Monday, September 24, 2012

Power reforms: Bailout for state boards.

The cost of power is all set to rise as the Cabinet approves a restructuring package for state electricity boards across the country.

One of the major riders for availing the restructuring package is that state electricity boards will have to revise the tariffs for consumers annually, and cut down on their transmission and distribution losses by 25 per cent.

Years of populism, corruption and mismanagement have driven the power distributors, most of them state-owned, deep into the red. They had accumulated Rs. 1.9 lakh crore in losses by the end of the 2010-11 financial year, according to government data.

The country's mostly state-owned distribution utilities are drowning in losses and were blamed for triggering probably the worst blackout in history in July, when power was cut for two consecutive days in a massive area home to 67 crore people.

A lifeline for power distributors would free up cash and help them buy more power to supply factories and homes that resort to expensive diesel generators and solar panels to plug their energy gaps.

Under political pressure to sell below cost and losing more than a quarter of power supply to theft and decrepit networks, distribution companies have been borrowing for years to fund their losses. Just seven of the country's 28 states—Rajasthan, Uttar Pradesh, Haryana, Tamil Nadu, Punjab, Madhya Pradesh and Andhra Pradesh—have between them accumulated short-term debt of Rs. 1.9 lakh crore from power distribution.

Last week, the government cut subsidies on diesel and opened up the country's vast retail sector as well as aviation to foreign investment to win back investor confidence and attack the country's ballooning fiscal deficit.

Prime Minister Manmohan Singh, defending the measures, said "money does not grow on trees" and that failure to bridge the gap between government spending and income would stoke inflation and lead to further loss of confidence in the economy.

Half measures

But analysts said the bailout plan did not address the country's long-term energy problems and may only drag government lenders deeper into the red.

"The debt restructuring, as it stands, appears largely a breather as it is not accompanied by any concrete reform measures," said Kameswara Rao, a partner at consultancy PricewaterhouseCoopers.

With loans to power distributors accounting for 4-7 per cent of their respective books, Indian Bank, Union Bank of India, Bank of India, Oriental Bank of Commerce and Canara Bank are among those with the highest exposures, according to a report by Bank of America-Merril Lynch.

The country's largest lender, State Bank of India, and leading private banks have no exposure to the distributors, according to the report.

"The restructuring could worsen their (banks') asset liability mismatch," Rao warned. That is because banks will have to wait longer to be paid back, hampering their ability to repay short-term liabilities.