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Wednesday, 27 March 2013 02:01
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Restructuring gets a heads up, CERC adds to cheer

 

Though states are unlikely to be able to sign up on the financial restructuring plan with the respective lead bankers for their electricity boards by the end of the month deadline, the process has got a leg up with the government finally deciding on the cost of the transitional finance. Power minister Jyotiraditya Scindia told the Express Group’s Idea Exchange on Tuesday that the government has just agreed to a rate of below 9%, a rate far below what banks offer to lenders today. Under the terms of the restructuring, states are to get 4-5 years to get their SEB finances in order and till such time that this happens, they need transitional finance from the Centre.

Getting the plan off the ground, however, is going to take a lot more. States, it is true, have a greater stake in ensuring the restructuring happens since they will be, eventually, taking on their books an amount equal to half the short-term liabilities of their electricity boards—besides, with SEBs not able to pay for the power they purchase, several power producers are now threatening to stop supplies. The SEBs, in turn, are not able to pay for their power purchases since the state governments also owe them several tens of thousand crore of rupees as payments for extra subsidies given to the agriculture sector. How states find the money to repay the SEBs is critical since, under the plan, the restructuring of short-term liabilities will be done after netting the outstanding subsidies due from the state government—the states are to get two years to make the payments. While the tariff hike required differs from state to state, at an all-India level, the hike required is around 30%. Though most states who have signed on to the package have hiked tariffs significantly, the key is whether they will follow through in the future. This is the plan’s weakest link and there is no credible mechanism to ensure this. Under the plan, banks will have directors on committees whose job is to monitor states, but it is not clear what action banks can take if states stop hiking tariffs—nor have banks shown tremendous ability to keep private defaulters in check.

For now, however, the sector looks a lot more positive and broking houses are re-rating power producers since the payments situation looks a lot rosier than in the past. Adding to the cheer is the Central Electricity Regulatory Commission (CERC) likely to come out with a decision on whether power tariffs need to be hiked for the Tata’s Mundra UMPP. While this could mean a higher tariff burden on the states who are buying Mundra power, the alternative is that the UMPP doesn’t produce to full capacity, something the country—and the banks who’ve lent to it—can ill-afford. And if CERC rules in favour of the Tatas, other UMPPs caught in the same trap of fixed tariffs in the face of rising coal prices will also come up for review. All told, the next few weeks are critical for the health of the power sector.

 
 

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