UDAY fails to power discoms in laggard states

Bihar, Uttar Pradesh, Rajasthan, Haryana, J&K and Chhattisgarh are among such states

The Union power ministry’s flagship programme UDAY has not improved the finances of power distribution companies in laggard states.

Chhattisgarh, Bihar, Uttar Pradesh, Rajasthan, Haryana, and Jammu & Kashmir are among eight states whose aggregate transmission and commercial (AT&C) losses have gone up after they joined the debt-restructuring scheme. Twenty-six states have joined UDAY so far. A higher percentage of AT&C losses indicates the poor health of the power supply and distribution infrastructure.

In a press release in July, Union government-owned Power Finance Corporation had said: “Under UDAY, power purchase cost, AT&C losses and interest cost have all started decreasing, resulting in 40 per cent reduction in revenue-cost gap under the NDA government.” The data indicated the average AT&C losses came down to 20 per cent in 2017 from 23 per cent in 2014. 

A closer look at the data, however, indicates that states have a lot of ground to cover to meet the 15 per cent target by 2019.

In the case of Chhattisgarh, losses have doubled to more than 44 per cent from the time when the state signed the memorandum of understanding (MoU) with the Union government for UDAY in January last year. 

Barring Punjab, whose AT&C losses are 19.22 per cent, and Kerala, where they have risen by four percentage points to 16.03 per cent, the remaining six states are either ruled by the BJP or its allies.

At 61.6 per cent, AT&C losses in J&K are the highest though there has been a marginal improvement of 0.14 percentage points. Despite tariff restructuring, losses in Bihar are currently 44 per cent, more than 2 percentage points higher than in February 2016, when the state had signed the UDAY MoU.

Uttar Pradesh and Rajasthan, which had high debt exposures of Rs 50,000 crore and Rs 75,000 crore, respectively, in 2016, too have seen losses go up. For Uttar Pradesh, AT&C losses have gone up marginally by 0.14 percentage points. In Rajasthan, they are 28.86 per cent and in Haryana 28 per cent. 

“Unless the state governments crack the whip and go full throttle, chances of turnaround seem bleak ... While the central government did what it could, the baton has passed on to the states to undertake reforms,” said Sambitosh Mohapatra, partner, power and utilities, PwC India. 

UDAY is a financial restructuring plan for state-owned discoms, which cumulatively had a debt of Rs 4 lakh crore at the end March 2015. For states that join UDAY, loss funding from any financing institution and/or banks is disallowed. Funding will be dependent on the performance of discoms cutting losses and improving operations.

While 90 per cent of the Rs 4 lakh crore debt has been converted into bonds, states may again have to borrow because there has been hardly any tariff revision. 

Bihar did announce a tariff structure linked to power procurement cost for 2017-18. Tariffs increased by 28 per cent across all categories of consumers in the state. The Bihar government would give direct subsidy to economically weaker sections.

Besides AT&C losses, the difference between power procurement cost and selling price has gone up. States such as Uttar Pradesh, Rajasthan, Punjab, Haryana, Jharkhand, and Tamil Nadu have a high gap between the cost of procurement and revenue, which is measured as a ratio of the average cost of supply (ACS) and average revenue realisation (ARR). It ranges from 0.26 to 2.55 in these states. PFC said the average ACS-ARR gap was reduced to 0.46 in 2017 from 0.76 three years ago in 2014.

The restructuring programme has accentuated another problem. The government’s Economic Survey last month said UDAY was not a panacea for addressing fiscal situations though it had a significant impact on addressing structural issues related to the power sector. 

“Under the UDAY scheme, states were allowed to issue non-SLR (statutory liquidity ratio) state development (SDL) bonds in the market or directly to banks or financial institutions holding the discom debt. Due to these bonds, the state gross fiscal deficit (GFD) to GDP ratio increased by 0.7 percentage points to 3.6 per cent in 2015-16 from 2.9 per cent without UDAY,” it said. 

The GFD/GDP ratio of states that have issued UDAY bonds is higher than the GFD/GDP ratio of states that have not.

Mohapatra said all stakeholders — the central government, regulator, owner (state government), and utility — must work together if overall losses were to come down, but this was missing in most states. 

He said a utility had to take measures like fixing governance and leadership issues, and spend on networks, meters, and operational and information technology. Besides upgrading people’s skills and holding them accountable, private sector involvement and outsourcing were important, he said.