The government is set to approve the debt restructuring package for India’s state electricity boards (SEBs), a move that will give the sector a much-needed boost in the short term, but further measures are needed to tackle the root of the problem if long term reform is to be achieved.
The terms of a financial package could be finalised as soon as this week, according to Veerappa Moily, India’s power minister, who spoke to local press on September 18.
India’s loss-making power sector has placed pressure on the country’s banks; its outstanding loans totalled INR3.4 trillion (US$62.5 billion) at the end of July 2012, according to data from the Reserve Bank of India (RBI). As such, the restructuring package is a welcome development as it should relieve some of the pressure on the country’s lenders.
The basic premise of the restructuring is that states will take 50% of the debt burden and issue bonds against it, while the other 50% of the debt will be restructured by the banks. But while this is positive in theory, commentators argue that the details are unlikely to be so simple.
“Typically these things are never done in one stroke, you will have several rounds of discussion. You have to take into account the opinion of the banks, the state governments, and the central government, so there are multiple parties and typically one solution is almost impossible,” said Siddhartha Sanyal, India economist at Barclays.
Additional details that could be announced over the next couple of weeks include a moratorium of up to three years on repayment of principal of outstanding loans as well as targets for SEBs to reduce transmission and distribution losses.
These losses, or power leakages, are another key factor that needs to be addressed if the sector is to see any sort of turnaround, according to Sanyal. Another key problem, repeatedly highlighted by commentators including rating agencies, is the issue of tariffs.
As it stands, it costs less to buy power than it does to produce it. Because of this, any debt restructuring package, no matter how successful, can only have a limited effect, according to Rajiv Vishwanathan, corporate and infrastructure analyst at Standard & Poor’s (S&P).
“Based on what is known it seems like it’s still a short term solution because the question is really: is it causing a sustainable change going forward? The answer there would be no until there is a clear push to increase tariffs at state level,” he said.
“The guidelines and the framework are in place at the central electricity regulatory authority but the implementation of these has not been consistent across the states, so while [the restructuring package] might improve liquidity on a short term basis, for a sustained improvement in the financials, tariff hikes need to be implemented.”
Former power secretary R.V. Shahi, speaking on CNBC-TV on September 18, argued that while the debt restructuring is a temporary solution, tariff hikes are already being implemented.
“What did not happen in the previous three to four years has happened in the last eight months or so. You have seen more than 20 plus tariff revisions happening in the country, though [they are] not fully adequate because they have created a backlog,” he said.
While this is true, there is too much disparity in the progress being made, according to one director at a ratings agency.
“Different states have been following different speeds in terms of tariff increases so there isn’t a consistent benchmark for how much the tariff increase would have to be. Some states have been quicker, some haven’t been quick enough,” he said.
“There is a push to increase tariffs at the state level but it hasn’t taken place at the pace that one would expect, so there is a bit of a gap between the center proposing and the state implementing at this point.”