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Carrot & stick approach for sick power discoms

Funds may be cut for states not following reforms

Shreya Jai  |  New Delhi 

Carrot & stick approach for sick power discoms

The Centre has come up with a slew of carrot and stick measures to push sick state power distribution companies (discoms) towards financial and technical restructuring. Instead of giving financial backing, it is likely to cut central funds if these companies fail to cut losses and carry out the restructuring suggested by it.

Officials privy to the matter said now, the distribution reforms committee (DRC) would present these reforms to states.

According to the plan, discoms' debt will be transferred to the state government concerned, which will issue bonds from a part of it (this percentage could vary across states). Sources in the know said if the state government failed to honour the bond terms or defaulted on the dividend payment, the Centre would divert some of its financial grant intended for that state to bond owners.

Sources in the government said the diversion of grant could be through tax devolution from the Centre to states.

To service the remaining debt and bring about long-term efficiency, states will have to increase power rates and reduce technical losses with Centre-initiated reform schemes - the Integrated Power Development Scheme and the Deendayal Upadhyay Gram Jyoti Yojana.

The Centre will propose these measures to all sick state electricity boards. Those agreeing to these will have to abide by the terms and conditions set to reform their power utilities.

The DRC is primarily focusing on eight states that contribute the highest to the overall accumulated debt of Rs 3.17 lakh crore - Rajasthan, Andhra Pradesh, Uttar Pradesh, Tamil Nadu, Haryana, Jharkhand, Bihar and Telangana.

The committee, chaired by the secretary in the power ministry, also has representation from member states. The secretary (banking) in the finance ministry, the chairmen of Power Finance Corporation and Rural Electrification Corporation are members, while senior executives from Torrent Power, Tata Power and CESC are special invitees.

"The idea is divided into two parts - how to reduce current losses and how not to let any more loss/debt accumulate. Banks have already stopped lending to the sector. Tightening by discoms can be carried out through such measures alone. There is no single way to solve this problem," said a senior executive involved in the discussions.

The debt portion in the gross state Budget plan would also be increased to facilitate state governments to take over discoms' losses and lend more from the market, said the official quoted earlier.

"In turn, states are being given around 0.25 per cent relaxation in their fiscal responsibility and Budget management (FRBM) limit.

This would help them absorb the losses and issue bonds in the short term," said the official.

FRBM shows the amount of deficit a state can have. Relaxation on this front will result in states adjusting more fiscal deficit in their public accounts.

"States would have to take the reforms till the last point of the chain, which will mean reforming the operations of the SEBs (state electricity boards) to demand-side management. These short-term measures will work only when the long-term trajectory for bringing down the losses is strictly adhered to by states," said Sambitosh Mohapatra, partner (power & utilities), PwC India.

  • States to take over debt of power distribution companies
  • States to convert debt into bonds
  • Over a period, discoms to cut losses and do regular tariff hikes
  • Govt to review fiscal responsibility & budget management (FRBM) provisions to ease absorption of debt into states' fiscal deficit; likely relaxation 0.25%
  • Centre to divert amount from tax devolution to bond owners in case a state defaults on dividend payment
  • Debt ceiling in the gross state domestic product (GSDP) to be increased by 10-20%
  • Cumulative loss of discoms stands at Rs 3.17 lakh crore
  • Eight states account for 75% of losses, owing to no tariff hike in the past five financial years

Rajasthan & AP to get $500-mn aid from World Bank
  • Of the eight discoms, those from Rajasthan and AP will receive aid from World Bank
  • The two states will get $500 million each to finance technological reforms and boost sub-transmission and distribution
  • World Bank financial aid is not part of the central government's plan for sick power discoms
  • The debt burden of Rajasthan is the highest at Rs 80,000 crore followed closely by Andhra Pradesh at Rs 50,000 crore

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First Published: Fri, September 18 2015. 00:59 IST