The government’s move to stop institutional loans to state electricity distribution companies (discoms) unless they draw up a roadmap for loss reduction and adhere to it augurs well for stakeholders across the sector.

The Power Finance Corporation (PFC) and the Rural Electrification Corporation (REC) have to strictly adhere to prudential norms and review existing loan utilisation carefully before granting new loans to state utilities, whether for capital or non-capital expenditure, the Union power minister announced recently.

Also, discoms with aggregate technical and commercial (AT&C) losses above 15% will not be granted any loan unless they draw up a roadmap for reduction of the losses within two years. The ministry will monitor and verify progress on the action plan, including the process and data quality monitoring practices adopted, and further grant of loan may be considered for such discoms only upon satisfactory performance.

As of fiscal 2017, REC and PFC together had ~Rs 81,000 crore of loans outstanding against Discoms, which works out to 18% of their total outstanding loans. This amount has significantly reduced after repayment of more than Rs 75,000 crore under UDAY scheme.

In addition, several central schemes, such as the Rajiv Gandhi Grameen Vidyutikaran Yojana (RGGVY), Restructured Accelerated Power Development and Reforms Programme (R-APDRP), Integrated Power Development Scheme (IPDS), Deen Dayal Upadhyaya Gram Jyoti Yojana (DDUGJY), and the Sahaj Bijli Har Ghar Yojana (Saubhagya), have been providing significant capital support in the form of grant.

Again, to incentivise discoms, the government has provided an option to convert a certain percentage of loans to be granted once the target AT&C loss reduction has been achieved. For instance, under DDUGJY and IPDS, 15% of a discom’s loan would be converted into grant if they achieve AT&C loss targets. Similarly, under UDAY, state governments have assured that loss funding of discoms will be only limited to the accepted AT&C loss trajectory.

Despite all this, average AT&C loss in the country reduced only marginally from 23.98% in fiscal 2016 to 21.60%[1] in fiscal 2018.

AT&C losses still high for many states

Source: PFC Report, Signed UDAY documents, UDAY Portal

As the chart shows, most states are short of target on AT&C loss reduction. And unless the discoms make significant improvement on this count, their cash flow will not increase and they would not be able to repay the loans in time.

Another key concern is poor progress in project implementation and quality of work. However, it may be too early to comment on the success or failure of the schemes in meeting the desired objectives as only 12% of the approved funds have been released under DDUGJY and around 29% under IPDS so far.

As for the use of government loans, the bulk of capital investments under various schemes has been for network upgradation and expansion, with the objective of improvement in electrification levels and quality supply to the larger population. Again, the recent initiatives of 24x7 Power for All and Saubhagya will significantly improve the electrification level and enable round-the-clock quality supply in rural areas as well.

This large-scale expansion for last mile connectivity will create a negative impact on AT&C loss reduction and recovery of cost of supply.

Therefore, commercial loss reduction initiatives, tariff subsidy structuring and measures to eliminate theft, and unauthorised use of energy need to be embedded in the new investment packages along with network expansion and augmentation of distribution network. It is also important that all the investments be planned well and executed timely, keeping in view the dual objectives of improvement of quality electricity access and reduction of AT&C losses.

This is why the restriction on disbursement of funds to the discoms unless they come up with a concrete action plan is a welcome step. This will offer discoms and funding agencies alike much clarity on returns and reduce uncertainty of recovery. Investor confidence will get a boost as the roadmaps are duly validated by the Ministry of Power. The validation will also help discoms explore other funding options such as multilateral banks, commercial banks, bond issuance and other financial institutes.

In addition, the government may seek active support of private players through distribution franchise or other public-private partnership options, especially in high AT&C loss areas. This will also help bring in best practices in management and operations. It is also high time segregation of retail and supply was done to infuse competition and ease the burden on the government.