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Power sector debt recast only a temporary measure: S&P

* Rating agency expects no significant reforms before 2014

Written by ENS Economic Bureau | New Delhi | Published: September 11, 2012 1:19:02 am

Standard & Poor’s has said it expects no significant reforms in the Indian energy sector before the general elections,heightening concerns that this could keep India in line for a ratings downgrade.

The ratings agency said the restructuring of state electricity board loans in the power sector was a short-term correction while for oil subsidies,“the government was aware of the necessity for corrections” but expected that nothing major may happen “before the state elections or even a general election,next year”.

Credit analyst at S&P,Takahira Ogawa said the delays have not,however,increased the risk factors for India than what it was already at.

S&P had issued an outlook for ratings downgrade for India in June this year. The key risks the agency had identified for the economy stemmed from the weakening of loan quality for banks as corporate results weakened and the Central government persisted with a high fiscal deficit.

Analysts from the agency made the comments at a conference call on the government’s recent proposal to restructure about Rs 1,20,000 crore debt of state electricity boards.

“We believe a sustained improvement in the credit quality of distribution companies and greater private sector participation can provide a long-term solution to the country’s power sector woes,” said credit analyst Rajiv Vishwanathan.

The domestic banking sector has an exposure of about 7.5 per cent of its loan book to the power sector. This works out to about Rs 3,30,000 crore as on March,2012. Outstanding loans to the state electricity boards comprise about a fourth of that amount.

The proposal envisages that a portion of these loans to the state boards will be restructured. About half of these loans will be transferred to the respective state governments,which would issue bonds against the papers adding the sweetener of a guarantee.

The package also seeks to postpone repayment of principal by three years to allow loss-making utilities to achieve an operational and financial turnaround. Structural reforms focussed on regulation,tariff and technical inefficiencies will accompany financial restructuring so as to restore the viability of the state power utilities.

Short circuit

Investment In Power Infrastructure Is Inadequate

Although power demand has been mushrooming,the growth in installed capacity and the improvement in transmission and distribution infrastructure,particularly at the state level,have not kept pace with demand growth. This has caused severe instability in the system. In fact,India has consistently failed to meet its planned power capacity expansions since the 1950s. The weak financial health of discoms,delays in securing environmental clearances,and fuel-supply risks are key contributors to falling investments in the power sector.

Losses continue to be high

The aggregate technical and commercial (AT&C) losses in India are as high as 27% in several states,compared with a global average of 5%-10%. Technical losses generally arise from inadequate investment in system improvements,while commercial losses are mainly due to inefficient metering and theft of power. The loss of revenue due to gross inefficiencies exacerbates the inability of discoms to purchase sufficient power to meet demand or make timely payments to power generators. Pilferage also results in disproportionately low revenue to power distributors and low recovery for generators from the sale of power.

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