UDAY: Beginning of Dawn for Discoms or Marking Sunset for State’s Finance?

Bringing to Light the “UDAY” : Know Ujwal DISCOM Assurance Yojana

The long standing “Achilles” heel of Indian power sector has arguably been the power distribution facet courtesy the poor operational efficiencies and piling debt mount on respective discoms. The weakest link of the power value chain has consistently pressurized India’s power industry and has threatened procurement dynamics putting a serious question mark over existing and upcoming power generation portfolio of the country. What erstwhile was ignored, has now gained pinnacle importance by Government as the future of power sector at large depends upon better financial health and consistent operations of DISCOMS. To ensure this objective Government did attempted FRPs for struggling discoms in 2013 which tanked due to lack of timely implementation, forcing yet another scheme to turnaround the fate of state owned distribution utilities which has earned the nomenclature as UDAY (Ujwal DISCOM Assurance Yojana).  

UDAY touted as the next paladin to bail out the struggling discoms, potentially could see them turn green in a time horizon of 3-4 years from 2015/16. Though optional for the states the objectives of the scheme are pretty direct and convincing provided they find timely application as well, which are depicted as below:

Principal-Objectives-of-UDAY-Scheme-of-GoI-for-State-Owned-Discoms-and-Key-Numbers

‘GAIN’ING Discoms from UDAY – Certain Positive for Indian Power Sector

Enincon Perspectives believes that the benefits in offing by UDAY for the participative discoms would be immense should they manage timely actions. UDAY quintessentially is a schema launched to aid the suffering discoms to bail out from their prevailing losses and turn green with healthy balance sheet. The contemporary challenges if identified through much popular “Pareto” principle the main architects of the messy condition of the discoms would funnel out as following:

Reasons for Bad Debts of Ailing Discoms till 2015
  • Poor operational efficiencies of Discoms which led to piling of the arrears and an increased rate of AT&C losses among the worst hit state utilities of the country. The losses stand at an estimated whopping amount of INR. 4 Trillion (till March 2015) and counting
  • Heavy payout of interests by discoms in lieu of the debts putting immense pressure on their balance sheets in order to break-even and gradually turn green. This reason can also be deemed as the chief architect for the failure for erstwhile applied FRPs in 2013 by GoI
  • Northbound trend of power procurement cost courtesy domestic coal scarcity (coal supplies improving since April 2015) forcing the power generation companies to import coal thereby forcing increase on cost of power generation, repercussion of which was a certain spike in cost of supply for discoms
  • Last but not the least by any means was the non-cost reflective tariff structure among the states due to lack  of timely tariff revisions by SERCs respectively
Will UDAY mark a Dawn of Discoms – Offers bright future and immense potential but all rests upon timely implementation

There is little left for imagination when it comes to evaluation of potential benefits of what UDAY brings on platter for discoms and can easily be regarded as one stop medicine to all discom woes, however the implementation of same by States effectively holds the key for its success. Enincon examines the likely gains of power distribution utilities and the cascading effect on the power generation utilities as well for India through the scheme. The gains can be tracked in following pointers:

UDAY-Scheme-for-Discoms-An-Infographic-View-For-Volunteer-Discoms

 

  • Piled up losses of close INR. 2.5 Trillion shall be wiped off by 2018-19 through UDAY for the plagued discoms  on pan India basis. This would result in savings of potentially INR. 0.75 – 0.85/unit  on cost of supply for all states
  • The cost of interest would be at large a major savings for discoms having greater exposure of debt with PSBs, which will not only improve the financials of the struggling utilities but also shall impinge a cascading effect upon the cash flows of PSBs.
  • Tamil Nadu, Rajasthan, Uttar Pradesh and Haryana to have best savings in the range of INR.1 -1.80 for cost of supply. Rest of the states would have a benefit of 80p/unit
  • States of Andhra Pradesh, Rajasthan and Telangana plan to reduce AT&C loss levels below 15% by 2018-19, which means the greatest saving potential is ahead for states like Uttar Pradesh, Bihar & Jharkhand under UDAY scheme

With tremendous positives for the  discoms UDAY potentially and arguably is most suited programme in so far as an attempt for reviving fate of the loss making giants . However, it is yet to be discovered as to how states bring into effect the scheme and absorb the risks involved there off to reflect changing fortune of the discoms.

