Bailout package for power distributors to be performance-linked: Moily

A day after the government approved a Rs 2 lakh crore debt restructuring package for state electricity boards (SEBs), Power Minister Veerappa Moily on Tuesday said the bailout will be performance-linked and the government will bring a law to fix responsibility on state discoms that benefit from it.

Mr Moily said to ensure compliance with the provisions of the debt-restructure package, a State Electricity Distribution Responsibility Bill would be drafted after inter-ministerial consultations and beneficiary states would have to enact the legislation within 12 months from the draft being circulated. Additionally, two monitoring committees will ensure that the power distributors or SEBs comply with the terms and conditions.

To qualify for the debt recast, states must undertake milestone-linked reforms, including yearly tariff revisions, cutting down on their transmission and distribution losses by 25 per cent and changing managements of loss-making distribution companies. For the end user, this will mean a rise in the cost of power.

The states have till December 31 to accept the package. So far, only seven states—Rajasthan, Uttar Pradesh, Madhya Pradesh, Andhra Pradesh, Punjab, Haryana and Tamil Nadu—have come on board, Mr Moily said. Between them, these states have accumulated a short-term debt of Rs. 1.9 lakh crore from power distribution.

Under political pressure to sell below cost and losing more than a quarter of power supply to theft and decrepit networks, also called transmission and distribution losses, the state-owned distribution companies have been borrowing for years to fund their losses. The accumulated losses of these discoms are estimated at Rs 1.9 lakh crore as on March 31, 2011, and at Rs 2.46 lakh crore as on March 31, 2012, the minister said.

Mr Moily took a big swipe at the BJP when he pointed out that this was not the first time that SEBs were receiving such bailout packages. The BJP-led NDA government, too, had handed out a bailout in 2001-02, but that, he added, turned into a “death trap” because it was not linked to performance.

Under the rescue plan that the Cabinet cleared last evening, state governments will take on half of the power distributors' short-term debt over the next two to five years and convert it into long-term bonds, according to a government statement. The remaining 50 per cent of the loans will be restructured by providing a moratorium on the principal and the best possible terms for repayment.

However, these bonds will not enjoy SLR (statutory liquidity ratio) status, Mr Moily clarified today. It is easier to raise money with SLR bonds since the status underscores the government’s commitment to fulfill its financial obligations.

The distinction is important because should the restructured power debt be given SLR status, banks would need to sell some of their existing securities to be able to buy into those bonds.

After the package was announced yesterday, analysts said it had failed to 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-Merrill Lynch.

Shares exposed to India's state-owned electricity distributors gained in early trade on Tuesday, before succumbing to profit-booking.

The BSE Power Index, which opened nearly 2 per cent higher, ended the day with only 0.5 per cent gains.

Shares in Lanco Infra closed 2.6 per cent higher, while Adani Power gained 1.09 per cent.  Power Trading Corporation traded 2.6 per cent higher, while Reliance Power gained 0.94 per cent and Tata Power fell 0.24 per cent.

With inputs from PTI, Reuters