Acceptance of Mission UDAY Favor States : Ind-Ra Market

The state governments of stressed electricity distribution companies (discoms) need to come forward to accept the revival plan under Ujwal Discom Assurance Yojana (UDAY) says India Ratings and Research (Ind-Ra). Ind-Ra estimates the annual interest saving of INR250bn by the discoms, assuming 50% of the INR4.3trn debt is restructured under this scheme. Additionally, Ind-Ra believes discontinuing funding of the discoms’ operating losses by the banking system will help in avoiding the debt trap.

The participation in the UDAY scheme is optional and state governments have not yet indicated their stance on it, since it would lead to the states assuming significant liabilities. This scheme offers the discoms a chance to break out of the decade old vicious cycle of operational losses being funded by bank debt, by transferring debt to the state governments, reducing aggregate technical and commercial (AT&C) losses and lowering of the gap between average cost of supply and average revenue per unit.  Thus, the focus of the mission is on improving internal efficiencies of the discoms instead of passing on the inefficiencies to the consumers by tariff hikes.

Discoms a Systemic Threat: Financially weak discoms pose a systemic risk to the existing and future investments in the power sector, especially renewables. A peculiar situation has emerged lately in many states, whereby power was available, but discoms could not purchase, evacuate and supply it to the consumer, due to their poor financial health. Thus, the plant load factors of large power generators are suffering, despite better coal availability due to inefficient intermediation by the discoms. At the same time bank loans to the state discoms are close to the non-performing category and pose a systemic risk to the financial system.

Grater Onus on States: This scheme places greater financial and operating onus on the states as it seeks to transfer 75% of the INR4.3trn total discom debt to the states as against 50% of the short term debt under the financial restructuring plan of 2012. To enable the states to participate in the scheme, for FY16 and FY17 the debt taken over by the state governments will not be taken as part of the fiscal deficit of the respective state. Additionally, state governments would need to take over the operating losses of the discoms gradually by 5%, 10%, 25% and 50% over FY18-FY21. Thus the state governments would need to push discoms to lower the operating losses. Further the scheme seeks to incentivize the states and discoms meeting operating milestones, by increasing their share in various central grants and assistance and dis-incentivize the non-performing states and discoms by curtailing the same.

 Plan for Operating Losses: In order to ensure that UDAY is not a rescue plan but rather a sustainable long term revival, it envisages an operational turnaround at the discom level by targeting two key areas a) lowering of AT&C losses and b) lowering of power purchase costs. Operational efficiency improvements include three broad areas, energy metering (compulsory smart metering), distribution network strengthening and energy demand management and conservation (LED bulbs, agricultural pumps). The programme envisages AT&C loss reduction from 22% to 15%. Reduction in power purchase cost is likely to be achieved through measures such as increased supply of domestic coal by Coal India Limited, coal linkage rationalization, coal swapping, coal price rationalization based on gross calorific value, supply of washed and crushed coal, and faster completion of transmission lines.

Better Financial Flexibility: Transfer of the unsustainable debt to the states, will allow discoms to improve their balance sheets by de-leveraging, lowering interest costs and giving them financial space for fresh borrowing for capex and working capital. A possible advantage of the scheme will be reduction in interest rates as the state governments are likely to fund the debt at cheaper rates. Interest liability for the discoms will also reduce substantially due to transfer of 75% of debt and lowering of the interest rate on the remaining 25% debt to base rate +0.1%.