UDAY for State’s Finance – Tracking the Unknown

Predicting a changing market with greater degree of accuracy demands thorough details and a trend to identify with. Ironically what UDAY offers on stage for State’s which opted for the scheme has neither to comply with. However, there will be certain implications on the state’s financial health courtesy the taking over debt of discoms by state of upto 75% by 2016-17 in a phased manner of 50% in 2015-16 and another 25% in the following fiscal. This would be done through issue of non SLR SDLs (State Development Loans) directly linked to market or to existing lenders holding the debts of discom to appropriate extent. Hence, to estimate a ball park in terms of the risks for the State’s to be negated an identification of  main uncertainties  becomes quintessential in order to develop signposts to effect robust decision making process.

In case of State’s finance the key uncertainties that will alter the long-term future post the implementation of UDAY scheme are highlighted below:

  • Increase in Fiscal Deficit: Since the state’s will take over the debts of the discoms the increase in their fiscal deficit will increase without any doubts. However, what is in doubt will be the financial performance of the underlying discoms which would be instrumental in determining the state of fiscal deficit increasing or plummeting for states. Servicing of interest by State Government which is unavoidable as and when debt’s are taken over by them, would inflate the interest payments thereby impacting their revenue and fiscal balance leading to pressure of increased borrowings.
  • Less Pressure on Liquidity and Cost of Market Borrowings to be Consistent with State’s Credit Profile: The borrowings of the State’s are governed by GoI and if they continue to do so by gross basis , i.e. by after adding back principal payments during given fiscal year will reduce the pressure on the liquidity as state’s can redeem the bonds at the time of maturity. Post the announcement of the central bank RBI in it’s fourth bi-monthly fiscal monetary policy review has announced a separate limit for investments in SDLs by FPIs and shall be increased in a calibrated manner to reach to a level of 2% of the outstanding stock by March 2018. In its first phase an investment of INR. 35 billion investment has been permitted by RBI as on October12, 2015 which would be scaled up to the tune of INR. 70 billion by January 1, 2016. But when it comes to offsetting of the debt exposure of state discoms the amount to be recovered through FPIs in SDLs would be too small. Therefore state’s would end up having more issue of non- SLR SDLs to existing lenders. However, a positive impact of RBI permitting FPIs in SDLs would impose tight scrutiny on state’s fiscal health and is for sure mark a new beginning of an era which will make the cost of market borrowings consistent thereby implementing congruence with state’s credit profile.
  • DDUGJY, PSDF and IPDS – Will these Schemes Reduce the Burden on State’s Finance? States opting for UDAY will receive additional funding through DDUGJY (Deen Dayal Upadhayaya Gram Jyoti Yojana), IPDS (Integrated Power Development Scheme) and PSDF (Power Sector Development Fund) apart from host of other incentivizing schemes are in offing for state’s meeting operational milestones. However, the amount available under these schemes are undisclosed and upto what extent shall be beneficial for state’s that only time bears an answer to. Coupled with the risk of amount shortage there is also the risk of state’s not meeting operational milestones in the event of which they will have to forfeit these benefits.

Though, tacky but UDAY might prove to be wild card for states to overcome the political embargoes and improve both the power situation and tariff conundrum in one go. However, challenges are umpteen which would shape even big with years to come and only efficient dealing of them would ensure UDAY as a fit for state’s else the financial condition would witness a sunset and delve so deep in darkness that restructuring will be difficult.

For a more detailed examination of the developments on UDAY get in touch with the author and read more related articles here.

 

*The views expressed in this article are solely those of enincon perspectives and do not necessarily represent those of Enincon LLP.

Leave a Reply