The power and coal sectors are in trouble. Misplaced domestic policies and the recent environmental tirade against infrastructure projects have thrown coal production and the linked-power capacity projections off track. The latest report of the Planning Commission-appointed Shunglu panel, meanwhile, has brought back focus on Rs 80,000 crore losses of power distribution companies. Commission member Bal Krishna Chaturvedi, also member of the 13th Finance Commission and a former cabinet secretary (he also heads a committee examining the financial health of power utilities), tells Sudheer Pal Singh the extent of the problem may not be as alarming. Edited excerpts:
The Shunglu committee has said regular rate hikes are a pre-condition for restructuring of power utilities’ loans. Any proposal on rate increases is not likely to sail through easily. Would this not delay the reforms proposed by the Shunglu panel?
Regular rate hikes have often met with political concerns. There have been non-economic reasons for postponing these. But two factors give us the basis for the assumption. The Appellate Tribunal of Electricity passed a judgment recently, which forces utilities to seek rate rises regularly. Also, many states have already put in regulations ensuring rate revision every time the cost of fuel changes. Increasingly, chief ministers have realised this business cannot run on its own steam without rate revision. Additional safeguards will be put in the final recommendation of the committee, on distribution reforms headed by me.
According to the panel, a major chunk of utilities’ losses has gone in meeting day-to-day expenses. Does this show the extent of the problem is larger than what the government thought?
Any sector not financially viable, often uses working capital for day-to-day purposes. This is why we find banks have been providing them loan which the utilities have been returning followed with taking larger loans to cover up losses. That way they have carried on because the volume of business has been growing.
The Shunglu committee had said annual losses are Rs 30,000 crore. A lot of this is also the money owed to state governments, which has not realised. If you exclude that, losses come down to Rs 20,000 crore. This, in a business, which is more than Rs 2.5 lakh crore in size, is not very alarming. The problem arises when losses accumulate year after year. No business can survive like this. So, the Shunglu committee and the committee being chaired by me would work out a mechanism to bring back the utilities on a financially sound footing.
The panel has proposed setting up an SPV (special purpose vehicle) under the Reserve Bank of India (RBI) to which all the loans would be transferred. Was the RBI represented in the committee or it RBI consulted?
The recommendations of the Shunglu panel will form an input for the committee I am chairing on 12th plan reforms formed by the finance minister. The committee has representation from RBI and banks and the Department of Economic Affairs. These recommendations will go to the RBI which will give its view.
It will take three-four years for the restructuring of the state electricity boards (SEB) loans, as proposed by the Shunglu panel. But the losses would keep on accumulating in the meantime.
We will take the key utilities, where major problems are, one-by-one. The exercise is already on in some states. We hope their report will come by February. These measures will be implemented in the next the six months to one year. As the power sector expands, banks will have to decide on their exposure if the loans get rescheduled. Rescheduling will also lead to some repayments.
The Shunglu committee has also pointed to inability of the government to ensure Open Access and unbundling of SEBs. And, this comes eight years after the Electricity Act mandated open access.
These are fundamental reforms in the way electricity is to be distributed and reforms will take time. There have been problems with unbundling. It has not happened in some areas in the expected spirit. The real problem is the pace of capacity addition has been quite large in the past years. But there will be gradual improvements. Today, everybody, including the utilities, realise that unless improvements are done, it will be difficult for distribution companies to survive.
Everybody had realised this 10 years before too, also when the government had to bail out the utilities. Today , we are doing the same exercise. What is the guarantee the same process will not be repeated 10 years from now?
There is no guarantee. We are living in a state where the aspirations of people are very high. A lot of people have low income and yet they want to have adequate electricity. Secondly, the level of governance in many of these institutions is not very good. Reform is not a one-time process. It has its own challenges. For instance, when coal blocks were allocated, there was not much demand. Today there is shortage of coal.
No doubt, there are governance and implementation issues in policies. But is not making a near-accurate projection of future supply scenario the basic job of the Planning Commission? Where did planning go wrong?
We must distinguish between planning and implementation. We had planned for construction of motorways some time ago, but not a single kilometre has been constructed. Implementation becomes a problem in the federal structure in sectors like power. Power is a state subject. When the state governments lag in performance one cannot say that planning was bad. The planning was good when we made the projections.
Do you think the utilities’ losses would impact fiscal consolidation in states?
The losses could create problems for states to meet their fiscal consolidation targets unless these are sorted out. We had pointed this out even in the 13th Finance Commission. We had estimated the losses and said that if the Business as Usual scenario continues, we will have problems. Since then we have been emphasizing the problem to the state governments. Electricity is such a sensitive sector that it becomes difficult for the political masters to separate good governance from the need for fiscal consolidation.
