The Indian State Electricity Boards (SEBs) are shedding loads of financial power that only timely bailouts can hope to restore
The State Electricity Boards, incepted in the year 1948, have come a long way since. But given the fact that they have been strapped of their aggregate net worth today, one wonders whether they have come the wrong way…. through the winding turns of operational losses, lack of reforms, distribution inefficiencies and reactive management.
Many factors have contributed to the erosion of net worth. These include:
Rising power cost: Power purchase forms the largest proportion of the Average Cost of Supply (ACS) for Indian distribution utilities at 62 per cent. The APS increased 17 per cent due to high merchant rates over FY 07-09, with FY09 being the year of maximum impact. The forced reduction in load shedding to suit the 2009 general election campaign only worsened the burden. As if to complement the power cost, even the employee cost and fuel cost witnessed a sharp increase in FY09.
Trivial AT & C loss recovery: In contrast, the correction in AT & C loss has been minimal - thanks largely to power theft, collection inefficiencies and lack of political will to initiate remedial action. No wonder, India incurs the largest AT & C losses expressed as percentage of power produced - as high as 28 per cent, even ahead of countries like Cameroon and Pakistan (the developed nations are below 10)
Low Tariff growth: Tariffs have largely remained stable over FY07-09 with blended tariff registering a mere 6.5 per cent rise during the period. Again, industrial tariffs continue to bear the burden of subsidies to agricultural sector. Now, there’s a finite limit to which the industrial tariffs can reach as they would adversely affect a state’s prospects for industrial investments in a highly competitive environment.
So, the rising gap between cost and revenue and the slowdown in subsidies created a mountain of continued losses that ultimately wiped out the SEB aggregate net worth of Rs. 296 billion at end-FY09. And all SEBs are resting their hopes more on bailouts than reforms to help them rise above the red.
The losses, read from the accounting perspective, only expose the bleakness further. Adverse Debt-equity ratios are the order of the day. Diminishing state support has made way for increased borrowing from banks and institutions. The power situation can be sarcastically summarized as an endeavor of the SEBs to increase power generation and distribution based on the uninterrupted supply of borrowed finance. And if the deliberately aggressive accounting policies are negated, the losses could be even more. In this context, migration to IFRS reporting norms would only expose the losses that are understated by virtue of the Indian GAAP post-adjustments following the concept of regulatory assets.
The solace could well be the fact that despite the mounting losses, the state utilities have not curbed their capex flow. Over FY 06-09, the consolidated capex for state utilities rose from Rs 261 billion to Rs 522 billion. With financial institutions willing to lend and central governments grants in place, balance sheet constraints have not harmed T & D capex but for the fact that vendor payment cycles would be lengthened.
From a stock market perspective, we need to consider the fact that erratic power purchases from state-owned discoms would challenge the prospects of private players that plan to sell short-term power. Precisely why we recommend investment in integrated utilities that have complete control over fuel source and self-owned distribution operations and which are less exposed to diktats of state-owned discoms and merchant markets.
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