Everything has to go right for that not to happen, meanwhile PSU banks will take a Rs 6,000 crore hit
Though the power sector mess is not of his government’s making, and several attempts by the UPA — including a committee headed by Montek Singh Ahluwalia in 2002 and, later, the Financial Restructuring Package (FRP), in 2012 — failed to deliver, it is not clear if power minister Piyush Goyal’s plans will work either. To be sure, there is a lot of detailed analysis that has gone into the plan as well as extensive stakeholder consultation, and the Bharatiya Janata Party’s (BJP) stated difference compared to the UPA is great attention to detail/monitoring of targets jointly with the states. But for the plan to work, too many things need to go right, and in tandem — pulling that off, especially in a public sector set up, will be nothing short of a miracle.
The point Goyal needs to keep in mind is that most solutions, such as his, which begin with a financial one—replacing Rs 1.5 lakh crore of higher-cost short-term bank debt with state government bonds which have a 4% lower interest cost—end up making life easier for states; what they need, instead, is a hard budget constraint, and it is not clear if what it being planned is hard enough. The conversion will have to be staggered since, at Rs 6,000 crore, the hit equals a sixth of FY14 profits of all banks.
At the heart of Goyal’s philosophy, as he has reiterated often in public, is that tariff hikes — the constant demand of the pink press! — are not the solution to inefficiencies of the state electricity boards (SEBs); this has to lie in cutting Aggregate Technical and Commercial (ATC) losses. Goyal’s argument is, and he has a point, that if consumer tariffs are raised regularly, this reduces the need to cut ATC losses; also, the tariff hikes may not be palatable. In the case of Rajasthan, one of the worst off states with losses of Rs 15,926 crore, accumulated losses of Rs 68,938 crore and bank loans of Rs 72,858 crore in FY14, the gap was Rs 2.64 per unit in FY14 — fixing this through a tariff hike means an unacceptably high 72% hike in tariff levels.
An example should make Goyal’s point clear. Assume an SEB buys 100 units of power at one rupee each and is able to recover money for all 100 units — that is, there are no ATC losses — the tariff needs to be just one rupee. If, however, 50% of this gets lost to ATC, the tariff on the billable units needs to rise to Rs 2; if the ATC losses are brought down to 25%, the tariff needs to be just Rs 1.33 which represents a cut of a third. At an all-India level, Goyal’s plan is to reduce ATC losses from the current 27% or so to 15% within 3 years — this will have the same impact as a 14% tariff hike; the impact will obviously be greater in states like Bihar where the ATC losses are currently in the 42% range.
Goyal plans to spend Rs 1.6 lakh crore over the next 2-3 years in strengthening transmission lines and distribution networks, separating feeders — this was the big learning from the Gujarat model of then Chief Minister Narendra Modi — greater metering and IT-enabling the entire system.
The ATC reduction is very ambitious and will require a lot of work. In the Montek Ahluwalia plan of 2002, for instance, those states with ATC losses of over 30% were to reduce these by 3 percentage points a year and those with levels of below 30% were to cut their losses by 1.5 percentage points a year. Goyal is looking at a 4 percentage point cut each year for even states like Rajasthan, Tamil Nadu and UP where loss levels are below 30%.
Theoretically, it is possible since, in the case of Delhi, ATC losses went down from around 55% in 2002 to around 14% today, but that’s over a 15-year period, under a profit-driven private-sector management, in a dense and small geographical area where there was a lot more political support — at least under Sheila Dikshit — to catch power thieves; on average, the three private sector firms filed around 30,000 cases of theft each year to get theft levels under control; the current run rate is around 80,000 a year. The question is whether all states will show the same will, especially as elections approach.
It is also worth keeping in mind the ATC figures being bandied about for SEBs are, to a large extent, a myth — since few states have 100% metering, no one really knows what the losses are; often a number is ascribed to agricultural use to arrive at an ATC figure. Take the numbers for Uttar Pradesh from the latest Power Finance Corporation (PFC) report, the most trusted data source on SEBs. From a whopping 41.95% in FY12, ATC losses rose marginally to 42.85% in FY13 and then miraculously collapsed to 24.65% in FY14 — at the same time, when the ATC losses were supposed to have collapsed, the gap between purchase costs and tariffs rose from Rs 1.32-33 per unit in FY12 and FY13 to Rs 2.16 per unit; this was largely due to a surge in the cost of power, but that just proves the point that tariff hikes have to be an important part of any loss-reduction strategy since UP’s losses rose from Rs 12,006 crore in FY12 to Rs 13,154 crore in FY13 and Rs 17,678 crore in FY14 at a time when ATC losses were supposed to be collapsing.
In the case of Rajasthan, where losses fell from 24.81% in FY12 to 20% in FY13 and then rose to 26.76%, the gap fell from Rs 3.91 to 2.23 and then rose to 2.64 — tariffs were raised by less than the increase in costs — as a result of which losses fell from Rs 19,952 crore in FY12 to Rs 12,510 crore in FY13 and then rose to Rs 15,926 crore in FY14. Rajasthan’s current gap of Rs 2.64 is 72% of costs — the ATC reduction trajectory will help it meet a fifth of this, so tariff hikes or huge efficiency gains have to make up the rest of this.
How strong the budget constraint is will, of course, depend upon whether there will be any more relaxations in the FRBM. For now, if Rajasthan takes on the entire SEB debt, the latter’s annual interest outgo falls by 4%. While that eases the financial constraint for the SEB, since this debt will be transferred to Rajasthan which will need to service it by cutting some other expenditure or by raising revenues — the FRBM limit of a 3% fiscal deficit will be relaxed for just 1-2 years — this is a hard budget constraint according to Goyal’s plan; more so since PSU banks will not make fresh loans to states which do not repay these.
Apart from keeping in mind the fact that ATC tends to be a nebulous concept, Goyal has to ensure FRBM limits are not relaxed again — ideally, they should not be relaxed even once — which also looks a tall ask given how the Centre’s FRBM targets have been pushed back so many years; at 3.5%, Rajasthan’s FY15 deficit is already higher than the FRBM limit. Also, unless Goyal ensures there is more competition through open access, it is difficult to see how costs will come down — open access is what slashed tariffs in telecom, there is no reason why it won’t work in power; indeed, genuine competition will do more to fix the power sector than most other plans will.