Turnaround visible for power distribution sector

Ailing discoms in three states embark on Financial Restructuring Plan-led breakeven scheme

In little more than a year since its inception, the Union government’s ambitious Financial Restructuring Plan (FRP) for the beleaguered power distribution sector is at the cusp of success. Ailing discoms in at least three states – Rajasthan, Uttar Pradesh and Tamil Nadu – have readied plans for their breakeven beginning next year.

Distribution companies in the three states have already issued bonds to lenders, backed by state governments’ guarantees, taking care of one half of their short-term liabilities, while the other half has been rescheduled by bankers wrapping up a bulk of the liabilities. Also, Haryana has begun issuing bonds.

The four states were among the seven with 75 per cent of the total Rs 1.9-lakh-crore debt with discoms. “Uttar Pradesh will breakeven by 2014 and Tamil Nadu by 2017. As soon as the four states start doing well, the liquidity in the system will improve. This, along with tariff hikes and the budgeted support from the government will lead to a reduction in losses,” a senior PFC official said.

A senior executive representing distribution utilities in Rajasthan, the largest contributor to the discoms’ losses nationally, said the three discoms in the state would breakeven by 2017. “The work on our Rs 36,000 crore restructuring scheme is over. We have just concluded the process of issuing bonds of Rs 15,000 crore with an interest rate of 9.5 per cent and rescheduled loans of Rs 3,000 crore. The state government has taken over Rs 18,000 crore,” he said.

He added that the state is now focusing on meeting the “difficult” conditions laid out under the FRP scheme including reducing Aggregate Technical and Commercial (AT&C) losses by two per cent every year, frequent tariff revisions and 100 per cent metering. “Tariffs have been hiked twice in two years. But, implementing pre-paid metering would be difficult as it amounts to cutting off supply once the paid amount is consumed,” he said.

States have to focus on the reduction of AT&C losses as they have been linked to the Transitional Finance Mechanism under the FRP. The mechanism provides liquidity support equal to the value of the additional energy saved through loss reduction. Moreover, the Centre would also give a capital reimbursement support of 25 per cent of the principal repayments by state governments on the liabilities taken over by them.

Experts say four states with large short-term debt implementing the restructuring package is encouraging as it will provide respite to their liquidity position and ensure quicker payments to suppliers. “But the long-term financial recovery and sustainability of these utilities will depend on improvement in efficiency and regular tariff increases. Utilities are realising that it is no longer possible to restrict tariff increases to subsidising categories as these consumers have reached their paying limits,” said Debasish Mishra, senior director at Deloitte. He added the real test for states would be to increase tariffs in subsidised categories such as agriculture and pay declared subsidy to utilities timely.

The farm sector accounted for more than 22 per cent of power distribution companies’ total annual sales of 900 billion units in 2011-12. However, the sector contributed only eight per cent to their total revenue, exceeding Rs 3 lakh crore. The subsidy on agricultural sales, which determine the commercial losses of utilities, increased 36 per cent - from Rs 33,300 crore in 2007-08 to Rs 45,500 crore in 2011-12, the latest year for which published official data is available.

Seven major defaulting states have a total outstanding liability of Rs 1.2 lakh crore. Half of this or Rs 59,813 crore was to be taken over by state governments through bonds. This includes Tamil Nadu’s Rs 9,573 crore, Rajasthan’s Rs 18,000 crore, Uttar Pradesh’s Rs 12,967 crore, Haryana’s Rs 7,859 crore, Punjab’s Rs 5,823 crore, Andhra Pradesh’s Rs 3,151 crore and Madhya Pradesh’s Rs 585 crore.

The PFC official said two states – Himachal Pradesh and Meghalaya – are in the process of finalising their FRP schemes while Bihar, Jharkhand and Andhra, which were unable to participate earlier, have been included after last month’s approval by the Union cabinet for revised FRP. However, Madhya Pradesh and Punjab have opted out.
FINALLY, SOME RELIEF

• In little more than a year since its inception, the Union government's ambitious Financial Restructuring Plan (FRP) for the beleaguered power distribution sector is at the cusp of success
• Ailing discoms in at least three states - Rajasthan, Uttar Pradesh and Tamil Nadu - have readied plans for their breakeven beginning next year
• The four states were among the seven with 75 per cent of the total Rs 1.9-lakh-cr debt with discoms
• States have to focus on the reduction of AT&C losses as they have been linked to the Transitional Finance Mechanism under the FRP
• The mechanism provides liquidity support equal to the value of the additional energy saved through loss reduction