Lifeline for power

For the second time in less than a decade,the power distribution sector has been handed a lifeline. Monday’s cabinet decision to clear a Rs 1.9 lakh crore debt recast package for state distribution utilities,most of which are reeling under the impact of mounting losses and operational inefficiencies,primarily aims at restoring a modicum of financial viability to the sector. Investments in the upstream generation and transmission sectors are rendered unviable if the downstream distribution sector continues to leak like a sieve. The package does incorporate safeguards in the form of conditions the states need to observe — hiking tariffs annually and undertaking prescribed reform measures — in order to qualify for the debt restructuring. But there is a clear danger that the mistakes of the past could be repeated yet again,especially given that such performance-based incentives to reimburse loans have been at the centre of all the major central government schemes in the power sector for more than a decade.

Apart from the early part of the last decade,when the debts of the state utilities were similarly restructured,two rounds of the Centre’s flagship Accelerated Power Development and Reforms Programme have been implemented,where similar commitments to reform and reduce losses were incorporated. Yet,distribution losses continue to stay at a high 27 per cent. The key to ensuring that the sector does not end up in need of another financial bailout in the coming years is that the conditionalities are made the main focus this time.

The pitfalls are clear. Following a clean-up of their books,distribution utilities could fall prey to the temptation of borrowing afresh from the banks to meet working capital expenses in lieu of setting right the distortions in their tariff structures. Besides,it is a fact that tariff revision,based on the cost of service,is not easy to enforce unless there is the necessary political will,especially as general elections loom closer. On a more optimistic note,however,over the last 20 months or so,some 19-odd states have hiked electricity tariffs. It is imperative that the financial recast spurs the reform momentum instead of turning the clock back.