Why the Rs 90,000 crore boost isn't enough to revive discoms

KEY HIGHLIGHTS

• Discoms' financial sustainability and turnaround remains a matter of concern
• Rs 90,000 crore liquidity boost will temporarily ease pressure on discoms
• PFC/REC balance sheets to be strained by the govt's move
• Industry was expecting a Rs 1.10 lakh crore discom bailout in next budget
• Discoms have outstandings of Rs 90,600 crore and overdue of Rs 79,800 crore by March 2020

Union Finance Minister Nirmala Sitaraman's announcement to fund Rs 90,000 crore to ailing power distribution companies (discoms) may not solve their issues and should be seen only as a short-term bail-out measure, say industry experts. "The larger issue of discoms' financial sustainability and turnaround remains a matter a concern," says Vivek Sharma, Senior Director - Energy, CRISIL Infrastructure Advisory.

Though the Rs 90,000 crore stimulus to clear outstanding dues of independent power producers (IPPs) and generators is a big positive step to ease liquidity pressure, appropriate structuring for bond issuance against guarantee will be critical to raise funds in the current tight liquidity situation, he said. Amar Ambani, Senior President and Head of Research - Institutional Equities, YES Securities said the move will put additional pressure on the public sector power financiers, Power Finance Corporation (PFC) and Rural Electrification Corporation (REC).

Also read: Stimulus package 2.0: Power discoms get Rs 90,000 crore liquidity jumpstart

In March 2019, PFC had acquired a majority stake in REC by giving Rs 14,500 crore to the government, but the Reserve Bank of India's (RBI) norms on the exposure of NBFCs caused a roadblock in the merger. The apex bank stipulates debt exposure of an NBFC in a project should not exceed beyond 25 per cent. But both are exclusive financiers for power projects and, in many projects, they have jointly funded beyond that limit. The PFC had financed 70 per cent of the REC investment from its cash inflows and the balance 30 per cent is through debt and now has a strained balance sheet.

Sources say the move to fund discoms was anticipated as their cash positions went into doldrums after the lockdown. The lockdown led to a big 23-25 per cent decline in power demand and generation due to very low power offtake from commercial and industrial consumers (C&I), which account for 40% of the total power demand.

Following this, to provide relief to the financially burdened discoms, the Union Power Ministry (MoP) had proposed PFC/REC provide special loans to discoms to help them clear power generators' outstanding bills. The special concessional loans were envisaged for 10-12 years, and with a moratorium on principal and state governments giving guarantees. "Financial position of most state governments fighting the COVID-19 is precarious and it needs to be seen how many states can and will do it," said an industry source.

As on August 19, 2019, discoms had a combined outstanding overdue worth Rs 88,500 crore and Rs 71,300 crore, even after two rounds of bailouts and the Ujwal Discom Assurance Yojna (UDAY) scheme to resurrect them. The outstandings swelled to Rs 90,600 crore and overdue to Rs 79,800 crore by March. Discoms were also allowed lower bids for power procurement, with a moratorium on interest and principal repayment to banks.

This was to help them get working capital as power demand and revenue collections started dwindling during the lockdown. The government was also looking to mandate high loss-making discoms to privatise or appoint franchisees to modernise the network or allow EMI facilities to clear the dues. Tentatively named as Atal Distribution System Improvement Yojana, a Rs 1.10 lakh crore bailout was expected to be announced in the Union Budget for fiscal 2021.

"On the power sector, the need for reforms is urgent and long overdue and liquidity to the tune of Rs 90,000 crore in DISCOMs against their receivables by PFC and REC will help DISCOMS discharge their payments to Gen-Cos. But a longer-term approach to make the sector sustainable is required", said Dr Sangita Reddy, President, FICCI.

New renewable project developers fear the move to fund discoms will be against their interest. Renewable energy projects having power purchase agreement (PPAs) with discoms will benefit in purchase payment from discoms since the government is backing discom, says Imaan Javan, Director (operations), Suntuity Renewable Energy India. "Having said that, new projects will be affected as the discoms may not promote those at the moment."

Also read: Stimulus package: FM announces Rs 90,000 crore liquidity boost for discoms