Financial restructuring of Discoms and mandatory conditions
V K Gupta
18 October, 2012
The bailout plan for power sector by way of debt restructuring of state-run power distribution companies (Discoms) is a welcome move, but a strong political will is needed to implement it.

THE MUCH-awaited bailout plan for power sector by way of debt restructuring of state run power distribution companies (Discoms) with total losses of Rs. 1.9 lac crore is a welcome step but comes with mandatory conditions linked with it.

This is the second such move in less than a decade. But the million dollar question remains unanswered that how power utilities will get rid of political and bureaucratic interferences due to which they keep on running in losses. In the past, politicians have prevailed upon the State Electricity Regulatory Commissions headed by retired bureaucrats who are at the mercy of state political bosses. As a result the Discoms have been saddled with losses.
Restructuring Plan
Support under the financial restructuring scheme will be available for all participating state-owned Discoms on fulfilling certain mandatory conditions. The State Governments will have to convert all their loans to equity. All outstanding energy bills of the state departments as on March 31, 2012 are to be paid by November 30, 2012.
50 percent of the outstanding short term liabilities up to March 31, 2012 will be taken over by State Governments. They will be first converted into bonds to be issued by Discoms to participating lenders, duly backed by State Governments guarantee. Restructuring the balance 50 percent short term loan by rescheduling loans and providing moratorium on principal and the best possible terms for this restructuring to ensure viability of this effort.
Although the scheme is not mandatory for all states, but it requires that the states which agree on adopting the package will have to pass the State Electricity Distribution Responsibility Bill in their respective states following which the package will be made effective and the government grants will start flowing in. The real bailout will come only after 5 years of consistent performance by Discoms when the center will pay 25 % of restructured debt.
Cost of Supply & Realization
Due to wrong policies of successive government’s overall gap between costs and tariffs kept on increasing in spite of increased tariffs. During 2007-08 the average cost of power was 404 paise per unit whereas the average tariff was 305 paise per unit. Last year the power cost was 487 paise per unit and average tariff was 404 paise per unit. In some states this gap has gone up to 200 paise per unit.
The stunning increase over last four years in the amount of bank exposure to the power sector is a major area of concern. The bank’s exposure increased from 124447 lac crore to 344982 crore in four years. The banking sector's short term exposure to the distribution companies was estimated at Rs 1.5 - 1.7 trillion as on March 2012. This includes 3-3.6% of banking credit and 45-52% of total power credit. A major chunk of these loans were taken to fund cash losses of the Discoms.
UP with liabilities of Rs 25934 crore, Punjab with Rs 11646 crore, Haryana with Rs 14088 crore, Rajasthan with Rs 39710 crore and Tamil Nadu with Rs 19146 crore are said to be main beneficiary states with debt restructuring package declared by Government of India.
The overall book losses of the Discoms till March 31, 2012 was estimated at Rs 1.90 trillion, of which 70% of the losses were estimated to be contributed by the Discoms of Rajasthan, Tamil Nadu, Uttar Pradesh, Haryana, Punjab and Madhya Pradesh.
The restructuring package for the State Electricity Boards (SEBs) has to be supported by tariff hikes, a timely and adequate financial support by the state governments, and better regulatory process and disclosures to yield results. It is estimated that over the next four years, on an all-India basis the Discoms would require an annual tariff increase of around 10-11% to recover all costs and 50% balance short-term debt over a seven-year period commencing from 2016-17.
The tragedy of the power sector in various states including UP, Punjab and Haryana is that they depend heavily on power purchase to tide over the power crisis year after year. Even half of the amount spent on power purchase during last 5 years by each state was sufficient to add generating capacity which would have made these states self-sufficient in power.
This all is happening due to wrong energy policy of successive state governments, resulting from failure to plan for capacity addition in a planned and systematic manner and overdependence on private players through MOU routes. This is one of the major factors responsible for very high cost of supply and increasing cash gap between cost of supply and revenue realized.
Privatization & Franchisee Precondition for Bailout
The most dangerous condition is the involvement of private sector in state distribution sector through franchisee arrangements or any other mode of private participation to be prepared within a year by the Discoms. Government of India has made it a pre-condition of its financial revival package that the Discoms should introduce input based distribution franchise. The panacea of distribution franchise is not based on technically logical or sound principles.
Government did not examine or analyze the practices and methods utilized in the best performing Discoms which have succeeded in reducing the AT&C losses to a level of below 15%. AT&C losses can be better controlled and reduced within the framework of public sector functioning with a professionally qualified and technically oriented management to guide the policy and with a political will of the state government.
In the case of Andhra Eastern Discom, the engineers and the management have demonstrated that with the best practices of loss reduction and introduction of information technology, the AT&C losses can be reduced to a level even lower than 10%. Tamil Nadu and Punjab have succeeded in bringing the distribution losses to a point near to 15% .There is a need to ensure that the other states of the country which have higher AT&C losses adopt these methods and practices.
Shunglu Committee report
The debt restructuring plan is based on the report of Shunglu Committee. The Shunglu committee had come to the mistaken conclusion that distribution franchise was the only solution to the ills of power sector. Further the sweeping conclusion that reduction in AT & C losses is not possible until the distribution companies are under state control. This loss reduction could be achieved only under private sector for which input based distribution franchise must be introduced throughout the country. The Committee overlooked the fact that the distribution companies working in state sector in Andhra Pradesh, Tamil Nadu, Punjab and Karnataka, the AT&C losses had been reduced significantly in the range of 15%.
In year 2002-03 on the recommendations of Ahluwalia committee report a financial package was introduced by which outstanding dues of state electricity boards of about Rs 43000 crore were securitized by state governments through the issue of bonds, but because the fundamental problem remained that the cost of supply was more than the average tariff and average revenue realized, the power Discoms of the country again went into red and in less than a decade the accumulated losses have gone up to Rs 1.9 lac crore by March 31, 2012.
The power theft is a major problem in those states where line losses are reported high. Non- payment of power bills in certain regions of country is also a cause of concern for some Discoms. The Government has never tried to diagnose the problems faced by power sector but only tried to treat the symptoms. The experimentation in power sector continues only to benefit the private players at the cost of tax payer’s money. Franchisee system in power distribution means beginning of end of role of state Discoms.
Under political pressure to sell below cost and losing more than a quarter of power supply to theft and decrepit networks, distribution companies have been borrowing for years to fund their losses. Further years of populism, corruption and mismanagement are the main reasons for Discoms losses.
The franchise/ privatization system was resulting in higher tariff on the consumers which was requirement for ensuring high profit margins for the private franchisee. The government has become a willing partner to increase the tariff every year for the benefits of franchisee companies.
Conclusion
The whole purpose of this exercise seems to be two-fold. The first is to meet the Discoms’ immediate liquidity requirements, which will also enable lenders to avoid the prospect of their loans turning into non-performing assets. Secondly, since the loan restructuring is subject to the Discoms/ State Governments undertaking “concrete and measurable” actions to improve the operational performance of the utilities, it would eventually restore the viability of the weakest link in the power sector value chain.
Actual benefit to DISCOMS will be when pre-condition of privatization is withdrawn, the issue of improvement methodology is left on state Govts so that bail-out package announced second time in less than a decade may not go in vain. Strong political will be needed to achieve meaningful reforms. The long-term benefits will only materialize if the Discoms meet their milestones on tariff rise and reducing the large operational inefficiencies.
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