Can UDAY succeed in reviving cash-starved discoms?

The government last week tried to usher in a Diwali for the power sector by announcing a scheme called Ujwal Discom Assurance Yojana (UDAY, which seeks to improve the finances of the loss making power distribution companies (Discoms). However, is UDAY a fool proof plan to control discom losses for is the big question and to get an answer to this question CNBC-TV18’s Latha Venkatesh caught up with two former power secretaries, R V Shahi and P Umashankar. She also spoke to Ajay Jain, energy secretary for the state of Andhra Pradesh and Sanjay Sagar, Joint- MD & CEO, JSW Energy.According to experts the plans needs constant monitoring and one can not expect the scheme to succeed just because the plan is in place.They also think there is no way that the centre can ensure AT&C losses or the power theft will come down because it is still dependent on the discoms and the state governments implementing it in good faith.Experts believe quarterly revision of tariffs must be ensured, so that the tariff revisions don't become big. If they are quarterly the revisions are likely to be small. There is no clout with the centre to ensure that this process is not politicised.Banks can be are a very powerful way to ensure that this quarterly revisions take place, say experts More importantly, Coal India should ensure that it provides the coal at a cheaper price because currently, its RoE is much higher than the RoE of power distribution companies, which the centre needs to think carefully about.Background

It is for the third time in the last 12 years that the government is making an attempt to improve the state of distribution companies. India's power distribution companies or discoms have accumulated losses of Rs 3.8 lakh crore today and the banking sector's exposure to them stands at Rs 4.3 lakh crore. They had financial recasts in 2003 and in 2013 but slipped back into losses, one mainly because of huge transmission losses due to power theft and two, because the state governments refused to let them raise power tariffs.However, the Central Government is now trying to plug all these holes with its latest UDAY scheme. Main features of the scheme are as follows1. State Government will take over 75 percent of the discom debt and the balance 25 percent will be converted to discom bonds, which aims at bringing down the discoms interest costs.2. States have to commit to smart metering to reduce the aggregate technical and commercial (AT&C) losses from 22 percent to 15 percent.3. Starting FY18, state governments will have to take over discom losses as part of their deficit. 5 percent of the losses will be part of their deficit in 2018, 10 percent in 2019, 25 percent in 2020 and 50 percent in 2021.4. Finally, banks have been told not to fund discom losses.According to a Crisil report if the scheme is implemented for the 8 financial restructuring plan (FRP) states, it has the potential to wipe out losses of discoms in Haryana, Andhra Pradesh and Telangana by FY18. For discoms in Tamil Nadu, Rajasthan, Uttar Pradesh, Bihar and Jharkhand, losses will reduce but total elimination can happen only by achieving milestones on operational efficiencies lest they regress into the debt trap, it said.Interview transcript on next page_PAGEBREAK_Below is the verbatim transcript of the interviewQ: First up the plan envisages that from 2018-19 onwards any losses of the discom will directly become part of the fiscal deficit. Does the centre have the constitutional clout to ensure this?Shahi: At the outset let me say that when you made your introductory remarks that the previous two schemes did not succeed. I might mention to you that what we did in 2002-2003 did succeed because we applied the characteristic policy that is being talked now. Throughout 2002-2003, we signed agreements with different governments that means distribution companies, the state government and ministry of power. It was not memorandum of understanding (MoU) but was agreement on non judicial stamp papers. We started monitoring their physical performances in terms of AT&C loss reduction. It was linked to the Accelerated Power Development and Reform Programme (APDRP). So if you see 2002-2003 and throughout about 2006, 2007 and 2008 we were able to contain the losses. In many cases we were able to finance the losses. I would say that this Uday scheme I must compliment the power minister Piyush Goyal who has spearheaded the scheme.Q: You put your finger on it. It succeeded for a time but later again either because the tariffs were not raised or because of power theft we came back to Rs 3.8 lakh crore losses. This time the big stick is that states have been told the deficit will be part of your fiscal deficit, so is that sticky enough?Shahi: I think that where it did not work that somewhere down the line by 2003 we had eliminated the free power from the power map of India – Punjab, Madhya Pradesh and Tamil Nadu included and that time again Jayalalithaa was the Chief Minister and she did it. I mean the free power was totally eliminated.It requires a sustained attempt to make it a success. So, further it is characteristic policy, monitoring of different physical parameters, all these things have to be done very regularly and meticulously.I would say it won’t be a constitutional issue, it is a commercial issue and there is enough commercial clout with Central government to have this characteristic very meticulously implemented and applied and it should be possible to administer this. I agree that it can work.Latha: You spearheaded a financial restructuring involving the banks but at that time the Central Government did not tell the banks you shall not fund losses. Now Central