Andhra becomes first state to enlist in Centre's debt restructuring for power distribution

Exactly a month after the Union government came out with a financial restructuring scheme for power distribution companies, Andhra Pradesh has become the first state to join it. The scheme is considered the first move of NDA government to set right power distribution through restructuring of stressed loan in the business.

The Union government had approved a financial restructuring scheme for distribution companies on November 5, 2015. "Congratulations to Hon'ble chief minister of Andhra Pradesh Shri Chandrababu Naidu for joining UDAY (Ujwal DISCOM Assurance Yojana) for turnaround of DISCOMs," Union power minister Piyush Goyal said in a tweet. "Under the leadership of Sri Naidu, Andhra Pradesh is making rapid strides across sectors. With UDAY, AP can assure 24X7 power for all," he said in another tweet.

Andhra Pradesh, in the southern grid, has acute power shortage. Naidu's Telugu Desam is part of the National Democratic Alliance that came to power at the Centre in May 2014. Under Naidu, the state had undertaken measures in the distribution segment during the first phase of power sector reforms in the 1990s.

Rajasthan is also likely to join the scheme shortly. During the partnership summit last fortnight to attract global investment in the state, CS Rajan, chief secretary of Rajasthan, had told Business Standard the state was ready to join the scheme and take over half of the total debt of the state's power distribution companies (discoms) as on March 31, 2015 and the rest 25 per cent by next fiscal (2016-17).

Rajasthan is saddled with the highest discom losses. At present, the state has a financial burden of around Rs 85,000 crore to lending institutes. The state, along with other loss-making states, is already on notice by the Reserve bank of India (RBI) to clear their debts or they will be debarred from receiving financial aid.

As per the UDAY scheme, state governments, which own the discoms, can take over 75 per cent of their debt as of September 30 and pay back lenders by selling bonds. For the remaining 25 per cent, discoms will issue bonds. 

This would not only help in cleaning up debt of Rs 4.3 lakh crore accumulated on state owned distribution companies but also bring relief to lenders.

For the next two financial years, the central government will not include the debt taken over by the states in the calculation of their fiscal deficit, which could have gone up by as much as Rs 3.2 lakh crore.

Among all states, Rajasthan has the highest debt of Rs 85,000 crore followed by Tamil Nadu with Rs 70,000 crore and UP with Rs 32,000 crore.

States are suggested to take over 75 per cent of discom debt as on 30 September 2015 over two years – 50 per cent in 2015-16 and 25 per cent in 2016-17.

“This will reduce the interest cost on the debt taken over by the States to around 8-9 per cent, from as high as 14-15 per cent; thus improving overall efficiency,” Goyal had said on November 5.

Discoms debt not taken over by the state shall be converted by the banks / financial institutions into loans or bonds with interest rate not more than the bank’s base rate plus 0.1 per cent.

Alternately, this debt may be fully or partly issued by the discom as State guaranteed DISCOM bonds at the prevailing market rates which shall be equal to or less than bank base rate plus 0.1 per cent, said Goyal.

Any future losses would be taken over by the states in a graded manner. As of March 2015, the total accumulated loss is Rs 3.8 lakh crore. In its Financial Stability Report on June 2015, the RBI said the Rs 53,000-crore exposure of Indian banks to seven state electricity boards (SEBs) has a “very high probability” of turning into non-performing assets (NPAs) in the quarter ending September.

The discoms would have to reduce their Aggregate Technical & Commercial Losses (AT&C) to 15 per cent from current level by 2018-19. Business Standard reported that the central government would restrict the borrowing capacity of state owned power distribution companies (discoms) to efficiency parameters.

“Once there is improvement in working of discoms, the job of regulator becomes easy because he does not have to only increase tariff but he can balance the tariff for all category of consumers for better service,” said Pramod Deo, former chairman, Central Electricity Regulatory Commission.

The difference between average revenue realisation and the average cost of procurement would have to be brought down to zero by 2018-19. The State Electricity Regulatory Commissions (SERCs) will also do quarterly tariff revisions, said Goyal.

“The power ministry would form a MoU with the state government and the discom to perform monthly monitoring of the reforms suggested,” Goyal said.

As an incentive, the states adhering to the operational milestones will be given additional central funding through Deendayal Upadhyaya Gram Jyoti Yojana (DDUGJY), Integrated Power Development Scheme (IPDS), Power Sector Development Fund (PSDF) or other such schemes of ministries of power and renewable energy.

However, the laggards “would be liable to forfeit their claim on IPDS and DDUGJY grants”.