Discoms' health is a test of govt's will: S&P
BS Reporter / Mumbai Sep 11, 2012

Rating agency Standard and Poor's (S&P) on Monday said the Indian government's proposal to restructure the debt of power distribution companies (discoms) was an “inadequate” measure.

While restructuring could help the debt-burdened state power discoms cover costs in the short term, S&P finds these moves inadequate and hence believes the government is looking to buy time to address the troubles plaguing the industry.

“The government's will and ability to undertake necessary reforms will therefore be put to test,” the agency said. While restructuring debt is the first step, it feels the next step would be to establish a transparent, fair, and predictable tariff framework, independent of political interference. “

It added in a report the restructuring proposal “does not eliminate the practice of subsidies and provision of free power to some sections of the population, and may not be sufficient to encourage more investment in the sector. We don't believe the underlying credit problem of discoms can be addressed sustainably unless the practice of cross-subsidies is eliminated”.

State discoms have been under the scanner since last year over their losses and credit crunch, which resulted from years of delayed rate increases. A report by CRISIL last year estimated the losses of the distribution companies across the country at around Rs 35,000-40,000 crore in 2010-11. Rajiv Vishwanathan, the credit analyst of S&P said the key factors affecting the sector were fuel supply concerns, high cost of fuel and higher capital expenditure. Though some discoms have already gone ahead and hiked rates, such measures were insufficient, he added.

“Mushrooming losses could force discoms into another cycle of increasing debt and weakening finances, leading to a decline in system reliability and future supply constraints,” the S&P report said.

State discoms whose debts are restructured could have more funds to invest in transmission and distribution (T&D) infrastructure. The T&D losses for some states are as high as 27 per cent, compared to 5-10 per cent globally.

Around 11 per cent of power sector loans were already restructured last financial year, including that of discoms in Punjab and Haryana. S&P expects more restructuring to follow this year. Power sector loans account for 7.2 per cent of the total loanbook of Indian banks, which is stands at Rs 3.30 lakh crore.