UDAY Scheme: Review of Performance So Far
UDAY scheme was launched to relieve the distribution companies from debt problems and make their operation sustainable. In this article, we review the scheme from its basics and examine if it has been successful and achieved its mandate.
Background
Ujwal DISCOM Assurance Yojana (UDAY) was approved by Government in November 2015 as a scheme for financial turnaround of the Power Distribution Companies (DISCOMs). Its objective was to improve the operational and financial efficiency of the DISCOMs. The problem of DISCOMs is such that they have accumulated losses of around Rs. 3.2 lakh crores and also are burdened with repayment of a debt of Rs 4.3 lakh crores. One of the major reasons for the inability of these DISCOMs to repay the debt is the operational losses that they have incurred and which are largely funded by debts. These financially stressed DISCOMs are not able to provide adequate power supply at affordable rates. In addition to it, large defaults by these companies have the potential to negatively impact banking sector.
Working of the Scheme
This Scheme is specially designed for the DISCOMs that are owned by States. These DISCOMs may include combine generation, transmission and distribution undertakings. However, it is optional for the States to be a part of the Scheme. The whole scheme of revival of the power sector companies is to be carried out by adopting the following initiatives or objectives:
- Improving operational efficiency; reduction of cost of power; reduction in interest cost; and enforcing financial discipline by aligning with state finances.
- Permitting an increase in borrowing limit of State Government for mobilizing resources to these companies so that it can take over 50% of the debt by 2015-16 and additional 25% by 2016-2017, they can do so by issuing SDL bonds in the market or to banks/FIs.
Debt not taken over by the government are to be converted into state guaranteed public sector bank loans, bearing interest rate, not more that bank’s base rate plus 0.1%. The States are required to not only fund future losses in a graded manner but also help the DISCOMs efficiently manage their activities so that they can reduce their losses.
Functions of the Participating States
The States that are participating in the Scheme are required to take up some of the following measures:
Improving Operational Efficiency
The Scheme lays down a particular framework for targeted activities to be undertaken by the States within a particular deadline. These activities will ensure operational efficiency.
Developing State specific targeted programmes
The States have the responsibility to develop suitable targeted programmes for revival of the DISCOMs.
Indicators for monitoring
The Scheme also lays down the indicators that will help to review the performance of the DISCOMs after a certain period of time.
These projects were almost free to price their power to cover up their cost and were mandated to enter Power Purchase Agreement (PPA) with distribution companies. DISCOMs were required to lift a certain amount of power at a pre-specified price. As long as DISCOMs were able to pay their dues, generators were able to service their loans which they have taken from commercial banks. The scheme was based on the premise that power distribution companies and State Electricity Board would become profitable on the account of better transmission, efficient management, reduce theft and modernization.
Compliance with Renewable Purchase Obligation
The States shall comply with RPO that is outstanding since 2012 within a deadline set in consultation with Ministry of Power.
How far has the Scheme succeeded?
In a year’s time the Scheme has received overwhelming participation of 21 states [Tamil Nadu is 21st state to participate]. We are told that the scheme has played significant role in the revival of the DISCOMs in the chronically inefficient states. Many of the States have been able to reduce the gap between the average cost and revenue. The states which have shown a reduction of losses are Bihar, Andhra Pradesh, Rajasthan, Uttarakhand. Goa and Jharkhand. The states have also taken sufficient measures to improve efficiency like Rajasthan, Haryana, Gujarat, Bihar and Punjab have been successful in fulfilling 30-45% of the requirements under UDAY. However, there are some shortfalls also. These are as follows:
Increase in operational losses
Out of the 21 states participating in the Scheme, around seven has reported increase in losses.
Increased AT& C losses
UDAY by setting an aim to reduce these losses, have followed the path of the two bailout packages of 2001 and 2012. It set a target to reduce it to 15%. But it is observed that instead of utilizing the funds given for this purpose, the DISCOMs utilized it for the purpose of clearing their balance sheets. So AT&C losses have in fact increased in states like Haryana, Karnataka, Maharashtra, Rajasthan, Andhra Pradesh, Bihar, Punjab, Chhattisgarh, Uttarakhand and MP.
The Jharkhand story
BJP led Jharkhand was the first State to join the Scheme. But its progress has also been pretty minimal. Here, the DISCOMs have not only to failed to raise tariff, but also have to pay high prices to private generators. Due to this, it stopped paying to Damodar valley cooperation for 700MW electricity it acquires daily.
CONCLUSION
The above discussion makes it clear that UDAY has not been enough for salvation of our discoms. For its success, the scheme needs to ensure proper monitoring of the activities of the DISCOMs. It also needs to make sure that the participating States are receiving the required support through the Scheme for its proper implementation.
