CHENNAI, April 8, 2012
'Subsidy to discoms must be transparent'
K. T. Jagannathan

‘Power sector reforms, unbundling of power utilities have not had the desired impact'

With the financial losses of State power distribution utilities mounting, the Reserve Bank of India (RBI) has stressed the need for ensuring transparency by the State governments in reporting the subsidy given by them.

“The State budgets follow cash accounting as opposed to accrual-based accounting,'' says a study by the RBI on State finances. As such, “information on unpaid subsidies, loans extended against State government guarantees/letters of comforts as also guarantees invoked, if any, should be transparently reported by the State governments,'' the apex bank feels.

According to the study, the power sector reforms and unbundling of power utilities “have not had the desired impact'' on the financial position of the power utilities or the State governments. In this context, it points to the higher level of subsidy in Gujarat and Karnataka, which had unbundled power utilities, and also in Tamil Nadu, where the utilities remained in bundled form till 2009-10.

“The SPUs are making huge losses due to non-revision of tariffs over extended period, on the one hand, and non-realisation of subsidies from the State governments, on the other,'' the study says. With the gap between the average cost of supply and average revenue widening in several States, the SPUs resort to borrowing from banks and financial institutions to cover their losses. This situation is putting further pressure on the financial health of SPUs. No doubt the share of loans from States as a proportion of total borrowings of SPUs and subsidy realised have been declining, “the increase in State government guarantees to them has increased the contingent liabilities of the States,'' the study argues.

According to a high-level panel constituted by the Planning Commission, 70 per cent of the accumulated loss of Rs.82,000 crore of the distribution utilities between 2005-06 and 2009-10 was financed by public sector banks, 42 per cent of which was backed by State government guarantees. A third of this loss was incurred in 2009-10. Given this, the cushion available in the form of States' guarantee redemption funds at Rs.4,000 crore to meet the commitment arising from possible default ‘is grossly inadequate', feels the apex bank. The committee has, in fact, recommended the setting up of a special purpose vehicle to address the issue of payment default by SPUs.