Kameswara Rao, Leader, Energy, Utilities & Mining, PwC India explains why the cumulative losses of state electricity boards are dipping to pre-UDAY levels.
Why are SEB losses touching pre-UDAY levels? What could have gone wrong?
There was no specific date when you could say that UDAY was launched. Different SEBs had to adopt it at different points of time. The scheme is essentially reasonably extensive. It had several things that the states would benefit from, but for that, they had to take some action. From a utility perspective, the financial restructuring, which is the most commonly used one, essentially helped to take it off the balance sheets. It is technically money from one pocket to another. But the banks also took a haircut both in terms of interest rate as well as tenure. As such, there was a real benefit to the sector.
There were certain issues thereafter. The expectation was that utilities would use their stronger balance sheets to raise funds to invest in network and address concerns like theft, losses, quality of supply and reliability. In other words, a whole set of things which could help improve revenues. It also had many other provisions whereby, if certain steps were taken, you would get coal supply on a more preferential basis. That would also reduce costs. However, in reality, most of the state utilities did not take advantage of the window of opportunity. They used it to invest a bit. Despite the rise in inflation and the cost of coal, etc., the cost of supply remained the same.
What about tariff reforms?
The tariff reforms which should have taken place have not happened. Regulators failed to do that. Utilities should have invested because they got breathing space to improve their performance, but they did not do so. Governments also could have taken advantage of it and put some of this into private operation. Privatisation does not mean ownership transfer. It means giving things out on a franchise model for 10-15 years with no loss of jobs and with no asset sold, but with improvement in the performance of the operations. None of the three has happened, except in bits and pieces. Rajasthan did franchise four to five districts, but most of the states did not. Very few states revised the tariffs, most of them did not. Hence, every one of the stakeholders failed to take action. It wasn't a surprise for we knew even then that we were losing an opportunity and it could all come back to square one.
The latest numbers say that SEBs have accumulated losses of Rs 760 billion. What is the way forward?
Yes, absolutely, and in a much shorter time. The rolled-out relief package did not even last that long. Barely one term and we are back to square one. If you ask me where we are today, I would say we are precisely at the same point. Losses have not come down and efficiency is at the same level. Also, because of ownership issues, the debt is building up, and payments are all getting delayed. The result? Any new bidding coming in would be at a higher cost.
In the recent past, we came across instances of solar assets being put on sale because the projects were becoming unviable. Now they are being put on sale to repay debts. Your comment, please!
It is unfortunate for a private bidder to bid very low. These are the projects that are essentially tying up the whole supply chain, the panel, the land, and so on. Things cannot go wrong unless certain things happen like the price of the panels, unforeseen forex movements, inefficient project management, and so forth. I would say that if many such situations were to happen it really would be the bidders' fault because one should bid sensibly.
On the other hand, the government has issued a letter of credit notification. How practical is that at this point when SEBs are in such a condition?
That is merely recognising a practice that is already there in the power purchase agreements (PPA)s but is not enforced. It is an excellent prudential financial practice. However, it is only for inter-state projects. If the project is supplying intra-state then there is no such benefit.
For thermal it would be practical, but how does it work for a renewable energy generator?
It can also be done for renewable energy. It is just a financial commitment to pay. If I don't physically pay the banks can remit, it is as simple as that. Obviously, in both situations, thermal or renewable energy, the actual settlement has to be done. If there is a dispute about the metered energy then that needs to be sorted out. But the PPAs are generally written to ensure that a particular standard level of payment is met so that you don't default on your loans.
What is the way forward for SEBs?
I think both the central government and state governments should recognise that there is no financial solution that is going to work, no restructuring and no debt relief. If it is done, it should be only on the achievement of certain conditions rather than on good faith. Knowing the challenges, acting upon both the efficiency and tariff revision is required.