Centre plans power debt recast but states yet to decide

The Union government may be planning to kick-start the next tranche of reform measures by announcing a financial restructuring scheme for power distributors this week, but all states are not enthused. Madhya Pradesh has already successfully restructured the debt of distribution companies. Haryana, expected to avail itself of the central scheme, is yet to discuss it with distribution companies.

The Cabinet Committee on Economic Affairs (CCEA) is likely to approve the package this week. To begin with, Rajasthan, Tamil Nadu, Haryana and Uttar Pradesh are on the list of beneficiaries. To be part of the exercise, states will need to conform to mandatory conditions such as annual hikes in power tariffs, conversion of loans into equity and bringing in private participation. As an incentive, the Centre will provide them a transitional finance mechanism.

The restructuring scheme worked out after a year of deliberations is being looked at as the next big step in dealing with the Rs 1.9-lakh-crore consolidated debt of government-controlled distribution companies. Some of the conditions could be politically difficult to implement. Also, states are worried about their inability to adhere to Fiscal Responsibility and Budget Management (FRBM) limits, especially when 50 per cent of the liabilities of distribution companies are to be borne by them for a certain period.

Under the scheme, the state government would take over the liability during the next two-five years by issuing special securities to lenders in a phased manner till half of the short-term loans have been taken over. The entire exercise would be within the FRBM targets, which bind the states to reduce their borrowings to a certain percentage of their gross domestic product.

States have expressed inability to continuously make budgetary provisions to subsidise the widening gap between tariffs and the cost of purchase of power. In some states, the tariff approved by the electricity regulatory commissions is up to 60 per cent. The cost of power purchase ranges 70-150 per cent.

Madhya Pradesh, which had accumulated Rs 11,491-crore (Rs 114.91 billion) losses in the power distribution business and was earlier in the Centre's list of states in need of such a package, recently closed its restructuring scheme. "There is no short-term exposure of banks to distribution companies in our state. We have a loan only from Power Finance Corporation," said a senior official in MP Power Management Company, the holding company of three distribution companies in Madhya Pradesh.

A senior official in the Union ministry of power said if states did not restructure debt, banks and other financial institutions might stop lending to them. Rajasthan, which had a debt of Rs 37,200 crore (Rs 372 billion) till last year, found itself in a fix when banks refused to extend it a loan recently.

Bihar is one of the states looking forward to the package. Ajay Nayak, Bihar's principal secretary for the energy department, said they would examine the scheme. A Maharashtra energy department official said the Centre must differentiate better performance, especially with regard to collection efficiency and distribution loss reduction. The state has losses of around Rs 3,000 crore (Rs 30 billion).

R V Shahi, former power secretary, who also worked for the Reliance-controlled power distribution company, BSES, said it was the responsibility of the state regulators to ensure the sector became commercially sustainable.