Future loss funding denied to discoms under UDAY

Discoms' working capital should be funded through loans which could be only 25% of their revenue from last year

To put an end to the vicious circle of ‘loss funding’ to power distribution companies (discoms), the agreement for restructuring of loans under Ujwal Discom Assurance Yojana (UDAY) restricts the states signing up for the scheme from availing any short-term loan from any bank or financial institution.

Further, the working capital of discoms would be funded by states through loans that could be only 25 per cent of the discoms’ revenue from last year. The loans can be availed from state-owned Power Finance Corporation (PFC) and Rural Electrification Corporation (REC).

The UDAY announced last year envisages financial and operational turnaround of stressed power discoms. So far, 16 states have given their in-principle approval to join UDAY and six — Rajasthan, Uttar Pradesh, Jharkhand, Chhattisgarh, Gujarat and Bihar — have signed the agreement.

Officials said the applications for loss funding by some states had been rejected. “One major component of the memorandum of understanding (MoU) is that banks/financial institutions will not advance any short-term debt to the discoms for financing losses,” said an official.

One of the first steps enlisted in the MoU is takeover of 75 per cent of discoms’ cumulative debt — 50 per cent by March 2016 and the remaining by March next year. States would issue state development loans against it at prevailing market rates. The remaining 25 per cent would be issued as sovereign backed bonds by discoms.

State governments are also supposed to provide operational funding requirement support to the discoms till they achieve a turnaround. PFC and REC officials said states would either guarantee the bonds issued by the discoms or issue bonds to meet the current losses of discoms.

Apart from financial improvements, the discoms would need to improve operational efficiency as well such as reducing aggregate technical and commercial losses. Improving collection and billing efficiency, considerably reducing energy theft, reducing the gap between discoms’ average cost of supply and average revenue realised are also part of the targets.

• No loss funding by any banks or FIs to the discoms that join UDAY
• Either state through its bonds or discoms' bonds to fund losses
• States' applications looking for loss funding rejected
• 25% of last year's revenue only to be financed as working capital