It has been nearly eighteen months since the Ministry of Power announced the vital Ujwal DISCOM Assurance Yojana (UDAY) scheme for financial and operational reform of power distribution companies (DISCOMs) in India. Twenty six states and Union Territories, including four of the worst affected states — Rajasthan, Tamil Nadu, Uttar Pradesh and Haryana — have signed up for the scheme. The only notable omission is Odisha, which has not signed up because its DISCOMs are partly privately owned. The scheme has been undeniably successful in achieving its most important objective — of restoring financial health of DISCOMs — by transferring almost 75 per cent of their debt to the state governments and reducing interest cost burden on the remaining 25 per cent debt.
These measures alone are expected to reduce annual aggregate interest cost burden by Rs 160 billion ($2.4 billion), down 65 per cent. More importantly, apart from the one-off financial engineering exercise, a key difference of UDAY over previous restructuring schemes is that it is designed to reduce incentives for state governments to meddle in power pricing and DISCOM operations.
All ongoing financial losses of the DISCOMs must be funded directly by the respective state governments instead of commercial borrowings. If this aspect is enforced in principle, it will break the cycle of financial boom and bust for DISCOMs forever.
Progress on the operational parameters has, however, been much slower than expected. AT&C losses have come down from 24 per cent in FY2016 to 22.5 per cent — the target is to reach 15 per cent by FY2019. Tariff under recovery, which is expected to be eliminated completely by FY2019, has reduced only marginally from Rs 0.61/kWh in FY2016 to Rs 0.49/kWh.
Notwithstanding the somewhat weak performance on operational parameters, improvement in DISCOM finances will be hugely beneficial to the entire power sector. It will free up much needed financial resources for investment in infrastructure and other operational upgrades. It will also significantly improve upstream investment prospects by reducing off-take risk for power generators, investors and lenders.
The Central government has linked availability of various Central government funding programs, additional coal supplies and low cost power from central public sector generators to successful implementation of UDAY. Hopefully, these measures will encourage states to stay on track in the long run.