Government's new UDAY scheme not stringent enough to clean discoms debt
On November 6, Power Minister Piyush Goyal announced a scheme for turning around power distribution companies, or discoms , reeling under a combined debt of more than Rs 4.2 lakh crore. Under the scheme, called the Ujwal DISCOM Assurance Yojana (UDAY ), the states will take over 75 per cent debt of their discoms and, in return, get leeway to borrow more. For the other 25 per cent debt, the discoms will issue bonds. The government has thrown in other sops too - such as more funds and coal - for states that opt for the scheme, start selling power at market rates, depoliticise decision-making in the sector and bring transmission & distribution (T&D) losses under control. The target is to reduce national T&D losses from 28 per cent to 15 per cent in the next three years, leading to savings of Rs 57,523 crore by 2019.
The plan looks perfect at first glance but the fate of similar schemes in the past makes one sceptical about its efficacy. The biggest drawback, say experts, is lack of disincentives for states that go back on their promises. The only deterrent is that they may have to forfeit their claim on funds under the Integrated Power Development Scheme (IPDS) and the Deen Dayal Upadhyaya Gram Jyoti Yojana. Last year, the Cabinet had approved Rs 44,011 crore for the IPDS; for the latter, the government has a pool of Rs 39,275 crore.
The plan looks perfect at first glance but the fate of similar schemes makes one sceptical about its efficacy.
In the FRP, the states were asked to take over 50 per cent outstanding short-term liabilities, whereas the discoms were asked to issue bonds, backed by their state governments, for the rest. After this, banks were allowed to give discoms additional loans. The states were also asked to rationalise tariffs.
ABOUT UDAY
1. The scheme will rework the Rs 4.3 lakh crore debt of discoms. It will also encourage states to bring down T&D losses and power subsidies.
2. State governments can take over 75 per cent of this debt and issue bonds to pay lenders.
3. This extra borrowing will not be added in states' fiscal deficit numbers.
4. States have to push discoms towards operational efficiency improvements.
5. The scheme is optional.
In UDAY, the states will take over 75 per cent debt of their discoms as on September 30, 2015, over two years - 50 per cent this year and 25 per cent next year. This additional debt will not be included in their fiscal deficit numbers for these two years. They will issue ordinary bonds to fund this debt. The idea is to reduce interest payments as state loans carry a much lower rate (8-9 per cent) than the 14-15 per cent that the discoms pay. CRISIL has predicted savings of Rs 12,000 crore a year on this account alone, though this can impact banks' margins by 8 per cent. Unlike the FRP, under which corporate bonds were issued, the states will this time be allowed to issue non-SLR (statutory liquidity ratio) bonds and state development loans. Non-SLR bonds are not eligible for banks' SLR holdings and so are in lesser demand.
Among the top debt-ridden states, only Tamil Nadu is in a position to take more debt comfortably. For Rajasthan, the worst-hit, with cumulative losses of more than Rs 81,000 crore, any additional borrowing could be a nightmare as its fiscal deficit is already 3.5 per cent of state gross domestic product. The states are yet to come out with a response to the scheme. The toughest call is to how to pay the principal on these bonds when they mature.
Government is also pushing discoms to reduce the cost of generation by 35 paise per unit by more rationalised use of coal
Still, implementation will be the key. Like the FRP, the new scheme also requires states to rationalise tariffs within the next three years. But will the states do it, especially as power has become a central issue in assembly elections? This year, for instance, Punjab did not increase tariff despite losses by distribution companies. It goes to polls in February 2017. The Chief Minister of Uttar Pradesh, Akhilesh Yadav, has already said that UDAY is an effort to help banks, not to provide electricity to the poor, hinting at another round on politics on this. Uttar Pradesh also goes to polls in early 2017.
Also, in the eight states that opted for the FRP in 2012, the gap between average revenue and average cost of supply is Rs 1.40 per unit. Even if UDAY does well, the states will be able to bring down the gap to only 70 paise a unit by the end of 2017/18. That is why Goyal is pushing the companies to reduce the cost of generation by 35 paise per unit by more rationalised use of coal. But there is no road map for this.
So, all in all, the plan will stay on paper if it is not backed fully by the states.
