Losses accumulated due to bad governance: Ex-power secy

Restructuring package for the distribution sector has been cleared and will go a long way to help in restoring the health of the entire power eco system.

Anil Razdan, former secretary, ministry of power, says that overall, it was bad governance, bad economics and bad technical performance. These three issues led to a loss of confidence of the lending sector as their money got stuck in the process. Also read: Link bailout to mandatory initiatives: Shahi Below is the edited transcript of his interview to CNBC-TV18. Q: The package is half of the outstanding of around Rs 1,90,000 crore, which is the combined loss of all State Electricity Boards (SEBs) with a cut-off date of March 31, 2012 will be converted into bonds issued by the discoms subsequently to be converted and taken by the states in a 2-5 year period. All the lenders will restructure the balance outstanding, take a bit of the haircut. There will also be a transitional finance mechanism and all of this comes with conditionalities. The most important is mandatory periodic tariff revision and from the details that were available before the proposal went to the Cabinet, it was April 1 every year. So given the size of the problem, given the nature of the bail out what are your thoughts what seem to have been put in place today?
A: This is a confidence building exercise for the financial sector also which had panicked after seeing the bad financial condition of the distribution companies. With short-term loans touching almost Rs 2,00,000 crore they were in a bad shape.
Essentially, it reflected three things; first the kind of complacency on the part of the state governments where these distribution companies were located and most of these are public sector distribution companies. The regulators were amiss in not revising their tariffs regularly. Some of them took the softer option of not revising tariffs for 5-7 years. Finally, the inefficiencies of the board and bad distribution practices with high Aggregate Technical and Commercial Losses (AT& C Losses) touching about 28 percent overall in the country. It is a horrendous situation to see some dubious distribution companies having the distinction of 50-70 percent AT &C Losses.
Overall, it was bad governance, bad economics and bad technical performance. These three issues led to a loss of confidence of the lending sector as their money got stuck in the process. Q: It is not only about lack of frequent revisions, it is system where even subsidies are not paid on time. The SEB's are treated as vassal entities that have to function at the whim and choice of the political system in power and the high cost of power and distribution also come into play. Given the nature of this package, how confident you are that this will in some way prevent the reoccurrence of similar situation in the years ahead because we have seen in the last 10-12 years or even more where every 5-7 years, we go for some restructuring bail out, support hand holding for the SEBs and privatisation is a very small and sorry story so far in this entire game?
A: Essentially, it is a failure of governance and bad corporate governance on the part of the restructured entities. One needs to put out the laid principles, the tariff policies and various judgments that came out in the Electricity Act.
It is just postponing a problem and not showing the people what the exact picture is that one needs to pay for the power. The costs have gone up, yet no one is willing to pay for it. Then you come out with reform-reform, but there is not reform. Everybody knows what is the need for reform, what the reform path is. The problem is nobody is willing to perform. And if you have to run a sector, which is purely economic and commercial on lines other than economic and commercial, then one will land up repeatedly in the mess that we are at the moment.
On the other hand, there have been improvements in some distribution companies, in some electricity boards. Andhra Pradesh and Tamil Nadu used to be a good example but they have deteriorated over the years. Gujarat is doing reasonably well. The regulators have been active, they have been revising tariffs. As long as there is a gap between the cost of supply and the return, in that situation one will get repeatedly land up in such problems.
If orders are not placed in advance then when you need power, you are going to lead it to last minute purchasing from the grid under the misuse of the unscheduled interchange (UI) mechanism or from exchanges, then short-term loans would be used to tide over that crisis, which is a reflection that the regulator has not really scrutinised the performance and the operations of the distribution entities. Q: Is this restructuring package become a restructuring package for life. Is it going to become an endowment plan or a entitlement system that will now be created because we will some changes that could possibly happen due to political changes, some step backwards as far as tariffs are concerned. Is that the real downside fear to the success of this package in the long run?
A: Certainly, that is a threat to the whole scheme but what is the alternative? The sector has to live on loans or borrowings from the financial institutions, if the financial institutions are not assured return of money then who will lend them the money.
Either, you finance the tariff entirely from the state budget or from subsidies if you don't want to increase tariff, but what about the finance of the state governments? They are not in the pink of health. I think this package is there but the other components of it, that have timely balance sheets, timely tariff revisions and revolutionary change in corporate governance of these entities. It is not enough just to create three or four entities out of the erstwhile electricity boards. Let them run like good corporate entities.
We have central undertakings which have independent directors, you have listed companies, good debate, discussions, let these corporations now have representatives of the lending institutions. So, that those lenders can keep an eye that the improvements that need to be brought about have actually been put on ground, they are being monitored regularly and there is improvement.
If there is no improvement then some other measures needs to be thinked. I hope that there are technical tribunals to handle this subject. There is the regulatory commission and Aptel, let them look at these technical problems and let us not take this litigation to other fora or sitting judgments because we recently had a grid collapse also which showed bad governance, misuse of the UI mechanism and other issues.
