Beginning of the end

The government has announced a power bailout package yet again. Will it help discoms recover or will we be back to square one in five years’ time?

There’s a popular T-shirt slogan, “It’s déjà vu all over again.” It might as well have been a commentary on the Indian power sector and what ails it. In 2001, based on the roadmap drawn by the Montek Singh Ahluwalia committee, the government outlined a bailout package for cash-strapped state power utilities. The intention was to ensure that the dues owed to central public sector enterprises such as NTPC, NHPC and Coal India, amounting to over Rs.41,000 crore, were repaid. 

For its part, the Centre pitched in by waiving almost 50% of the interest due. The remaining 50% plus the principal due — another Rs.33,000 crore — was to be securitised through tax-free bonds issued by the state governments. There was also a five-year moratorium on the repayment of principal.

Of course, there were strings attached. States that availed this bailout had to mandatorily change their attitude towards the power business. They would have to follow a milestone-based reform programme that included measures such as setting up regulatory commissions, metering power supply, improving revenue collection and so on. 

Eleven years after the initial plan was announced, the accumulated losses of the state power utilities is now close to Rs.1.9 lakh crore. And now there’s another bailout package, announced by the Centre in September, a similar scheme with bonds worth Rs.60,000 crore and a moratorium on principal repayment to be issued by the state governments. The first attempt was a big flop. The question is: will it work this time around?

Then and now

Essentially, this is the current plan: state governments will take over half of the short term loans of discoms as on March 31, 2012 and convert them into long-term bonds. They will also stand guarantee for the remaining half, which banks will reschedule to longer repayment tenures as well as give a moratorium on repayment of principal. And, just like last time, there are caveats on states to commit themselves to power sector reform if they are to avail of the bailout.

The problem in 2001 was a combination of several factors: low tariffs, non-payment of subsidies to discoms by state governments and high distribution losses. Now, there’s an added problem: the high cost of power purchase. Essentially, the gap between the average cost of supply (ACS) and the average revenue realised (ARR) has been steadily increasing, from under Rs.1/unit a decade ago to over Rs.1.5/unit by 2010. Now, discoms are being incentivised to reduce the gap between ACS and ARR — they will get a grant if the gap for the year is reduced by at least 25%, keeping FY11 as the benchmark. 

Of course, states can’t be compelled to reform — electricity is a subject on the Concurrent List, after all. So, the Centre is offering another carrot: if the states implement reforms that bring down T&D losses (for which it is anyway offering a grant for every percentage point reduction), reduce the gap between ACS and ARR, and take over their mandated 50%, the Centre will pick up 25% of the principal repayment. And given their fiscal responsibility and budget management commitments and the cap on the extent of guarantees a state can give, states have been granted a window of two to five years to take over their share of discoms’ short-term loans.

Reality bites

But why wasn’t the 2001 bailout successful? Quite simple, says VS Ailawadi, former chairman of the Haryana Electricity Regulatory Commission. “For years, there has been no increase in retail tariffs in many states. And distribution companies kept borrowing from banks to tide over their revenue shortages.” Indeed, in December 2011, the VK Shunglu committee on distribution utilities pointed out that “over 70% of the [financial losses of the power sector] is financed by public sector banks”. With distribution companies not in a position to repay banks and even state guarantees being inadequate, the problem climbed up the supply chain to hit generation companies as well, which in turn began depending on banks to fund their working capital shortfalls.

Clearly, the checkbox approach to power sector reform hasn’t worked. Losses have only climbed, tariff hikes haven’t kept pace with expenses and the state electricity regulatory commissions (SERCs) haven’t really made a tangible difference.

Since 2001, various studies to rank states on power efficiency invariably give high ratings to states that corporatised their power companies and appointed SERCs. But a power ministry note on the current turnaround package points out that the desired objective of depoliticising tariff setting through these appointments hasn’t been achieved.

SL Rao, the first chairman of the Central Electricity Regulatory Commission, says the trouble was that “we started doing too many things at the same time, without concentrating on replicating success stories”. Those included the privatisation of power distribution in Delhi — which went through its share of teething troubles but is now held up as a model to be emulated. Instead, says Rao, “we get carried away with concepts and ideas that cannot be implemented in the country at this stage”, referring to issues like open access and removing cross-subsidies.

