In an attempt to find a permanent solution to the financial mess that power distribution is in, the Government of India announced a revival package for electricity distribution companies in November 2
In an attempt to find a permanent solution to the financial mess that power distribution is in, the Government of India announced a revival package for electricity distribution companies in November 2015 namely, the Ujwal Discom Assurance Yojana (Uday). The scheme is optional for the states to join. However, 15 states have already joined the scheme.
The government of Rajasthan first felt the pain of taking over 50 per cent of electricity distribution companies’ (discoms) debt under Uday, when its public debt for 2015-16 swelled by almost thrice from '224.4 billion (without Uday) to '654.01 billion (with Uday). The balance sheets of the rest of the states, which have signed memorandums of understanding with the Union ministry of power (MoP) under Uday, are expected to witness a similar dent.
The accounting measure of transferring 75 per cent of discoms’ debt to state governments is a welcome move as it may provide apparent relief to the discoms and the concerned financial institutions in the short run. But, if operational efficiency in the functioning of discoms is not ensured in the interim, this may pose a challenge in the long run, given the high opportunity costs (in terms of development) of state finances.
Although certain gaps still remain in the design of Uday, it is a definite improvement over its predecessors and provides the much-needed fiscal space to discoms. However, to ensure that failures of the previous schemes are not repeated, the long-pending task of undertaking structural reforms in the distribution sector will have to be completed.
On the face of it, poor financial health of the distribution sector seems to be the biggest hurdle in ensuring its efficient functioning, but the devil lies in the details. In order to ensure a true operational and financial turnaround in the functioning of distribution utilities, there is a need to correctly diagnose the problem and devise a strategy to address its root cause rather than adopting a band-aid approach.
While Uday may succeed in cleaning the balance sheets of the discoms at least in the short run, thereby overcoming the seemingly big problem of high financial burden on the utilities, the scheme’s success hinges on the state government’s ability to overcome the structural flaws in the functioning of discoms.
One of the major flaws identified with the poor functioning of distribution utilities is the lack of operational and financial autonomy. Instead of an independent corporate entity, the utilities are but an extended arm of the state.
Secondly, sub-optimal investment in strengthening the transmission and distribution (T&D) network has led to high aggregate technical and commercial (AT&C) and T&D losses, despite sincere efforts undertaken to strengthen the sub-distribution network by previous reform measures. Thirdly, the electricity distribution sector is still devoid of the required level of market competition, which not only goes against consumer interest, but also results in inefficiency in the operation of utilities.
Fourthly, the continued operational and financial dependence of regulatory institutions on state governments has severely impacted their effectiveness in regulating the distribution market.
Under Uday, the provision of holding the state responsible for honouring the outstanding debt of the discoms and taking over the future losses in a graded manner is justified on the ground that state governments must pay for their past wrongs. While this may prove to be an effective penalty measure in the short run for the respective state governments, this may also result in continued improper functioning of the state with the discoms.
As the states ease the fiscal space for discoms to function efficiently in the long run, it is quintessential for them to let go of control over discoms. They should allow discoms to function on sound commercial principles in order to ensure financial viability of the distribution business.
In order to solve the second structural problem mentioned above, Uday provides for a time-bound achievement of much-needed operational milestones, including installation of smart meters, distribution transformer metering and adopting demand side management measures to achieve the ultimate objective of AT&C loss reduction to 15 per cent by 2018-19. The scheme provides for forfeiture of grants under Central schemes — Integrated Power Development Scheme and Deendayal Upadhyaya Gram Jyoti Yojana — in case of non-compliance with operational milestones, which are measured by AT&C loss reduction.
While the provision of one-time disincentive is appreciated, the scheme may fare better to provide for disincentives at frequent intervals in line with the utility’s achievement of individual operational milestones. For instance, a disincentive in the form of non-payment of a part of total assistance could be provided in case of non-achievement of a predefined monthly goal by the concerned discom.
Further, sound monitoring and evaluation process are a must when it comes to ensuring achievement of the set targets of any scheme. Although Uday provides for monthly performance review — the mechanism for which is yet to be designed by the MoP — it is hoped that an element of transparency will be included in Uday’s review mechanism by providing the public access to monitoring reports, corrective measures undertaken and their impact on utility performance.
Currently, the impact of the scheme has explicitly been visible through increased public debt on the balance sheets of state governments. However, if structural flaws and operational inefficiencies are not corrected while implementing Uday, it may have a colossal impact on the capital and social development expenditure of states, especially post-2017-18, when the debt overtaken by states will be included in the calculation of their fiscal deficits. The authors work for CUTS International, a public policy research and advocacy group
