SOME CARROTS BUT NO STICK

In 2012, the UPA Government had granted a financial restructuring package of Rs2,00,000 crore, to deal with the debt of ailing State Electricity Boards. As part of the package, 50 per cent of the SEBs outstanding liabilities were taken over by the respective State Governments and the balance was issued to public sector banks at nine per cent interest.

In return, the States were to increase tariff and reduce transmission and distribution losses to ensure that the realisation from sale of electricity equals the cost of procurement in two to three years. The objective was to eliminate losses and make SEBs stand up on their own. That hasn’t happened.

The SEBs have again piled up debt of over Rs4,00,000 crore. The Modi Government has approved yet another financial package called Ujwal Discom Assurance Yojna. Under UDAY, the State Government will take over 75 per cent of the debt and the SEBs will use the balance to issue bonds at 0.1 per cent above bank’s base rate. Like the 2012 package, UDAY also requires States to increase tariff and reduce T&D losses so that they can stand on their own feet in three years.

So, how is the latter different from the former? Is there anything in UDAY to ensure that it does not meet the same fate as the 2012 package? Thankfully, unlike the UPA dispensation, this Government has taken steps to help States reduce T&D losses. The Deendayal Updhyaya Gram Jyoti Yojna and the Integrated Power Sector Development Fund seek to augment and strengthen transmission and distribution systems, install separate feeder lines for supplies to farmers, provide for comprehensive and smart metering et al. According to Power Minister Piyush Goyal, this will help reduce T&D losses from 22 per cent to 15 per cent by 2018-2019.

The Government has also taken steps to improve efficiency and reduce cost. These include increased supply of domestic coal at lower prices, rationalisation of coal linkages with emphasis on re-allocating supplies from less efficient to more efficient plants, and goading the SEBs to buy power from cheaper sources. Mr Goyal also points towards reduction in interest rates, consequent to financial restructuring which will also help in lowering the cost of power supply.

All this is fine, but it does not address the core problem: The bulk of T&D losses are due to theft abetted by those very functionaries who are expected to ensure full payment for the power consumed. Unless this is reined in, any strengthening T&D infrastructure or installation of meters to cover every nook and corner will be of little help.

Two other factors behind the huge losses of SEBs are (i) supply of power to farmers and households at heavily subsidised rates but not funded by the Government (in some States, supply to farmers is even free) and (ii) financial irregularities. While, UDAY takes cognizance of the first issue, it is silent on the second.

A Comptroller and Auditor-General report on the audit of three power distribution companies in Delhi has revealed that consumers were charged excess tariff by a staggering Rs8,000 crore and there was an equivalent amount of ‘inflated’ regulatory assets previously incurred losses but not covered by tariff revision. An audit of SEBs/PDCs in other States will expose a similar scenario.

The Government must make a frontal attack on all three factors to eliminate losses by 2018. This requires political will and inclination to shun populism by establishments of all hues. This is missing in UDAY. There is one condition which requires that States who are unable to discipline SEBs, resulting in continued losses, will have to absorb the loss of the preceding year on a progressive scale. The percentage of loss absorption will be five per cent in 2016-17; 10 per cent in 2017-18; 25 per cent in 2018-19 and 50 per cent in 2019-20. But, this is no deterrent at all.

Having relieved SEBs completely from their past baggage, one would have expected the Centre to compel the States to absorb the entire loss if any, from day one. Instead, the percentage of absorption proposed, especially in the first two years makes a mockery of intended discipline. This gives SEBs a long rope to continue business as usual.

The Union Government has made the SEBs task easy by relaxing fiscal deficit targets under the Fiscal Responsibility and Budget Management Act for two years. With this, the States will merrily issue bonds backed by sovereign guarantee to raise funds at nine per cent, as against the 13 to 14 per cent SEBs were paying on their debt.

As regards financial irregularities, Delhi Chief Minister Arvind Kejriwal brought the issue to centre-stage and was keen to have fast action on the CAG report. But, efforts in this regard have been damaged by a recent judgement of the Delhi High Court which says that the CAG has no jurisdiction to audit PDCs. According to the Delhi High Court, auditing has to be done by the regulator i.e. the very body which allowed and abetted the irregularities to pass muster!

Reforming SEBs requires judicious use of the carrot and stick policy. UDAY offers only carrot and fails to wield the stick. The root causes of the SEBs bleeding balance sheets are populism and corruption. As there is no trace of States shunning populism or taking steps to countenance corruption, the only way is for the Central Government to crack the whip by not relaxing FRBM targets and forcing states to absorb 100 per cent of SEB losses. Pushed to the wall and having to cut corners on their other essential expenses, the SEBs will be forced to do the right things.

http://www.dailypioneer.com/columnists/oped/some-carrots-but-no-stick.html