Financial restructuring of Discoms comes with riders
V K Gupta
September 29th, 2012

Financial restructuring of Discoms comes with riders
The bailout plan for power sector by way of debt restructuring of power distribution companies (Discoms) with total losses of Rs. 1.9 lac crore is a welcome step but mandatory conditions linked with it may not yield desired results.
Support under the 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.
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 bail out will come only after 5 years of consistent performance by Discoms when the center will pay 25 % of restructured debt.
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
The most dangerous condition is that 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.
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.
Shunglu Committee overlooked the fact that the distribution companies working in state sector in Andhra Pardesh , Tamil Nadu, Punjab and Karnataka, the AT&C losses had been reduced significantly in the range of 15%. In Punjab , PSPCL has brought down the AT&C losses from 22.5 per cent to 17.6 per cent.
It may be mentioned that in 2002-03, a financial package had been introduced by implementing the Ahluwalia Committee Report by which outstanding dues of state electricity boards of about Rs.43, 000 crore were securitized by the State Governments through the issue of bonds. As the cost of power supply was always more than the average revenue realized, the SEBs of the country again went into the red.
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.
Fitch the international rating agency commented on debt restructuring that strong political will be needed to achieve meaningful reforms .It should allow the entities to upgrade their infrastructure, curtail inefficiencies and improve credit profile. However, the long-term benefits will only materialize if the SEBs meets their milestones on tariff rises and reducing the large operational inefficiencies that lie at the core of the problem.
Just seven of the country’s 28 states – Rajasthan, Uttar Pradesh, Haryana, Tamil Nadu, Punjab, Madhya Pradesh and Andhra Pradesh account for 70 % of loans and these states are awaiting eagerly for the bailout package. The bailout plan for power sector has indeed not addressed the country’s long-term energy problems and may only drag government lenders deeper into the trouble.

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