 "Power")
The Centre is considering interest subvention for bonds to be issued against state-owned power distribution companies' debt. Looking to recast the debt held by discoms, state governments have asked for short-term bonds with five-year moratorium period.
After discussions with four states - Uttar Pradesh, Tamil Nadu, Rajasthan and Haryana-and a separate meeting with lenders last week, the Centre is finalising a debt restructuring plan. Discussions with the remaining states reeling under the debt of their discoms will be held this week.
The plan is set to be finalised by the end of this month. The Union government has made a headway after taking on board Tamil Nadu, Rajasthan and Haryana. The three states had earlier agreed to the financial restructuring package (FRP) of the United Progressive Alliance (UPA). "States like Uttar Pradesh, which had reservations, were asked for their suggestions. During the meeting, Union Power Minister Piyush Goyal said the plan would be placed for Cabinet approval only after big states like UP come on board," said a senior government official in the know.
According to senior UP government officials, its discom has a total debt of Rs 40,000 crore, of which the state was willing to take over Rs 30,000 crore. The Centre had earlier suggested the states take over the entire debt of the ailing discoms and issue bonds against them.
UP also asked for interest subvention of 3-4 per cent on the bonds repayment or allow lower interest rate of around 9 per cent (against the prevalent 12 per cent). "The Centre has said it would be considered. The Centre has agreed to the suggestion of five-year moratorium for the bonds," said the senior government official.
Last week, Goyal, along with senior Central government officials, met state energy ministers and energy and finance secretaries. The plan would again be discussed with the public sector banks and financial institutions.
To enable states to take over the debt, the Centre is likely to relax the borrowing limit for state governments. "States are being given 0.25 to one per cent relaxation in their Fiscal Responsibility and Budget Management limit. This would help the states absorb the losses and issue bonds in the short term," said an official.
In the FRP floated by the UPA government, if the state met certain milestones set in the plan, the Centre would reimburse around 25 per cent of the interest payment. "We suggested this also to the Union ministry of power and we were told that this will be considered," said the UP official.
The government will first focus on eight states that account for the highest contribution in the total accumulated debt of Rs 4 lakh crore (as on August 2015). These states are Rajasthan, Andhra Pradesh, Uttar Pradesh, Tamil Nadu, Haryana, Jharkhand, Bihar and Telangana. Unlike the UPA's FRP, under the new programme, the state government will take over 80-100 per cent of debt of the discoms and convert them into bonds. The rest would be serviced though technical reforms and tariff hike. Sources in the know said if the state government fails to honour the bond terms or defaults on the dividend payment, the Centre would divert the tax devolution amount from the state's kitty to the bond owners.
The tax devolution is 42 per cent of the total divisible pool offered from the Centre to states. A portion of it would be deducted from the Centre's share in states' revenue and used in payment of dividends. "There is no debt-servicing by the Centre; only the borrowing limit is increased. But the extra debt that the state government is burdened with and the interest payment that we will have to make annually could cause the state's finances to slip into the red," said a senior state government official who was part of the earlier stages of discussion.
Most states are of the view this is a temporary measure. In three to five years, either the discom or the state government or both will again be financially pressed.
STATE OF AFFAIRS
Discussion done
- Tamil Nadu
- Rajsathan
- Haryana
- Uttar Pradesh
- Public sector banks and financial institutions
- Rajasthan (already started process of power reforms)
- Tamil Nadu, Madhya Pradesh (had earlier done debt recast of discoms during UPA regime)
- 5-year moratorium for bonds
- Interest subvention of 3-4 per cent
- And/or 25 per cent reimbursement of interest payment by the Centre
