The Ujjwal DISCOM Assurance Yojna (UDAY),
approved by the union cabinet on November 5, 2015 will not only improve
the capability of distribution companies. Beside this , it
will also account to capital savings around Rs.12,000 Crore for
Public Sector Banks (PSBs) as estimated by the Credit Rating Information
Services of India Limited(CRISIL).
Why
UDAY:
- The Overall
losses of the power distribution companies were estimated to be around
Rs.62,000 Crore as of March 2015(estimated by CRISIL).
- This is
mainly due to operational inefficiencies, discounted tariffs and
subsidies, power thefts and leftover interest rates on the past
debts.
- The companies
were facing a total debt of about Rs.4.3 Lakh Crore and most of them are
on the verge of bankruptcy. So the scheme launched for financial restructuring
for these companies.
How is it implemented:
- According to this scheme the Union government allowed state governments to take 75% of the debt (as of September 30) of the distribution companies owned by them and pay back the lenders by selling government bonds and for the remaining 25% the concerned companies will be issuing the bonds.
- The State
governments will be provided incentives which will allow them to borrow
more from the Bond Market. The bonds issued by the state government are
offered at a coupon of 8-9% and the rest will be reprised at the minimum
lending rate of banks plus 0.1percent.
Positive Outcomes
? : UDAY scheme 2015 for power DISCOMS
1. It helps to reduce the financial pressure of
the power distribution companies and reduction in cost of power.
2. It helps in improving the operational efficiencies and
to provide clean and 24×7 power supply across the nation.
3. It enforces financial discipline in the companies.
4. This prevents the standing loans from converting to
Non-Performing Assets.
5. It improves liquidity in the financial market.
6. This Scheme has the potential to wipe out losses of
DISCOMS in Andhra Pradesh Telegana and Haryana by 2018. For the states of
Tamil Nadu, Rajasthan, Uttar Pradesh Jharkhand and Bihar, loses will reduce.
But the total elimination will only happen by the improved performance of the
companies.
Now the first question why DISCOMs have accumulated huge losses?
There are three chief reasons for the accumulation of the
liability:
1. Tariff hikes not keeping pace with the rise in costs.
2. Pilferage
3. Transmission losses.
How will UDAY improve the situation?
§ UDAY attempts to buffer the finances of the distribution
companies, or discoms, from the subsidies that state governments may want to
provide for power. This is done by asking states to issue bonds to
banks as repayment for discom dues. The states will now have to directly
bear on their budgets the entire cost of the subsidies.
§ It attempts to enforce discipline on States as it requires them to
absorb a part of future losses of the discoms.
What is left out of UDAY?
UDAY is silent on improving the operational efficiencies.
Following ways can be adopted to improve the operational
efficiencies:
§ Smart metering.
§ Upgrading of transformers.
§ Separating agricultural connections at the transformer level.
§ Use of efficient LED bulbs, agricultural pumps, fans &
air-conditioners
(But it seems government is also
working on this aspects !! )
Now lets move to ANALYSING
the REFORM !!
lets go back a little !!
After the 2003
Electricity Act was passed by the Vajpayee government, the discoms were carved
out of the monolithic state electricity boards across India at varying speed
and efficiency. This last mile aspect of the power sector never had any central
control given that electricity is an area of concurrent list in India. Since their
creation, state governments running the discoms have routinely attempted to
rope the central governments to underwrite their operational inefficiencies,
given the importance of power supply as an instrument of politics. Twice the
central governments have attempted to clean up the poor management of state
discoms and both attempts were a failure.
- The first one came
right at the time of generation, transmission and distribution functions
decoupling which happened in the Vajpayee era.
- The second attempt was
made by the UPA-2 government in 2012, via Financial Restructuring Plan or
FRP. .
Both the plans
focused largely on capital infusion into discoms, but like black holes
absorbing all mass coming towards them, discoms continued to burn all cash
thrown at them without turning profitable.
So how is UDAY different ??
Firstly UDAY is about Financial Restructuring and Not a
Bailout.
- UDAY is not a simple central government driven bailout
programme which just gives cash to discoms and states without
accountability.
- There’s a specific roadmap for debt restructuring and
there are hard budget constraints imposed for participating in the programme.
- Once on board, the states will not be able to back out
and the only prudent course of action for them will be to keep their side
of the bargain – which is around driving operational efficiencies.
- The centre is allowing states to relax their Financial
Responsibility and Budget Management (FRBM) Act 2003.
- Under UDAY, participating states will take over their
public discom (private discoms are not allowed to participate in the
programme) debt over two years with the debt benchmarked to September 2015.