These are highly technical and commercial issues, the business needs to run as a commercial and technical business and there is no scope for political or other populist interventions. If the quality of power is good and it is available in abundance, I am sure in due course of time people will also understand that there is no power, that is more expensive, than no power at all. Q: In the past few months, long pending tariff revisions happened across the states. The point at this stage is that, while the center proposes this and states which have no option agree to sign on and implement the conditionalities isn’t there a downside risk in terms of tariffs reaching a situation where you would see the same kind of politicisation of this entire matter that we have seen in oil, therefore the April 1 mandatory revision not happening, being held back and then what could the center do? It can’t obviously penalise the state beyond a particular point?
A: Let us put an intelligent public debate and transparency on the issue. Luckily, most are public sector companies, so you can't say that the private sector has taken undue advantage. It is a sheer case of bad governance, bad technical performance because the AT&C losses have been unduly high.
If there is a requirement for improvement of the distribution segment and transformation segment, that is you need to have higher capacity substations and subsequently distribution transformers at the lower end, you need to bring every thing in position. That investment must be approved by the regulator.
This is in the interest of the health of the grid and quality supply. It will certainly mean a higher tariff, but I think it is better to give power and good quality power at Rs 5-6 a unit instead of making people to have inverters at home, going in for Rs 12-18 a unit diesel generated power and having the mess of pollution all around. The uncertainty and the tension in the minds of parents whose children are facing examinations, all that needs to be put to one side, let the sector be run as a commercial sector with sound technical advice and sound technical supervision.
Where human agency has failed, where there is large scale theft in the distribution of power, I think let technology replace these situations. Smart meters should be placed so that the consumer is also involved. He must learn to understand that the cost of power cannot be the same the whole day around.
Peaking power has to be more expensive. If he can reschedule his use of power so that he doesn't use peaking power as much as possible, I think the sector will stand to gain. People would learn to be in the demand response management side and if the tariff is reasonable then I am sure people will use power more efficiently.
People using incandescent bulbs will switch to CFL and those who can afford LEDs would move in that direction. Similarly, all the gadgetry and the device right from agriculture pump sets to the other gadgetry that we use at home, if we are to use the star rated gadgetry, I think it will be a step in the right direction.
We will be reducing our carbon footprint. We will also have lower energy intensity and in the whole process the health of the sector, environment will improve. But we need to take a collective decision. Media also needs to play a very important role and not only highlight the negatives of the sector.
After all government can make policies, government cannot do a linesman job or it cannot do a job in a sub-station. Those people have to be made to be accountable, there has to be transparency. The hearings of the regulatory commissions must be widely televised so that people know and can participate in this, virtually in a kind of self governance also. Q: About the need to prevent a reoccurrence of similar situations because clearly in terms of the details if this is exactly what has been agreed upon as the per the original proposal 50 percent bonds, 50 percent restructuring by the lenders, transitional finance mechanism, mandatory tariff revisions. What more is needed at this stage to prevent a similar situation reoccurring because the numbers are going up and any more problems would drag the economy down even further?
A: There should be no supply of electricity without a meter. Metering should be made compulsory and mandatory and the onus has to be essentially first on the supplier. The supplier has to ensure that they will supply electricity if the meter is working.
Regulatory authorities should ensure that there is proper metering, audit and technical compliance of the quality of supply. We just cannot switch on and off, the power. There is a universal service obligation. Consumers do not have an option to switch to other suppliers. So if there is no competition in the supply of power, the regulator has to ensure by some mechanism that all the consumers have been getting power and the promised quantity. Q: Why have regulators so far failed to do that because that is the point, the regulators are independent entities, and you must have yourself appointed many of them. There is a dual structure, a very well placed regulatory architecture yet we have seen regulators according to industry not take decisive steps as and when they are required, why this, there is no political interference as far as the regulators are concerned?
A: There is no scope for that interference, if there is interference and if they are complying with some whispers or directive or by habit some of them don't want to offend some problem, it is their problem. But we have to simultaneously also look at some accountability in the regulatory mechanism. They cannot be removed at the moment without almost the procedure of a high court judge.
Regulators have till now did not understand the enormity of the responsibility that has been laid at their door. If the provisions of the Electricity Act or truly and well understood; the government has not only taken away the power to set tariffs but also to regulate supply. How and what should be the technical parameters? Who should be selected? Should one go in for a franchise arrangement or privatization? Or should you separate ultimately the wire from the content, if you have to move in the direction of some of the developed countries, so that the consumer has some choice.
The sector needs to develop sensibly. So that the law abiding citizens are able to enjoy the fruits of whatever tariff they are paying and those who are cheating the system whether from within or from outside get the due punishment and are expose. Q: Lets hope that we sort of get into a sector which is much better financially and there are no more restructuring packages that are required 10-20 years down the line.
A: I think I am looking at a change in corporate governance of the distribution companies. The lenders must be involved. They must get some outside experts to come and supervise the technical functioning of the board and not go entirely by what their own technical staff is talking about.