Why the power sector reforms could collapse

Moneylife Digital Team 08 October 2012

Only if the states and Discoms “walk the talk” with the mandatory conditions outlined in the financial restructuring scheme, would the chronic “payment security” risk for power sector in India be addressed

The proposed financial restructuring scheme announced by the government for the state electricity boards (SEBs), would translate to just another bailout, unless the state governments and SEBs fulfil the mandatory conditions, remind Nomura Financial Advisory and Securities (India) Pvt Ltd.

The brokerage, in a research note, said, “the detailed working mechanism of the financial revamp plan for SEBs confirms that state governments and lenders would assume the bulk of the burden, the Central government would provide support in the form of ‘incentives’ via a ‘transitional finance mechanism’ and compliance with mandatory conditions to avail this ‘scheme’ would ensure ‘fiscal discipline’ by Discoms in terms of retail tariff revisions and focus on aggregate technical and commercial (AT&C) loss reduction.”

Earlier, following approval of the Cabinet Committee on Economic Affairs (CCEA) a fortnight back, the ministry of power (MoP) has notified the “Scheme for Financial Restructuring of State Distribution Companies (Discoms)” over the weekend.

Besides revamping the balance sheet of ailing Discoms, the financial restructuring scheme entails sustained “fiscal discipline” on the part of Discoms, including adherence to stipulations of the Appellate Tribunal’s (APTEL’s) landmark order in November 2011 on retail tariff revisions.

“We believe it is a long-term positive for power utilities. Within our coverage universe, while private IPPs such as Lanco Infra, which have sizeable receivables from ailing Discoms, and JSW Energy, which is awaiting final tariff orders from the electricity regulator in Rajasthan, are near-term beneficiaries, as fuel security remains the overarching risk for private IPPs, Power Grid Corporation of India and NTPC remain our preferred picks. In our view, any move to restore the financial health of SEBs also augurs well for Coal India,” Nomura said.

However, the brokerage feels that loss-laden Discoms are more likely to adopt this scheme. It said, “In our view, besides the Discoms in seven focus states (for which this exercise was primarily undertaken), states with loss-laden Discoms are likely to utilize this ‘scheme’ as: 1) working capital refinancing is already contingent upon commitment to a ‘cash flow’ restoration roadmap and adherence to APTEL’s Order; 2) the central government would be sharing part of the financial burden, in this case; and 3) a ‘special arrangement’ to fund near-term operational losses and interest payment could be worked out.”

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