Discom revival plan to improve health of power cos: Experts

The Union Cabinet on Thursday gave its approval to a scheme that would allow power distribution companies (discoms) in select states to convert their debt into state bonds, as well as roll out a host of steps to improve efficiency at power plants. This move is likely to help struggling discoms shake off years of losses and start on a path to profitability.Coal Secretary, Anil Swarup, KVS Manian, President-Corporate & Investment Banking- Kotak Mahindra Bank, Arvind Virmani, Former Chief Economic Advisor and market experts Vikas Khemani President & CEO Edelweiss Securities, Dipan Mehta Member BSE & NSE shared their view on the above developments and the way forward for the discoms as well as the economy.Below is the transcript of their interview with CNBC-TV18’s Shereen Bhan and Latha Venkatsh?Q: We understand that the cabinet has given its go ahead as far as the discom package is concerned. I know that you have also been participating in the consultation process in trying to put this package together which is crucial not just India's power sector but also for India's banking sector. If you could take us through the finer details of the plan that has gone through?Swarup: I am not fully conversant with the entire process. My job was to look into the coal aspect of it. We have been engaging with the state governments very intensively to get their view on what was being planned. The good news is that most of the state governments or almost all of the state governments are onboard. They were also very keen and continue to be keen in terms of rehabilitation of the discoms. Most of the discoms in these states were not in good shape. So, this was welcomed by all the states when we had preliminary discussions with them. Very intensive discussions have been held by the ministry of power. I was associated with some of them. So, I do recall some very intensive discussions with the state governments. As I said the good news is that all the state governments, all the stake holders are onboard and that probably augurs well for the discoms as well for the energy sector.Q: If I could ask you to detail for us the plan as far as coal linkages are concerned for the discoms and what this will eventually mean in terms of being able to bring down costs as far as discoms are concerned?Swarup: One of the major components of the proposed plan is to bring down the cost of power. This can be brought down by a variety of steps that could be taken in future. One would be what we are calling as the efficiency rationalisation of linkages, meaning t hereby that we would look at various linkages that are presently being given to see whether the same amount of coal could generate more power in more efficient plants. The details will be will be worked out subsequently but this is one of the steps that will be taken. The other step would be to see whether in future linkages could be offered to discoms or the state governments who in turn could auction these linkages on tariff so that the tariffs will come down . The ultimate objective of all this exercise is to see how the cost of power to the discoms can come down, thereby giving them better margins to service their loans.Q: What will this mean in terms of being able to bring down costs as well as power tariffs? Once all the measures that you have been in consultation with the power ministry and state governments are implemented and rolled out?Swarup: The role of coal ministry will be primarily in the context of providing low cost coal which in turn will bring the cost of power down thereby providing better margins for the discoms and in that sense they will be able to service their loans in future. So, the primary objective as far as coal is concerned is to bring down the cost of power either by way of allotment of linkages or even in terms of allotment of blocks which can then again be bid in the same manner as they were bid in case of UMPP. So, that will bring down the cost of power to the discoms.Q: What quantum of coal are we talking about that would be allocated for this purpose for discoms?Swarup: It would be difficult for me to give the exact quantity. It will have to be worked out individually with each discoms. The issue here is there is a very detailed plan that is being worked out which each state government and the quantum etc will be determined when we sit down with the state governments and finalise those plans. I must confess to you these discussions are already underway and as I said earlier almost all the state are onboard as far as these discussions are concerned.Q: In your consultations with the power ministry did you get some sense of what the final revival plan would entail because there is ofcourse the FRBM headroom that is likely to be utilised. We could probably see the discom debt being moved to the state balance sheets, there is talk of bonds and these are things that we have been reporting but could you detail for us in the consultations that you have had what could be the final contours, the conversations that you would have been privy to?Swarup: I would suggest that you speak to the power secretary in that regard. Broadly speaking what I can say is there is a present existing liability of the discoms. Now without financial restructuring you can't even talk in terms of improving the functioning of discoms because that area will have to be vacated, that fiscal space will have to become available to the discoms for them to move forward. I think the effort is to see how this fiscal space becomes available to discoms by probably transferring the liability to the state government thereby vacating that space for discoms to move forward. Anil Swarup, Coal SecretaryQ: I also want to address the larger issue which some people have raised as perhaps a moral hazard where you are really shifting the burden of debt from one balance sheet to another. You are moving it on to now the state governments book and whether this is actually going to be able to address the situation in the long term or provide a band-aid solution at this point in time?Swarup: Let me address both these issues that you have raised. Number one, what you heard from UP, clearly demonstrates that the states on this occasion are extremely serious. They have not only accepted what the central government has been saying, they have gone ahead in making very detailed plans. That is how this is very different from what has happened in the past and that is the reason why I feel this is eminently workable and it will work. Now let me attempt to answer the second question that you have raised. In any case all these discoms are basically owned by the state government, they are a liability of the state governments, most of these loans are state guaranteed, but they are presently listed in the balance sheet of the discoms. What this has done