Too little, too late. The government’s recent decision to allow restructuring of the gigantic debt state power distribution companies (discoms) have taken on over the past decade is at best a short-term fix for the ailing sector, say experts. More likely, the government has given a breather to the banks and financial institutions whose exposure to these entities has mounted over the years.
Rajesh Pandey, chairman and managing director, West Bengal State Electricity Distribution Company, likened the debt-recast move to oxygen, but said the state electricity boards (SEBs) will need much more than that to turn around.
As such, only 50% of the loans are getting restructured, while the other 50% are to be borne by the respective state governments, said S K Agarwal, director, finance, Uttar Pradesh Power Corp (UPPCL).
That’s a big worry for some SEBs, he said, adding that the Tamil Nadu SEB, for example, has a total debt of Rs 38,000 crore, while Rajasthan’s has around Rs 44,000 crore.
“How these two SEBs, which require around Rs 5,500-6,000 crore annually for debt servicing, come out of the debt trap remains to be seen,” he said, adding, how much banks come forward to help them will depend on how timely these entities service their debt.
Agarwal also advised that UPPCL completed its loan restructuring in March 2012, where the state government took over the whole loan liability of Rs 15,020 crore and in turn, UPPCL promised to gradually increase the tariff, which has been languishing Rs 2 below the power procurement cost. “Today, our average cost of procurement is Rs 5.83 per unit, while our average supply is Rs 3.67 per unit. We have filed a petition for a 25% tariff hike and are waiting for the judgment,” said Agarwal. Hardly surprising, UPPCL had suffered a loss of Rs 12,000 crore in 2010-11 alone.
Alok Ramachandran, institutional equity research – power, said that the accumulated losses of SEBs are estimated to be about of Rs 1.9 lakh crore as of March 31, 2011 and it is possible this amount touched Rs 2.5 lakh crore by the end of March 2012. He further suggested that the states may not be in a position to take on the debt on their books as they could exceed their fiscal responsibility and budget management limit of 3%. “It has to be seen how the states are going to absorb such humongous debt on their books post this recast as they have to not only service the debt but also repay them.” To be sure, the loans were taken to cover the accumulated losses stemming from supply of power to consumers well below costs by the discoms. “To cover the losses, SEBs took loans and then repaid those by taking new loans and this cycle went on till nine months back when financial institutions decided not to lend further to these loss-making SEBs,” said Agarwal.
What were regulatory bodies and financial institutions doing when SEBs were doling out cheap power?
Pandey admitted that various institutions had failed to perform their duties. R Nagarajan, director, Power Finance Corporation (PFC), said financial institutions had limited options at that time but now the time is changing, as is evident from the fact that 17 states have applied for tariff hikes just this calendar.
“How can we stop lending to these SEBs? Moreover, PFC offered project-wise lending and its lending is not based on balance sheet performance,” he reasoned. PFC, along with Rural Electrification Corporation, has a huge exposure to SEBs.
So, was the restructuring move in effect aimed at bailing out these financial institutions and banks?
The Cabinet Committee on Economic Affairs approved the scheme for financial restructuring of state discoms to make sure banks don’t have to write off the sour loans incurred by loss-making SEBs, said a highly placed official of a power company involved in generation, transmission and distribution.
Over a longer term, privatisation of distribution appears inevitable, he said. “Very soon, you will see many state governments coming up for tenders, either based on franchisee or licencee model, at least for cities with population over 20 lakh,” said the official.
According to the experts, only structural changes like regular tariff hikes, modernisation of distribution infrastructure, reduction of transmission and distribution losses, adoption of new technologies and implementation of a cost pass-through mechanism where fuel price increases could be passed on to consumers rather than be absorbed by the state electricity boards, which are often forced to sell power below cost will make for a long-term solution.
If tariff revisions or other operational improvement measures are not sustained, we may have only postponed the underlying problem, giving the lenders a false sense of security, warned a September 25 Icra report.
Pawan Agarwal, senior director, Crisil Ratings, said restructuring exercise will lead to cumulative savings of Rs 6,000-7,000 crore in interest for the discoms. However, the desired impact of this restructuring will not be realised unless a broad-based political consensus is achieved to implement the much-needed tariff hikes, a timely and adequate financial support is provided by the state governments, and the discipline of the regulatory process and disclosures is enhanced, he added.
