Rs 1.9 lakh cr-bailout for SEBs,with riders

States must raise power tariffs,improve efficiency

Written by ENS Economic Bureau | New Delhi | Published: September 25, 2012 2:40 am

The cabinet on Monday cleared a Rs 1.9 lakh crore-debt recast package for state power distribution utilities,most of which are reeling under accumulated losses and operational inefficiencies.

The bailout,broadly on the lines of a similar intervention in 2003 when losses of state electricity boards were taken over through RBI-guaranteed bonds as a “one-time” financial clean-up exercise,is aimed at easing immediate cash flow problems and stemming recurring losses.

For consumers,the exercise may mean bigger power bills,because to have access to the package,states must compulsorily file for annual tariff increases.

Under the new plan,about half of outstanding short term liabilities of distribution utilities (amounting to Rs 1.9 lakh crore up to March 31,2012) would be taken over by state governments. These would be first converted into bonds,to be issued by the utilities to participating lenders,duly backed by state government guarantees.

Also,lending institutions and banks have been asked to roll over the balance 50 per cent of the utilities’ debt,with a three-year moratorim on repayment. On their part,states must undertake milestone-linked reforms which include,besides yearly tariff revisions,changing managements of loss-making distribution companies,and moving towards a franchisee-based privatisation of select circles.

An official statement issued after Monday’s meeting of the Cabinet Committee on Economic Affairs said support — effective as soon as notified and to be open until December 31,2012 — would be available to participating state-owned distribution companies subject to their fulfilling “certain mandatory conditions”.

Two committees,one each at the central and state level,have been proposed to monitor the turnaround plan. As an incentive,the Centre has offered to the states a grant amount equal to the value of the additional energy saved by way of accelerated technical and commercial loss reduction beyond the loss trajectory specified under the government’s flagship distribution loss reduction programme (Restructured Accelerated Power Development and Reforms Programme or RAPDRP),and capital reimbursement support of 25 per cent of principal repayment by state governments on the liability taken over by them under the scheme.

Power stocks surged on Monday in anticipation of the government’s move,which was announced in the evening after markets closed. On a day the Sensex closed 79 points down,BHEL was up by over 6 per cent,lending firm PFC surged nearly 3 per cent,and power trader PTC India Ltd was up by over 2 per cent.

The accumulated losses of state electricity boards net of state government subsidy payments are estimated to be nearly Rs 2 lakh crore,or 2.3 per cent of GDP. Utilities in six states — Rajasthan,Tamil Nadu,Uttar Pradesh,Jammu & Kashmir,Madhya Pradesh and Haryana — account for nearly 70 per cent of accumulated SEB losses.

Taking over half the accumulated SEB losses under the bailout plan is likely to leave most states facing a sharply worsened overall debt situation. Experts said states can then manage their finances only as long as they are able to ensure that losses do not mount on account of power being sold substantially below cost.

“In the short term,this will ensure the resumption of much-needed credit flow to discoms and,as a result,give a boost to the entire supply chain of equipment and power suppliers as well as lenders to the sector,” Pawan Agrawal,senior director,CRISIL Ratings,said.

“However,the desired impact of this restructuring will not be realised unless a broad-based political consensus is achieved to implement much-needed tariff hikes,timely and adequate financial support is provided by state governments,and the discipline of regulatory processes and disclosures is enhanced.”

An executive of the Association of Power Producers,which represents private power project developers,termed the government’s move as a step in the right direction of restoring the financial viability of the sector.

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