In a major reform for the power sector, the Centre has asked states to take over 75 per cent of the debt of power distribution companies (discoms). This would not only help in cleaning of the debt of Rs 4.3 lakh crore accumulated on state-owned discoms, but would also bring relief to lenders.
For the next two financial years, the central government will not include the debt taken over by the states in calculation of their fiscal deficit, which could have otherwise gone up by Rs 3.2 lakh crore.
The programme titled Ujjawal Discoms Assurance Yojana, would be open to all states. Among the states, Rajasthan has the highest debt at Rs 85,000 crore, followed by Tamil Nadu at Rs 70,000 crore and UP at Rs 32,000 crore. States are suggested to take over 75 per cent of discom debt as on September 30, 2015 over two years - 50 per cent in 2015-16 and 25 per cent in 2016-17.
"This will reduce interest cost on the debt taken over by the states to 8-9 per cent, from as high as 14-15 per cent thus, improving overall efficiency," said Piyush Goyal, minister of state for coal, power and renewable energy.
Discoms' debt not taken over by the state will be converted by banks/financial institutions into loans or bonds with an interest rate not more than the bank's base rate plus 0.1 per cent.
Any future losses would be taken over by the states in a graded manner. As of March 2015, the total accumulated loss is Rs 3.8 lakh crore. The Reserve Bank of India in its Financial Stability Report of June 2015 said the Rs 53,000-crore exposure of banks to seven state electricity boards had a "very high probability" of turning into non-performing assets by the quarter ending September.
The discoms would have to reduce their aggregate technical & commercial losses to 15 per cent, from the current level by 2018-19. Business Standard reported that the central government would restrict the borrowing capacity of state-owned power discoms to efficiency parameters.
"Once there is improvement in the working of discoms, the job of the regulator becomes easy because he does not have to increase tariff but balance the tariff for all category of consumers for better service," said Pramod Deo, former chairman, Central Electricity Regulatory Commission.
The difference between average revenue realisation and average cost of procurement would have to be brought down to zero by 2018-19. The State Electricity Regulatory Commissions will also do quarterly tariff revisions, said Goyal.
"The power ministry would sign a memorandum of understanding with the state government and the discom to perform monthly monitoring of the reforms suggested," said Goyal.
As an incentive, the states adhering to the operational milestones will be given additional central funding through Deendayal Upadhyaya Gram Jyoti Yojana (DDUGJY), Integrated Power Development Scheme (IPDS), Power System Development Fund or other such schemes by the ministry of power and renewable energy. However, the laggards "would be liable to forfeit their claim on IPDS and DDUGJY grants".
Business Standard reported in September that instead of giving any financial backing, the central government is likely to cut central funds if the states default on the advised restructuring by the Centre and are unable to cut losses.
The performing states would be propped with additional coal at notified prices and, in case of availability through higher capacity utilisation, low-cost power from NTPC and other central public sector undertakings.
"Unlike the earlier restructuring schemes, this time it looks like the government has done a detailed analysis to come out with a comprehensive package which will ensure long-term sustainability of discom revival. It talks about cost and ensures regular tariff increase to match cost inflation and bringing in discipline by including discom losses in the state Fiscal Responsibility and Budget Management limits," said Debasish Mishra, senior director (consulting), Deloitte India.
RESTRUCTURING DEBT: ONUS ON STATES
75 per cent of debt to be taken over by states
Impact: Interest rate for discoms to come down to 8-9%
FRBM relaxation to states for two financial years
Impact: Centre's disbursal of funds will not get impacted
AT&C losses to be brought down to 15% by 2018-19
Impact: Future losses of discoms to be reduced
Central funds to be linked to reforms
Impact: Banks would not lend to discoms if losses accumulate again