Discom loan package: A boon for power sector?

Historically, in spite of delays, no lender has invoked a state government guarantee.

By R Krishnamoorthy

The Rs 90,000 crore loan package announced by the Centre for discoms is being seen as a boon for a major element of the power sector: generation companies or gencos. Improvement in their cash-flows will help their credit rating, and enable fresh funding. State government guarantees against the loans to the discoms will help PFC and REC to treat the loans as standard assets. That, however, is no assurance against default in debt-servicing. Historically, in spite of delays, no lender has invoked a state government guarantee.

The Centre, over the years, has formulated various schemes to help the ailing state power sector. In spite of these measures, there has been no real improvement in the functioning of the distribution companies, or discoms. A pattern is visible. Diversion of funds meant for capital expenditure to meet interest liability is rampant, resulting in further increase of liabilities with no creation of assets. Therefore, no significant investment has been seen in terms of strengthening sub-transmission and distribution, systems improvement, or separation of agriculture feeders. Starting in the late 1990s, the Accelerated Generation & Supply Programme (AGSP) subsidised the interest on loans from PFC by 3-4%. Later, around Rs 38,000 crore was securitised under the Ahluwalia Committee model of One-Time Settlement. The aim was to make SEBs bankable. Interest/surcharge of Rs 8,300 crore was waived. Net outstandings were converted into tax-free bonds at 8.5% pa, with a repayment period of 15 years. Importantly, payment of current bills through LCs was mandated. But, LCs were not established by the SEBs.

Announced in 2002-03, the Accelerated Power Development Reforms Programme (APDRP) envisaged a six-level intervention for reform, with a budget of Rs 40,000 crore. The major objectives were to improve the financial viability of discoms and bring aggregate technical & commercial (AT&C) losses down to 10%. The Centre funded 25% of the cost; 75% was arranged by the discoms from financial institutions or internal resources. NTPC and PGCIL, imparting consultancy to the discoms, fell short of expectations. Not surprising, given their little knowledge or experience of the constraints and complexity of distribution systems, this resulted in the inevitable—the failure of APDRP. Delayed release of funds by states to the discoms, and even diversion of funds to other sectors compounded the problem. In the XII plan, the Restructured APDRP was introduced with changes in the scope and revised terms and conditions, with an outlay of Rs 51,000 crore. Reduction of losses was the major objective, which remains elusive even today.

More recently, in 2014, the Integrated Power Development Scheme (IPDS) for strengthening of sub-transmission and distribution, metering of distribution transformers/feeders/consumers, and IT enablement even carried forward the outlay of R-APDRP. The scope extended to 4,041 towns. An outlay of Rs 32,612 crore and R-APDRP scheme cost of Rs 44,011 crore, including a budgetary support of Rs 22,727 crore, was earmarked. The latest information on the ministry of power’s website shows a sanctioned amount of Rs 32,500 crore, and Rs 12,500 crore released. The 2015 UDAY scheme aimed at financial turnaround, operational improvement, reduction in cost of generation, development of renewable energy, energy efficiency and conservation. State governments took over 75% of the debt of discoms and issued low-interest bonds. In return, discoms were given a deadline (2017-19) to meet efficiency parameters such as timely tariff revisions and elimination of the gap between the average cost of supply (ACS) and average revenue realised (ARR) by 2019. The turnaround envisaged by UDAY hasn’t materialised, with several targets missed.

Apart from the financials of the discoms, banks and financial institutions have also contributed to the stressed assets of many independent power producers.

Virtually no power project in India has ever been completed without cost and time overruns. Many private players quoted unworkable tariffs in making successful bids for projects. Many naphtha/gas-based stations were built, but the absence of gas supply and import of costly naphtha added to their woes. Most of these plants are shut today. The lucky few, which got into long term PPAs, are getting paid fixed charges, but are not operating. Many private power plants suffered as banks took considerable time in approving revised project costs, accumulating interest during construction. Additional assistance by the banks was adjusted against their dues, ‘evergreening’ the loans to remain standard assets. No disbursements went towards completing the project. With no cash flow, the natural fallout was defaults. The result—many of the private projects today face IBC proceedings or liquidation.

A mention must also be made of the role regulators have played in this. In spite of an APTEL order mandating electricity regulatory commissions to initiate suo-motu proceedings for discoms tariff revision, no tangible action is visible. Pendency of litigation has increased, and in many cases, commissions have been reduced to safe havens for retiring bureaucrats.

The FM’s announcement regarding privatisation of discoms in the Union Territories is a welcome step and should be adopted by states which are reform oriented. Private players like Torrent Power, with their successful experiences in distribution, can even be retained on an agency basis, on a profit-sharing model. Demonstrated improvements in Delhi by Tata Power and BSES show how investment in system strengthening can make a difference.

In conclusion, the bottom line is securing discoms’ cash-flow and efficient collection. Some suggestions to achieve this are—the introduction of pre-paid metering (complemented by smart metering and remote reading), separation of agriculture feeders, metering and measurement of agriculture consumption, direct transfer of subsidy and write-off of all state government loans to discoms.

It is important to establish benchmarks for efficiency in operations, develop MIS and use data analytics for continued improvement. Going forward, consider appointing professionals for managing the discoms and delegate operational authority to them. Only then can we expect to have directed investment for operational and financial improvements.

The author is Former Member, CERC
Views are personal