To bring power distribution companies (discoms) out of losses, the government is planning to allow them to issue bonds, backed by state guarantees, for about 50 per cent of their outstanding loans. This will be part of the government’s restructuring package for these ailing companies that have accumulated losses due to high cost of power and non-revision of tariff.
The Union power ministry was finalising the package, which was expected to be put up for Cabinet approval shortly, a senior official told Business Standard. With states struggling to meet the targets under the Fiscal Responsibility and Budget Management (FRBM) Act, the Union finance ministry had overruled the earlier proposal that would have entailed states issuing bonds on their own.
According to power ministry estimates, power discoms’ loan dues stand at over Rs 1.5 lakh crore. These companies will issue bonds for an initial period of two to three years. “States would take over the liabilities of discoms over a period of time according to the window provided by the FRBM targets,” said the official, who did not want to be identified.
According to the revised fiscal road map chalked out by the 13th Finance Commission, all non-special category states are expected to achieve a gross fiscal deficit (GFD) target of three per cent of gross state domestic product (GSDP) by 2011-12. The state budgets of 2011-12 show the GFD-GSDP ratio was budgeted to be within the stipulated three per cent for all states, except Goa and Jharkhand. Any substantial load on states’ finances taken on behalf of the discoms would derail the FRBM outlook and need to be calibrated with the targets.
According to the revival package, the other 50 per cent of the loans will be restructured by banks by extending the tenure for repayment and a possible moratorium on interest. Discoms across the country are reeling with huge financial losses and debt, as the lack of rate increases has widened the gap between actual cost and recovery cost.
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Besides, another reason for discoms’ bad financial health is the non-receipt of subsidies by state governments. A similar situation had arisen in 2001-02, when a committee under Montek Singh Ahluwalia had worked out a bailout package for utilities by issuing long-term bonds to be discharged by state governments. Some experts believe, if the government does not take continued action to improve discoms’ financial health soon, there could be a relapse of the 2001-02 situation.
Though it would be difficult for discoms to get a response on their bonds, a silver lining had already appeared before the government decided on the bailout package. About 15 states went for a power rate increase in 2011-12 and 23 states have already filed tariff petitions for the current financial year. Experts believe if this continues for a few years, discoms will be able to come out of their losses.
According to a CRISIL report, fuel costs account for about 48 per cent of the total power purchase cost growth for utilities in last six years. “Over the next five years, it is estimated that fuel costs will account for about 54 per cent of the total power purchase cost growth for utilities.” On account of the cost increases, the tariff would require to be increased at compound annual growth rate of six per cent over the next five years,” the report added.