UDAY has been successful in restoring financial health of power distribution cos: Report

Electricity, gas, water supply growth demonstrate an encouraging recovery by 4.4 percent.

Nearly 18 months ago, the Ministry of Power announced the vital Ujwal DISCOM Assurance Yojana (UDAY) scheme for financial and operational reform of power distribution companies (DISCOMs) in India and since then 26 states and union territories, including four of the worst affected states — Rajasthan, Tamil Nadu, Uttar Pradesh and Haryana — have signed up for the scheme.

The only notable omission is Odisha, which has not signed up because its DISCOMs are partly privately owned.

The scheme has been undeniably successful in achieving its most important objective — of restoring financial health of DISCOMs — by transferring almost 75 percent of their debt to the state governments and reducing interest cost burden on the remaining 25 percent debt, a Bridge to India report says.

DISCOMs were under heavy burden and their financials were in a mess back in 2015 with aggregate debt of Rs 4.3 trillion (USD 65 billion) and annual losses of Rs 600 billion (USD 9 billion) at the end of March, 2015.

Out of the total debt of Rs 3.8 trillion (USD 58 billion) attributable to the 26 UDAY states and union territories, 61 percent has been already transferred to state governments and/or refinanced in the form of state government guaranteed bonds. Another 10 percent is expected to be similarly restructured shortly.

"These measures alone are expected to reduce annual aggregate interest cost burden by Rs 160 billion (USD 2.4 billion) (down 65 percent). More importantly, apart from the one-off financial engineering exercise, a key difference of UDAY over previous restructuring schemes is that it is designed to reduce incentives for state governments to meddle in power pricing and DISCOM operations," the report says.

"All ongoing financial losses of the DISCOMs must be funded directly by the respective state governments instead of commercial borrowings. If this aspect is enforced in principle, we believe that it will break the cycle of financial boom and bust for DISCOMs forever."

Progress on the operational parameters has, however, been much slower than expected. AT&C losses have come down from 24.0 percent in FY16 to 22.5 percent – the target is to reach 15 percent by FY19. Tariff under recovery, which is expected to be eliminated completely by FY19, has reduced only marginally from Rs 0.61/kWh in FY2016 to Rs 0.49/kWh.

Notwithstanding the somewhat weak performance on operational parameters, improvement in DISCOM finances will be hugely beneficial to the entire power sector.

"It will free up much needed financial resources for investment in infrastructure and other operational upgrades. It will also significantly improve upstream investment prospects by reducing off-take risk for power generators, investors and lenders," the report says.

"The central government has linked availability of various central government funding programs, additional coal supplies and low cost power from central public sector generators to successful implementation of UDAY. Hopefully, these measures will encourage states to stay on track in the long run," it further adds.