In 2015-16, they can take over 50% and in 2016-17 25% of the outstanding
debt on their books.
State government BONDS as State Development Loans and not as
Statutory Liquidity Ratio !
- Another great point about this plan with respect to the
banks is that these state government bonds cannot be counted against
banks’ statutory liquidity ratio (SLR) requirements – presumably the RBI
was roped in for this provision already.
- While this will classify these bonds as state
development loans (SDLs) available for sale in the bank books – currently
overwhelmed by similar securities – over time, they can create a tradable
market in these securities.
- This can be a good template for future, with a degree of
market tempering built into what the discoms can borrow.
Regarding Value Chain reform !!
- Indian
power sector has a very complex value chain – which involves fuel, fuel
linkages, power generation, power transmission, power trading and
financing, distribution, and end consumption.
- Different
steps in the chain are owned by different parts of the central and/or
state governments.
- UDAY
ensures that the discom reforms are not just distribution centric, but
positively impact various inputs and outputs to the distribution function,
even those which are not owned by the centre directly.
- This is a
big positive vis-à-vis the past discom reform packages.
Reforms relating to Operational Efficiency
- UDAY
compels the discoms to improve operational efficiency.
- The
financial restructuring package will be based on a loss trajectory agreement
where the discoms will sign up for ensuring their cost of operations
reduces and their revenue from operations is sufficient to cover their
cost of supplies.
- The UDAY package will need the states to bring their
AT&C losses to 10% or 15% (customized for each state) by
2018-19.
- This is a huge ask, but if the states achieve this, they
will get the additional benefits of better infrastructure and technology
via the centrally sponsored schemes.
- The central government will be monitoring the progress on
this parameter regularly – a clause built in the UDAY MOU.
(Case Study :- Rajasthan which has been blazing a reform trail of its own may well
be the first state to commit to hard AT&C control targets – the state is
considering monitoring these losses not for the state as a whole, but at circle
level – for better accountability of individuals in the state electricity
board.)
The Carrot and Stick policy
!!
- The action on this count by the states will be the
single biggest driver towards the “power on tap” dream – and for the first
time, there will be carrots and sticks for the states to act on
this.
- Even if the bigger culprit states get in the region of
20% AT&C losses in the next 4 years, it will move the needle
significantly.
The right to select and switch DISCOM of own choice !!
- The central government has promised legislative changes
required to ensure consumers choose their discom and switch, letting
multiple discoms operate in the same region.
- This will require amendments to the Electricity Act, so
the enforcement may be delayed, but even talking about separating content
from carriage and encouraging last mile competition is a bold move given
the state of the power sector today.
Operational bottlenecks on the generation side....!!
- The UDAY plan provides for easier transferring coal
linkages from old to more modern plants, and incentives for creating large
plants running at an economy of scale rather than operating small sub 200
MW plants.
- Additionally, UDAY will involve incentivizing 11 top
industries which consume almost 50% of all industrial power to improve
their operations.
Focus on Renewable energy
- As part of the 2012 FRP, discoms had signed up for a
Renewables Purchase Obligation (RPO), which then was never enforced as the
FRP itself fell apart.
- UDAY brings back the focus on this RPO again, although
no dates are mandated. This is a significant step especially in light of
the recent Sun Edison bid for an Andhra Pradesh solar power plant at sub
Rs.5 / unit.
- If discoms start mandating purchase via renewable
sources as per their respective RPOs, it will give a big boost to the
renewable sector.
- (we will see this in detail in our other post
which will be regarding the new POWER TARIFF POLICY !! )
Towards Cooperative Federalism !
- The power sector reforms have traditionally been marred
by the “centre knows best” approach.
- UDAY however creates enabling provisions across the
power value chain for states to choose and do what fits them, with the
view of reaching the committed operational goals.
- There are incentives at various stages of the value
chain, and each state will find value in choosing different paths and
different speeds of implementation.
- The only binding part will be reducing the AT&C
losses i.e. improving the law and order situation enough to ensure there
is no pilferage.
MORAL of the STORY !!
UDAY seems to
be a well thought-out, scalable, future proof-reform and restructuring
programme for the struggling power distribution companies.While there is
nothing certain in a democracy laced with electoral populism and constantly
edgy centre-state relations, this plan may well be the “now or never” stage for
discom revival. UDAY addresses a range of issues rather than doling out cash
and hope things will improve operationally. It is broad-based and
comprehensive, “ready for future” and agreed in principle by the states. These
factors make this plan turn out to be OPTIMISTIC for us !