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Cover Story | January 2016

UDAY will reinitiate siGNing of PPAs

Manish Gupta | Director, CRISIL Ratings

Do you think UDAY scheme will revive signing of PPAs by the loss-making discoms, boost power supply to consumers and how?
UDAY will result in liquidity improvement and sharp reduction in discom losses, thus improving the ability of discoms to procure power and reinitiate signing of long-term power-purchase agreements (PPAs). This will help capacities of around 10,000 MW which were at risk due to non-availability of long-term PPAs. Additionally, the all-India plant load factor of coal based plants, which had declined to 60% for 6 months ended September 30, 2015 (from 65% in the corresponding period a year ago) despite improving coal availability, will improve, thus further improving power supply situation and reducing all India deficit.

Is privatisation one of the means to achieve the objective of turning loss-making discoms around and why? Do you think political will would help improve the state of discoms?
Privatisation will bring in higher operating efficiencies especially in reduction of AT&C losses as demonstrated in privatised discoms in Mumbai, Ahmedabad, Delhi or Kolkata. However, cost reflective tariff hikes and imparting commercial orientation to discoms, will be imperative for sustainable operations of discoms.

What has been the performance (Net profit/loss) of state discoms over the last three years, how do you envisage it over the next three years and why?
All-India discom losses have been coming down from
Rs.72,369 crore in 2011-12 to
Rs.70,894 crore in 2012-13 to
Rs.63,765 crore in 2013-14.
It is estimated to be at around `62,000 crore in 2014-15. Over the next 3 years, the losses are expected to reduce due to lower interest costs, deriving benefit from implementation of UDAY. However this would remain contingent upon level of adherence to milestones for reduction of AT&C (aggregate technical & commercial) losses prescribed by UDAY.

Which are the factors that affect performance of state discoms?
The all-India losses of discoms are estimated at around Rs.62,000 crore for 2014-15. There were three reasons for the losses: 1) Poor operational inefficiencies because of high aggregate technical and commercial (AT&C) losses; 2) Tariff hikes of the past not being reflective of cost; and, 3) Huge interest burden because losses were being funded by debt.

What are the initiatives that may be needed to transform them? How do you think UDAY will help in this context, when compared to earlier FRPs?
UDAY aims to provide a sustainable solution by addressing the issues highlighted above in a comprehensive manner beginning with the takeover of 75% of the debt of discoms as on September 30, 2015, by their respective states in a staggered manner by fiscal 2017. These will be converted into state bonds that offer a coupon of 8-9%. The rest of the debt will have to be repriced at base rate plus 0.1%.

The FRP (in 2012) had improved the liquidity of discoms by providing a moratorium on debt repayments so that losses could be reduced in the moratorium period. But the package failed because there were no deterrents to non-compliance with loss-reduction targets.

UDAY will focus on both liquidity improvement and a sharp reduction in losses by lowering the interest burden. This will provide discoms an opportunity to start afresh. UDAY tackles the issue of efficiency improvement and cost-reflective tariff hikes by making the states formally accountable. It is thus a more comprehensive solution compared with FRP. Over the long term, UDAY can imbue a commercial orientation to the discoms of the implementing states.

Further, if larger states adhere to their milestones by reducing AT&C losses to around 15% by 2019 through efficiency improvements, UDAY can spawn a transformational change in India┬┤s power sector.

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