Why central government schemes to improve financial position of discoms have not worked?

Relevance: issues related to assistance schemes for discom sector

Synopsis: Due to the problems associated with reform-linked assistance schemes, an alternate approach would be to provide only transitional financial support to all discoms, which are privatised under the private-public partnership mode.

Context

Recently, the government launched a new scheme to improve the distribution infrastructure of the distribution companies (discoms) with the primary intention of improving their financial health. Under this scheme, the discoms will be offered financial assistance provided they meet certain laid down criteria.

• Read more: Reform based power distribution scheme

Failure of assistance programs

The recently launched scheme is nothing new, and such assistance programs for discoms have been going on since 2001, when the Accelerated Power Development Scheme was initiated. The government also launched the UDAY scheme in 2015.

The overall principle of all such schemes is broadly the same

• Financial assistance is offered in the form of grants and loans provided some pre-identified parameters are satisfied, indicating better performance of discoms.
• UDAY, however, did not involve any monetary assistance to the states, but only promised to help the states in reducing the cost of power through coal linkage rationalisation, etc.

The problem with all these schemes (including UDAY) is that they have not delivered and the financial position of the discoms has only worsened.

Situation has worsened

• The Power Finance Corporation reports that the aggregate loss of the discoms (after tax) was about Rs 49,600 crore in 2018-19.
• A recent report of Niti Aayog has assessed the losses to be about Rs 90,000 crore in 2020-21

Issues with schemes

• Governance is difficult: The governance of such reform-linked schemes is a complex issue because the performance of the discoms needs to be monitored quarterly to facilitate the release of funds to deserving discoms. The two most popular parameters which are monitored are the loss levels and the difference between the ACS (Average cost of supply) and ARR (Average revenue realised). These parameters keep fluctuating, and it is very difficult to know their trend on a quarter-wise basis, rendering the release of funds to be tricky and cumbersome.

Transitional financial support 

An alternate approach that can be considered by the Centre (in lieu of such assistance schemes) is providing only transitional financial support to all discoms, which are privatised under the private-public partnership mode.

• Performance monitoring: The quantum of support can be worked out and the performance of the discom can be monitored over a five-year period.
• The onus would be on the privatised utility to use this support judiciously under the supervision of the regulatory commission.
• Targets: Targets of loss reduction can be laid down on a year-wise basis and if these targets are not met, the privatised utilities would have to bear the loss.
• Incentives: Incentives could also be thought of in case there was over-achievement vis-à-vis the targets.

This is exactly the approach followed in the case of Delhi.

Examples:

• In Delhi, a transitional support of Rs 3,450 crore spread over five years proved to be exceedingly beneficial since it allowed the privatised utilities some breathing time to bring down their losses.
• On the flip side, one can also mention the case of the first phase of privatisation of discoms in Odisha (late 1990s), which proved to be a failure and one of the reasons often cited was the lack of any transitional support.

Conclusion

Adopting this approach will ensure that the central government moves away from the micro-management of discoms, which inevitably happens if the release of funds is linked to reform-linked parameters on a quarter-wise basis. It would also give an opportunity to try a new approach, different from what was done in the past which clearly has not paid dividends despite the huge quantum of money spent.