Recently, the government launched a new program to improve the distribution infrastructure of distribution companies (discoms) with the main aim of improving their financial health. Under this program, discoms will be offered financial assistance provided they meet certain established criteria. The total expenditure for the program is approximately Rs 3.03 lakh crore, spread over five years. The aim of the scheme is to reduce business losses in the range of 12 to 15 percent and also reduce the difference between the average cost of supply (ACS) and average realized revenue (ARR) to zero. here 2024-25.
This type of disco assistance program is not new and has been around since 2001, when the Accelerated Power Development Scheme was launched. This has been followed by various other diets with some differences between them. But the general principle has remained the same – financial assistance will be offered in the form of grants and loans provided that certain pre-identified parameters move in a direction which would indicate better performance of the discos. Prior to the launch of this program, the government had launched the UDAY program in 2015. UDAY, however, did not involve any monetary aid to states, but only promised to help states reduce the cost of electricity through rationalization. coal links, etc.
The problem with all of these programs (including UDAY) is that they failed to deliver on their promises and the financial situation of nightclubs only got worse. The Power Finance Corporation reports that the total loss of discoms (after tax) was around Rs 49,600 crore in 2018-19. A recent report by Niti Aayog estimated losses at around Rs 90,000 crore in 2020-2021, although this figure is not strictly comparable to the PFC figure. Surprisingly, such programs are formulated, one after another, with spending reaching trillions of rupees, knowing full well that they are not effective and have not worked in the past. Reducing trade losses isn’t really about improving infrastructure, it’s more about management.
Although the average losses (including technical and commercial) are around 22 percent today, several clubs are recording losses above 40 percent. It is common knowledge that it is possible to reduce losses from 40 percent to about 15 percent without any significant investment in infrastructure. Investments would be needed, however, to reduce losses further to single digits, as all the fruit on hand would have been consumed by then.
The governance of these reform-related programs is a complex issue as the performance of the discoms must be monitored on a quarterly basis to facilitate the release of funds to deserving discoms. The two most common parameters that are monitored are loss levels and the difference between ACS and ARR. There are inherent problems with these parameters as they keep fluctuating and it is very difficult to grasp their trend on a quarterly basis which makes releasing funds tricky and cumbersome.
In the scheme now announced by the government, monitoring will be all the more complex as around 26 parameters will be taken into consideration and noted, but here again, the levels of losses and the difference between ACS and ARR will have the greatest weight. . Also, for some of the settings it can be difficult to assign a score across the discos, which can lead to some subjectivity. Some examples being – provision of accurate energy accounts, tariff reforms initiated, consumer rights and grievance settlement addressed. Some parameters are even debatable, for example the liquidation of regulatory assets, since these are mandated by the regulatory commissions and therefore, the discoms have no role to play.
Due to all the problems associated with reform-related assistance programs, an alternative approach that could be considered by the Center (instead of such assistance programs) is to provide only transitional financial support to all disco, which are privatized under the public-private partnership. fashion. We would also like to cite the case of Delhi. Transitional support of Rs 3,450 crore spread over five years has proven to be hugely beneficial as it has allowed privatized utilities to breathe a bit to cut losses. Conversely, we can also cite the case of the first phase of privatization of nightclubs in Odisha (end of the 1990s), which turned out to be a failure and one of the reasons often cited was the absence of any support. transient.
Given that in a previous policy statement the government had mentioned that the privatization of nightclubs should be encouraged, it would make sense to view this transitional support as a catalyst. The amount of assistance can be established on a normative basis and the performance of the disco can be monitored over a period of five years. It would be up to the privatized public service to use this support judiciously under the supervision of the regulatory commission. Loss reduction targets can be set on an annual basis and if these targets are not met, the privatized utilities should bear the loss. Incentives could also be considered if the objectives are exceeded. This is exactly the approach taken in the case of Delhi. Adopting this approach will ensure that the central government moves away from the micro-management of nightclubs, which inevitably happens if the release of funds is tied to parameters related to reform on a quarterly basis. It would also be an opportunity to try a new approach, different from what has been done in the past which has clearly not borne fruit despite the enormous amount of money spent.
This column was published for the first time in the paper edition on August 12, 2021 under the title “Comment not to help the discos”. The author is Senior Visiting Fellow, ICRIER and former member (Economic & Commercial), CEA