Know about UDAY Scheme

UDAY, easily the best designed scheme thus far, falls well short of addressing the real malaise[ma'leyz(unease,बैचेनी)] . Blaming power distribution companies alone or raising tariffs to eliminate their revenue gaps will simply compound the problem as demonstrated by experience since the first restructuring of 2002-03.

The average price of bulk power in India is among the highest in the world and India’s average consumer tariff is easily the highest worldwide when corrected for capacity to pay.

UDAY is the first financial restructuring scheme that implicitly[im'pli-sit-lee(clearly,स्पष्ठ)] recognises this malaise and includes measures to reduce bulk power prices through reductions in the delivered cost of coal and potentially higher capacity factors in generation. Bulk power in India should be at least 30 per cent cheaper.

High bulk power prices severely constrain the scope for creating surpluses in power distribution. The distribution segment also lacks concentrated creamy mega projects. The consequent[ kón-si-kwunt(result,परिणाम)] neglect and disproportionately low investment in distribution has and continues to plague[pleyg(suffer,त्रस्त)] the Indian power sector.

Poor performance standards
Individual distribution investments are relatively small and widely dispersed[di'spurst(spread,फैला हुआ)] . Ensuring effectiveness of such outlays requires sophisticated control systems.

Much like the earlier two attempts, UDAY also sees higher distribution investments and meaningful monitoring as key ingredients of success. Like its predecessors, UDAY too relies on assumed performance improvements delivering additional resource flows to distribution companies for funding unmet investment needs.

UDAY promises additional coal at “notified” prices and “low-cost” bulk power resulting from higher capacity factors in generation to compliant distribution companies. This needs rigorous[ri-gu-rus(exact,सही)] scrutiny[skroo-t(u-)nee(examine,जाँच)] as it presumes higher coal availability for power sector at current notified prices despite shortages across several coal consuming sectors.UDAY lacks an investment component for removing infrastructure constraints and a robust[row'búst(strong,सुदृढ़)] 24x7 power system would typically have capacity factors of around 65 per cent and possibly lower with growing share of renewables.

Contrary to the government’s claim, UDAY is a bailout for the financial institutions that have knowingly funded losses of distribution utilities for years. Converting 75 per cent of their outstanding to State government bonds/loans and the balance potentially to State government guaranteed utility bonds/loans with no provisioning requirements is a recipe for continuing profligate[pró-fli-gut(wasteful,अपव्ययी)] lending practices.

While the two largest lenders to the sector are outside Reserve Bank of India’s regulatory oversight, it would be educative to understand from the independent bank regulator why the proposed book-keeping exercise negates the need for provisioning 25-100 per cent of the commercial bank exposure to these State government owned distribution companies?

It is also incorrect to say that consumers will not be burdened by the inefficiencies of the sector. State governments do not have a slush fund to pay for such past or future inefficiencies. Either way, consumers will suffer the full consequence beyond the haircut taken by the lenders through reduced interest.

UDAY proposes to restructure an outstanding of ₹4.3 trillion. This off-balance-sheet fiscal hole is a sizeable 15.8 per cent of the estimated combined total liabilities of all States as of end March 2015.

The additional interest burden on State governments from UDAY will further pressure State deficits and likely breach the limit on interest payments remaining below 10 per cent of revenue receipts. And finally, there is no market for non-SLR bonds/SDLs. The lenders will simply be asked to accept these bonds in lieu[in lyoo(instead,के बजाय)] of their outstanding.

The above facts pose daunting[don-ting(fearful,डरावना)] questions for State finances. The consequences will be dire[dI(-u)r(horrific,भीषण)] for the six most-indebted States.

Despite good intentions and a feverish[fee-vu-rish(violent,उत्तेजित)] pace, the power ministry’s capacity limitations are showing.  We can again kick the can down the road, or bite the bullet and change course to deliver a radically reformed power sector fully compliant with Electricity Act 2003.

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