Government mulling interest subsidy to improve distribution of power

The government is planning to come out with an interest subsidy scheme to move forward the distribution improvements in power sector. The performance based financial support would be given to distribution companies to create infrastructure. This subsidy scheme intends to bring more areas under the reform process. Earlier, the government has proposed to offer 3% interest subsidy for 14 years to private and public power distribution utilities that are able to curb commercial losses. The interest subsidy would only be offered to distribution companies which are not being covered under in the existing distribution programme. The subsidized loans could be used by states for improving their distribution and transmission infrastructure; however the amount of subsidy will vary from state-to-state depending on their ability to bring down aggregate technical and commercial losses.

The interest system would be enforced through creation of a National Electricity Fund (NEF). The idea of NEF was first proposed in the 2008-09’s budget to help the perennially bankrupt State Electricity Boards (SEBs) to improve finances and reduces distribution losses. Previously a commission was appointed by the government under the chairmanship of B K Chaturvedi, member, planning commission to work out the details. The commission suggested an interest subsidy mechanism, in which the central government would bear a part of the interest cost of funds raised by a state utility for power distribution projects. It has been reported that the Ministry of Finance has given its permission and the power ministry is likely to move a cabinet note for approval of this scheme. The government would also decide on the executing agency for the new scheme. It can either be Power Finance Corporation (PFC) or Rural Electrification Corporation (REC), or both.

The existing Restructured Accelerated Power Development and Reform Programme (R-APDRP) is also intended to improve distribution system and minimize transmission and distribution losses in the sector through loans that are converted into grants on the completion of the reforms process. Although the amount for the fund is yet to be decided, but it is being anticipated that the requirement would be met through budgetary support. Under the R-APDRP R, the government provided a budgetary support of Rs 1,831 crore for 2011-12, of which Rs 1,756 crore is being given as loan to PFC which finances power distribution companies. Projects under this scheme are taken up in two parts in urban areas and cities with population of more than 10,000 in special category states and 30,000 in normal states. Under the R-APDRP, the government aims to cut down Aggregate Technical and Commercial (AT&C) losses to 15%.

Planning commission in its last year’s mid-term review had noted distribution of electricity as the weakest part of nation’s power sector due to heavy AT & C losses. The AT&C losses increased a record high of Rs 40,000 crore in 2009-10, and forced most SEBs to raise money at very high rates of interest.