|In contemporary parlance, SEBs remain deeply subprime.|
|Several initiatives in the power sector are supposedly on the anvil. First, a Rs 100,000 crore National Electricity Fund (NEF) has been reportedly proposed by a committee. Ostensibly the objective is to provide loans to those state electricity boards and, presumably, their successor unbundled entities comprising transmission and distribution companies that cannot otherwise borrow from normal channels, like banks. The money will be borrowed for the benefit of state electricity boards (SEBs) by government-owned specialised financial intermediaries, specifically, Power Finance Corporation (PFC) and Rural Electrification Corporation (REC) with the help of fiscal sops and concessions (and implicitly government backing given the origins of these entities). Second, the possible extension of the tax holiday for new power projects (including mega ones) from 2010 to 2017 since projects that have been awarded recently are unlikely to begin operations on time to benefit within the current deadline. Third, a revamped Accelerated Power Development and Reform Programme (APDRP) to induce reduction in aggregate technical and commercial (ATC) losses may be introduced, whereby states are financially rewarded if losses decline to a target level, say, 15 per cent. The serious "new" money is the NEF, if it comes about. The proposed initiatives are hardly original, they are devoid of conviction (since we are close to elections), and they are largely an admission of failure.|
|Since the beginning of the decade, this will be the second instance of a major central government financial intervention in the electricity sector. It may be recalled that in 2001, unpaid dues (including interest and penalties) of SEBs to central public sector units (CPSUs) and Indian Railways had reached Rs 41,500 crore (about 2 per cent of 2000/01 GDP); the sector was on the verge of a default crisis, which would have taken CPSUs down, financially. The way out, in a manner of speaking, entailed securitising Rs 35,000 crore through bonds "" tax-free and a tenor of 15 years with moratorium "" issued by state governments, with the balance waived altogether [the financial alchemy came to be known as the One-Time Settlement (OTS) scheme]. In addition, to harden the budget constraint, a quasi-binding restriction on SEBs was introduced designed to recover defaults to central government-owned utilities and suppliers through adjustments from Central Plan Assistance via a Tripartite Agreement between the Centre, the states and the RBI. So, what has been the outcome? First, according to the 2006/07 Annual Report of the Ministry of Power, SEBs have been paying power sector CPSUs on time (it is silent on payments to Indian Railways and to non-power sector CPSUs like Coal India Ltd.). Secondly, states have added about 6,850 Mw in capacity over the intervening period. Thirdly, the national average energy shortage has increased from 7.8 per cent in 2000/01 to 9.3 per cent at present. Finally, the cumulative financial assistance under the APDRP since 2002/03 has been Rs 9,100 crore, of which the cash incentive component for reducing ATC losses (one-half of actual cash loss reduction) has been Rs 1,960 crore. It is instructive that after 2004/05, aggregate data for ATC losses are not publicly available (to the best of my knowledge).|
|It is also helpful to summarise the state power sector along three financial measures for 2000/01 and 2006/07 (for the latter year, figures are in brackets): (a) commercial losses, including subsidy, were Rs 16,575 crore (Rs 12,280 crore); (b) the uncovered subsidy of SEBs was Rs 22,172 crore (Rs 21,201 crore); and (c) the rate of return was -41.8 per cent (-27.4 per cent). To sum up, while the rot in the power sector may have been stemmed post-2001, the malaise is so deep that the threshold for the sector to be self-sustaining is still far away, and therefore market-based risk-assessed finance is not forthcoming. In contemporary coinage, SEBs remain deeply subprime.|
|The recently proposed interventions are essentially the central government's way of admitting that states, one way or the other, will have to be helped out regarding the power sector. Investment in the distribution and transmission systems of the SEBs is inadequate, and this could be reduced further with repayments of the securitised debt. Plans for generation capacity will be constrained in the absence of concomitant enhanced distribution and transmission infrastructure. The power purchase agreements (PPAs) for large generation projects are mostly with SEBs; hence, the financial health of the primary off-takers for additional power could do with a coat of varnish (cynics may view it as indirect "credit enhancement" of independent power producers).|
|The initiatives are unlikely to deliver much by way of enduring change because they fail to address the crucial prerequisite for restoring health to the sector, viz. transformation in the intrinsic functioning of SEBs to induce profitability and keep the sector remunerative; in other words, the underlying incentives of SEBs' operations will be left untouched. In this regard, privatising the distribution segment and introducing competition are critical, but the moral hazard on account of states' confidence in regular central government bailouts and muddled rhetoric over public-private partnerships has undermined this option, despite the positive performance of the privatised distribution utilities in Delhi. Only improvement in cash flow will give investors and lenders durable comfort about the ability of SEBs to meet their financial and operational obligations; directed soft loans from government intermediaries are only temporary relief. While the central government will claim (and hope) that loans from PFC and REC will be deployed for investment, given the proximity of the next election cycle it is more likely that the money will be used to bridge the shortfall on account of supplying (more) free or highly subsidised power in the name of the aam aadmi! It will be interesting to follow the break-up of loans from the proposed fund between UPA and non-UPA states. And what about the health of PFC and REC, who will now augment their borrowing considerably to lend to SEBs? That could be a potential headache, but for another government sometime in the next decade.
The views expressed are personal