is, first the interest rates are very high because they are not loans given to the state government, they are loans given to the discoms. So interest rates range between 13 and 15 percent. When they go into the so to say balance sheet of the state government, the interest rate comes down automatically, so it saves enormously on the interest cost. In any case the liability ultimately would have been of the state government. So what is really happening is, reducing the interest burden of the state as a whole, so it gets down that way. Secondly, as I mentioned earlier, it provides that fiscal space to the discoms to borrow further and improve their functioning.Shreen: What do you make of the reform measures that have been unveiled to try and revive the discoms at this point in time and specifically I ask you this about the plan to actually look at the bonds, the government is saying that there is significant appetite to absorb these bonds, but what is your own sense?Manian: First of all the measures by themselves, is a great move. What it does is two or three things, at one shot improves the health of the discoms and helps them get into much better health and from now on price electricity properly because whatever deficit also there is a failed manner absorption by the state. So basically it in one single shot improves the discom health, number one; number two, what it is doing is shift the liability to the state and therefore they will obviously now definitely demand more than the discom bonds for the state bonds, what I mean is state bonds will have definitely better demand than discom bonds and therefore it improves the marketability of the bonds and the third important thing it does is almost at a single shot it changes the exposure of the banking sector to the power sector.Latha: At the moment, the Discom loans are not bad loans. They are still standard loans in the books of banks. At the moment, do you think as a stock market player, you will play any of these stocks, banks or power companies? It is only when the Discom debt clears and they start bidding for fresh power, that the power companies will benefit. At the moment, is any stock benefitted?Khemani: I think it is not about at the moment, Discom loans are bad, but there is a market perception if the health of Discoms are not good, market participants view them differently as a risky proposition. So, this at once takes away the whole perception of that loan to a secure loan and that is a very positive move. And in my opinion, this plan, addresses in a comprehensive manner which was the need of the hour. The power sector was disliked for long, because you had generation reforms happening but you did not have any distribution reforms happening and because of that power sector was becoming unattractive and viable. This addresses at one go and one most attractive feature I find in the plan is that making Discom losses as part of the fiscal deficit, that will bring in some discipline politically also in terms of making sure losses come down, free power is not given. If it is given, the burden on the state exchequer, not on the banks. So far banks were being used.Latha: I completely take the point that this is a much needed reform and it is very good that the government has bitten the bullet, but I am just asking you as an investor, will you buy anything? Is it tomorrow, of only these reforms were announced and Bihar exit polls were not there. Let us assume only this was announced, is it going to make a difference to the market?Khemani: According to me, big difference. Latha: So, you may buy power stocks?Khemani: Absolutely, no doubt about it. In my opinion, NTPC will be biggest beneficiary, Power Finance Corporation (PFC), Rural Electrification Corporation (REC), some of the banks with exposure.Shereen: Market reaction to what we have seen being unveiled by the power minister as far as the Discom revival plan is concerned?Mehta: Certainly, very positive for the street and there was some aspirations, expectations that some reform had to take place for the Discoms, because that was one sector which was clearly lagging and definitely some amount of government reform was required.As I understand, the scheme is quite path breaking and overnight will have an improvement in the financial positions of the Discoms. And that will go a long way in not only improving the power industry per se, but also the banking industry, where a lot of these loans may have been classified as non-performing assets (NPA) or affecting the liquidity of the system over there.So, I think it is a step in the right direction. Implementation of course is extremely important and I am still not very clear as to once you transfer the debt, what happens to the present operating losses which the Discoms are still making. Is there some sort of a scheme or plan has been put in place to ensure that in the future, the losses do not pile up. Once you have this one time clean up of the balance sheets, it should not be that in two to three years, it should not be that in two three years, you find yourself in the same position.Latha: I wanted to ask you if there is no Bihar tomorrow as a factor, if it was only a Discom reform, will it be a big difference to the market or is it that the market will wait for things to roll out and then only go in and buy a PSU bank or a power company?Mehta: It is not a simple answer to that, but certainly, the sentiment in the PSU banks, power generating companies will look up and to that matter, even some of the capital goods manufacturers, electrical equipment companies, their prospects also appear to be slightly better after this particular move of the government. But the more larger picture is that the reform process is on and the government is month after month coming out with something different trying to make change, trying to make India more business friendly, remove some of the constraints which are there, which may take us from that 7 percent growth to 8-9 percent kind of growth rate.And there are many such features and I think that is the most important aspect that all the ministers are working towards and trying to improve and take care of the problems which the country has been facing which we are aware of for the past several decades and really nothing has been done. So, that is the important message which investors look out for.Shreen: We have seen this happen in the past as well, the government is making a fresh attempt now to try and revive discoms, moving debt from the discom balance sheet on to the state government balance sheet, your quick comments on what you have heard from the power minister and whether you believe this will really address the problem that has plagued this sector?Virmani: So let me start form the macro aspect which is the debt. The Non performing assets (NPAs) and the whole banking sector debt gives rise to what we call