Rajesh Pandey, chairman and managing director, West Bengal State Electricity Distribution Company, likened the debt-recast move to oxygen, but said the state electricity boards (SEBs) will need much more than that to turn around.
As such, only 50% of the loans are getting restructured, while the other 50% are to be borne by the respective state governments, said S K Agarwal, director, finance, Uttar Pradesh Power Corp (UPPCL).
That’s a big worry for some SEBs, he said, adding that the Tamil Nadu SEB, for example, has a total debt of Rs 38,000 crore, while Rajasthan’s has around Rs 44,000 crore.
“How these two SEBs, which require around Rs 5,500-6,000 crore annually for debt servicing, come out of the debt trap remains to be seen,” he said, adding, how much banks come forward to help them will depend on how timely these entities service their debt.
Agarwal also advised that UPPCL completed its loan restructuring in March 2012, where the state government took over the whole loan liability of Rs 15,020 crore and in turn, UPPCL promised to gradually increase the tariff, which has been languishing Rs 2 below the power procurement cost. “Today, our average cost of procurement is Rs 5.83 per unit, while our average supply is Rs 3.67 per unit. We have filed a petition for a 25% tariff hike and are waiting for the judgment,” said Agarwal. Hardly surprising, UPPCL had suffered a loss of Rs 12,000 crore in 2010-11 alone.
Alok Ramachandran, institutional equity research – power, said that the accumulated losses of SEBs are estimated to be about of Rs 1.9 lakh crore as of March 31, 2011 and it is possible this amount touched Rs 2.5 lakh crore by the end of March 2012. He further suggested that the states may not be in a position to take on the debt on their books as they could exceed their fiscal responsibility and budget management limit of 3%. “It has to be seen how the states are going to absorb such humongous debt on their books post this recast as they have to not only service the debt but also repay them.” To be sure, the loans were taken to cover the accumulated losses stemming from supply of power to consumers well below costs by the discoms. “To cover the losses, SEBs took loans and then repaid those by taking new loans and this cycle went on till nine months back when financial institutions decided not to lend further to these loss-making SEBs,” said Agarwal.
What were regulatory bodies and financial institutions doing when SEBs were doling out cheap power?
Pandey admitted that various institutions had failed to perform their duties. R Nagarajan, director, Power Finance Corporation (PFC), said financial institutions had limited options at that time but now the time is changing, as is evident from the fact that 17 states have applied for tariff hikes just this calendar.
“How can we stop lending to these SEBs? Moreover, PFC offered project-wise lending and its lending is not based on balance sheet performance,” he reasoned. PFC, along with Rural Electrification Corporation, has a huge exposure to SEBs.
So, was the restructuring move in effect aimed at bailing out these financial institutions and banks?
The Cabinet Committee on Economic Affairs approved the scheme for financial restructuring of state discoms to make sure banks don’t have to write off the sour loans incurred by loss-making SEBs, said a highly placed official of a power company involved in generation, transmission and distribution.
Over a longer term, privatisation of distribution appears inevitable, he said. “Very soon, you will see many state governments coming up for tenders, either based on franchisee or licencee model, at least for cities with population over 20 lakh,” said the official.
According to the experts, only structural changes like regular tariff hikes, modernisation of distribution infrastructure, reduction of transmission and distribution losses, adoption of new technologies and implementation of a cost pass-through mechanism where fuel price increases could be passed on to consumers rather than be absorbed by the state electricity boards, which are often forced to sell power below cost will make for a long-term solution.
If tariff revisions or other operational improvement measures are not sustained, we may have only postponed the underlying problem, giving the lenders a false sense of security, warned a September 25 Icra report.
Pawan Agarwal, senior director, Crisil Ratings, said restructuring exercise will lead to cumulative savings of Rs 6,000-7,000 crore in interest for the discoms. However, the desired impact of this restructuring will not be realised unless a broad-based political consensus is achieved to implement the much-needed tariff hikes, a timely and adequate financial support is provided by the state governments, and the discipline of the regulatory process and disclosures is enhanced, he added.
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