Scheme Uday- A chance for Indian DISCOMS to rise?

Plagued by a real possibility of bankruptcy, electricity distribution companies or DISCOMs in India paint a troublesome picture today. On November 5th of 2015, Union government introduced a scheme- Ujjwal Discom Assurance Yojna (UDAY) to rescue the distressed power distribution sector. The Union cabinet headed by the Prime minister Mr Narendra Modi approved this scheme and Power minister Mr. Piyush Goyal made some important announcements relating to this package. UDAY is a comprehensive voluntary scheme that includes debt restructuring, curbing operational inefficiencies and some long pending reforms urgently required in the DISCOM segment.

The Bankruptcy story

DISCOMs in India are State- owned enterprises that are involved primarily in distribution of electricity across the state after buying it from electricity generation companies. Over the years inherent factors owing to government ownership as well as inability to streamline the operations, these companies have put themselves in a financial lurch which has been heading towards a point of no return. Main reasons attributable to this abysmal situation can be surmised as follows:
1.    Holding up tariff raise for a prolonged period coupled with heavy subsidies;
2.    Low plant load;
3.    T&D losses especially due to theft of electricity that has fuelled the cost of supply as shown below;

AT & C (Aggregate technical and commercial) losses have been pegged at INR 62,000 Crores by CRISIL as on 31st March’2015;

4. Inadequate maintenance of distribution networks;

5. Shortage of investment;

6. Issues in billing ranging from non-billing to erroneous billing.

7. High interest liability of past loans. According to Financial express, total debt liabilities of DISCOMs is an eye popping INR 4.3 lakh Crore!

UDAY goodie bag

Looks like Government is ready to put a stitch in time by introducing UDAY, a scheme that holds the hope of revival for the sinking DISCOM sector. CRISIL ratings senior Director, Sudip Sural opines that this scheme could transform DISCOMs faster if followed by larger states. The noteworthy features of this package are as follows:

  •  75% of the debts as on 30th September would be owned up by State Governments and for remaining 25% DISCOMs have a freedom to issue Bonds;
  • State Governments will payback lenders by selling bonds with coupon rate of 8-9%;
  • Taking over of debt would relieve the DISCOMs ofan interest cost of INR 46,000 Crores;
  • Identifying and targeting operational inefficiencies thereby reducing cost of distribution;
  • Plugging power theft;
  • Enforcing financial discipline amongst DISCOMs;
  • Introduction of Smart meters and upgradation of transformers;
  • Funds under Deendayal upadhyay Gram jyoti Yojna and Integrated Power Development Schemes have been linked to UDAY;
  • A re-look at the heavy Tariff subsidies.

The UDAY Goal seek

With this ambitious project, Union government seeks to achieve some serious numbers as far as the financial health of these retailers is concerned. By squashing T&D inefficiencies, DISCOMs in participating States should be able to bring down losses from current 22% to 15% by 2018-19 which would also translate into loss reduction by 95 paise per unit across India as per ICRA . ICRA also states that every 1% reduction in AT&C losses would reduce the cost of supply by 32 paise per unit by March 2019. These measures will help the DISCOM sector to break even in about 2-3 years.
If UDAY marches on the success path, Government is hoping that it will open up the avenues of long-term power purchase agreements between the power generation and power distribution companies in future. Indirect benefit of DISCOMs doing well would be seen in the increase in Plant load factor of power generation companies from the present 60% giving them heavy economy of scales.  
Challenges for UDAY
Firstly this scheme is optional and so, it is up to the States to opt for it by signing an MOU with centre. Presently only three states- Andhra Pradesh, Jharkhand and Rajasthan have joined this initiative, although more are expected to join.
There is no clarity on the means and methods of maintenance programmes and replacement of metres. If the DISCOMs falter on this point then the issue of power pilferage and revenue loss would continue.
A lot is riding on this scheme since States would need to honour the bonds issued against loans on maturity. If the financial situation of DISCOMs does not take a turn for better then servicing the bonds may prove to be a problem landing State governments in a bigger mess.
Increase in tariff vis-à-vis the cost of supply is extremely important but it is a tough decision and needs a very strong political will. The issue is if this unpopular hike is not carried out then the financial rut will continue for the DISCOMs. Till now there is clearly a huge gap between the hike required and the ones proposed as clearly shown below in a report of ICRA.

Finally for public sector banks though the potential NPAs have been converted into viable assets yet the lower coupon rate on bonds would shave off a neat INR 4300 Crores of profit. The coupon rate is 350 basis points lower than the current lending rate. The long term success of UDAY depends on how strict a fiscal discipline is maintained by the States. At last count, 18 states had come onboard and soon all the states are expected to join the scheme. But clearing the debt is not a panacea for all the ills plaguing the discoms.  Most Discoms make losses even at the opeating level before the interest costs kick in. However iscoms like the one in GUjarat have shown that tey CAN become profitable. Lets hope that Scheme UDAY   is a step in the right direction.