Discoms haven't gained from financial rejig: Feedback Infra

Despite undergoing restructuring exercise in FY02 and unbundling of state utilities, lack of political willingness ensured distribution sector remains in abysmal state. High debt (USD 53 billion in FY13) largely led by short-term debt to meet operational costs continue to hit discoms.

RS Ramasubramaniam, co-chairman of Feedback Infra, says power requirement has grown by 5 percent in the last 5 years, while availability has historically grown by 6-6.5 percent. Power contraction was around 10 percent in April 2015 versus historical growth rate. He says the contraction in April seems to be an aberration.

The situation on the ground has shown no signs of improvement despite FRP/ assistance, says Ramasubramaniam. He says installed capacity increasing by about 8.5 percent, while power deficit stands at 3-4 percent.

Meanwhile, Animesh Chauhan, MD and CEO of OBC, says the financial health of discoms has not improved the way it was expected to. He had expected the scene to improve post the signing of FRP in 2012-13.

Oriental Bank's advances to state discoms stands at around Rs 5,400 crore.

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Below is the verbatim transcript of Animesh Chauhan & RS Ramasubramaniam's interview with Latha Venkatesh & Sonia Shenoy on CNBC-TV18.

Latha: What is the feedback you are getting from the power generators, why is it that power generation in April contracted?

Ramasubramaniam: If you take the last 5 year period for which clear data is available, power requirement has grown plus 5 percent. Power availability has grown plus 6.50 percent. I am getting straight into controversy around that gross domestic product (GDP) figures. GDP too has grown upwards of 5-7 percent. Industrial GDP too has grown by 6 percent. So, at the putset, I would like to say that the so called contraction put out by Central Electricity Authority (CEA) for April of about 3.50 percent, if you compare it to historical growth rate of 6-6.50 percent is a contraction of 10 percent over the historical growth rate.

I find that a little puzzling; but you have already alluded to the answer to this which is the offtake by discoms. The same CEA report which talks about 3.5 percent contraction in the April actually talks about load shedding and if you look at the data in terms of fine print you would note that in the southern states in particular planned load shedding itself accounts for a fair bit of the shortage. So that is planned load shedding then on top of that is unplanned load shedding. So, you rightly said, the real answer to this is in the offtake by the discoms.

Even given the fact that others indicators of capacity utilisation, credit offtake all point to little slowdown in the growth. However, to talk about the contraction is completely off the chart and a little puzzling. Having said all of this I would still like to point out saying there is a power deficit whether you take the energy deficit or you take the peak deficit, it is round about 3-4 percent. So, you put all this together I don’t think that this contraction in April is a figure that I would rely on. It seems to be an aberration.

Sonia: Even if this 10 percent contraction is an aberration there is still lower demand coming in from power discoms. That is something that we have been alluding to for a while? What exactly are the losses that the state discoms have faced in FY15 and has the financial health deteriorated further? Do you have any numbers that you can share with us?

Ramasubramaniam: I can speak from personal experience of some states that we are operating in where the situation on the ground despite all the talk about financial restructuring package (FRP) and the systems etc. The situation on the ground is that there has been no improvement. If you look at the fact that new models of participation by the private sector whether they are input based franchisees, licensees or distribution franchisees I can not recall a single tender that is gone out to award in the last 12 months.

I don't think there has been enough of traction on improvement in the either the state of health of the distribution of the discoms or of new private sector participation in this. I therefore see little reason to cheer and little reason to expect that the discom will increase their losses by continuing to offtake from power producers.

Latha: Do you have any numbers on this, how much of extra power generation came into the country in the last 12 months or 24 months and how much of power purchase agreement (PPAs) were signed?

Ramasubramaniam: If you look at how much power generation has come in to the country, I first want to set the context of the longer-term increase. If you take the 11th Five Year plan and it roughly increased from about 1,30,000 to 2,00,000 which is about 8.6 percent per annum growth in installed capacity. That said in the period of the 12th Five Year plan which we are it has grown from 2,00,000 the latest figures that I have is 2,68,000. So installed capacity is growing at around 8.50 percent which is a healthy growth but having said that, I am coming back to the figure of same 3-4 percent is the energy deficit and the peak deficit.

So we still have a long way to go in terms of adding installed capacity and that is where I thinking the whole sleeve of problems and I particularly refer to banking problem of saying that lenders have to come forward so this business of saying that there is no credit offtake, there are no projects to lend to, versus the fact that bankers are vary of lending to the power sector, this is part of the problem. However, I put the distribution problem as the bigger problem as oppose to the power generation problem.

