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BW Businessworld

Red Discoms Woo Black

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Acting on the Chaturvedi Committee recommendations, the power and finance ministries are converting 50 per cent of the losses of the power distribution companies (discoms) into state government bonds. Banks will be asked to extend the tenure of short-term loans to discoms with a moratorium on interest.

The Chaturvedi Committee was set up in 2011 to devise a plan to restructure the loss-making discoms in Andhra Pradesh, Haryana, Madhya Pradesh, Punjab, Rajasthan, Tamil Nadu and Uttar Pradesh. Rating agency ICRA says the losses topped Rs 80,000 crore (before subsidies) in FY2012, up from Rs 63,500 crore in FY2010.

Experts say the current situation is similar to the debacle of 2001 when state electricity boards (SEBs) default on payments to central generation stations necessitated a one-time settlement by the Centre. Then, the expert group on the settlement said the total accumulated dues of the SEBs were Rs 41,473 crore, consisting of Rs 25,727 crore of principal and Rs 15,746 crore of interest and surcharge.

Of late, there have been no big defaults by discoms. However, debt has become a source of worry. While discoms have tried to pull up their socks, it will be three years before they will be able to sort out their woes, says an expert who does not wish to be named.

Former power secretary R.V. Shahi is cautious: "The situation now is not as bad as it was in 2001 when default in paying the bills of power generators, coal companies and railways by state electricity boards was routine; today it is an exception.

In 2001-02, SEBs were paying not more than 80 per cent of bills. By applying a carrot-and-stick policy during 2002-2007, the power ministry succeeded in arresting the ever increasing losses. The situation is pretty bad now but not alarming, it can become alarming in a couple of years if not corrected now."

Will such restructuring turn out to be repetitive, an every once-in-a-decade problem? The power ministry says many checkpoints have been woven in to ensure an improvement in the bottom line of discoms — regular and adequate tariff hikes, a cut back on transmission and distribution losses, better financial discipline in operations, improved metering, and timely release of subsidies. The wave of tariff hikes in as many as 17 states in 2011 along with the sustained reduction in T&D (transmission and distribution) losses is seen as a silver lining.

"This plan is different from the one in 2001. If the states take necessary steps to fulfil these conditions, the Centre will put in some funds when the state comes to retire their bonds," says a senior ministry official. The ministry has approved a rating system to rank discoms according to their operating efficiency; new guidelines have been put in place for short-term procurement of power in order to cut down on expenses inflated by unplanned purchases.

A high-level panel headed by V.K. Shunglu in its December 2011 report said over 70 per cent of the accumulated loss was financed by state-run banks; 42 per cent of which was backed by guarantees issued by state governments.

In many cases, the cushion available in the form of states' guarantee redemption funds at Rs 40,000 crore to meet the commitment from possible default is grossly inadequate.

(This story was published in Businessworld Issue Dated 18-06-2012)