A DISCOM payment crisis has been building up again in India. The Ministry of Power payments portal shows that outstanding dues increased to INR 410 billion (USD 5.9 billion) by November 2018 (March 2018: INR 250 billion). These numbers are based on limited available data, actual amounts are likely to be much larger. Worst offending states include Uttar Pradesh, Tamil Nadu, Karnataka, Andhra Pradesh, Telangana, Madhya Pradesh and Punjab. Payment delays range from 2-3 months to as much as 9-10 months in the worst cases. We understand that dues of some large renewable IPPs may have gone up to as high as INR 15 billion (USD 0.2 billion).
- UDAY has failed to provide sustainable solution to DISCOM finances;
- The crisis has been worsened by rollout of the SAUBHAGYA scheme and impending general elections when tariff rises are politically unpalatable;
- Weak DISCOM finances and delayed payments undermine all government moves to reform the sector;
Late payments have been a chronic challenge for the power sector. There were hopes that the UDAY scheme, introduced in 2015, would provide a lasting relief with emphasis on debt transfer, tariff rises and reduction in T&D losses. The one-off financial engineering – transfer of (nearly 70%) debt to the respective state governments – was successful in temporarily shoring up balance sheets. But disappointingly, there has been little progress on key fundamental aspects of the UDAY scheme. The sector continues to see heavy meddling by the local governments as the election season looms. Average annual tariff rise of between 0-4% in the last three years has been nowhere near sufficient to meet rising costs. T&D losses are also stuck at about 21% despite the target of reduction to 15% by 2018-19.
The payment crisis owes partly to the success of the Indian government’s SAUBHAGYA scheme. Sale of power at subsidised prices to small residential consumers is costly and incurs a heavy loss of about INR 6.00/ kWh. There is some evidence to show that load shedding to agricultural and residential consumers has fallen drastically in advance of the elections. (should we provide a link here?)
As a result, annual DISCOM losses, which are estimated to have fallen by two-third from about INR 600 billion in FY 2014-15 to INR 200 billion in FY 2017-18, are expected to again increase this year. At the same time, state government power subsidy bills are also rising. Punjab is a glaring example with annual subsidy bill of INR 140 billion (USD 2 billion), more than 10% of the state’s annual budgeted revenues.
Delayed payments not only starve the IPPs of liquidity and put them at risk of default to lenders, but also eat into profits as IPPs rely on more expensive short-term debt or equity to bridge cash deficit. To make matters worse, the DISCOMs usually don’t even pay interest on delayed payments in contravention of the PPA provisions. The crisis has blown to such an extent that a radical move to make advance payments to IPPs is being proposed. But we are not very optimistic – the problem is behavioural/ systemic rather than structural.
The payment crisis comes at a very inopportune time as the industry is already reeling under multiple problems. It is one more factor draining away industry confidence and a solution doesn’t seem in sight.