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Long-term cure lies in transparent tariff revisions, private investment: S&P

According to reports, a transparent tariff revision mechanism and participation by private players are the long-term solutions for a healthy electricity distribution sector in the country.

The Government’s proposal to restructure short-term debts to the tune of Rs 1.20 lakh crore in the books of State Electricity Distribution Companies (Discoms) would provide them only a temporary reprieve from weakening finances, said global ratings agency Standard & Poor’s (S&P).

“We believe a sustained improvement in the credit quality of distribution companies and greater private sector participation can provide a long-term solution to the country’s power sector woes,” said Standard & Poor’s credit analyst Rajiv Vishwanathan.

At the same time, if a longer term solution to India’s power woes is not found, the risk of another restructuring due to a continued deterioration in Discom credit quality could raise future Government liabilities, the global credit agency said.

Currently, Indian banks and financial institutions have offered loans of about Rs 45 lakh crore. Out of this, nearly Rs 3.3 lakh crore is exposed to power sector and 25 per cent of it for distribution companies. Till now, bad debts of nearly Rs 6,000 crore in the books of Discoms have been re-structured.

“We believe the fragile financial positions of Discoms will limit their ability to invest in the power network over the next three to five years at least. Regulatory reforms are needed to open up India’s power transmission and distribution sectors to the private sector,” S&P said in a statement released from Singapore.

“Given India’s enormous growth potential, we believe the private sector would be keen to invest in this sector, particularly if regulations are transparent and fuel supply is reliable. The government’s will and ability to undertake necessary reforms will therefore be put to test,” S&P said.

“One key reason is that several Indian companies have broken away from state-supplied electricity, and now depend on their own captive power plants. However, we believe that such a practice reduces the competitiveness of Indian businesses and deters investments by overseas companies,” said Vishwanathan.

The proposed rejig plan would not impact ratings of Indian banks or financial institutions or it will have an impact on sovereign rating.

The loss of revenue due to gross inefficiencies exacerbates the inability of Discoms to purchase sufficient power to meet demand or make timely payments to power generators. Pilferage also results in disproportionately low revenue to power distributors and low recovery for generators from the sale of power.

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