Rajasthan Government Moves To Help Loss-Making Power Utilities

Last week, the Vasundhara Raje-led BJP government held a partnership summit to attract global investment in the state. In addition to inking 295 MoUs with leading conglomerates worth Rs 3.30 lakh crore, the north-western state gave a strong hint to become the first state to participate in Centre's UDAY Scheme ((Ujwal Discom Assurance Yojna), a financial restructuring programme for the loss-making power utilities.

Confirming the speculation about the state's participation, C.S. Rajan, chief secretary of Rajasthan, said that the state is ready to join the scheme and thereby take 50 per cent of the total debt of the state's power distribution companies (discoms) as on 31st March 2016 and the rest 25 per cent by next fiscal(2016-17).

Rajasthan is saddled with the highest discom losses. At present, the state has a financial burden of around Rs 85,000 crore to lending institutes. The state, along with other loss-making states, is already on notice by the Reserve bank of India to clear their debts or they will be debarred from receiving financial aid.

By adopting the scheme, the state has clearly given itself ample time to implement a profitable tariff policy, reduce AT&C losses (aggregate technical and commercial losses) and increase operational efficiency among others to turn the loss-making discoms into profitable ones.

As per the UDAY scheme, state governments, which own the discoms, can take over 75 per cent of their debt as of September 30 and pay back lenders by selling bonds. For the remaining 25 per cent, discoms will issue bonds. The scheme aims to restructure an outstanding of Rs 4.3 trillion.

In UDAY, power distribution companies have to reduce their technical and commercial losses to 15 per cent by 2018-19 against existing national average 22 per cent and eliminate the gap between Average Revenue Realised (ARR) & Average Cost of Supply (ACS) by 2018-19.

Since the launch of the scheme, it is being widely discussed how compatible the scheme will be in the long run to improve discoms' health and whether the non-BJP ruling states willing to participate in the scheme. Excluding Rajasthan, two other states with highest accumulated losses have non-BJP government, Uttar Pradesh and Haryana.

BW|Businessworld take a close look at the previous restructuring program and expert opinion:

Reforms Over The Years
The first promising act to wipe out discoms losses was passed in the year 2003 by the then NDA government when it introduced the Electricity Act, 2003.

Prior to this act, India's electricity sector was guided by the Indian Electricity Act, 1910 and the Electricity (Supply) Act, 1948 and the Electricity Regulatory Commission Act, 1998. The generation, distribution and transmission were carried out mainly by the state electricity boards in various states.

The Electricity Act 2003 was aimed at encouraging private sector participation in generation, transmission and distribution and distancing regulatory responsibilities from government to regulatory commission. Other primary objective of the act was to protect consumer interest, supply electricity to all areas, rationalization of tariff among many other reforms.

Though, the act is said to be the first noticeable reform in the sector, it failed to deliver because of many reasons. Two main problems were political interference and slow bureaucracy.

In 2012, UPA-II launched a Financial Restructuring Plan (FRP), which provided for a specific bailout package for 8 states if they agreed to meet a series of pre-conditions.

One of the key terms of the FRP was to divide the short term liabilities (STL) of discoms in two halves. According to the program, 50 per cent of the STL was to be assumed by state government in a progressive manner, starting with discoms issuing state government back bonds, which would later be replaced with state government issued debt securities.

The other 50 per cent of STL would be serviced by the discoms, with a moratorium on principal repayment for 3 years backed by state government guarantees.

Out of the 8 mentioned states, only Haryana, Rajasthan, Tamil Nadu and Uttar Pradesh joined the programme. After initiating several rounds of talk between the stakeholders, the implementation of the programme was delayed. Only Rajasthan, Tamil Nadu and Uttar Pradesh made some progress under FRP.

What State Governments Are Planning?
Excluding Rajasthan, no other state has confirmed its participation in the UDAY scheme. Tamil Nadu, Uttar Pradesh and Haryana owe Rs 70,000 crore, 32,000 and Rs 10,000 crore respectively.

Asked about UP's participation in the restructuring scheme, officials in the Uttar Pradesh government said the state was ready to take over its distribution utilities' debt.

"Instead of 75 per cent, the state government is ready to take over the entire debt of the distribution utilities. But we will request the Centre that interest and principal payment be kept out of the fiscal deficit calculations," Rahul Bhatnagar, principal secretary, department of finance, Uttar Pradesh told a business daily.

"Almost all the states have heartily welcomed the new initiative when it was discussed at the conference of Power, Renewable Energy & Mines Ministers of State and Union Territories being held in the city," said Union Power Minister Piyush Goyal.

"The new scheme UDAY has been very well received... We shared the scheme in greater details with power ministers from all the states and I am delighted to report to you and to the people that almost all the states have heartily welcomed this new initiative. There is a pan India consensus on this proposal," he added.

For the time being, the Centre is looking to implement the programme in NDA ruling states like Haryana, Jharkhand, Telangana and Punjab to give the scheme a boost.

What Experts Have To Say?
Till now, UDAY has received a thumbs-up from analysts and experts.

Former power secretary Anil Razdan says that the scheme is a crucial step to improve the health of the discoms.

Talking to BW Businessworld, Razdan said: "The scheme does promise necessary changes which should be put on application as soon as possible, clubbing every state to participate will be a challenge for the Central government."

The government should also focus on critical aspects like improving billing efficiency, cutting down AT&C losses, skilling workers, stability in the top level management and most important privatisation of the loss-making discoms to improve the health of the discoms, he said.

Rajan, the chief secretary of Rajasthan said, "The advantage of the scheme is twofold. Firstly, it will clean the balance sheet of the discoms, which will help discoms to raise fresh loans on their own balance sheets, and second, it will bring about considerable reduction in the interest servicing burden of the state government."

Santosh Kamath of KPMG said the initiatives associated with the UDAY scheme will encourage states to come in board.

"UDAY will help reduce interest burden on state discoms which will prevent them to have defaults. If the scheme is blended with perfect kind of technology, cost of the power will come down," Kamath said.

The additional benefits attached with UDAY are additional coal supply by NTPC to power stations and additional allocation of funding from the Deen Dayal Upadhyaya Gram Jyoti Yojana.

About setting the right tariff for electricity, Razdan said: "Discoms need to hike their tariff charges by 50-60 per cent to meet their operating costs and supply reliable power."

Recent estimates by CRISIL suggest that poor progress on tariff reforms and high AT&C losses have cost led to accumulated discom losses of Rs 3.75 trillion (equivalent to around 2.7% of India's GDP).

In the last financial year, the average rate of electricity sold by state-run NTPC Ltd's coal-fuelled projects was Rs.3.25 per unit, while the tariff of power from its other projects ranged between Rs 2 and Rs 4.50 a unit.

Since setting power tariffs is a state concern, most of the time tariffs are kept low by state government to secure its votes.

It's a common tendency in India that voters' loyalty will fall on the party which supplies cheap electricity and adequate waters. For example, a state like Bihar which has a loan burden of around Rs 5,000 crore, buys electricity at a price of around Rs 5 per unit from neighbouring states but sells it anywhere between Rs 2-3 units. Similar is the condition with most of the states.

Billing everyone is also one thing government should look into. At present around quarter of the entire electricity supplied flows to the agricultural sector. This in turn contributes only around 5 per cent in the total revenue.

Though it is Prime Minister Narendra Modi's dream to electrify every village by the year 2019, the dream should not be achieved by pushing discoms to sell electricity at loss bearing tariffs in villages.