Reportedly, the ministry of power (MOP) is working on new ‘reform-linked distribution scheme’ with a two-fold objective of (i) overhauling the power distribution sector and (ii) building robust supply infrastructure.
Involving total capital outlay of Rs 312,000 crore, the scheme will be funded by the union government and states in the ratio of 60:40 respectively. While, 60% of the proposed investment or about Rs 180,000 crore will come as Central grant, the balance will be borne by states. This umbrella scheme will subsume all existing schemes such as Deendayal Upadhyaya Gram Jyoti Yojana (DDUGJY) and Integrated Power Development Scheme (IPDS) into itself.
DDUGJY is aimed at metering every rural household and improving electricity infrastructure in villages. IPDS targets improvement in electricity infrastructure in urban areas, along with introduction of smart meters and IT systems in power supply. The schemes were launched in 2015 with total outlay of Rs 103,000 crore on DDUGJY and Rs 20,000 crore on IPDS. The residual sum of Rs 23,000 crore will get subsumed in Rs 180,000 crore. In other words, no separate allocation will be made for these.
The funds will be released in proportion to the achievement by power distribution companies or in short discoms (mostly owned and controlled by state governments, discoms are the most crucial players; they procure electricity from independent power producers (IPPs) and public sector undertakings (PSUs) viz. National Thermal Power Corporation (NTPC) etc besides their own generating stations and sell to consumers) against mutually agreed targets in the action plan. The scheme will have a 5 year time frame for discoms to improve their operational and financial performance.
The Scheme is currently under discussion at the inter-ministerial level and thereafter, it will be put up to the Expenditure Finance Committee (EFC) for approval (a similar proposal involving capital outlay of Rs 200,000 crore and grant by Centre of 40-60% was turned down by the ministry of finance (MOF); even states had opposed on the ground that it involved private franchisees and end of subsidies as part of the reforms package appended to it).
Prior to this, under the special economic and comprehensive package or ‘Atmanirbhar Bharat Abhiyan’, unveiled by finance minister, Nirmala Sitharaman during May 13 – 17, 2020, the government had promised special loan of Rs 90,000 crore from Rural Electrification Corporation [REC] and Power Finance Corporation [PFC] to discoms to enable the latter clear their dues to IPPs and PSUs. Sitharaman also announced Centre’s decision to hike borrowing limit of states by 2% of which 0.25% of SGDP (state gross domestic product) borrowing space is linked to power sector reforms.
As per a letter dated May 17, 2020 sent by MOF, “0.05% of the additional borrowing space is predicated on the state reducing aggregate technical and commercial (AT&C) losses of its discoms, another 0.05% is linked to their reducing the gap between average cost of supply and average revenue realization (ACS-ARR gap)”. The MOP will fix the target against each and monitor performance. To avail of the remaining 0.15% borrowing window, “a state will have to formulate a scheme to roll out DBT to all farmers in lieu of free electricity from 2021-22. The scheme should be implemented in at least one of its districts by December 31, 2020”.
Based on the progress on the above three parameters, the power ministry will recommend to the expenditure department to release the 0.25% by January 31, 2021.
It is not clear whether the special loan to discoms will be part of the new reform-linked distribution scheme or the two are independent. However, one thing is in common i.e. release of funds under each is linked to implementation of reform measures. That sounds laudable. But, what is the situation on ground zero?
Already, MOP has removed the reform rider appended to ‘special loan’ to discoms. Union power minister RK Singh has only asked “PFC/REC not to extend any new credit line to the discoms, after exhaustion of the liquidity window (read: Rs 90,000 crore), if the latter don’t self-correct”. “They will get fresh loans only if they chart a trajectory for AT&C loss reduction as approved by concerned state governments and Centre”. If, discoms fail to traverse it, the loans will be recalled.
Meanwhile, PFC and REC have already received loan applications for an aggregate amount of Rs 160,000 crore under the scheme against sanctioned limit of Rs 90,000 crore. One wonders whether the ministry will subject the excess credit to the target set for AT&C loss reduction. One can only wait and watch.
Be it the special loan to discoms, or reforms expected from states for getting extra borrowing space or the new ‘reform-linked distribution scheme’ now under works, all of these are plain rhetoric when seen in the backdrop of the last two decades experience. The discoms had been in dire financial straits since 2000 and the government has granted them three bail-out packages the latest being in 2015 under Ujwal Discom Assurance Yojana (UDAY) which condoned their whopping debt of about Rs 400,000 crore. Each time, promise was extracted from them and their owners (read: state government) – for carrying out reforms – only to be flouted.
Under UDAY (it was run between November 2015 and March 2019), the discoms were required to reduce AT&C losses from 20.7% during 2015-16 to 15% by 2018-19. Further, they were required to reduce the ACS-ARR gap from Rs 0.59 per unit during 2015-16 to ‘zero’ by 2018-19. Against these, during 2019-20, their AT&C losses were 18.9% while ACS-ARR gap stood at Rs 0.42 per unit. In other words, in respect of both the crucial parameters, the actual was far short of the target and that too in 2019-20.
Persisting AT&C loss and ACS-ARR gap led to losses of discoms. After decreasing from Rs 52,000 crore during 2015-16 to Rs 17,000 crore during 2017-18 (courtesy, condoning debt under UDAY and resultant reduction in expenses on interest), these increased to over Rs 30,000 crore during 2019-20. The Corona – crisis has worsened the situation as under lock-down, most industries and businesses are shut thereby denying them a major revenue source.
The financially bankrupt discoms are unable to clear their dues to IPP/PSUs which currently stand at about Rs 120,000 crore (July 31, 2020). When, IPPs/PSUs don’t get their dues, they can’t sustain electricity generation. The government can’t risk a situation of disruption in power supply. So, it acts with alacrity to arrange funds for discoms (even if they don’t perform and reform) so that generators get paid.
The special loan of Rs 90,000 crore (plus more in the pipeline) is meant primarily to help discoms come out of the payment crisis. It is also quite possible that the ‘reform-linked distribution scheme’ involving an outlay of Rs 312,000 crore might be an attempt to create a buffer for dealing with discoms financial woes in future. Prescribing a 5 year time frame for discoms to reform is no more than a gimmick. This is meant only to lend some credibility (albeit on paper) to the real plan of garnering funds to save bleeding distribution companies.
How long will this vicious circle of discom losses – unpaid dues – reform-linked bail-outs continue? Will there be an end to this? To get a clue to the answer, we need to look at the root cause of the problem.
Being their sole or dominating owner and controller, the state governments order discoms to do what they should not be doing as a commercial enterprise. They are told to sell power to certain class of consumers viz. poor households and farmers either at a fraction of the cost of supply or even free. Second, they abet large-scale theft which in jargon is called AT&C losses. Third, under power purchase agreements [PPAs], discoms are made to pay inflated tariff to IPPs using routes such as ‘gold plating’ (declaring higher investment than actual), over-invoicing of fuel cost etc.
This leads to a terrible situation whereby the ARR from sale of electricity falls short of the ACS. Indeed, this happens despite discoms charging exorbitant tariff from industries and businesses (this can go up to Rs 10 per unit or even higher) against cost of Rs 3-5 per unit. As a consequence, they are saddled with huge losses year-after-year leading to pile up of unsustainable debt.
From time to time, successive governments have talked loud of reforms such as open access; transparency in setting tariff, reducing cross-subsidy; direct benefit transfer (DBT) etc. But, these won’t work so long as the above mentioned three major causes are not addressed.
And, that won’t happen if our political class does not muster the will.