Make states bleed for the lack of power sector reform PDF Print E-mail
Tuesday, 28 January 2020 04:53
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More money to states, even if linked to ‘reform’, often fail; deduct state govt revenues for real power reforms

The central government is expected to announce a new reform package for the power sector—most likely in the budget—and the plan is to reduce ATC loss levels in the sector to 12%; the gap between the cost of electricity and the sale price is to be reduced to zero. To do this, the plan—there are two, actually, for state electricity boards (SEBs) in dire and more dire trouble—includes the use of pre-paid meters, ensuring that SEB operations are either privatised (as has happened in Delhi) or run through franchisees, state governments committing to setting up dedicated police stations to tackle power theft, SEBs clearing all government and private sector debt within a year, releasing all subsidy payments (for agriculturists, by way of example) on time, adhering to the new trajectories for ATC and cost-tariff reduction/elimination. Funding by government-owned banks and financial institutions is to be clearly linked to the states undertaking these reforms, and one of the presentations prepared by the ministry of power talks of “no fund release against non-achievement of any measure for a year”.

If this sounds familiar, it is because it is. Some of the micro details may differ, but the Uday reforms programme during the first tenure of this government targeted an ATC reduction level of 15%, and a complete elimination of the cost-tariff gap. Uday was a bonanza for state governments as banks were made to convert their lending at 12-14% interest rates to state government bonds with a 8.5% coupon; yet, as a government presentation on the new reforms package points out, 21 states have ATC loss levels of over 18%. For some of the big ones like Uttar Pradesh, these are as high as 38%, and the gap between costs and tariffs is as high at 45 paise per unit; it is 79 paise for Bihar, where the ATC loss levels are 33%. While Uday had said that banks would not be coerced into lending to bankrupt SEBs—as they had been in the past—one way around this seems to be simply not paying suppliers; nor is it clear whether bank lending to SEBs is based on genuine appraisals.

The central government’s Praapti website records that SEB owe power generators Rs 81,000 crore; of this, Rs 71,673 crore is beyond the allowed grace period of 60 days and represents a 45% jump over that a year ago. Indeed, the private sector power producers say the data is incomplete; while Praapti shows their dues as Rs 23,000 crore, they claim this does not include the late payment surcharge of Rs 6,000 crore, or the ‘change in law’ claims of Rs 17,000 crore that the courts have ruled the SEBs need to pay. With the SEBs cash-strapped, they are also not signing new power purchase agreements (PPAs), and around 14,700 MW of power plants do not have PPAs.

So, while it is to be hoped the government will genuinely ensure SEBs reform this time around, the reality is that doing so is tough; can a government hoping to win an election in UP, by way of example, actually turn off financing for the state? So, even if the government is serious, the only way to make the reforms look credible is to put an automatic mechanism to make the states bleed if they don’t deliver.

In the early 2000s, the government forced states and SEBs to sign on to a scheme where, if the SEBs didn’t pay the dues of central PSUs, RBI deducted this money from the accounts of states—where central taxes etc were deposited—and paid this to the PSUs. As it happens, the PSUs are probably not insisting on this—how else could their dues rise so much?—but, this needs to be done for the private sector as well. Else, the new reforms package is just another waste of time.


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