Discom Debt To Rise To Pre-UDAY Level This Fiscal, Says Crisil

The total debt of power distributors is expected to go up to the level before the implementation of government’s revival plan for the ailing units as states’ finances deteriorated over the past few years.

The aggregate external debt of state power distribution companies is set to increase to Rs 2.6 lakh crore by March 2020, according to a media statement by Crisil Ratings, which analysed distribution companies in 15 states accounting for 85 percent of aggregate losses in India.

Prime Minister Narendra Modi launched the Ujwal Discom Assurance Yojana—a scheme aimed at improving the finances and efficiencies of electricity distribution companies—in 2015. The scheme mandated states to take over 75 percent of the debt—50 percent in 2015-16 and 25 percent in 2016-17—and issue bonds, with a mix of equity, grant and loan, for the rest. The discoms were then given operational targets to lower their losses, including those due to transmission.

“The increase in total debt to Rs 2.6 lakh crore factors in debt-funded capital expenditure, loss funding and incremental working capital requirements,” Crisil said in response to BloombergQuint’s emailed query. The arithmetic assumes an average tariff increase of 2 percent by states, and partial funding of losses through state government grants, in line with the commitments made under UDAY, the credit rating agency said.

The state power distributors had a debt of around Rs 2.75 lakh crore in September 2015 when UDAY was launched. It fell to its lowest in 2016-17 but has been rising since then. Bloomberg separately reported that combined losses by state distributors that signed up for UDAY rose to about Rs 24,000 crore ($3.4 billion) in the first nine months of the last fiscal, a 62 percent jump from a year earlier, amid an increase in coal and power costs.

Under UDAY, state power distributors were to initiate structural reforms by reducing aggregate technical and commercial losses by 900 basis points to nearly 15 percent in financial year ended March 2018 as well as implement regular tariff hikes of 5-6 percent per annum, according to the statement. In lieu, state governments took over three-fourths of discom debt, thus reducing the interest cost burden.

“While discoms enjoyed the benefit of debt reduction, structural reforms have been slow to come by,” according to Crisil’s media statement. “AT&C losses reduced by only 400 basis points by December 2018 from pre-UDAY levels and average tariff hikes were a paltry 3 percent per annum.”

Further improvement in operations may face challenges because the focus on new rural connections without adequate tariff hikes can increase losses, Subodh Rai, senior director at Crisil, said in the media statement.

That leaves states with two options: take hard decisions to get their discoms back into shape or prepare for another bail-out, the rating agency said. In 2016, most states had the fiscal headroom to assume three-fourths of the debt of their discoms, but now, because of deterioration in state finances over the past few years, the latitude is limited. So discoms have to become commercially viable through prudent tariff hikes and a material reduction in aggregate technical and commercial losses, it said.

“Nine of the 15 states under Crisil’s study, accounting for more than two-thirds of the total external debt of discoms, are already in breach of the Fiscal Responsibility and Budget Management Act bound of 25 percent debt to gross state domestic product ratio,” Naveen Vaidyanathan, associate director at Crisil, said in the media statement.

That makes structural reforms of discoms, especially ensuring cost-reflective tariffs and a material reduction in AT&C losses using measures such as smart meters, a critical need. Any delay would increase the pain for the power sector, especially for the generating companies, investors and lenders, Vaidyanathan said.

The Power Ministry clarified that debt levels of 16 UDAY states with comprehensive memoranda of understanding were to the tune of nearly Rs 3.24 lakh crore. Therefore, the prediction that discom debt at nearly Rs 2.6 lakh crore would reach pre-UDAY levels isn't correct, the ministry said on Twitter.

“The analysis perhaps discounts the fact that almost nearly Rs 85,000 crore of debt is yet to be converted into grants/equity by the participating states as per UDAY trajectories,” it said, adding: “It also perhaps ignore several CAPEX-based government of India loans and counterpart funding loans for various schemes, a large portion of which may be converted into grants.”