Government owns the banks. The shareholders very right to tell the bank you cannot fund losses. Won’t that be the correct way to literally hold the discoms and the state governments by the throat? Do you think simply because the banks have been told this time this plan is more likely to succeed?Umashankar: The 2012 plan did not tell the banks not to fund losses. That is actually incorrect. What was told to them was that you have a three year window. The first year the financial losses will be to the extent of 100 percent. The second year it will be 50 percent and then third year it will be 25 percent after that you will not fund losses. It was very clearly stated. It is not possible to turn the tap off suddenly because the entire thing will collapse. So, when you allow the situation to slide to where it has reached you also have to have measures which will bring it back in an orderly fashion. So, to say that the then government did not or the Financial Restructuring Plan (FRP) 12 did not have any restrictions on banks, financing losses of distribution companies is incorrect. It was very clearly stated and after 2015 they were not to fund losses and probably that is one of the reasons why we need to have one more bailout.Q: Now are you reasonably confident that with the banks given this mandate, that future losses will be avoided?Umashankar: Hopefully. Last time when this bailout was or the FRP was implemented or initiated, one of the things that we did was the lender can call the tunes; the distribution company will listen to a lender. We had made a committee of the lenders for each state and asked them to review the financial restructuring plan that the distribution company will give.We also had suggested that the lenders must have a representative on the distribution company's board so that they can monitor almost quarterly whatever was going on there. Why it did not succeed is another issue, like for instance you can look at one or two states. For instance if you look at Rajasthan the AT&C losses were to come down to 16 percent, they went up to 26 percent. They just could not control those losses. The distribution companies of Rajasthan were in such a bad shape that the kind of tariff increases that were expected in the FRP were not achieved.Q: Can they ensure this time around that the AT&C losses go down because ultimately it has to be implemented by the discoms and the governments. Can that be ensured just by saying it?Umashankar: My feeling is that whether this is going to succeed or not you will only know after 3-5 years. I myself have my doubts as to how much you can force the distribution companies to reduce the AT&C losses or to reduce the gap between revenue and cost of service, I have my doubts because 2002-03 a bailout was organised, subsequently as I saw the gap between revenue and cost kept on going up.Q: So, your point is that even now if the AT&C losses don't go down sufficiently, three years down the line this government again cannot tell the banks stop funding. It is quite possible that we get into another financial restructuring package, it is possible is it?Umashankar: Exactly. So, one of the principle things that I see in this package is very different from what probably was done earlier is that the minister is talking about quarterly monitoring, whether that is feasible or not is another question but at least that says that they are going to monitor the situation very frequently. That is going to put a lot of pressure on the state governments.What further levers the centre has with the states to ensure that they move on the reform path is again debateable. Shahi had mentioned about NTPC and others, I have also seen the sector for some time, I thought that the most powerful person that you have today in the entire gamut is the person who gives them loans. I have seen that it is difficult for NTPC or Power Grid to do much but a banker can definitely put the screws on the distribution companies. One more thing; you talked about three bailouts or three financial restructuring plans. I would like to also look at how this plan is different -- in certain ways it is different and that is where I think this plan can have much more chances of success.The earlier plans we kept looking at what the state governments can or should do, like for instance metering, reducing losses, reducing gap between revenue and cost. This time the government is also looking at what it can do to help the states bridge the gap between revenue and costs. I think that is a very important thing that this particular financial restructuring plan is looking at and that is something that you have not mentioned.Q: What are the chances that this will succeed?Shahi: Chances are that if this monitoring is done meticulously at least 6 monthly basis if not on quarterly that is point one. Two, if regulatory commissions are convinced through forum of regulators or otherwise that they regularly review the tariff -- may be a more frequent tariff revision, may be six monthly or quarterly because it would be a better arrangement if it is smaller dosages than trying to postpone it for a couple of years and then increasing by 15-20 percent.I am not very sure that AT&C losses, which includes a good degree of theft of electricity that can be done to 15 percent in next 3-5 years through this type of institutional arrangement. What is missing based on our experience of last 10-12 years in this is that we must insists upon the state governments that they should indulge in both franchise model and PPP model of distribution management.Electricity today is the only business where retail is being handled by the state controlled entities. No other business retail is being handled by state