India tries easy fix for huge
power debt By Swati Lodh Kundu
NEW
DELHI - The Indian government on Monday approved
an ambitious plan to bail out the virtually
bankrupt state electricity distribution companies
through a restructuring of their short-term loans,
in effect a temporary fix at best to a deeply
flawed industry. As
approved by the Cabinet Committee on Economic
Affairs (CCEA), 1.9 trillion rupees (US$35.5
billion) worth of debt of state electricity boards
(SEBs) is set to be restructured. The decision was
expected as the distribution companies owned by
the state governments have to undertake fresh
borrowing merely to service their debt and hence
are finding it difficult to raise even their
working capital requirement.
Under the bailout package,
states will take over half the outstanding loans
of SEBs and convert them into bonds that will
be
issued to the lenders and backed by state
government guarantees; the lenders will
restructure the remaining 50% and provide a
three-year moratorium on principal repayments.
In
India, privatization of the power sector has
assumed weird proportions. While power generation
equipment is virtually privatized and power
generation itself is partly privatized (ie
approximately 50% of power generated in India is
by the private sector), power distribution
continues to be government monopoly, and the SEBs
together account for nearly 95% of total power
distribution in the country. This is the weakest
link in the entire chain, especially as these are
to all intents and purposes bankrupt.
Note:
E - estimate. Source:
Financial Express report
Present losses for these
companies, before accounting for the state
subsidies, are estimated to be as high as 700
billion rupees (US$13 billion).
Reasons for the dismal state
of the distribution companies essentially boil
down to populist politics, particularly when India
moved in the 1990s from single-party rule to
coalition governments, that is, when political
parties with different ideologies came together to
form a government.
With every passing election,
the national parties like the Congress and the
Bharatiya Janata Party are losing ground to very
many regional parties. Most of these regional
parties prefer to eschew issues of national
importance, instead focusing focus on factors such
as class, creed, religion and so forth. As they
get elected their preference lies in pampering
their constituency - which they believe is a
sure-shot way of getting re-elected again.
Hence, populist measures
(such as free to extremely cheap power to the
agriculture sector) rule the roost, with nobody
being bothered about the impact on finances. The
table below shows the electricity tariffs for both
agriculture and industry users.
Average tariff per unit of
electricity for
agriculture and industry (Rs/unit) Source: Planning Commission
of India
The above table clearly shows
the huge difference between tariffs of the two
users, with agriculture tariff varying between (a
mere) zero to 4 cents. According to a report by
Power Finance Corporation on the performance of
power distribution sector, these companies are
losing close to 0.85 rupees on every unit of power
consumed.
Not surprisingly, most of the
losses of the SEBs are due to low tariffs that do
not match the rising cost of procurement of power
and high transmission and distribution (T&D)
losses. As of 2009-10, average T&D loss for
India has been as high as 25.7%.
Source: Planning
Commission
The precarious fiscal
condition of the distribution companies also puts
the power generation companies under severe stress
since the cash-strapped SEBs are not in a position
to pay them. This further adds additional pressure
to banks and financial institutions that lend to
the power sector.
As of July 2012, outstanding
loans of India’s scheduled commercial banks to the
power sector stood at approximately 3.5 trillion
rupees, close to 18% of their total lending. About
a fifth of this is exposure to the distribution
companies.
There is, therefore, a strong
possibility that a good chunk of these loans can
end up becoming non-performing assets for the
banking sector unless the issues facing the power
sector are resolved.
According to a recent report
by CRISIL, a Mumbai-based credit rating and
information company, the "exacerbating refinancing
and liquidity pressure, especially for the state
power utilities" could lead to restructuring of
nearly 1.5 trillion rupees of loans, of which 600
billion rupees have already been restructured by
banks.
Unfortunately, rather than
addressing issues like the low agriculture tariff,
high T&D losses and so forth, the solution of
restructuring the debts of the SEBs is nothing but
an effort to kick the can further down the road
while the problem persists.
In
around 2002, the accumulated losses of SEBs had
crossed the 400 billion rupee mark. To find a
solution to the looming crisis, the Montek
Ahluwalia Committee suggested some "reform"
measures. Part of the dues of SEBs was written
off, while the balance was taken over by the
center through guaranteed bonds. The aim was to
enable the states to start afresh and with the
expectation that they would start behaving
responsibly.
It was decided that they
would have to provide subsidies from state budgets
to cover SEB losses, while overdue debts to
suppliers would be deducted from the central
government allocation to the states.
What
the committee did not take into account was that
center cannot impose discipline on the states,
especially in an era of coalition politics when
financial conditions are of least concern to them.
Not surprisingly, by the fiscal year ending March
2004, the commercial losses of SEBs were more than
200 billion rupees and even after subsidies
provided by the state budgets, the deficits
exceeded 100 billion rupees.
One
can, therefore, rest assured that a restructuring
programme as envisaged now will necessarily have
to be revisited in the future, unless the basic
anomalies are effectively addressed.
Swati
Lodh Kundu is a New Delhi-based
commentator.
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