On September 12, 2015, chief secretaries of states whose power distribution companies [PDCs] are making losses had a meeting with union power minister, Piyush Goyal. This was followed by a meeting of PDCs officials with prime minister on September 14. They were demanding support from central government in dealing with their accumulated losses of over Rs 300,000 crores. To be precise, they wanted these liabilities to be extinguished so that they start on a clean slate. Contrary to expectations, Team Modi has categorically rejected any bail out. This is a bold stance.
Since 2002, PDCs got two bail out packages [Rs 40,000 crores in 2002 and around Rs 200,000 crores in 2013]. These were granted on the promise that they would adjust tariff in a manner so as to plug the gap between revenue and cost of electricity besides reducing transmission and distribution [T&D] losses. But, they have failed on both these fronts and now are staring at much higher losses despite starting on a clean slate only a couple of years ago.
By not conceding to their demand, Modi – dispensation has given a jolt forcing states to do serious introspection. But, this by itself will not work as their current state of deep financial stress is already having a contagion effect on power producers [they are running at just 2/3rd PLF [plant load factor] because PDCs are unable to buy as they can’t pay] and consumers do not get supplies. The stress of former in turn, leads to ever increasing NPAs [non-performing assets] of public sector banks [PSBs] as their loans don’t get paid.
These wider repercussions on the economy could still make states/PDCs complacent. They may still believe that centre would blink sooner than later as it cannot afford continuing crisis in the economy [what a pity, unlike past when power plants were hamstrung due to non-availability of coal, today they have plenty of coal; courtesy, Modi’s successful efforts to rejuvenate coal sector, yet they are unable to generate electricity] and will have to come to their help out of its own compulsions. Team Modi should tell states that it shall not budge and force them to take required steps urgently.
The state governments are solely responsible for the present mess of PDCs. They have done it via giving power at throw-away price [free in some states] to farmers & households, patronizing theft [this is institutionalized with states, PDCs and politicians acting in unison] and allowing inflated cost bills to PDCs as amply demonstrated by revelation in CAG report in case of Delhi [they were allowed excess tariff of Rs 8000 crores and an equivalent amount as regulatory assets, a euphemism for losses on their books which can be recovered from consumers on approval by regulator].
In view of above, logically and in all fairness, state governments should be asked to take over the entire debt of PDCs on their books so that the latter can clear all their outstanding dues to power producers, banks and all others. A beginning could be made with Rajasthan which leads the pack with a whopping debt of Rs 95,000 crores and being a BJP ruled state, there should be no glitch in accepting the direction from Modi – government [if, Vasundhera Raje can strictly follow centre on issues like land acquisition and labour reforms, the case for power reforms is equally compelling].
While, taking over the aforementioned liabilities, the states must not be given any relaxation/leeway in complying with the requirements relating to fiscal deficit and revenue deficit under the FRBM [Fiscal Responsibility and Budget Management] Act. Letting them do so will tantamount to keeping them in their current complacency mode ad infinitum. Therefore, the targets set under FRBM must be adhered to.
Luckily, under the award of the 14th Finance Commission [this has been promptly implemented by Modi – dispensation] which increases the devolution of taxes by central government to states from extant 32% to 42%, the states will be getting substantially higher funds. This should help them in smoothly absorbing the PDCs liabilities and yet ensuring that they do not deviate from the milestones under FRBM.
To enforce discipline, the government may take a cue from arrangements in place for payment of dues to NTPC [National Thermal Power Corporation – a central PSU] whereby amounts are deducted from share of concerned state in the ‘divisible pool’. Likewise, before releasing the funds under the Finance Commission award, the outstanding dues of PDCs to various entities may be deducted and directly released to the latter.
The above will address only part of the problem. The more difficult one is how to prevent losses in the future? The tendency of PDCs to make losses is deeply ingrained in the system. These are primarily due to (i) institutionalized theft [any business where 30-50% of output is not paid for is inherently unsustainable], (ii) cheap/free supply of power and (iii) state favours to distribution companies [wherever, these are in private hands]. Unfortunately, the political dispensation is unwilling to address (i) and (ii) at all and has a lackadaisical approach towards (iii)!
The state governments – irrespective of their political colour – strongly feel that dispensing with free supply of power or increasing tariff to reasonable levels will make a dent on their vote bank. Many of them also feel that there is a sizeable vote bank around even power theft [majority of people living in slums/jhuggis get power for a nominal amount they pay to their politically well connected benefactor]. As regards (iii), this is clear case of quid pro quo where a corrupt official benefits in exchange for favour to owners of PDCs. So, they do not want to touch this either.
Modi will need to build a consensus to stem these three menaces. He should convince all [within his party and alliance partners in NDA, to begin with] that giving un-interrupted 24×7 supply at reasonable price is a far better selling proposition to the electorate than a situation of frequent power cuts or no supply which is inevitable if PDCs remain perennially sick. Likewise, by dismantling the cult of power theft, the party will gain politically [even if, it suffers a set-back in some local elections, that should be taken in stride for the sake of overall gains it will bring for every one sans power thieves].
As regards reining in corruption to curb inflated power cost allowed to PDCs, this is the sole prerogative and duty of prime minister. He should use his indomitable spirit “naa khaoonga, naa khanne doonga” [neither I take bribe, nor will let any one else take] to get their audit done and take stern action based on its findings. For future, he should make sure that regulators do not allow inflated costs.
Modi has made a good beginning by saying “NO” to states demand for a financial bail out. He must do all other logical things [some of them very harsh politically] as outlined above to ensure that power distribution companies turn permanently viable and self-sustaining thereby removing the biggest hurdle in way of his pledge to supply power to every home by 2019.