I just want to point out to the fact that the plant load factors (PLFs) are running somewhere between 60 and 65 percent so against installed capacity of 2,68,000 offtake hovers around 1,30,000-1,40,000 megawatts.

Latha: You mean half of it?

Ramasubramaniam: PLFs are pointing to that. If you take the history even, if you take the month wise trend in the last year average between 60 and 65 percent; we have hit a high of 65 we have hit a low of 60 may be.

Latha: Have you looked at the numbers of the discom companies whom you lend to, is there a problem lending to them, have they come to you for loans?

Chauhan: They have been coming for loans but the basic problem has been in the states where the FRPs were signed in 2012-13. The improvement that was expected has not come through. The Aggregate Technical and Commercial (AT&C) losses, the overall losses have not reduced and therefore the financial health of these discoms has not improved the way it was expected to.

Therefore the gaps that discom show, are also suppressed; that is what we believe in. There should not be a lack of demand. It is basically the discoms unwillingness to purchase further as they have been incurring losses on every unit of power that they purchase. Therefore, they have been unwilling to purchase more power and therefore the demand is shown as suppressed.

Latha: Are you a lender to Rajasthan State Electricity Board (RSEB)?

Chauhan: Yes we are.

Latha: The reason why this entire power sector issue has come to the brim is because RSEB has asked for a recast of Rs 52,000 crore of its loans. Can you give us more details, is it true hat they have asked you and what are the bankers going to do about it?

Chauhan: There is at the central government level urgency been shown in resolving issues of not only the Rajasthan discoms but other discoms also who went for Request for Proposal (RfP) in 2013. There has been active involvement of banks, discoms, state governments and the central government in trying to resolve the issue.

However, saying anything at this stage would not be proper. However, I can only say that it is being discussed at the central government level also with the state and banks very actively and we hope that a solution is found out soon because that is a big chunk of lending of banks that has happened to the discoms where the FRPs happened and they need to be resolved as that FRP lending for losses comes to an end very soon.

Sonia: Can you just help us with some numbers, you did say that the financial health has not improved for many of these state electricity board (SEBs) what exactly is the exposure that you have to RSEB, Haryana State Electricity Board and Punjab and which is the SEB where the losses have increased you think?

Chauhan: Most of the SEBs, the losses have not reduced the way they were planned to because it is not a question of only where the losses are. The funding to losses has ended now and the state governments and the SEBs have to find out their own way of funding those losses going forward and that is where the discussions are centered around. Our advances to state discoms is around Rs 5,400 crore and most of it is through the states where the FRPs have happened.

Latha: The funding of losses ended in 2014 or in FY 15?

Chauhan: FY15.

Latha: So as of April 1st none of you all can lend to any of the SEBs is it?

Chauhan: None of us have a tie up for lending for losses as on date.

Latha: Are most of them making losses, I think Gujarat SEB is a profit making and they even have a higher rating?

Chauhan: Gujarat was not part of the FRPs. The FRP were to the 5-6 states other than that.

Latha: That is UP, Rajasthan State Electricity Board (RSEB)?

Chauhan: Uttar Pradesh, Rajasthan, Haryana, Andhra Pradesh and Tamil Nadu these were the states that were there, but they are very actively talking of steps being taken. We have seen tariff revisions also coming in most of these steps off late. However, whether they are enough to cover up their losses has to be seen.

Latha: Are all the 5 of them still running losses? Could any of them come into at least breakeven?

Chauhan: It is not coming into breakeven is a issue, it is off the marginal purchases that should now be not incurring further losses for them and that is being worked out. So March 15 figures will not be available off hand right now even as their accounts take time to settle down. We hope that the central government, the power ministry and the states and discoms are very actively in discussion to resolve that issue.

Latha: What happens if they take say 3-6 months, you will not fund losses then the SEBs will buy even less? I mean what happens if this takes like 6 months for a new FRP to come in?

Chauhan: My personal view it seems is that it should get resolved quite soon. It is because the discussions have happened for quite few months now. So it is not that it will be taking 5-6 months. The central government and the ministry, it is the combination of the power ministry, the states, the state discoms and the banks who have discussing it for quite few months know. So, I believe the decisions will be coming quick and fast and very soon.

Latha: What will be the nature of the decisions; will it be a new package?

Chauhan: It will be premature to talk of that right now.

Latha: I mean will the central government put in money; will the state governments put in money? Give us some idea as to who is going to bear the losses since you are saying that they are still making losses?

Chauhan: The losses have to be borne by the discoms only. I don’t think the central government can bear the losses or the banks can keep funding the losses. It is between the state government and the discoms that this issue of reducing losses and if there are losses the funding of losses has to be coming from.