Power reforms – chasing a mirage

The special economic and comprehensive package ‘Atmanirbhar Bharat Abhiyan’, unveiled by the finance minister, Nirmala Sitharaman in 5 tranches during May 13 – 17, 2020, has two components that have a crucial bearing on the fledgling power distribution companies – commonly known as discoms. The discoms – mostly owned and controlled by state governments – procure power from independent power producers [IPPs] and public sector undertakings [PSUs] viz. National Thermal Power Corporation [NTPC] besides their own generating stations and sell to consumers.

The first component under the first tranche provides for a special loan of Rs 90,000 crore from Rural Electrification Corporation [REC], Power Finance Corporation [PFC] to discoms to enable the latter clear their dues to IPPs and PSUs. These loans will be available subject to riders such as the discoms bringing in transparency in pricing of electricity supplies to industry and businesses, reducing cross-subsidy [an acronym for charging more from these users to subsidize supplies to farmers and poor households] and implement other reforms such as ‘open access’ i.e. allowing consumer to draw power from a supplier of his choice and direct benefit transfer [DBT].

The second component under the fifth tranche relates to hike in the borrowing limit of states as stipulated under the Fiscal Responsibility and Budget Management [FRBM] Act from existing 3% of the state gross domestic product [SGDP] to 5% [this will give them additional net borrowing space of a cumulative 2% which works out to about Rs 428,000 crore during 2020-21]. While, availability of the first 0.5% of additional borrowing space is unconditional, the remaining 1.5% will be permitted subject to the state achieving measurable targets in four areas of reforms – one of these being power.

According to an advisory issued to states by the Union finance ministry [letter dated May 17, 2020] 0.25% of GDP borrowing space is linked to power sector reforms. This is trifurcated into three parts. Of this, borrowing leeway of 0.05% is predicated on the state reducing aggregate technical and commercial [AT&C] losses of its discoms whereas another 0.05% is linked to the discoms reducing the gap between average cost of supply and average revenue realization [or ACS-ARR gap] from sale of electricity. The Union power ministry will fix the target against each and monitor performance.

To avail of the remaining 0.15% borrowing window, a state will have to formulate a scheme to roll out DBT to all farmers in lieu of free electricity from 2021-22. The scheme should be implemented in at least one of its districts by December 31, 2020.

Based on the progress on the above three parameters, the power ministry will recommend to the expenditure department to release the 0.25% borrowing freedom to each state by January 31, 2021.

The riders appended to both the announcements are anomalous. The Corona crisis has created an unprecedented situation wherein discoms are in immediate need of funds so that they can clear pending dues to  generators [in February, 2020, these dues were a staggering about Rs 88,000 crore and by now, this would have further galloped; courtesy, destruction of over 40% of the electricity demand – mostly from industry and businesses – and resulting loss of revenue from these lucrative customers] and enable the latter maintain supplies at the current most critical juncture.

Likewise, state governments faced with steep decline in their revenue – from all sources viz. own tax collection, devolution from the Centre as their share in latter’s tax revenue and compensation under GST [Goods and Services Tax] – need to raise resources to meet their increasing expenditure commitments including for providing medical facilities – testing, treatment, Covid – 19 hospitals, institutional quarantine etc.  This is the raison de atre behind the Centre sanctioning hike in the borrowing limit of states.

To link release of funds [needed immediately] to reforms which by nature yield results in the medium to long-term is amusing. To say that REC/PFC won’t give loan if discoms don’t deliver on mentioned reforms is self-defeating. To deny borrowings to states because they are unable to reduce AT&C loss to a particular level [this is impossible to achieve immediately] is anomalous.

The finance ministry’s advisory also states “the assessment of reduction in AT&C losses and in the ACS-ARR gap will be based on self-declaration by the state governments in January 2021. However, any major variation between this self-declared figure and actual realization assessed later on, may affect the borrowing entitlement adversely in the subsequent financial year(s).”

From the second sentence, one gets a sense that the Centre has no intent of denying additional borrowings during 2020-21 even if there is variation. Then, why make the states wait till January 31, 2021 which is implied in “based on the progress on the above three parameters, the power ministry will recommend to the expenditure department to release the 0.25% borrowing freedom to each state by January 31, 2021”. It seems bureaucrats have used clever drafting to deny funds almost till the year end.

In view of the present situation being an emergency, for now, the government may arrange for immediate funding of discoms as also allow states to borrow additional funds without riders. After normalcy is restored say from beginning of 2021-22, it should insist on implementation of reform measures.

However, for reform measures to deliver, two basic points should be kept in mind. (i) these must flow from the fundamental causes behind the precarious finances of discoms; (ii) all stakeholders particularly state governments should make sincere efforts to implement the measures on ground zero.

The causes are primarily three fold. First, discoms sell power to poor households and farmers either at a fraction of the cost of supply or even free. Second, there are substantial ‘technical and commercial’ [T&C] losses – most of it plain theft. Third, under several power purchase agreements [PPAs], inflated tariff is allowed to IPPs through routes such as ‘gold plating’ [declaring higher investment than actual], over-invoicing of fuel cost etc.

This leads to a terrible situation whereby the average revenue realization [ARR] from sale falls short of the average cost of supply [ACS] despite discoms charging exorbitant tariff from industries and businesses [this can go up to Rs 10 per unit or even higher] against cost of Rs 3-5 per unit. As a consequence, they are saddled with huge losses year-after-year leading to pile up of unsustainable debt.

This problem has existed for close to two decades. In fact, to keep them afloat, since 2000, the government had given three financial restructuring packages [FRPs] – a fancy nomenclature for condoning their debt. The FRP [2015] involved takeover of 75% of the debt of about Rs 400,000 crore. This was at core of the Ujwal Discom Assurance Yojana [UDAY] which ran between November 2015 and March 2019. Under UDAY, the government had set targets for discoms. They were required to reduce AT&C losses from 20.7% during 2015-16 to 15% by 2018-19. Further, they were required to reduce the ACS-ARR gap from Rs 0.59 per unit during 2015-16 to ‘zero’ by 2018-19.

The overarching objective behind fixing these milestones was to completely erase the losses of discoms enable them start on a clean slate so that in future, they won’t be needing any bail out. But, things have not panned out as planned. During 2019-20, AT&C losses of discoms were 18.9% while ACS-ARR gap stood at Rs 0.42 per unit. This shows that even when the states were given sufficient time [read: 4 years], they hardly made any efforts. It also reveals the absurdity of Centre’s expectation now under ‘Atmanirbhar Bharat Abhiyan’, that they will reform in few months.

The crux of the problem lies in unwillingness at the political level to address the fundamental causes. That explains persistent focus of our policy makers on ‘band aids’ only. For instance, they talk of letter of credit [LoC]. Put simply, the bank guarantees payment to supplier on behalf of the buyer. If, buyer does not pay then, the bank pays and later recovers from buyer [using legal means]. But, here the buyer being a state entity viz. discom, things won’t work.

Look at another band aid. The union government talks of reducing ACS-ARR gap per se but won’t specifically tell states to do away with free supply to farmers/poor households and stop theft. So, the states focus only on charging more and more from industry and businesses. But, this does not help in reducing the gap because the elephant in the room remains untouched.

If, the Centre is really serious about reforms in power sector, it should tell at least BJP – ruled states to shun free or heavily subsidized power and eliminate theft. Others should follow suit.