The increasing losses of power distribution companies [discoms] – firms which procure electricity from the generators and distribute to the consumers – have once again started haunting the states and union government alike.
In 2015, the union government had orchestrated a financial restructuring package [FRP] under which over 75% of the outstanding debt about Rs 400,000 crore of discoms was taken over by state governments whereas for the balance 25%, they were allowed to issue bonds – backed by sovereign guarantee – to raise funds at concessional interest rate. The FRP was intended to enable discoms start on a clean slate, reduce losses and eventually eliminate them.
During 2016-17 and 2017-18, they did show significant reduction but during 2018-19, this trend was reversed. The losses continue to increase during the current year. As a result, discoms in majority of the states have piled up losses running in thousands of crore with Tamil Nadu topping the list with cumulative loss of Rs 105,000 crore.
In a letter addressed to the concerned states [read: debt ridden], the union power minister, RK Singh had pointed out inefficiencies of discoms in billing and collection, low pricing of electricity, theft and delayed reimbursement of subsidy they are forced to give to certain categories of users viz. farmer, poor households as major factors behind their increasing losses. Singh had opined that this would also impinge on the health of generators and the state.
The reference was clearly to the inability of these financially bankrupt discoms to make payment to the generators for the electricity purchased from them. At present, the former have to pay an aggregate of close to Rs 73,000 crore [end June 2019] to the latter of which Rs 54,000 crore is overdue [i.e. the amount has gone past the date on which the payment was due]. In addition, the discoms owe about Rs 10,000 crore to the producers of renewable electricity.
If, power producers don’t get paid, this will have a debilitating effect on their ability to meet their operating expenses and servicing loans taken from banks and financial institutions [FIs]. Those loans run the risk of becoming non-performing assets [NPAs] [Association of Power Producers has already raised an alarm]. If, things continue as usual, ultimately even the states’ finances won’t remain unaffected as they are the owners of discoms.
The centre is well aware of the reasons as to why discoms are incurring losses. Singh had highlighted these in his letter to the states. Instead of insisting on necessary corrective action, the government is now contemplating a Special Loans Plan [SLP] under which FIs will be asked to give loans to discoms to enable them clear all their dues to the generators [gencos]. This is disgusting.
Giving discoms and their masters [read: state government] a soft option of arranging loan so that the dues are cleared [a condition that the money is used only for the purpose it is given is no consolation] will mean continuation of business as usual. They will pile up more losses and wait for another day when the centre will get ready to shower its benevolence with another dose of loans.
Under a “new tariff policy” being put up for consideration of the Cabinet, the government has proposed that discoms will pay a surcharge to the gencos for delayed payment equal to the commercial rate of interest. Further, they won’t be eligible for grant or loan if they don’t reduce losses. Meanwhile, from August 1, 2019, the Government of India [GOI] has already made it mandatory for discoms to open letters of credit [LoC] for getting supply from gencos. The special dispensation now being mooted is completely out of sync with this righteous approach.
It is ironical that on the one hand, the government is ruthless in mandating discoms to open LoC [under it, bank guarantees that a buyer’s payment to a seller will be received on time and for the correct amount; in the event that the buyer is unable to pay, the bank will be required to cover the full or remaining amount which in turn, it will recover from the buyer using all available legal means] and pay penalty for delayed payment at commercial rate of interest and on the other, it starts soft peddling to a point of arranging ‘special loan’.
It would appear that some degree of competitive politics came into play while arriving at this anomalous decision. Initially, the centre offered the help to Tamil Nadu only but when other states viz. Uttar Pradesh, Rajasthan, Maharashtra, Telengana etc insisted, the former agreed to consider special loan arrangement for all. There could not be a more apt example of policy paralysis even as the union government is taken for a ride by vested interests in the states.
The SLP will have serious implications for the banks and FIs whom the centre ropes in for bailing out discoms. This is a loan which latter won’t be able to pay back given their precarious finances and no effort being made to address the fundamental factors which has led them to the current mess. So, this will be a NPA from the day one. For banks/FIs struggling to come out of the crisis they got into [courtesy, legacy NPAs], this will compound their woes.
True, payment to gencos will enable them service loans they had taken thereby preventing those loans from becoming NPAs. However, from the perspective of banks/FIs, this is no consolation as one set of NPAs would have been substituted by another. Besides, let us not forget that gencos will always remain vulnerable to payment default as long as the discoms remain financially un-viable.
The discoms are caught in a ‘vicious circle’ being the handiwork of their own masters. First, the parties get elected on the promise of giving cheap or even free power to farmers and households and they force discoms to actually give without compensating them. Second, in a bid to further prop up their vote bank especially in slums and resettlement colonies etc, they abet power theft. Third, they allow inflated tariff to gencos taking recourse to ‘gold plating’ [euphemism for claiming higher investment], over-invoicing of fuel bills etc.
The above three factors cause persistent shortfall in the realization from sale vis-à-vis cost of supplying electricity pushing discoms into perennial loss. All parties vow to address these but none has ever bothered to act. So, the mess continues.