Saturday, December 19, 2015

India's Power Reform - New UDAY on the Horizon?

It has been a while since the Power Minister of Government of India, Mr Piyush Goyal, announced the Ujjwal Discom Assurance Yojana (UDAY). The purpose of the programme is to permanently resolve the crisis of indebted state owned power distribution companies (utilities) in India. The crisis is pretty severe - despite a 2012-13 financial restructuring package, the total outstanding debt on the distribution utilities is over INR 4 lakh crore. Most of the debt is ironically concentrated in just eight states, including notable names such as Rajasthan, Tamil Nadu, Uttar Pradesh, Madhya Pradesh and Haryana being among these ignonimous leaders.

UDAY tries to target the past legacies of debt by repackaging it as state debt instead of discom debt. This debt, upto 75% of which shall be taken over by the state, shall be repackaged as state bonds and shall be sold with first right to banks and pension funds. While the standard loan interest rate has been at around 14%, the bonds shall be given out at a range of 7.5% for a period of at least ten years. While credit rating agency CRISIL welcomed the move, it notes that the loss of interest income for the power sector may be to the tune of INR 4,300 crore of profit after tax for the fiscal year 2015. However, if all goes well, it is believed that conversion of discom loans into bonds would lead to capital savings of around INR 12,000 crore for public sector banks in particular. In light of the fact that loans to power sector are the third major source of non-performing assets on the loan books of public sector banks, a resolution is necessary. Another component of the problem is to reduce the revenue gap on power. To that extent the government has a proposed a multi-pronged strategy - allowing quarterly tariff revisions, making cheaper power available by removing roadblocks to it (coal supply issues, linkages of plants with mines etc.) and incentivizing states that perform well with greater coal supplies. Also, 2020 is the year when the discoms shall stop getting any more debt from banks for covering losses or working capital. On paper, the plan looks workable in some ways. However, the program seems to be repackaging many of the existing efforts of the government. The coal supply issue shall help irrespective of whether states sign up to the program or not. Tariff revisions can be done even in the current circumstances, and perhaps do not need any special provisions.

The one major thing that UDAY has managed to however do is to recognize the fact that states are directly responsible for the financial mess. Politics of governance has meant that tariff revisions are untimely and wrongly try to cross subsidize consumer categories by shifting the financial burden onto lesser consuming categories. A Power Finance Corporation report of July 2015 has shown how between 2011-12 and 2013-14, the agricultural sector was tied as the largest consumer of electricity with the heavy industry sector, but contributed only one-third of the total revenue earned by discoms. Agricultural subsidy (or even free power in Karnataka, Punjab and Tamil Nadu) has translated into increasing losses for state owned discoms. Much of this is driven by political considerations with no acknowledgment of the impact it subsequently generates on the whole state's power. Tamil Nadu's load shedding and power cut cycles are notoriously famous, and we are seeing a repeat of the same in Karnataka as well. After all, the more power the discom has to sell, the more loss it makes. Political considerations of the state's government forces tariffs to be kept under a leash alongside pressures to not act against power theft and unmetered consumption of electricity. States like Punjab are unable to crack down on power theft due to political patronage to the crooks, and hence despite significant improvement in technical losses the problem persists. Others like Rajasthan withdraw increased tariffs and metering connections of farmers entirely due to political considerations. What is often missed in this hyperbolic politics is the fact that assured power is what farmers seek, for which they shall be willing to pay. Pumps and tubewells are being run on adulterated expensive diesel, and power supply to them shall actually reduce their operating costs significantly. Sadly, populism rules. Because states were not technically responsible for the discom debt but were seen as the sovereign guarantee for it, banks continued to finance this bad politics, and states got away by not showing these losses on their own budget balances. Now that the states will have to absorb the debt and also meet the requirements under their own fiscal deficit targets, we may see a real dent being made in the area.

UDAY potentially has the power to transform not just the power sector but also significantly improve the financial positioning of banks and non-banking financial companies in this country. So far ten states have joined, and this includes the big fish like Rajasthan and Madhya Pradesh. The much sought UDAY (sunrise in Hindi) of the power sector may finally be on the horizon; however, the problems can continue forever if this politics of subsidy and shielding bad behaviour is not curbed right away.

Friday, December 4, 2015

Are the Chennai Floods A Signal of Changing Climate?

An ariel view of a submerged Chennai (courtesy: NDTV)

The recent washout that Chennai is nothing short of a catastrophe. It happens on a regular basis in other parts of India; however a Mumbai or Chennai does manage to get our attention in ways we cannot fathom. The severity of the low pressure system has ensured that rain stopped only yesterday, giving the city, the administration and the agencies involved in disaster relief a moment to gasp and bring some semblance of normalcy to people's lives. Of course, the real disaster danger lies once the rain stops and the water begins to subside, as the threat of epidemic manifolds itself in the city. Mind you, so far we have only heard of Chennai - many other cities in Tamil Nadu are faring much worse. Kanchipuram has been completely submerged, and other affected towns are still off-limits to many.

While the rescue and relief operations are going on and the Chennaiites must be commended for rallying together in this time of crisis, a very important question has cropped up due to the timing of this natural disaster with the Climate conference of parties meeting that concluded in Paris only this week. A lot of people are now openly questioning if the events as they unfolded in Chennai and other parts of Tamil Nadu are a signal of a changing climate. The answer is not that simple, because we need a lot of analysis of data that is done by institutes like the Indian Institute of Tropical Meteorology (IITM) in Pune and the Indian Meteorological Department (IMD). But what we do know is what needs to be understood in the right perspective.

What we have had in Tamil Nadu is a one in a hundred year event. In hydrology, a one in a hundred year event essentially refers to the likelihood of this quanta of precipitation (rainfall) to occur in a single day. Now what the climate scientists have been saying is that while this particular event may not be a direct result of climate change, the frequency of occurence of such events may change considerably. Instead of one in hundred years, we may see such rainfall once in fifty years or once in twenty five years.

What such events do tell us however is the fact that a changing climate does pose significant problems of a kind we can only imagine. Fighting climate change will have to be a mix of mitigation and adaptation strategies, and our disaster preparedness will have to spruce itself up considerably to manage and respond early to these dangers as and when they are predicted. Another critical aspect is the building up of climate resilience within cities. Currently, our cities are becoming hotbeds of encroachment over natural watersheds, due to which we see repeated incidents across all major cities in India. Guwahati in Assam has to suffer deluges every year, and yet precious little changes there. This has to be rectified especially if we have to be able to live alongside a changing climate. Much of this of course will happen only if we adopt two way channels of communication between the city residents and the respective administration authority that are far more empowered to do so, and are far more aware of the challenges they need to face. A responsive system thus prepared can certainly go a long way in preparing us for climatic eventualities as and when they arrive.

Slicing Through the Chinese High-Tech Economy Propaganda

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