The recently announced restructuring plan will lower crushing debt burden of discoms and will support merchant prices which have been impacted due to inability of discoms to purchase power, discusses A Shivkamal.
The debt restructuring for discoms is seen in many quarters as a well-pitched scheme designed after careful consideration of the recommendations of the 12th Finance Commission (TFC). The scheme has the potential to solve problems related to debt-ridden discoms to a larger extent, restore their power purchasing capacity and enable banks to recover their loans.
IMPACT ON BANKS
The SEB loan bailout package, approved by the Cabinet Committee on Economic Affairs recently, remains positive for the banking sector, as it provides confidence and clarity on the timeline of the SEB loan repayments. The scheme will be available for all participating state-owned discoms on fulfilling certain mandatory conditions and will remain open up to 31 December, unless extended by the central government.
The banking sector's short term exposure to discoms is substantial, and is estimated at Rs 1.5û1.7 trillion as on March 12. This is 3-3.6 per cent of banking credit and 45-52 per cent of total power credit. A large part of these loans were taken to fund the cash losses of the discoms. The restructuring will lower crushing debt burden of discoms and will support merchant prices which have been impacted due to inability of discoms to purchase power.
On all-India basis for the distribution sector entities, ICRA expects overall relief or savings arising out of reduction in interest costs for 50 per cent of the debt proposed to be serviced by state governments, at about 15p per unit, which is around 3 per cent of their average cost of supply. However, for some of the more indebted states including the six states mentioned earlier, the extent of relief could be much higher at between 20p and 75p (3-12 per cent of the cost of supply).
ICRA believes that over the next four years, the discoms would require an annualised tariff increase of around 10-11 per cent to recover all costs and service the 50 per cent balance short-term debt over a seven years period commencing FY 2016.
LONG TERM RISK REMAINS
Experts say the package will be able to prevent a repeat of current discom debt crisis only if it has stringent conditions to ensure timely tariff revision, privatisation and other operational improvements. The package can bring short-term relief for cash-strapped discoms, but its long-term success will hinge on the ability of discoms to raise tariffs/cut AT&C losses and regular subsidy payments by states. However, the discom restructuring package has certainly reduced the asset quality concerns and offered banks with additional comfort in the form of state guarantee on the discom advances. With price hikes of 25-30 per cent required to just break even, it will take more time before SEBs' health improves. The measures are expected to reduce the risk of financial dis- tress and any working capital concerns for some utilities.
Other factors responsible for the poor performance of the discoms still lurk. These include free or heavily subsidised power supply to agriculture, high percentage of theft in electricity, nonfunctioning of meters at the premises of consumers, rampant corruption prevailing in distribution companies, huge transmission and distribution (T&D) losses prevailing at 24.12 per cent against 14 per cent as recommended by the Rajadhyaksh Committee and interference of state governments in the functioning of State Electricity Regulatory Commissions (SERCs), which prevent revision in tariff.
Financial services firm Morgan Stanley says, "The proposed restructuring package may lift sentiment in the power sector especially for stocks such as Lanco which have large outstanding dues from State Electricity Boards (SEBs)".
Adds Bank of America Merrill, "Key beneficiary of this move apart from PSU banks, are utilities, with high undisputed receivables (R Infra - Mumbai, Delhi, Tata Power -Delhi, Neyveli, NHPC, NTPC) and IPPs whose capacities are coming on-line in near future".
CARE Research believes that although this scheme is better than the earlier bailout package offered in 2002 (where no stringent conditions were put in), it puts onus on the respective states and discoms and mandates them to initiate proactive measures such as: 1) regular tariff revision, 2) curb AT&C losses sustainably (around 15 per cent versus 27 per cent at present) to improve viability, and 3) revenue-cost gap reduction over the moratorium period.
The states have till 31 December 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. Between them, these states have accumulated a short- term debt of Rs 1.9 lakh crore from power distribution.
Moreover, the states involved in the current financial restructure plan (FRP) may also find it difficult to adhere to their respective fiscal deficit limits (enacted under FRBM Act), given: 1) acceptance of weaker states for the central restructuring package, 2) doubts over the tariff hike momentum continuing given the approaching elections in the next 12-18 months, 3) ability of states to service the increased liabilities given the dismal condition of most state finances, and 4) limited room for states given bulging subsidies and anticipated slower revenue growth.
STRESS ON DISCOMS
Banks with a higher exposure to discoms, especially in the seven states (approximately 90 per cent of total banks' discoms exposure) are cautious as: 1) banks may have to take upfront NPV hit on discom bonds and 2) MTM losses over the bond tenure. The restructuring plan will make discoms self-sustainable only if the states proactively create fiscal space and enable improvement in discom operational parameters by: 1) allowing legitimate tariff hikes on consistent basis, 2) initiating reduction in AT&C losses by ensuring implementation of distribution franchisee and R-APDRP scheme, 3) autonomous functioning of discoms, and 4) strict monitoring of the proposed turnaround plan.
The impact on state government finances will be in two forms - interest payment on bond issuances by states and an increase in debt. TFC has prepared a fiscal consolidation roadmap for each state. The roadmap is prepared in terms of revenue balance, fiscal balance and outstanding debt. The financial restructuring scheme has taken cognisance of FRBM targets and allowed states to take over liabilities in a phased manner in the next two to five years as per the fiscal space available to each state.
Bonds' interest payments will impact both revenue and fiscal balance. The states would have to make a balancing act to prioritise expenditure to absorb shock of additional interest payments without compromising on the TFC's fiscal consolidation targets and their own FRBM acts. Any change in fiscal balance will have a direct impact on states' debt and exert pressure on their fiscal position in the coming years.
The Punjab State Power Corporation (PSPCL), for example, has short-term liabilities to the tune of Rs 9,500 crore outstanding towards various banks. With expected revenue of Rs 19,000 crore in current fiscal, the utility had projected revenue gap of Rs 8,984 crore for 2012-13. The Haryana power distribution companies have short-term liabilities of Rs 11,000 crore so far, according to state officials.
State governments' Medium Term Fiscal Plan (MTFPs) indicate, according to India Ratings, that most of the states would be able to absorb adverse impacts of discoms debt restructuring, exceptions being Punjab, Haryana, Madhya Pradesh and Uttar Pradesh which would face some problem in absorbing the shock. The global and domestic economic scenario at the time of presentation of FY13 budget is different from the present economic scenario. The next two years' global economic outlook is still very hazy.
States receive a significant proportion of their revenue from the Central government in the form of grants and devolution. Even in FY13 till date, the Central government's revenue collections have not been in line with the budget assumption. An economic slowdown will adversely affect not only the Central government's ability to extend grants to states but also states' own revenue. If the economic situation does not improve in FY14, states' finances will be negatively impacted. The states which are more integrated with the global economy will struggle to absorb adverse impacts of discoms debt restructuring. Andhra Pradesh and Tamil Nadu's economic growth is linked to the global economic scenario. Tamil Nadu's industrial production has a large proportion of textiles, and auto and auto ancillaries. The current exports slowdown and sluggish auto sector demand would impact Tamil Nadu's economic growth and thus the state's finances.
If the current economic slowdown extends further, it would be difficult for states to absorb additional debt due to discoms debt restructuring and adhere to fiscal consolidation targets set by the TFC and their own MTFPs. Globally, capex bears the brunt of fiscal consolidation, which has a long-term impact on growth and fiscal profile. India Ratings expects states to continue their movement along the fiscal consolidation path by rationalising their current expenditure rather than cutting capex growth.