Budget may announce plan to recast state electricity boards

The budget will also make provisions for the National Electricity Fund, which will subsidize the interest on loans taken by SEBs to cut distribution lossesUtpal Bhaskar New Delhi: The Union budget may announce a restructuring plan to improve the financial health of beleaguered electricity distribution firms that are mostly owned by state governments.

The state electricity boards (SEBs) are finding it difficult to raise working capital and owe a staggering Rs1.77 trillion to banks, an indicator of the ongoing crisis in India’s power sector.

The budget will also make provisions for the National Electricity Fund (NEF), which will subsidize the interest on loans taken by SEBs to cut distribution losses.

“The budget is expected to make an announcement regarding SEB restructuring to improve their financial health,” said a government official requesting anonymity. “This is expected to come in the backdrop of the work done by the panel on financial restructuring of discoms, headed by B.K. Chaturvedi.”

The panel, headed by Chaturvedi, a member of the Planning Commission, was set up last year to look at the restructuring of power distribution companies of Tamil Nadu, Uttar Pradesh, Rajasthan, Madhya Pradesh, Andhra Pradesh, Haryana and Punjab.

The power distribution companies of states such as Uttar Pradesh, Rajasthan, Madhya Pradesh and Tamil Nadu alone account for around 75% of total distribution losses in the country.

Many distribution utilities are saddled with losses arising from theft, inefficient transmission and billing inefficiencies. Some regularly buy expensive power to tide over short-term deficits, and many haven’t revised rates in years.

The poor financial health of these distribution firms means they cannot raise money at all, or can do so only at very high interest rates. Worse, since they are the main customers of power generation and transmission companies, there is a growing reluctance among investors and financiers to invest in the latter.

“We believe easing interest rates and the central government’s actions to address the key issues (fuel, clearance and approvals) have reduced the overhang on the power sector. However, valuations are still at distressed levels for most asset owners and lenders,” said a 2 February report from UBS Investment Research. “We expect progress on the SEB reforms to improve further after the state assembly elections (Uttar Pradesh and Punjab), especially as the experience in Tamil Nadu was positive.”

“We’ve been discussing a lot of things. This proposal hasn’t reached that stage. However, there is still a long way to go till the budget. In total we have made 47 demands, of which 17 are tax-related. Let’s see what we get,” a power ministry official said on condition of anonymity. “The budget is also expected to make some provisions for the electricity fund, which was announced in the 2008-09 budget speech.”

The NEF will subsidize the interest on loans taken by SEBs to cut distribution losses, with the interest subsidy to be given from the budget. According to the proposed scheme worked out under the NEF, the boards will get a 3-5% discount depending on performance, which will be paid by the Union government to the lenders.

The troubled utilities are expected to avail Rs.25,000 crore worth of loans in the first two years. This subsidy will be performance-linked and aimed at an efficient distribution system.

The finance ministry’s position could not be confirmed as it is under quarantine during the last phase of preparations for the budget.

The cumulative losses of the distribution utilities are around Rs75,000 crore, and if the present trend continues, their projected losses in 2014-15 will be Rs1.16 trillion, according to a study conducted by energy consulting company Mercados EMI Asia for the 13th Finance Commission.