A major ingredient of Modi – government’s development agenda is un-interrupted supply of power 24×7 to industries, services, agriculture, households et al in required quantity at affordable price. It plans to reach this goal in less than a decade.
Undoubtedly, it is making unstinted efforts in all vital areas viz., adding to the generation capacity [a big chunk in solar power to make our systems environmentally benign]; making arrangements for fuel supply especially coal and gas to run power plants at optimum load; augmenting and strengthening the transmission and distribution (T&D) infrastructure [by involving private sector through a competitive bidding process] and providing last mile connectivity through a well-spread out network of feeder lines etc.
However, one area of concern which may well have the potential of frustrating and nullifying efforts on all other fronts relates to the deteriorating financial health of state electricity boards (SEBs) and power distribution companies (PDCs) [these were created in several states in early 2000s under a comprehensive restructuring program that involved inter alia creation – out of moribund SEBs – independent outfits for generation, transmission and distribution respectively].
The revenue generated by majority of SEBs/PDCs from sale of electricity falls much short of their expenses on its purchase and T&D. They are forced to take recourse to short-term borrowings to pay for bills to National Thermal Power Corporation (NTPC), other public sector undertakings (PSUs) and independent power producers (IPP). Together with long-term borrowings for funding capital spend on maintenance of existing assets, interest payments have increased dramatically. These alone account for a significant share of the cost of their operations, in some cases reaching a high of 25%.
The persistent and ever increasing revenue deficit exacerbated by increasing interest burden has led to mounting losses which at present is Rs 300,000 crores for all SEBs/PDCs put together. This alone constitutes nearly 2/3rd of the total debt of Rs 470,000 crores owed by power sector to the banks [most of it from public sector banks (PSBs)].
Sadly, the entire power distribution sector continues to be in dire financial straits despite two rounds of restructuring packages given by central government. Thus, a Rs 40,000 crores package was handed out in 2002 on the condition that SEBs/PDCs would make efforts to reduce the revenue deficit within a given time frame. The required efforts were never made and as a consequence, the losses continued to mount.
In 2013, central government came up with a massive Rs 200,000 crores restructuring package [this one was five times the size of 2002 package]. Under this, state governments took over 50% of outstanding liabilities of SEBs/PDCs. For the balance 50%, the latter issued bonds to PSBs on the strength of guarantee given by former. Further, in a bid to reduce the cost of servicing, PSBs were made to accept less than 9% interest on these bonds.
The package required SEBs/PDCs to increase tariff to plug the gap between realization from sales on one hand and cost of purchase and distribution of electricity on the other. They were also required to take steps to eliminate T&D losses in a time bound manner. The objective was to ensure that their operations become viable on their own without requiring any support from government.
However, things have not moved as planned. Neither tariffs have been raised to fully offset cost increases [according to ICRA (Dec,14) during 2012-13, tariff hikes across states varied from 2% to 37% with average hike of 14% for distribution sector as a whole] nor state governments made a dent on T&D losses. While, SEBs who got the package viz., UP, Rajasthan, Punjab, Haryana etc continue to be in doldrums, others like Gujarat, Andhra Pradesh, Tamil Nadu etc are also on the verge of joining the bandwagon.
Rajasthan State Electricity Board (RSEB) which only 2 years ago had got Rs 38,000 crores restructuring package, has now asked banks to consider a second round of restructuring for a whopping Rs 55,000 crores. The necessity for this has arisen because RSEB continues to incur heavy loss [e.g., during 2013-14 this was Rs 10,650 crores] leading to more and more borrowings. As on March 31, 2015 its short-term working capital loan alone was Rs 52,400 crores. The position of other SEBs is broadly similar.
In view of strict provisioning norms enforced by RBI from April, 2015 [under these, even for a restructured loan, banks are required to make provisioning at the same rate of 15% as for a non-performing asset (NPA)], it is most unlikely that the PSBs would be willing to extend help. In such a scenario, the central government may have to make its intervention for the third time to bail out the SEBs/PDCs.
We are trapped in an un-ending vicious cycle. The SEBs/PDCs make losses in the hope that some day, government will come forward to extinguish their liabilities. Indeed, it happens enabling them to start on a clean slate. Yet, again they start piling up losses and after some years, the state comes up with a second round of waiver. Several rounds of waiver are given but there is no end to losses and increasing debt.
The root cause of this pernicious problem is that governments of all political shades recklessly promise cheap/free power and then proceed to redeem the promise in an equally brazen manner. For extending largesse to farmers or households [to serve their political interest] they make SEBs/PDCs bleed instead of providing money from their budgets, a logical course that should have been taken.
In addition to subsidies, SEBs/PDCs also bear the brunt of rampant corruption and in-efficiency that manifests in a variety of ways viz., inflated claims for various costs by PDCs in their books, large-scale theft of power, T&D losses [due to ageing equipment and poor maintenance] besides inefficiencies at all levels in the distribution system. These factors are much more deadly as they won’t let the health of SEBs improve even when tariff is increased.
The task of reining in subsidies [read unfunded] and combating corruption is rendered daunting [indeed, impossible] by a stark fact that vote banks involving millions of people have for generations been fed on these very sops. So, any political establishment which tries to take away subsidies or stop illegal connections [these benefit millions living in slums and jhuggis] runs the risk of being severely penalized in elections.
That indeed is a major reason why a die hard reformist like Modi is also unable to get things on desired trajectory even in a BJP ruled state like Rajasthan. But, he needs to break away from this cult and demonstrate to the world that a government can be popular among masses even without subsidies or allowing/abetting un-authorized connections.
Modiji should metamorphose power sector in India in to a state where all households [including the poor], farmers and industries are willing to pay a little higher tariff for un-interrupted supply of quality power. This will create the right ambience for elimination of losses of SEBs/PDCs and turning them in to healthy and robust enterprises.
Without the above drastic course correction, the goal of having a vibrant power sector fully geared to meet India’s need for rapid and sustained development will remain a distant dream.