Bloomberg News

India Considers $35 Billion Debt Revamp After Blackout

August 21, 2012

India Considers $35 Billion Debt Revamp After Biggest Blackout

People gather near vendors at a market in Kotla Mubarakpur, New Delhi, India. A series of failures and excessive demand on the national grid knocked out power for 640 million people in northern and central India on July 31, a day after a separate blackout left 360 million in seven states without lights. Photographer: Sanjit Das/Bloomberg

India plans to restructure about $35 billion of loans held by its utilities to boost their ability to supply electricity and avert outages like the one that cut off power to half the nation’s 1.2 billion people.

Half of the short-term borrowings of the state-owned utilities, which generate or buy and distribute electricity, will be transferred to the books of the regional governments, according to a power ministry draft proposal obtained by Bloomberg News. The rest will be rescheduled by the banks and allowed a three-year moratorium on principal repayments.

Cash losses at utilities widened 15 times over three years to 288 billion rupees ($5.2 billion) in the year ended March 2010, prompting them to seek short-term loans even as dues to power producers and coal miners rose. The difference between the average cost of supplying electricity and the average tariff has almost doubled in the 11 years to March 2010, according to the draft, leading banks to refuse loans.

“For some state utilities today, selling more power means incurring more losses,” said Salil Garg, a New Delhi-based director at Fitch Ratings India. “Restructuring their debt seems to be the only solution. Utilities will look to turn around, while banks will seek to minimize sacrifices.”

The proposal is expected to be circulated among cabinet members in a week, Power Secretary P. Uma Shankar said on Aug. 13. There will be a separate arrangement for financing part of the operational losses and interest payments for the first three years, according to the plan.

Biggest Blackout

The utilities are “servicing the interest on existing loans by fresh borrowings, which leads to a virtual debt trap in the long run,” according to the draft report.

Almost 27 percent of India’s electricity is lost in transmission because of dissipation through wires and theft, causing a peak shortfall of 9 percent. Distribution utilities, unable to retrieve their costs through tariffs, accumulate debt and losses and cut purchases of electricity, leading to blackouts. Grid collapses on two consecutive days in India last month caused the world’s biggest blackout.

NTPC Ltd. (NTPC), the country’s biggest power producer, was forced to cut generation by 13 billion kilowatt hours, or 6 percent of total production in the year ended March 31, as state government utilities reduced purchases, Chairman Arup Roy Choudhury said on Aug. 7. The company may have to cut output by almost as much this fiscal year.

Free Power

Most state utilities often adhere to political demands of the local governments by providing free or cheap power to people. Punjab and Haryana, two of India’s biggest producers of food crops, provide subsidized power to farmers. Some utilities don’t receive subsidies announced by governments in lieu of free power they give to farmers, Garg of Fitch Ratings said.

States, including Tamil Nadu, Andhra Pradesh, Punjab and Karnataka, have increased tariffs since April to reduce the gap between cost and sales. Tamil Nadu increased tariffs after almost a decade.

“We are hoping to break even this year, thanks to the increase in tariffs,” S.C. Arora, finance director at Punjab State Power Corp. said by telephone. “Deficient rains have forced us to buy more power for irrigation and we are appealing to people to use electricity judiciously.”

Punjab State Power has 200 billion rupees of liabilities, half of which is short-term and being considered for restructuring, Arora said. The utility lost 0.07 rupees on every kilowatt hour of electricity it sold last year, he said.

Higher Tariffs

“States have accepted the inevitability of increasing tariffs, but there’s a limit to the increase,” Garg of Fitch Ratings said. “Ultimately, the solution lies in improving efficiencies.”

The burden of any increase in tariffs will be borne by industrial users more than households. Industries pay more than double the price households pay for their electricity, which affects profitability.

“India has to have a tariff system that reflects the change in costs,” said Debasish Misra, senior director at consulting firm Deloitte Touche Tohmatsu in Mumbai.

Increasing losses at state utilities are also endangering investment in generation projects in states, as concerns mount that generation companies may find it difficult to recover their dues from utilities.

Nervous Lenders

“The risks of offtake and fuel availability are two biggest concerns in the minds of lenders today,” said Ashish Sethia, head of India research for Bloomberg New Energy Finance. “Banks will obviously be nervous in lending to a generation project in a state that has a financially stressed distribution company.”

Damodar Valley Corp., a power producer in the eastern part of the country, posted a loss of 1.2 billion rupees in the year ended March 2011 after interest payments on short-term loans increased.

“The biggest challenge in the power sector today is getting the money for what you sell,” NTPC’s Roy Choudhury said on Aug. 7. “If we are able to address that issue, this is the most viable sector.”

To contact the reporter on this story: Rajesh Kumar Singh in New Delhi at rsingh133@bloomberg.net

To contact the editor responsible for this story: Jason Rogers at jrogers73@bloomberg.net


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