New funding formula for private power push

States that are privatising their power distribution networks will have to get loans from multilateral institutions to meet their funds requirement.

The total requirement will not be less than Rs 100,000 crore and since there are not enough funds available, the states will have to use whatever money they get from the Centre to leverage funds from multilateral agencies.

"A few states have asked us for funding the transitional financing requirement for undertaking privatisation of distribution. The need arises from the fact that losses will have to be carried for a fair amount of time. This is a legitimate issue. We do not have a special fund for the purpose but we are willing to look at ways in which this could be financed," Planning Commission Deputy Chairman Montek Singh Ahluwalia told Business Standard.

One of the ways, he said, was through external funding by multilateral institutions. "They will provide an independent test of whether the reforms being implemented are credible enough to ensure these losses will come down," he said.

Uttar Pradesh, for instance, had recently asked for Rs 8,000 crore for privatising distribution in five circles. Other states like Maharashtra and Karnataka have raised the issue in the past.

Currently, distribution makes huge losses, which the public sector is bearing one way or the other. Active privatisation would enable the states to cut these losses, Ahluwalia said.

The Delhi model of privatisation, however, cannot be replicated across the country and the states would find it easier to keep their accumulated losses in a holding company and hive off the rest into a separate company to be privatised, Ahluwalia said.

The Delhi model involved the private sector operator taking over the labour force of the existing system, which would mean loss reduction would be a slow process.

In such a situation, one option would be to raise tariffs and let the consumers pay, while the other was to get the private sector agree to a schedule of loss reduction, calibrate tariffs to a reasonable loss and bear the burden through a transparent subsidy.

However, the alternative system was to let the accumulated liabilities stay with whoever accumulated them. "You could put accumulated losses into a holding company, spin off the rest into a subsidiary and privatise that," Ahluwalia said.

Continuing losses are however a problem and should be financed too," Ahluwalia said.