Cabinet Clears Rs 2 Lakh Crores Debt Restructuring for Power Companies

Finally the government has bit the bullet and has agreed for a massive Rupees 2 lakh crore (approx US$ 35 billion) restructuring of debt of the perennially under performing and inefficient State Electricity Boards.  But hang on, is this the magic bullet that the Electricity Boards were waiting for?  Actually, the devil is in the details.

Though the Central Government has agreed for the debt restructuring, it comes with a lot of caveats.  It throws the total responsibility of getting the Electricity Boards back on track on to the State Governments.  There are a lot of riders to go along with this.

The decision has the capacity to revive investments in a sector that is critically important, where investments had been inhibited by the mountain of debt that is at risk of going bad. Most of the power supplied by these Electricity Boards are bought from the private power plants who will be the most happy with this debt restructuring plan.

Under the terms of the bailout, the State governments need to take a lot of painful steps like…

  • Raising power tariffs annually
  • Take up 50% of the outstanding loans of the State Electricity Boards (SEB) and the rest will be rescheduled by the lenders (mostly public sector banks) with a 3 year moratorium on principal payments
  • Controlling power theft
  • Reducing transmission and distribution losses by 25%

All these are going to be a pain in the neck for the State Govenments who have been wooing the voting public by doling out free power.  Already most of the State Governments are neck deep in debt and this package is not going to help them in any way.  But if the government hold firm, then they can realise that such profilgacy is not easy to sustain and it comes with a heavy price.

The last time that State Electricity Boards (SEBs) were offered a one-time settlement of their dues, they were similarly told to get their books in order, but the good conduct lasted only a short while.

Distribution Companies (Discoms) have been lax in cutting back on power theft, and even checking transmission losses. State governments, on their part, have found it impossible to resist the resort to populist politics – which is channelled in  providing free power to the agricultural sector. Unless these leakages and inefficiencies are addressed, this bailout will not serve the purpose – and SEBs and discoms may require to be bailed out a few years hence. This could be the weakest link in the success of the bailout package.

Pushing new reforms in the power sector, the Centre today approved restructuring of Rs 1.9 lakh crore debt of State Electricity Boards in a move to turnaround the near-bankrupt power distribution companies.

Under the scheme approved by the Cabinet Committee on Economic Affairs, 50 percent of the short-term outstanding liabilities would be taken over by state governments. Balance 50 percent loans would be restructured by providing moratorium on principle and best possible terms for repayments, an official statement said.

As part of mandatory condition, 50 percent of the outstanding liabilities up to March 31, 2012 is to be taken over by the state governments. This shall be first converted into bonds to be issued by discoms to participating lenders, duly backed by the state government’s guarantee. The scheme is effective as soon as notified and will remain open up to December 31, 2012 unless extended by the government, the statement said. The support under the scheme will be available for all participating state-owned discoms on fulfilling short-term mandatory conditions, it said.

The restructuring or reschedulement of loans is to be accompanied by concrete and measurable actions by discoms or states to improve the operational performance of thedistribution utilities. As per the statement, the takeover of liability by state governments from discoms in the next two-five years by way of special securities and repayment and interest payment to be done by state governments till the date of takeover.

The approved scheme is formulated based on report of expert group headed by B K Chaturvedi, Member (Energy) Planning Commission and deliberations in the PMO and Finance Ministry, it said.

For monitoring the progress of turnaround plan, two committees at state and central levels,respectively, are proposed to be formed, the statement said. The Central government will provide incentive by way of grant equal to the value of the additional energy saved by way of accelerated AT&C loss and capital reimbursement support of 25 percent of principal repayment by the state governments on the liability taken over by them under the scheme, it added.

The accumulated losses of the state power distribution companies (Discoms) are estimated to be about Rs 1.9 lakh crore as on 31st March, 2011. “It is a step in the positive direction. The loss reduction and tariff increase plans would need to be monitored very strictly so that utilities are able to break even in next 3 to 4 years and in the interim they need to be provided adequate transition finance,” Ashok Khurana Director General Association of Power Producers said.

Commenting on the debt restructure, State Bank of India Chairman Pratip Chaudhuri in Mumbai said, “our exposure to discoms is perhaps the lowest…and that would also be covered by state government guarantee…to UP is Rs 800 crore, out of Rs 20,000 crore total.

We think that the most stressed discoms are Rajasthan, UP, Andhra Pradesh, Tamil Nadu and perhaps to some extent Punjab. “These are the discoms which will have to work extra hard and look at higher revenue generation in order to meet this benchmark but overall our discom exposure is 4 or 5 percent. Our power sector exposure is loaded towards the large generating companies, rated companies, he added. Central Bank of India Chairman and Managing Director M V Tanksale said: “It is a welcome move from the government and will definitely help the power sector. Here on, it would be important for discoms to operate at an ‘cost plus’ basis and let the subsidies come from the respective state governments on a cash basis.

“All the discoms where we have an exposure have already increased the tariffs, which is one of the conditions of the restructuring package. The assets continue to remain standard on our books as they were only restructured till now.”

News source: Firstpost

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