controlled entities. We have to revisit this approach and in many cases you should go in a big way to have institutional changes.Q: The discussion that we left off with the former power secretaries raises the question, does the central government or the banks have any control over the control of Aggregate Technical and Commercial Losses (AT & C Losses). Can power theft be stopped by these entities? They have no power. Do you think that part of the UDAY reforms can succeed?Jain: The scheme envisages additional support by the centre to the states, those who are accepting the scheme and of course performing as per the standards. For example, the scheme talks about additional funding, priority funding, through the Deen Dayal Upadhaya Grameen Jyoti Yojna or the Power System Development Fund or the Integrated Power Development Scheme  (IPDS). So it is a very good incentive for the states to support the scheme and achieve the targets. It also talks about additional coal support at notified prices; which is a big incentive for the state. So, these two factors of additional grants or additional support through central schemes as well as additional coal and then low cost power allocation through NTPC and other central generating stations, are big incentives. They may not be directly in the form of control, but they are in the form of the incentives. Ultimately, reduction of the losses as you rightly said is within the domain of the state governments. The discoms for their own operational efficiencies they have to take a step to reduce the losses and this central support will definitely go a long way in achieving the target.Q: The incentives and the Accelerated Power Development and Reform Programme (APDRP) were always available. Do you think now the centre can say that if I do not see your AT&C losses down by at least one percentage point, I will stop all funding? Can they actually take that position?Jain: In a federal setup, total stoppage of funding may not be possible, but then definitely the additional funding to the performing states itself is a big incentive. More than the centre acting as a watchdog or the big brother, it is like what the honourable Prime Minister has been saying, the team India thing. The states have to perform, irrespective of whether they can stop or they do not stop or they give additional funding, it is in the state’s interest to perform well and this additional support by the centre, only adds incentive to that. Even with the Financial Restructuring Plan (FRP) 2012 also, some of the states have definitely benefitted. So, I think with this additional support, the states will take action, the discoms also to reduce the AT&C losses.Q: Do you expect with the losses having gone down, or completely wiped out actually because the state governments will take over the losses and debt, that any state electricity board will put out a Power purchase agreement (PPA)? When is the earliest that you are expecting further purchase of power?Sagar: I fully share the apprehensions of the two former secretaries. It is a very tall order for the states; taking on the entire debt onto their balance sheets and then what Ajay has listed out is all the carrots which the centre is offering them. However, I really do not see a situation where the centre says ‘no more funding’ because in a country like India, you cannot allow the discoms to go down completely. So, you will have to make sure that the discoms keep on operating, and as you very rightly pointed out, some of these incentives have been in place for a very long time, but, it has not had much impact on the performance of the discoms. Secondly, what Ajay just said was that it is in the interest of the discoms to carry out the reforms but it was the political will to an extent which was missing. However I do not want to in any way belittle the effort or the scheme which the centre has offered, I do not think they could have done better than this.Q: When is the earliest you expect that anybody will put out a PPA?Sagar: To my mind not before 6 months.Q: What if the centre said that banks will not fund losses after this year? FY16 is the last, would it work?Jain: Ultimately centre has a control directly through RBI and the banks. When the discoms were borrowing money in the phase from 2011 onwards they were resorting to the loans from the banks for funding their operational inefficiencies and losses. If it stops, then we may come to a situation wherein the discoms do not purchase power and then they do not supply to the consumers as well. Then it would be the consumers who would take the biggest hit. If the banks do not fund the losses of the discoms then they would not be purchasing power and supplying power but consumers will suffer. It may work but that thing hurts the consumers as well.Q: We have already had a 2003 plan and 2013 plan, will 2016 be an improvement?Sagar: The plan is certainly more robust than the two earlier plans. However there is one aspect that I would like to sort of bring out here. I was going through some analysts reports recently and I discovered that in FY15 Coal India has operated on a RoE of 34 percent. If Coal India, which is a monopoly created by the Government of India is going to supply coal to the generating companies or the state discoms or whatever you may have at an RoE of 34 percent, I really don't see how the consumer is not going to be burdened.I personally don't see any justification when the generators who are operating at a regulated RoE of 15.5 percent, why should the monopoly coal supplier in the country be allowed to operate at 34 percent RoE? Probably, the government also needs to have a look at that when they talk about not burdening the consumers beyond a point.