds issued under the earlier bailout have become distress
bonds, says Devendra Kumar Pant, director and head, public finance,
India Ratings & Research. Where discoms were hobbled by its political
bosses, the regulators too proved toothless in imposing higher power
rates. “The regulators should have issued suo moto orders to hike the
tariffs,” declares Ailawadi. It didn’t help that in some states, the
utility companies themselves failed to file their aggregate revenue
requirements with their respective commissions.

That wasn’t the only norm that was given the go-by. Ailawadai says
public sector banks were handing out short-term loans to discoms whose
balance sheets weren’t even audited. And if the company exhausted
borrowing from one bank, it simply moved to another. The Shunglu
committee points out that entries in the books on rising current
assets are “highly opaque”, particularly for distribution utilities in
UP, Andhra Pradesh and Rajasthan. “Part of the losses are displayed as
increase in current assets… UP alone accounted for 40% of increase in
current assets. Likewise, one-third of the increase in sundry debtors
was in case of AP,” the report adds. “These are nothing but losses not
displayed in the annual accounts,” it concludes. Another unreported
loss was the subsidy payment due from state governments.

Second time unlucky

Things started changing in 2009-10, when banks became cautious after
the Reserve Bank cracked the whip asking why they were lending to
unaudited entities, says Ailawadi. And in January 2011, the power
ministry asked the Appellate Tribunal on power to issue suo moto
orders to states to hike tariffs. Despite resistance from states, last
year the tribunal directed the state regulators that tariffs should be
decided by April of each financial year; and that in case of delay in
filing of ARRs for tariff, the SERC should initiate suo moto action
for determining tariff. “[The tribunal’s] order to state commissions
is going to be critical for a successful implementation of the
turnaround package” says Satnam Singh, CMD of Power Finance
Corporation. Now, the power ministry is also working on amendments in
the laws, including those relating to tariff setting, the role of the
regulator and even redefining the nature of the distribution business.

“The tribunal’s order to state commissions is going to be critical for
a successful turnaround package"—Satnam Singh, CMD, Power Finance
Corporation

Of course, the million-dollar question is, when will the amendments be
finalised, passed, tabled in Parliament and then enacted? With barely
a year to go before policy freeze sets in ahead of the general
elections, it’s unlikely that any of these amendments will see light
of day anytime soon. As it is, states have never had compunctions
about using electricity as an election tool, buying power from
merchant power at Rs 4-7 a unit to ensure uninterrupted electricity
ahead of the polls. It is demand for merchant power that brought in
significant investment into power generation in the past decade,
despite the sector’s mounting losses. The shortage of coal and liquid
fuel (for some time) in the past couple of years has hit these gencos
hard, leaving stranded assets on the ground. But the present scheme is
aimed at repaying banks their short-term loans to state distribution
utilities, it’s not considering the trouble gencos are facing.
The current bailout package is open for debate until December 31,
2012. But there’s scepticism whether the scheme will achieve its dual
goal of repaying banks and turning around the sector. Much will depend
on how Appellate Tribunal order is implemented and whether the losses
of the sector can be stemmed. Experts aren’t too confident — the
Shunglu committee has indicated that the haemorrhage will continue.
Also, where is the revenue stream to service these state government
bonds?

Just Rs 8,500 crore has been disbursed under the R-APDRP against a
planned Rs 52,000 crore since states have not reduced T&D losses

Rao points out that the 2001 plan was good, but nobody monitored it to
see whether states were following the set agenda. Similarly, there are
no quantifiable targets in the current scheme.
Certainly, the Centre’s track record when it comes to such
strings-attached largesse isn’t reassuring. The
Restructured-Accelerated Power Development and Reform Programme
(R-APDRP) was launched in 2008 to help states improve their power
distribution network, subject to their showing improvement in T&D
losses. So far, the government has disbursed just Rs 8,500 crore under
the scheme against a planned Rs 52,000 crore since states’ progress on
this front has been abysmal. Similarly, the Rajiv Gandhi Grameen
Vidytikaran Yojana doles out funds for rural electrification if
post-implementation the villages get at least eight to 10 hours of
power daily. As things stand, peak season load shedding in even some
big cities leaves them with just 10-12 hours of power a day, so it’s
very unlikely that villages will fare better.

There’s another T-shirt slogan that’s unfortunately all too apt in
this situation: “What men learn from history is that men don’t learn
from history”