Back to the future

We are back in the season of debt write-offs and recast by the central government. Farmers and state government-owned electricity boards know that they can borrow freely from the market and from banks because when the lenders find their burden too onerous, the central government is sure to come with a bailout. The government has now announced a "restructuring" of the R1.9 lakh crore of SEB debt. Seven states accounting for 80% of these debts have joined the scheme.

In 2001, the Ahluwalia Committee restructured debts of SEBs by "securitisation". An amount of R41,473 crore (R25,727 crore of principal and R15,746 crore interest) was owed to central government undertakings (Railways, NTPC, NHPC, Coal India) due to "the continuing non-viability of the current operations of the SEBs". For the states participating in the scheme, the recommendations were:

As much as 50% of the surcharge/interest on delayed payments be waived off. The rest of the dues amounting to the full principal amount as well as the remaining 50% of the interest/surcharge, aggregating to R33,600 crore, should be securitised through bonds issued by the respective state governments.

The bonds should be issued through RBI at a tax-free interest rate of 8.5% per annum. There would be a moratorium of five years on repayment of principal with the entire principal being repaid between the sixth and the fifteenth year.

For ensuring timely payment of current dues in future, defaults in current payments for power/fuel should attract a graded reduction in the supply of power from central power stations and in coal supplies. If defaults exceed 90 days from the date of billing, the ministry of finance should recover these dues through adjustment against releases due to them from the Centre.

To initiate steps towards reform of the sector, SEBs should accept reform-based performance milestones such as the setting up of SERCs, metering of distribution feeders and improvement in revenue realisation.

The states should be offered incentives for complying with the scheme.

CPSUs were to reward conforming SEBs with incentives.

States undertaking reforms should also be assisted through APDP grants and discretionary allocation of power.

States that withhold their consent beyond 60 days after this scheme enters into force should be denied any share in the discretionary allocation of 15% from the power stations of CPSUs as well as any assistance under APDP.

It is unlikely that all conditions were accepted by government. If they were and had been rigorously enforced, the current debt situation would not have arisen.

Now, the new power minister has announced another debt restructuring scheme for the R1.9 lakh crore of SEB debt. PPAs will be bid on the basis of the cost of coal. The ATE requirements must be followed; there must be timely tariff revisions to bridge the gap between expenditure and revenue; T&D losses must be cut by 25%; change management of loss-making discoms; state governments to convert their loans to discoms into equity; also defer recovery of their loans and interest (over R35,000 crore) till rescheduled loans of banks and financial institutions are fully repaid; no fresh loans from banks and FI's to meet cash losses of discoms; state governments to pay all outstanding government electricity dues; quarterly monitoring by state and central governments; SEBs that fail to comply will lose fresh bank financing and higher interest rates.

While the government has imposed conditions, they are such that political expediency can subvert them, as has happened before. With elections in the offing in some states and later at the Centre, this is inevitable.

We must have much stronger conditions to be fulfilled within one year. No moratorium of three years makes sense in our fraught political environment. The essential conditions must be:
- Privatisation proposals for discoms to be ready in three months,
- Privatisation to be implemented within 24 months,

Meanwhile, top 30 business schools (IIMs and private) must be appointed (one for each state) to make proposals that must be implemented within three months of the report. The proposals will cover restructuring distribution enterprises so that there are autonomous strategic business units, prepare manuals and procedures for accounting, human resources, procurement, storage, maintenance, etc; review caliber of each staff, set out detailed organisation structure, job descriptions and individual accountability; procedure for setting goals for each individual to attain; have goals set within three months of report; get state governments to sanction and appoint special police to catch and punish electricity thieves; identify top professional managers to be CEOs replacing current bureaucrats.

The penalties for SEBs that do not comply must be very severe, and be implemented under any circumstances. These must include suspension of any bank lending, withdrawal of central electricity allocation, suspension of coal and gas supplies from central government undertakings, disconnection from the regional/national electricity grid; among other conditions.

If such an approach is not adopted we can be certain that the debt situation of SEBs will be much worse in a few years. Inefficiencies and thefts will continue so long as there is an uncommitted cadre of unprofessional management. Every change of minister and bureaucrat at the Centre and states will lead to a hiatus before any action is taken, and the action will change depending on the new incumbent's preconceptions.

If India is to grow, our power system must be insulated from politicians and politics. All political parties need to be educated on the consequences of their politicisation of electricity.