SECTOR UPDATE - Shunglu panel suggests steps to end power sector's woes

Power distribution has turned out to be the rusted part of the total power sector value chain. The mounting losses of the state electricity board (SEBs) are now affecting the entire sector. Given the severity of the situation, the prime minister under the aegis of the Planning Commission appointed a high-level panel led by VK Shunglu, former head of the Comptroller and Auditor General of India (CAG), to look into the financial problems of the SEBs and suggest corrective steps. The entire report could be summarised in two parts: (1) highlighting the messy financial status of the SEBs across the country and the reasons behind the same; and (2) recommendation of measures for both the immediate issue and the long-term issues.

Key recommendations

- Tariff hike only an immediate relief.
- Bail-out plan: SPV route recommended if honour of restructured loans fails.

View: We believe the SPV route suggested by the panel would help to immediately clean up the accumulated losses in the form of bad loan in the books of banks; it will be positive for banks (especially the public sector banks), Power Finance Corporation and Rural Electrification Corporation. Also, the proposed regular revision in the tariffs would check the losses. We believe the committee has rightly weighed and criticised the existence of managerial or operational inefficiency which should not be offset using tariff hikes always. Hence, simultaneously several steps have been recommended to improve the efficiency in the long term. However, we believe it will be a challenge to implement the recommendations especially the one to improve efficiency. Some of those may require political will too at the local or regional level, which could be a time-consuming process if undertaken.

Source : Equity Bulls

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