balance sheet recession. Though of course right now it is not a recession, but that problem had to be addressed and what is encouraging is that the government is systematically going through various major sectors to try and solve the immediate problems so as to end the debt problem as far as the new loans are concerned, that is very important. So taking up let us say the electricity sector, the coal sector and various others which have been stuck, including basic infrastructure sectors etc. So in each of these, I have seen over the last 18 months or so the government is systematically trying to unwind the bad debt problem so that new lending can begin. So that is the macro aspect, which is good.The second part of course is the power sector. As you said, one has been through many power sector reforms and the only difference I would say is that often in the past what I have seen is, a scheme used to be announced, usually the planning commission was involved in it and then there was less active interest from the government. So here given that the planning commission so to say does not exist, the coal minister and he also has the power ministry, so one is relative integration of the fuel supply and the electricity generation, that will make some difference. And second is that given the objectives of this government and this minister, who as far as I can see is one of the better ministers of the government, given his interest and his continuing will be very important in making sure that some of those things go through. On your program only I have heard as far as the efficiency and other things are concerned, there has already been discussions, let us say the UP person you had on your show just now, so from my perspective at having seen these various programs, the interest and the continuing interest of the minister and the government will play an important role.Shreen: We have seen this happen in the past as well, the government is making a fresh attempt now to try and revive discoms, moving debt from the discom balance sheet on to the state government balance sheet, your quick comments on what you have heard from the power minister and whether you believe this will really address the problem that has plagued this sector? Virmani: So let me start form the macro aspect which is the debt. The Non performing assets (NPAs) and the whole banking sector debt gives rise to what we call balance sheet recession. Though of course right now it is not a recession, but that problem had to be addressed and what is encouraging is that the government is systematically going through various major sectors to try and solve the immediate problems so as to end the debt problem as far as the new loans are concerned, that is very important. So taking up let us say the electricity sector, the coal sector and various others which have been stuck, including basic infrastructure sectors etc. So in each of these, I have seen over the last 18 months or so the government is systematically trying to unwind the bad debt problem so that new lending can begin. So that is the macro aspect, which is good. The second part of course is the power sector. As you said, one has been through many power sector reforms and the only difference I would say is that often in the past what I have seen is, a scheme used to be announced, usually the planning commission was involved in it and then there was less active interest from the government. So here given that the planning commission so to say does not exist, the coal minister and he also has the power ministry, so one is relative integration of the fuel supply and the electricity generation, that will make some difference. And second is that given the objectives of this government and this minister, who as far as I can see is one of the better ministers of the government, given his interest and his continuing will be very important in making sure that some of those things go through. On your program only I have heard as far as the efficiency and other things are concerned, there has already been discussions, let us say the UP person you had on your show just now, so from my perspective at having seen these various programs, the interest and the continuing interest of the minister and the government will play an important role.. Shreen: We are talking about the possibility of legislative logjam continuing in parliament, we are also talking about the possibility of the government stepping the level as far as the executive decision making is concerned. But you require a certain amount of political air cover to try and push through complex reforms, to try and push through reforms that actually require consensus. Would you say that the BJP- the NDA will now have to review the manner in which it is being going about and try to push through reforms that really require consensus? Do you think that perhaps could change? We may see them being pushed a little bit on the back foot if the verdict in Bihar is not in their favor. Virmani: There are two parts to this. On one part I kind of differ from two of your previous commentators. So the two parts that we know, one is things which do not require legislation approval in the Rajya Sabha and on the other part those that do. So take the part which does not require legislative approval, I differ with the views which have been expressed even by you or Latha, I do not think this has the actions today. The way I see it, before every election, there is a slowdown in new actions. One of them is due to the fact that of the election commission restrictions, which could result in challenging anything which appears to be a give away, remember there are loans and restructuring involved which could have been perceived by some people as such, and secondly governments generally before an election hesitate to do anything which could be controversial or could be converted into a controversial issue. For example by saying that you are favouring X state or Y state. So the way I see it, these actions actually have to wait till the elections are over and the pace of such actions will actually pick up independent of the results of the Bihar elections. So in that sense I differ with some of the people there who have said that there is some connection as far as the administrative stuff is concerned. So that will accelerate in any case till whatever the next big election is and secondly on the legislative, the conventional view is about how the BJP will react, well that is not what AK said but many people have said what will it be the effect on BJP? Of course the key issue in the Rajya Sabha is going to be the effect on the congress party’s behaviour in that chamber and that really is difficult to predict, what the effect of these results will be. Probably not very positive, but I do not think it would directly result in a much higher level of obstruction if one may call it that.