With a few notable exceptions, transmission and distribution losses haven’t been drastically reduced since the last bailout. And the lack of adequate tariff revision for several years has led to a situation where the bonds issued under the earlier bailout have become distress bonds, says Devendra Kumar Pant, director and head, public finance, India Ratings & Research.

Where discoms were hobbled by its political bosses, the regulators too proved toothless in imposing higher power rates. “The regulators should have issued suo moto orders to hike the tariffs,” declares Ailawadi. It didn’t help that in some states, the utility companies themselves failed to file their aggregate revenue requirements with their respective commissions. 

That wasn’t the only norm that was given the go-by. Ailawadai says public sector banks were handing out short-term loans to discoms whose balance sheets weren’t even audited. And if the company exhausted borrowing from one bank, it simply moved to another. The Shunglu committee points out that entries in the books on rising current assets are “highly opaque”, particularly for distribution utilities in UP, Andhra Pradesh and Rajasthan.

“Part of the losses are displayed as increase in current assets… UP alone accounted for 40% of increase in current assets. Likewise, one-third of the increase in sundry debtors was in case of AP,” the report adds. “These are nothing but losses not displayed in the annual accounts,” it concludes. Another unreported loss was the subsidy payment due from state governments. 

Second time unlucky

Things started changing in 2009-10, when banks became cautious after the Reserve Bank cracked the whip asking why they were lending to unaudited entities, says Ailawadi. And in January 2011, the power ministry asked the Appellate Tribunal on power to issue suo moto orders to states to hike tariffs. Despite resistance from states, last year the tribunal directed the state regulators that tariffs should be decided by April of each financial year; and that in case of delay in filing of ARRs for tariff, the SERC should initiate suo moto action for determining tariff.

“[The tribunal’s] order to state commissions is going to be critical for a successful implementation of the turnaround package” says Satnam Singh, CMD of Power Finance Corporation. Now, the power ministry is also working on amendments in the laws, including those relating to tariff setting, the role of the regulator and even redefining the nature of the distribution business. 

Of course, the million-dollar question is, when will the amendments be finalised, passed, tabled in Parliament and then enacted? With barely a year to go before policy freeze sets in ahead of the general elections, it’s unlikely that any of these amendments will see light of day anytime soon. As it is, states have never had compunctions about using electricity as an election tool, buying power from merchant power at Rs.4-7 a unit to ensure uninterrupted electricity ahead of the polls. It is demand for merchant power that brought in significant investment into power generation in the past decade, despite the sector’s mounting losses.

The shortage of coal and liquid fuel (for some time) in the past couple of years has hit these gencos hard, leaving stranded assets on the ground. But the present scheme is aimed at repaying banks their short-term loans to state distribution utilities, it’s not considering the trouble gencos are facing.

The current bailout package is open for debate until December 31, 2012. But there’s scepticism whether the scheme will achieve its dual goal of repaying banks and turning around the sector. Much will depend on how Appellate Tribunal order is implemented and whether the losses of the sector can be stemmed. Experts aren’t too confident — the Shunglu committee has indicated that the haemorrhage will continue. Also, where is the revenue stream to service these state government bonds?

Rao points out that the 2001 plan was good, but nobody monitored it to see whether states were following the set agenda. Similarly, there are no quantifiable targets in the current scheme. 

Certainly, the Centre’s track record when it comes to such strings-attached largesse isn’t reassuring. The Restructured-Accelerated Power Development and Reform Programme (R-APDRP) was launched in 2008 to help states improve their power distribution network, subject to their showing improvement in T&D losses.

So far, the government has disbursed just Rs.8,500 crore under the scheme against a planned Rs.52,000 crore since states’ progress on this front has been abysmal. Similarly, the Rajiv Gandhi Grameen Vidytikaran Yojana doles out funds for rural electrification if post-implementation the villages get at least eight to 10 hours of power daily. As things stand, peak season load shedding in even some big cities leaves them with just 10-12 hours of power a day, so it’s very unlikely that villages will fare better.

There’s another T-shirt slogan that’s unfortunately all too apt in this situation: “What men learn from history is that men don’t learn from history”.