SEB bailout of Rs1.2L cr being discussed: Feedback Infra

One sector that has taken the current sluggish economic conditions on the chin is the infrastructure space. High debt and rising interest costs and slowing growth plague these companies, and now they also facing the problem of coal supply shortage.

The biggest worry in the sector, however, is the state electricity boards that have huge amounts of debt on their books. Vinayak Chatterjee, chairman of Feedback Infrastructure, tells CNBC-TV18 that important decisions were taken during a meeting which took place yesterday, the main the decision to restructure Rs 1,20,000 crore with of SEB loans. This process is going to be conducted in two ways; one is via converting short-term loans too state government bonds, and restructuring of the remaining Rs 60,000 crore. With regards to the problems coal shortage, Chatterjee says the government should allow state owned agencies like MMTC and STC to import coal blocks to overcome the problems. “The government is also working to allow private companies to mine in blocks associated to Coal India,” he added. Below is an edited transcript of his interview with Udayan Mukherjee and Mitali Mukherjee. Q: What are your thoughts on power and whether any significant steps have been taken to resolve the problems with coal linkages, the floundering gas supply situation to the power projects? And are any of the recent statements coming in from New Delhi inspire confidence in you? A: It is moving forward in slow steps. I think the most significant policy announcement happened yesterday with a very major meeting in the Planning Commission chaired by the Deputy Chairman and the Minister of Power Mr Shinde, along with the ministers of state and the chairman of public utilities of all the 29 state governments as a precursor to finalizing the draft of the twelfth five-year plan. Now, while on the capacity side I think they agreed that there have been various permutation combinations of the target, the last we heard was it was pegged at 100,000 megawatt (MW). It has now been brought down officially I believe to 88,000 MW for the 12th plan. To answer your point on policy reforms, I think some major decisions were taken yesterday about restructuring state electricity board (SEB) loans. SEB loans today stands at about Rs 200,000 crore because they have accumulated losses of about Rs 140,000 crore. The total debt in the power distribution side is Rs 200,000 crore, which is a staggering amount. Yesterday the decision was taken that out of Rs 200,000 crore, Rs 120,000 crore relates to short-term loans and this has been split into two buckets. One is that the loans will be converted to bonds. Now these bonds are going to be issued by the state governments. The worrying factor is that across most of the states you are going to see an increase in the liability side of the states’ balance sheets of close to Rs 60,000 crore. Now I don’t know whether states today have the headroom to do Rs 60,000 crore worth of new bonds to state discoms. But that is point number one. So out of Rs 120,000 crore, Rs 60,000 crore fresh bonds to clear Rs 60,000 crore of debt by state discoms by state bonds. The other Rs 60,000 crore is going to be restructured. What does restructuring mean? Restructuring only means the kind of ever-greening which means the commercial banks are going to rollover those debts for as long as a period now from 3-7 years. Honestly, this similar exercise was done in 2002 by Montek Singh Ahluwalia when the extent of the problem was only Rs 10,000 crore about. That problem has now become Rs 200,000 crore of which Rs 120,000 crore is being addressed with this innovative financial mechanism. The measures that we are taking today could easily have been taken 12 years ago. All this is fine because it is easy to sit in New Delhi and keep restructuring the Rs 200,000 crore of bad loans and convert to bonds. The real issue is to find out from what problem this huge figure has come up in the first place. From what we understand, the government has requested the state governments to do a few things as part of this bailout package and let me read them out to you: “In return, states have to commit to undertake key power sector reforms including change in management control of loss making distribution companies and quickly moving for privatization models, franchising models and PPP in distribution circles. They have to also immediately implement mandatory open access for consumers with more than 1 MW connected loan.” Now here we have got Rs 120,000 crore bailout package against which I am still not clear what is the committed delivery of the state governments The central government has requested these conditions be met, but I would be happy as a citizen of the country to say, you do this, prove it to me that you have done that and then I will give you a bailout package. _PAGEBREAK_ Q: What about the issue of coal linkages in specific because that affects two very specific groups that the market sees which is Coal India on the one hand and these power companies, has that been resolved you think? A: No, it hasn’t because there are few issues. One is that Coal India at their last board meeting said they certainly cannot do 100% commitment. It then came down to 80%, and now it is hovering around 65% and yet there is no conclusive evidence that the FSAs are going to be signed for 65%. It is clear that the balanced 35% has to come from imports.
Now the government has to communicate an administrative order to entities like STC and MMTC who have a better management expertise in international trade so that they can do the business of buying coal abroad and bringing it. So therefore, I suspect if one looks at it from the Coal India board point of view, they would say that look we can take a commitment for what is in our control, which is the gradual output of domestic coal. So the balanced portion which is going to depend on imported coal, we are still waiting to hear an administrative decision. But yesterday there was another major announcement that the government has taken to allow private sector to enter coal mining in a PPP format. This includes giving unutilized mines owned by Coal India to private sector in a PPP mode. This is almost a kind of a bypass route because ideally you want to denationalize the sector, get an act passed in Parliament allowing full private sector participation, but that is politically contentious in the current coalition regime. So I think the government is trying to do the best that it can by saying instead of using the word denationalization, we are going to allow PPP formats in coal production. So that is as much as I can tell you right now. Q: Just to go back to the SEB point, do you think in a few years we will be back to the same state again as states ignore the central’s request? Also, is it not transferring the problems of the power sector to the financial sector right now by asking for banks these kind of restructuring, raising the risk or making another sector sick in the medium-term? A: Ofcourse, you are right. On your first point, there is no guarantee that the states are going to fall in line and that once again ten years down the line a Rs 200,000 crore problem doesn’t become a Rs 600,000 crore problem. The only way that you can stop the states from misbehaving or not taking action is doing subtly what I believe the central government is doing without going ballistic about it in the national press. I have seen clear signals that there has been an informal guideline to public sector banks and PSU financial institutions like PFC and others to stop giving further cash to the discoms which don’t come up with the expected behaviour patterns. Now the moment you stop cash, the states wake up, and this has quietly been going on for the last two-three months. Therefore you suddenly see nine states increasing tariffs from as high as 30% to 75%. Now this has not happened because the state governments or the state electricity discoms have suddenly woken up one morning with a change of heart. It has only happened because very subtly the central government has turned off the funding cash tap. Once the specter of illiquidity hits the discoms, which means they cannot pay for the power that they buy from the generating plants, they have no choice but to reform. Reform is in two parts, one increase tariffs and two reduce 80C losses which is loss, transmission, distribution all that kind of stuff. So the real message is to track the extent of which public sector financial institutions in the power space and commercial banks are continuing to release cash. So the backward states or the laggard states are going to feel the pinch so badly that they will probably have no choice but to reform.