core sector communique

Cabinet Committee on Economic Affairs Approves Scheme for Financial Restructuring of State Distribution Companies (Discoms).

In an attempt to restore power purchasing capacity of the debt ridden DISCOMS and also to enable Banks to recover their loans, the Cabinet Committee on Economic Affairs approved the scheme for Financial Restructuring of State Distribution Companies (Discoms). The scheme contains various measures required to be taken by State Discoms and State Governments for achieving the financial turnaround of the Discoms by restructuring their debt with support through a Transitional Finance Mechanism  by Central Government. The scheme is effective from the date of notification and will remain open upto 31st Dec 2012 unless extended by the GOI. The scheme would be applicable to all State owned Discomshaving accumulated losses and facing difficulty in financing operational losses. The accumulated losses of the state power distribution companies (Discoms) are estimated to be about Rs 1.9 Lakh croreas on 31st March, 2011.Any turn around strategy has to be based on the principle that gap between Average Revenue Realization (ARR) and Average Cost of Supply (ACS) is eliminated as early as possible, liability to be taken over by State Government/ equity infusion by State Government, subsidy to be provided in full by State Government as per the Electricity Act and Average Debt Service Coverage Ratio (DSCR) to be atleast 1. The scheme has been prepared keeping in view the fragile health of utilities and State Government, coupled with serious systemic deficiencies in the working of State Discomsand underlying principles of turnaround as aforesaid. The scheme contains immediate/ continuing and short term measures required to be taken in a time bound manner by the Discoms and State Governments. These measures include Financial Restructuring, Tariff Setting & Revenue Realization, Subsidy, Metering, Audit & Accounts and Monitoring. Salient features 50% of the outstanding short term liabilities upto March 31, 2012 to be taken over by State Governments. This shall be first converted into bonds to be issued by Discoms to participating lenders, duly backed by State Govt guarantee. a.           Takeover of liability by State Govt from Discoms in the next 2-5 years by way of special securities and repayment and Interest payment to be done by State Govt till the date of takeover. b.           Restructuring the balance 50% Short Term Loan by rescheduling loans and providing moratorium on principal and the best possible terms for this restructuring to ensure viability of this effort. c.            The restructuring/reschedulement of loan is to be accompanied by concrete and measurable action by the Discoms/States to improve the operational performance of the distribution utilities. d.           For monitoring the progress of the turnaround plan, two committees at State and Central levels respectively are proposed to be formed. e.            Central Government will provide incentive by way of grant equal to the value of the additional energy saved by way of accelerated AT&C loss reduction beyond the loss trajectory specified under RAPDRP and capital reimbursement support of 25% of principal repayment by the State Govt on the liability taken over by the State Govt under the scheme. f.             Ministry of Power to bring out draft model legislation on State Electricity Distribution etc. Responsibility bill, after due inter-ministerial consultation within a period of twelve months from the approval of the Scheme. g.           States will enact the legislation within twelve months from the date of circulation of model legislation by Ministry of Power to mandate the compliance of the provisions of FRP.   Objectives   The scheme proposes to enable the State Governments and the DISCOMs to carve out a strategy for the financial turnaround of the distribution companies in the State power sector which will be enabled by the lenders agreeing to restructure/reschedule the existing short-term debt. As the restructuring/reschedulement by lenders is subject to certain prior steps to be taken by the State Government/DISCOMs and their commitment to fulfil mandatory conditions which are aimed at bridging the gap between the average cost of supply and the average revenue realized, this would help in restoring the viability of the distribution sector in the State. By restructuring and rescheduling the outstanding short term debt and securing the commitment of the State Govt in the discharge of debt service obligation, the Discomswould be nursed back to health. Government of India support through the transitional finance mechanism would serve the purpose of incentivizing the fulfilment of mandatory conditions. Expected Outcomes (a)     Providing comfort to the lenders by securing State takeover of and guarantee for debt, (b)     Bringing about financial discipline in the distribution sector in the State, (c)      Providing a commercial orientation to the functioning of the distribution companies, (d)     Casting responsibility on the State Government to ensure a steady flow of revenue to the distribution companies by improving the efficiency of their operations, (e)      Accelerate the AT&C loss reduction effort of DISCOMs, through additional incentive from Central Govt (.f)     Ensure regular rationalisation of tariff to cover cost of service, (g)     Gradual elimination of the gap between ACS and ARR. (h)     Ensure timely audit of DISCOM accounts (i)      Improve the financial health of the Distribution Utilities to enable them to procure more electricity for meeting their growing demands. IMPORTANT MANDATORY CONDITIONS 1.    State Governments shall convert all their loans to equity 2.    All outstanding energy bills of State Departments/Agencies as on 31.3.2012 to be paid  by 30.11.2012 3.    Eliminate the gap between ACS and ARR within the period of moratorium of the bonds 4.    Involvement of private sector in state distribution sector through franchisee arrangements or any other mode of private participation to be prepared within a year by the Discoms 5.    Tariff order to be notified by 30th April of each Financial year 6.    Fuel cost adjustment to be allowed as directed by APTEL 7.    FRP to include targets for progressive reduction in Short Term Power (STP) purchase by the State Discoms 8.    Subsidy should be paid upfront by State Govt. 9.    Prepaid meters to be installed by 31.3.2013 for all Government consumers 10.  Audited accounts for and up to FY 2010-11 by 30.9.2012 and of FY 2011-12 to be finalized by 31.12.2012.