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.

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