A package of measures at an estimated cost of Rs.1.90 lakh crore approved by the Cabinet Committee on Economic Affairs last Monday seeks to recast the finances of the State electricity distribution companies (discoms). The package, which has been in the making for a long time, comes ten years after the Central Government extended a one-time settlement of the dues of State electricity boards (SEBs).

Quite obviously, the financial position of the discoms has not improved since then. The primary reason has been inability or unwillingness of the mostly State-owned distribution companies to adhere to the terms of the previous bail-out. One singular failure has been in not revising electricity tariffs at frequent intervals in line with the rising costs of production. Besides, a related covenant to set up a transparent, independent tariff regulator has not been observed, and wherever formed, the regulators have been mostly toothless.

The States and their electricity boards are now mandated to revise the tariff regularly. But even if they adhere to this key condition, they have a long way to go before the power distribution business acquires a degree of solvency.

Barring a few honourable exceptions, most of the discoms are in a financial quagmire, unable to raise working capital. Short-term loans taken from banks and financial institutions have reached menacing proportions, and are being serviced only by fresh borrowings.

The Centre’s package to restructure short-term loans consists of the following: (1) States will take over half the outstanding loans of the state electricity boards. (2) Convert them into bonds (securitise the outstandings), which will be issued to the lenders. (3) The State governments will guarantee the repayment of the bonds, which, however, will not have SLR status. The State government guarantee, therefore, becomes absolutely necessary to enhance the quality of these bonds. (4) Banks and other lenders will have to restructure the remaining 50 per cent of the loans and besides provide a three-year moratorium on repayment of principal amounts. (5) A transitional financing arrangement to enable the borrowers to tide over the near-term will also be put in place.

When implemented, the Centre’s package should help not only the State electricity distribution companies, but also the independent power producers. In State after State, these private sector companies have not been paid their dues by the distribution companies. States will be part of tripartite agreements to execute the plan. In addition to committing to revise tariffs periodically, in line with their costs, the SEBs will work to reduce theft, transmission and billing losses, now estimated at 27 per cent. The Centre will incentivise such action. The States have been given the option to join the scheme. They have been given time till December to decide.

Obviously, the success of this restructuring package depends on how well the States are willing to accept and implement its tough provisions. Past experience has not been satisfactory. The earlier bail-out, involving the same set of players, did not have the desired results. On the contrary, the financial position of the State electricity boards has visibly deteriorated in almost all instances. Despite all the incentives that the Centre is now willing to offer, the financial situation of the discoms may not improve at all, leave alone dramatically as it is optimistically hoped for. Besides, the key terms of the package, involving a moratorium on bank loans and all, will provide only a temporary reprieve. In which case, is the latest exercise another instance of throwing good money after bad money? What reinforces such pessimistic forecasts is the well-known fact that the power sector is heavily politicised. Rational economic thinking will never prevail when populist politics holds sway.

Yet, there seems to be no alternative but to proceed on the lines indicated in the Centre’s package. While primarily intended to restructure the finances of the discoms, the package of measures will directly help those public sector banks and some non-banking finance companies (NBFCs) whose exposure to the power sector has been alarmingly high. The bail-out ten years ago was intended to help Central power producers such as the NTPC salvage their dues from the electricity boards.

This time, it is the turn of government-owned banks to benefit. The question needs to be asked as to why the government-owned banks got themselves into such a mess. The State electricity sector with outstanding liabilities in excess of Rs.3 lakh crore and accumulated losses close to Rs.1 lakh crore would obviously never have been a model borrower at any time.

Perhaps, for many banks, there was no choice except to lend to the discoms, their incipient sickness notwithstanding. That is why by adhering to the terms of the new package, banks stand to benefit as much as the electricity boards.

One major worry will remain. There is a real danger that both the banks and the State electricity boards might become complacent and slip into their old bad ways on the belief that the Centre will once again come to their rescue. This is what is called moral hazard. Only by rigorous monitoring and benchmarking, the progress in implementing the agreed measures can be avoided.