SEBs to benefit from holistic debt restructuring pkg: APP

Power distribution companies or discoms reeling under a heavy burden are likely to get a relief. The government has approved a bailout package for the cash-strapped discoms and Ashok Khurana, Director General, Association of Power Producers (APP) believes the government has taken a very wholistic approach this time. The debt restructuring package not only will improve the financial health of the power distributors, it will also help them to pay bills on time.

Here is the edited transcript of the interview on CNBC-TV18.

Q: One of the key questions that is being discussed is the potential of this package with whatever changes that have been made. We know the details so far, what kind of implications could it have, especially for generation going forward because amongst all the stories of deficits the generation deficit should also be impacted by today's decision. What are your thoughts about that?

A: This is a very positive step in the right direction. If you have seen in the last year and a half, you have about Rs 14000 crore of unpaid bills of private sector. Payment risk of power sold was looming large in all the prospective clients. Unless we reform the distribution segment where all the revenues are collected for generation and transmission building, there is no way you can have generation or transmission even.

For the first time, about 8-9 years back when the Montek committee report came, it was only limited to payment of the receivables which had been collected and NTPC and other utilities took some haircut and got a concession. But, in this package debt restructuring is accompanied by two main factors. One is the mandatory condition of tariff increases every year to fill the gap between an average cost and the average realisation per unit.

Secondly, the loss reduction path is also predetermined. Now they are mandatory conditions. We spoke about a transition financing mechanism because no utility which is going through such heavy debt restructuring can come to the pink of health in the next one year.

Therefore, each utility has been given a planned period of 3-4 years. In the meanwhile, their transition financing requirements are also being met by this note, by this mechanism. So, you have two aspects to it. This is a very wholistic restructuring package giving you the time to improve the financial health of discoms and start paying your bills in time.

Also read: Link bailout to mandatory initiatives: Shahi

Q: The fact is that while this package is being implemented, some of the states have had problems and reservations with it. This is a central decision and any state that will sign on will in some ways be bound by the conditions. Combined with the possibility of political changes once the governance in a state changes as also some of the backlash that is likely to happen because of frequent power tariff increases, how confident are you that this package will stay and will not be tweaked in the coming years, especially because we are now entering a phase of political instability where power becomes one of the major electoral promises?

A: Those risks will always remain in a polity, change of governance and change of government. That does not stop us in taking the step forward. The worst case scenario could be in election year. If the tariffs are not increased then the budget subvention should increase if they want to continue the benefit.

There is a build-up system to overcome that, but as it is to the state's advantage I can only understand some states saying that to break even and to actually meet cost of service, instead of three years I may need four or five years. However it is to the state's advantage. What is the option they have? They cannot keep on buying power from a short term market and pay heavily for it. They have to enter into a long term purchase price agreement so that they have the economies of scale.

So, no state in real earnest would like its own citizens to be deprived of power. That is also a positive thing. If they are thinking of winning elections, it is helping them to provide power to people in this way.

Q: Let me pick up the point that Mr Razdan made, instead of paying Rs 5-6 per unit be prepared to pay out more and look at the fact that the kind of cost that you bear for diesel power and all the other associated problems with it. My question is, given the suppressed tariffs within this sector that have not been passed on, what kind of hike would be needed in the short term to bring a better sense of viability for the generation side and ensure that the entire sector sees some viability all across?

A: You are only talking about tariffs. We are forgetting one thing, along with tariffs there is also the issue of loss reduction. The mandatory conditions are attacking both the sides. Today, tariffs are alright at times but the losses are so much. If you are going to make Aggregate Technical and Commercial losses (AT&C Losses) to 42% no amount of tariff can help you.

This wholistic package is attacking the issue from both the sides. It is going to increase tariff and it recognizes that you cannot have a tariff shock beyond a point. Therefore, the issue of transition financing mechanism comes into the picture. They know some states may take three years, some may take four years and some may take even five years.

I am willing to live with five years also as long as the state is keeping with the calibrated path of tariff increases and loss control and the corrective steps are taken in the same year. In case tariff increase is not done, budget subvention increases. I am not denying that no state will budge from the five years path, many states will budge, but the future path is very clear.

Instead of only finding the fault, we need to see that a positive step is being taken in the right direction. It gives an enabling clause for states to take advantage of this scheme. Even if for one or two years they fall back, they can cover up in the third year. The main thing is loss reduction. Tariffs will also come down if loss reductions take place. Imagine 45% to 12% loss, you have 30% loss saving. It is a theft over there. All consumers who are regular payers are actually paying for inefficiency and theft. That has to stop one day.

More to come.