Facing The Heat

The numbers tell the story. Until a year ago, the Maharashtra State Electricity Board (MSEB) was among the handful of state electricity boards (SEBs) in India to run up a surplus and a positive rate of return (RoR) on capital, without, dipping into the governments subsidy basket. In 1994-95, it had a surplus of Rs 320.78 crore and its RoR was 4.5 per cent. This year, although, the results are still not out, the Board is expecting a revenue shortfall of a massive Rs 630 crore. And even the rate of return has fallen to 3 per cent not only is this lower than the numbers notched up in the past but is also way below the World Bank set norm of 4.5 per cent. Also for the first time, in 1995-96, the MSEBs hold on its creditors slipped: total outstandings which used to be cleared within an average 75 days now take around 100 days.

 

All this has led the World Bank to pull up what used to be Indias premier SEB. Last week, it suspended half the amount of the $350 million loan that the MSEB had been sanctioned for a 500 mw thermal plant in Chandrapur and high voltage direct current transmission line between Chandrapur and Padghe. The MSEB has already drawn around 30 per cent of the total outstanding loans and another 20-25 per cent is cleared over which the suspension does not apply, says Vinay Mohan Lal, Chairman, MSEB.

Since MSEB has already drawn half the amount of the 15 year loan, what this amounts to is, a cancellation of the rest of the loan until the state board meets with better housekeeping, as the Bank puts it. We are certainly disturbed because we have not been able to meet a 4.5 per cent rate of return on net assets, says Mr Lal. A rate of return (ratio of net profits to net assets) of 4.5 per cent has to be met by all SEBs availing of IBRD loans. This is 1.5 per cent higher than the stipulations of the Union power ministry.

Where did it go wrong?

The MSEBs problems are, in fact typical of the electricity boards in the rest of the country. Broadly, there are three trouble spots: tariff fixation, overdues from the end users and operational efficiency. The World Bank stipulated that tariffs have to be structured to eliminate any subsidy from the government and to ensure that the SEB makes a minimum return of 4.5 per cent on its capital. The MSEB was complying with this and raising tariffs by an average of 16-18 per cent until 1994 when, an impending election and pressure from the government made the Board raise tariffs by a mere 9.5 per cent. A 16 per cent to 18 per cent raise is corrective increase rate to maintain a rate of return of 4.5 per cent, says Asoke Bhasak, principal secretary, energy, ministry of Power, government of Maharashtra.

At the same time, the MSEB overdues from users especially in the agricultural sector was mounting. The MSEB was among the first state electricity boards in the country to stop free supply of electricity to the states it charges a tariff of Rs 1.65 from agricultural users. As on March 31, 1995, the it had Rs 546 crore pending with gram panchayats and public utilities like water supply and street lighting.

On the third front, MSEB is still better off than the rest of the SEBs. In fact last year, the SEB won a Rs 50 lakh prize money for being the best managed SEBs in the country. Its peaking power shortage is between 9 and 18 per cent and it operates at a plant load factor of 61.24 per cent. The national average for 1995-96 for PLF was 61 per cent.

And this is what MSEB officials and a number of bureaucrats are quick to point out, in their defence. The logic is that even though the MSEB has slipped, it is only a temporary phenomenon. However even if this is true, it is not enough. The Board cannot get back on its feet on the strength of operational efficiency alone for two reasons: One, the agriculture sector tariff rates are still too low. These need to be raised and unless the electricity boards get tougher on non-payment of dues, it will be pointless doing so. Some like the Karnataka SEB has suspended supplies to agricultural users for non-payment and there is no reason why the MSEB can not do so.

Secondly, political pressure is still a variable that the SEBs have to build into their profitability plans. For instance, during an election year, the MSEB had to keep tariff hikes below the norm and this, naturally, affected its profitability. And, if one has to point to the single most important reason for MSEBs poor showing this year, it would be this. And this is precisely what the World Bank is hitting out at through the suspension of the loan it has been pressing for corporatisation of the SEBs for a long time and by coming down heavily on the MSEB, it hopes the government will finally take heed.

Significantly, the MSEB top brass are downplaying the suspension of the loan. The Board believes that it is not really going to be hit by the suspension of the loan, as the state government has promised that it will bail out the Board by chipping in with the required amount for this year. And from the next year, the MSEB and the government says that the rate of return will be back in line with the 4.5 per cent norm set by the World Bank.

We think not. The problem is not short term. And even given the MSEBs track record, it is going to be tougher for the electricity board to get a higher return under the present circumstances when: corporate consumers, which make up the most profitable set of end users, are relying more and more on captive power plants, which implies that the state boards will have to increase realisations from other sectors.

And in the coming couple of years the board would see further lowering of the rate of return, as the asset value increases with commissioning of new plants.The 500 mw power plant with a project of Rs 1,100 crore is likely to be commissioned in 1997. Koyna Stage IV will be commissioned in 1999. Khaparkheda, a 2,210 mw with a project cost of Rs 1,100 crore would be commissioned in 1999-2000.

More important, since the MSEB alone was not responsible for bringing down the rate of return below the World Bank set standard, it is unlikely that it can pull back on the right track, single handed. Mr Lal says that recovery of dues Rs 914 crore as on March 31, 1995 from the priority sector and concessional rates of tariff to this sector has played the trick. But the phenomenon of concessional tariff and non-recovery from agriculture sector are perhaps as old as MSEB itself or any other SEB for that matter. This year, non-recovery dues amounting to Rs 500 crore from a co-operative, Mula Pravara in Ahmednagar district where a dispute relating to tariff rates is going on further worsened the situation. Mr Lal himself admits, We have no power to disconnect their electricity supply or take them to courts.

But if the SEB is serious about getting back on its feet, the agricultural sector problems have to be tackled. Agriculture asks for 32 per cent of total power demand, but contributes only 7 per cent of total revenue.We cant afford to ignore the agricultural sector. Also, we cannot go on taxing the industrial sector in order to cross subsidise, adds Mr Lal. While agriculture pays Rs 1.65 per unit, industry pays Rs 3.8 to Rs 4 per unit. Last year the Rs 2,500 crore of subsidy to the agriculture sector was offset by an earning of Rs 2,100 crore from industry.

Another factor which is out of the Boards hands but is critical to the MSEB profitability is the average tariff rate (decided by the state government for two years). It was increased by 21 per cent in 1990, over the preceding period and by 17 per cent in 1992. But in 1994 it was increased by only 9.5 per cent. Reason: election in early 1995.

This is the reason why corporatisation of the Board is a must. Unless a set of professionals who put profitability before political considerations takes over, there is little that will improve. The Board is moving to this end. It has set up a committee with V G Rajadhyaksha and M D Godbole both bureaucrats with experience in handling public sector enterprises to look into operational problems of the Board. However, it is moving too slowly and the World Bank is hoping that their latest action will hasten its pace.

corporatisation of the Board is a must. Unless a set of professionals who put profitability before political considerations takes over, there is little that will improve