In-depth Current Affairs Economy & Business | In-depth Financial restructuring of state power distribution companies

Introduction

The Government of India recently approved the scheme for Financial Restructuring of State Power Distribution Companies (Discoms). The scheme contains loan restructuring but in a conditional way. The Discoms are mostly in deep debts (totaling Rs. 1.9 lakh crore) due to huge losses. Now that the Government of India has approved debt recasting, the Discoms will have to fulfill certain criteria to avail debt recasting.

The restructuring is aimed at the financial turnaround of the Discoms.

The scheme is effective as soon as notified and will remain open upto 31st Dec 2012 unless extended by the GoI. Support under the scheme will be available for all participating State owned Discoms on fulfilling certain mandatory conditions.

Salient features

The salient features of the scheme are as follows:

  1. 50 percent of the outstanding short term liabilities upto March 31, 2012 to be taken over by State Governments. This shall be first converted into bonds to be issued by Discoms to participating lenders, duly backed by State Governments guarantee.
  2. Takeover of liability by State Governments from Discoms in the next 2-5 years by way of special securities and repayment and interest payment to be done by State Governments till the date of takeover.
  3. Restructuring the balance 50 percent Short Term Loan by rescheduling loans and providing moratorium on principal and the best possible terms for this restructuring to ensure viability of this effort.
  4. The restructuring/reschedulement of loan is to be accompanied by concrete and measurable action by the Discoms/States to improve the operational performance of the distribution utilities.
  5. For monitoring the progress of the turnaround plan, two committees at State and Central levels respectively are proposed to be formed.
  6. Central Government will provide incentive by way of grant equal to the value of the additional energy saved by way of accelerated AT&C loss reduction beyond the loss trajectory specified under RAPDRP and capital reimbursement support of 25 percent of principal repayment by the State Governments on the liability taken over by the State Governments under the scheme.
Impact
  1. Turnaround of the Discoms: As of now the Discoms have cumulative losses of Rs. 1.9 lakh crore. The loss and the resulting debt have impacted the efficiency of the Discoms badly. With the financial restructuring plan, the things are expected to improve the situation in near future.
  2. Rise in power price: The restructuring by lenders is subject to certain steps to be taken by the State government/discoms and their commitment to fulfil mandatory conditions aimed at bridging the gap between the average cost of supply and the average revenue realised to restore the viability of the sector. In other words, it will be mandatory for the State governments or distribution companies to revise their tariffs regularly to avail themselves of the package.
  3. Involvement of private players: A road map for involving the private sector in the State distribution sector through franchisee arrangements or any other mode of private participation will be prepared within a year by distribution companies. This will create a space for private players’ participation in power distribution sector.

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