SEBs to get a discount of 3-5% on interest rates depending on performance

The Union cabinet will decide this month on subsidizing the interest on loans taken by state electricity boards (SEBs) to cut distribution losses. The beleaguered utilities are expected to avail Rs. 25,000 crore worth of loans in the first two years. The mechanism, to be unveiled under the national electricity fund (NEF), has been in the making since the then finance minister P. Chidambaram announced its formation in the 2008-09 budget speech. This subsidy will be performance-linked and aimed at an efficient distribution system.

"The cabinet will shortly take a call on this, where interest subsidy will be given from the budget. The note was floated in April," said a top power ministry official, who did not want to be named. "The state utilities can raise money from any bank or financial institution with the government bearing the interest on loans as a subsidy."The boards will get a 3-5% discount on interest rates depending on performance, which will be paid by the Union government to the lenders, according to the proposed scheme under NEF.

SEBs across India are saddled with losses running into crores of rupees due to power theft during transmission and distribution, billing inefficiencies and, more importantly, because they have to buy expensive power to tide over short-term deficits.

A dependence on subsidies and the political compulsion of providing free power to farmers reflects poorly on the books of these state-owned boards. Some SEBs have also failed to revise tariffs for many years, adding to their losses.

However, analysts are not in favour of such a move."Providing interest subsidy without a comprehensive improvement road map would amount to throwing good money after bad. There is no road map for improvement of efficiency of utilities barring APDRP (accelerated power development and reforms programme) nor implementation of the mechanisms for implementing cost reflective tariff," said Anish De, chief executive at Mercados EMI Asia, an energy consulting firm. "There is no way to ensure that subsidies are paid on time and to hold utilities accountable for their performance."

Although the government had already put APDRP in place to upgrade the distribution system, minimize transmission and distribution losses, improve metering and assign responsibility for realization of user charges, it grossly underperformed as it was unable to bring down the losses to 15% by the end of 2007, as originally targeted in 2000-01. It was later restructured.The power ministry is working on a slew of measures to facilitate funding to the nation's power sector, which is struggling with a shortage of capital.

The government wants to make it easier to lend to the sector by relaxing exposure norms for banks and state-owned firms Power Finance Corp. Ltd and Rural Electrification Corp. Ltd. The country is planning a mandatory rating system for 65 state-owned distribution firms to streamline lending to them.

"Once the rating system is in place, it will facilitate smooth roll-out of this scheme," said the power ministry official quoted above.The 11th Five-year Plan (2007-12) targeted adding 78,577MW of power generation capacity, requiring Rs. 10.31 trillion of investment at current estimates. The power ministry predicts a Rs. 4.51 trillion shortfall. The sector will need $400 billion in investment during the 12th Plan (2012-17).