Banks can incentivise commercial performance of power sector: World Bank

Suggests utilities be freed from government interference, regulators focus on maintaining health of the sector

Amid increasing bank lending and burgeoning losses of the Indian power sector, the World Bank has suggested that banks help incentivise its commercial performance. In its study report More Power to India: The Challenge of Distribution, the World Bank said the overall bank lending to the power sector in FY14 stood at Rs 4,88,300 crore, which was higher than the overall bank credit to other infrastructure sectors. However, lenders have chosen to lend even in the face of continued inefficiencies in the distribution segment.

According to the World Bank, the financial health of the power sector is fragile, limiting its ability to invest in delivering better services. In 2013, the total accumulated losses of the sector stood at Rs 2.88 lakh crore or three per cent of the GDP. This is despite two bailouts in a decade comprising Rs 350,00 crore in 2001 and Rs 1.9 lakh crore in 2012. Projections for the 12th Plan show that even if tariff rises six per cent to keep up with the cost of supply, annual losses in 2017 will likely amount to Rs 1,25,300 crore.

World Bank’s economic advisor and the author of the study report Sheoli Pargal told reporters here on Tuesday that lenders are in a position to incentivise performance as the power sector relies on commercial borrowings. “There could be ripple effects on shortfalls on lenders and potentially on the health of the financial sector. A history of state rescues seems to indicate that lenders do not adequately pressure distributors to improve their operational and financial performance, expecting to be paid back by the state,” Pargal added.

On subsidies, the World Bank said in its report that utilities face pressure to provide below-cost power to agricultural and rural residential consumers for which they are reimbursed through subsidy payments by state governments. Since 2003, subsidies booked have grown 17 per cent a year and subsidies received expanded 12 per cent a year. The cumulative gap between them was Rs 40,500 crore for 2003-13. This has had a crippling effect on the already struggling financials of the utilities.

The World Bank has suggested that the power sector develop a commercial orientation once there are clear signals of political will to run it in a commercial manner with transparent subsidies going to only those who are eligible for such support. Subsequently, the day-to-day operations should be turned over to professional managers whose pay is linked to the performance of the utility.

The World Bank has also recommended that the utilities be freed from government interference and their management be professionalised. Regulators need to go beyond the technical review of tariff petitions and focus on maintaining the health and integrity of the operations of the sector.