Trust the government to prescribe an aspirin as cure for cancer.
The Union Cabinet is expected to decide this month on subsidising interest payments on loans taken by loss-making state electricity boards (SEBs). But interest costs constitute less than 6% of the average cost of power supply by SEBs.
Under the scheme, ailing SEBs are expected to avail themselves of Rs 25,000 crore of loans in the next two years, for which the boards can get a 3-5% discount depending on their performance. This works out to a maximum saving of Rs 1,250 crore when the aggregate net worth of SEBs has been wiped out with losses vaulting past Rs 68,000 crore as on March 31, 2011. By the end of March, 2012, it could cross Rs 1,00,000 crore.
According to the finance ministry, if tariffs remain the same, these SEBs will suffer annual losses of Rs 1,16,089 crore by 2014-15. But for the fact that these boards are utilities and backed by state governments, they would be considered bankrupt and unworthy of commercial rescue.
The losses of SEBs have been spiralling due to the higher costs of power they purchase - 62% of SEB costs relate to payments for power purchase - and higher employee costs due to the implementation of the Sixth Pay Commission. Apart from this, the reluctance of state governments to raise power rates despite a provision in the Electricity Supply Act mandating it is making things worse. Though aggregate costs of power supply have gone up 16.5% between 2007 and 2009, tariffs have not kept pace and grown only 6.5%.
The power sector's problems are simple. Most of the power is lost or stolen. As against a developed world average of 4-5% of transmission and distribution losses, India's losses in this sphere are as high as 28%. This means no revenue is collected on over a fourth of power generated. This happens due to theft of electricity, and the poor quality of the outdated distribution system.
But if 28% of power is wasted, another 23% which goes to the agriculture sector, is heavily subsidised. It yields less than 6% of SEB revenues. In short, over half the power generated leads to little or no revenue, loading the burden on the remaining consumers. SEBs are thus debt time-bombs waiting to explode.
If it explodes, it isn't the the power sector alone that will go down in flames. The financial sector's exposure to this sector is nearly Rs 2,00,000 crore while the accumulated losses of SEBs by the end of this fiscal (2011-12) are expected to cross Rs 1,00,000 crore. The Power Finance Corporation and the Rural Electricity Corporation have 100% exposure to the sector to the tune of Rs 1,45,000 crore. All other scheduled banks have an exposure of 6.1% of their loans.
Though SEB loans have a state guarantee, the financial status of most states does not give any confidence that they stand four-square behind their loss-making power companies. The newly-elected chief minister of Tamil Nadu has already approached the Centre for a Rs 40,000-crore bailout package for its SEB.
What industry experts really fear is that the SEBs may actually be faring even worse. Nearly half the boards do not have a proper auditing system. Most of the boards have not adhered to the AS-15 accounting standard on employee benefits - which means they don't budget for long-term payments like gratuity and superannuation benefits till they actually happen. Furthermore, a migration to International Financial Reporting Standards (IFRS) will push the Tamil Nadu board's losses up by an eye-popping Rs 17,500 crore alone.The unaccounted losses, according to experts, can be a sizeable proportion of the accounted losses.
In order to save the sector, the government will have to bite the bullet and increase power tariffs, sooner than later. Gujarat's Surat region has the highest blended tariff (agricultural + industry + residential) among all electricity boards, but there have been no complaints from that area, either from farmers or industries. What the consumers are getting is uninterrupted supply of power. Which is what matters, rather than low quality power in the name of low costs.
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Updated Date: Dec 20, 2014 05:12:38 IST