Will the new scheme save the Discoms?

Tue, 10 Nov Pre-Open

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We are all well aware of dire state of power distribution companies (DISCOMs). Reeling under legacy issues, these companies are stuck in a vicious cycle of high debt and losses. Lot of initiatives have been taken in the past to solve these issues, all in vain. Will Ujwal Discom Assurance Yojana (UDAY) be any different?

The present state of discoms...

Discoms across the country are operating on huge debts. Cumulatively they are sitting on a debt worth Rs 4.3 trillion. Their losses total up to Rs 3 trillion. Ironically, some of them don’t even have the money to buy power.

The Ujwal Discom Assurance Yojana (UDAY)

The government has recently announced a scheme named Ujwal Discom Assurance Yojana (UDAY). Under the scheme the government has allowed state governments, which own the discoms, to take over 75% of the debts as of September 30, 2015 over two years - 50% in 2015-16 and 25% in 2016-17. These states will in turn issue bonds at much lower interest costs in the markets or to the banks /FIs holding the debts of DISCOMs. The remaining 25% debt will be converted by the Banks / FIs into loans or bonds with interest rate not more than the bank’s base rate plus 0.1%. Or, the companies may issue state guaranteed DISCOM bonds at the prevailing market rates with similar interest limits.

The stumbling blocks...

The moot point here is: Will DISCOMs really benefit from this? Most importantly, who will bear the ultimate burden?

As an article in Livemint states, states of many troubled discoms are already in a financial mess and rely on Central government help for budgetary needs.

So while the debts on DISCOMs’ balance sheet may come down, states will continue to face financial crunch. This is because they will have to pay interest on this debt amid their unstable financial conditions. This in turn will limit resources available for other schemes.  Not to mention that it does not help the banks much, that will be buying the bonds issued by state governments.

Further, a mere transfer of DISCOMs’ future losses to states cannot guarantee their revival and operational efficiencies. The discoms have been suffering because of the cost under-recovery and high transmission and distribution (AT&C) losses. While the government plans to reduce the AT&C losses and bring down the gap between cost and realizations, the chances of its  success, going by the history, do not seem bright. 

It was poor implementation that led to failure of several initiatives to revive power sector in the past. Ultimately, the success of this scheme will depend how the execution is carried out. As things stand today, it might be too early to hail this scheme as a panacea for the ailments of the power sector.