Licence-based PPP model would avert need for future bailouts
After arranging a R1.90-lakh-crore bailout package for ailing state-owned power distribution companies (discoms), the Centre should now try to get states embrace deeper power sector reforms like change in ownership and management control of utilities to prevent them from slipping back into a financial morass. This is because under normal circumstances state governments try to avoid a tariff hike for fear of political backlash if the discom is state-owned. But if the discoms ownership changes, it will be free of political pressure to operate along commercial lines.
If that happens, state governments will get rid of their power sector liabilities which drain their scarce financial resources and let financial management go haywire. The Shunglu committee, which studied factors impacting the financial health of power discoms, has also recommended measures like a change in ownership and management control to ensure the long-term viability of the sector.
Discoms remain black holes in state finances. State governments, for instance, will be required to take over half of their discoms short-term loans under the R1.9 lakh crore debt-restructuring plan agreed by them with the Centre. Although the scheme has taken cognisance of the fiscal responsibility and budget management (FRBM) targets and allowed states to take over liabilities in phases over two to five years, according to the fiscal space, states where discoms have accumulated unmanageable debts could still breach their FRBM targets.
Projected fiscal deficit of Madhya Pradesh, Punjab and Uttar Pradesh in FY15 is very close to the Thirteenth Finance Commission targets. Although the impact of debt restructuring on states deficits is not large, any fiscal slippage due to either revenue slowdown or expenditure mismanagement would lead to states breaching fiscal deficit targets, India Ratings and Research, a Fitch Group company, said in a recent report titled, Financial Restructuring of State Discoms.
Significantly, this is not the first time discoms have been provided financial assistance to prevent their financial collapse. In 2003, too, the Centre had to extend a similar package to bail out discoms from potential default on power purchase from central utilities like NTPC and NHPC. At the time, states issued power bonds worth R28,984 crore to the central sector generators as payment towards their outstanding dues on power purchased by electricity boards from them. By end-March 2012, power bonds worth R11,520 crore were still outstanding on the books of state governments.
If states could get rid