The States would be inclined to kick the ‘reforms’ can down the road, with general elections due barely 20 months from now.

The Centre’s latest bailout package for state power distribution companies (Discoms) has all the elements of ‘this is the last and final boarding call’ that air travellers are used to. As in air travel, where VIPs are largely immune to such threats, here too, the State Governments-owned Discoms – spoilt children that they are – may well carry on as before, the latest Central threat of ‘reform or perish’ notwithstanding. With accumulated debts of nearly Rs 250,000 crore, many Discoms are borrowing to even service interest on their existing loans. Their poor financial health, in turn, has a cascading effect on the entire power sector, including generating companies that are owed huge amounts in unpaid bills. The turnaround plan, approved by the Union Cabinet on Monday, envisages 50 per cent of the outstanding short-term liabilities of the Discoms being converted into bonds to be guaranteed by their owners – the State Governments – who would over 2-5 years also fully take over these debts. The balance 50 per cent liabilities would be rescheduled, with lenders offering a three-year moratorium on principal repayments.

The whole purpose of this exercise seems to be two-fold. The first is to meet the Discoms’ immediate liquidity requirements, which will also enable lenders to avoid the prospect of their loans turning into non-performing assets. Secondly, since the loan restructuring is subject to the Discoms/State Governments undertaking “concrete and measurable” actions to improve the operational performance of the utilities, it would eventually restore the viability of the weakest link in the power sector value chain. The mandatory conditions cover the Discoms eliminating the gap between their average cost of supply and revenue realised (which has doubled to about Rs 1.5 per unit of electricity in the last 10 years), metering of all connections (including for agriculture, where any subsidy shall be borne directly by State Governments and released as per actual feeder/distribution transformer data), roping in private distribution partners through franchisee arrangements, and so on.

The above conditional bailout plan is good on paper. But like all such good plans, the ultimate test lies in implementation. In this case, the onus is largely with the States, who would be inclined to kick the can down the road with general elections due barely 20 months from now. After all, there was a similar one-time settlement scheme only 10 years ago, involving securitisation of outstanding dues totalling around Rs 37,000 crore owed by State Electricity Boards (SEB). Then too, the conversion of these liabilities into 15-year bonds with a five-year repayment moratorium was linked to performance milestones being met, including the unbundling of the SEBs’ generation, transmission and distribution functions. That did happen, though the newly formed Discoms, rather than operating on sound commercial principles, turned out to be the same old SEBs under a different name. The only hope this time around is that the sheer bankruptcy of the Discoms – plus the State Governments’ inability to backstop their losses – would make reforms inevitable, even politically. Voters may eventually prefer tariff hikes to extended blackouts.

(This article was published on September 25, 2012)
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