After a slew of measures to attract investment in the country, the Centre on Monday embarked on a clean-up operation for the power sector by announcing a debt restructuring package for distribution companies. The package comes a decade after the Union government extended a similar one-time settlement of state electricity boards’ dues.
The Cabinet Committee on Economic Affairs (CCEA) approved the package, which would restructure the debt of distribution companies by asking state governments to take over half of their short-term debt, with the remaining to be rescheduled by lenders.
The package makes it mandatory for state governments to go for annual revisions of power tariffs, convert loans to equity and bring in private participation in distribution. State-government controlled power distribution companies had accumulated losses of Rs 1.9 lakh crore, as of March 31, 2011. This was primarily due to the non-revision of tariffs, which increased the gap between the cost of supply and average tariff to 145 paise a unit (kilowatt per hour) in 2009-10 from 76 paise in 1998-99. “The scheme will tie states to a particular reform path and enable utilities to become technically, operationally and financially efficient, and recover their cost of operations,” P Umashankar, Union power secretary, told Business Standard.
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The restructuring and rescheduling of loans would require concrete and measurable action by the distribution companies and the states to improve the operational performance of the utilities, said a government statement issued after the CCEA meeting. To monitor the progress of the turnaround plan, two committees at the state and central levels are proposed to be formed.
The Centre would put in place a transitional finance mechanism for states that have an accelerated reduction in aggregated technical and commercial losses. “If one per cent of the losses are reduced, it will correspond with a central outgo of Rs 1,500 crore as incentive,” said Umashankar. Though the move was welcomed by power producers, Ashok Khurana, director general, Association of Power Producers, said, “The loss reduction and tariff increase plans would need to be monitored very strictly so that the utilities are able to break even in the next three-four years. In the interim, they need to be provided adequate transition finance.”
Rajasthan, Tamil Nadu, Haryana and Uttar Pradesh are expected to avail themselves of the scheme, which will be effective once notified and remain open till December 2012, unless extended by the Union government.
States will be eligible for transitional finance only if the gap between the average revenue realised and cost of supply is cut by at least 25 per cent during a year over 2010-11. A nodal bank will be nominated for every state or discom.