By Janaki Krishnan

While everyone is talking about the financial health of the power sector and are tending to lay the blame at the door of the state electricity boards (SEBs), one also needs to take a look at why the SEBs are behaving the way they do. One reason why the SEBs do not pay their dues to the central authorities is that they themselves are held to ransom by their clients -- the SEBs are unable to pay up as the customers themselves are unwilling to make payments to the SEBs.

Vicious circle
It is a vicious circle -- the users of power do not pay up their dues to the concerned SEBs, which in turn due to a paucity of cash are not able to pay the power generating utilities such as National Thermal Power Corporation (NTPC), Power Grid and so on, leading to sickness in the entire sector.

Recently, the NTPC indicated that mounting dues from the SEBs would force it to regulate (read cut) power supplies to the defaulting states --some of the states are Bihar, Uttar Pradesh, Orissa and West Bengal, among others. In fact, it has already issued notices to the Bihar SEB, West Bengal SEB, and Gridco in the east and UPSEB, the Haryana SEB and the J&K SEB in the north to pay up their dues or face the consequences.

No-win situation
To zoom in on actual happenings would elucidate things much better. Consider the poor state of affairs at the Bihar SEB. The Heavy Engineering Corporation (HEC) owes around Rs 250 crore to the SEB. The mounting dues and the inability of the Corporation to pay back have even drawn the attention and intervention of the Central Government. HEC is a sick unit and as such would not be able to shell out the cash to pay up its dues.

HEC happens to be just one of the customers of the Bihar SEB. While figures were not available, industry sources say the unpaid receivables of the SEB could be in the region of around Rs 4,000 crore. "There is however no way of ensuring that these users do pay up their dues," said an industry observer.

Let us take another extreme example --the Maharashtra SEB. The Board has arrears receivable from the agricultural consumers to the tune of more than Rs 650 crore. In fact, the total dues to the SEB from its customers is estimated conservatively at Rs 3,700 crore and the SEB is helpless in the recovery of these outstandings.

"This is equivalent to more than three months of sale of power," the source added. Besides the agriculture sector, the other defaulting industries include the residential complexes (Rs 500 crore), industrial low tension works (Rs 232 crore), high industrial sector (Rs 308 crore), street lighting and public works (Rs 100 crore) and inter-state (Rs 44 crore). The West Bengal SEB has the perennial problem of its coal mining sector not paying up its electricity dues while the state is congested with sick units, including the moribund jute sector which has not been settling its power dues for decades.

Securitising proposal
The Central Government is talking in terms of securitising the power dues of the SEBs, the huge amount --Rs 12,000 crore --that they owe to the Central power regulatory authorities and power generation companies. That is, the creditors will accept bonds from the SEBs, and these bonds will become tradable after an initial lock-in period.

At present, the total outstanding of SEBs amounts to Rs 29,000 crore.The same reasoning could be extended to the dues of the SEBs. That is, the receivables could be securitised and traded as an ordinary instrument in the market. What is securitisation after all? Simply put, it means that designated pools of loans or other receivables are packaged, underwritten and sold in the form of financial instruments.

The process would essentially involve sale or transfer of receivables from an organisation (which is the owner of the assets --in this case the SEBs) to an independent entity or a special purpose vehicle, which in turn issues the financial instruments to the investors.

Recently it may be recalled, the chairman of Securities and Exchange Board of India (Sebi), D R Mehta went on record to say that securitisation of assets should be permitted and these securitised instruments could be traded at the stock exchanges.

It was also made clear by both Sebi and the Reserve Bank of India (RBI) that securitisation could be done but through mutual funds, which undertake activities that are closest to securitisation.

Mutual attraction
Mutual funds have also expressed interest in undertaking securitisation of assets of triple 'A' rated companies and especially receivables of the SEBs, which they feel, are of a high calibre. For instance, the SEBs of Maharashtra, Kerala and some of the other boards which are, if not thriving, at least reasonably healthy.

These funds are willing to buy up (or in lieu of that issue unit against them) the receivables of SEBs and then securitise them --the securitised instruments could then be traded at the stock exchanges.

This arrangement is advantageous for both the parties. On the one hand, the SEBs will have access to immediate funds alleviating their cash problems to a certain extent. In fact, according to industry circles it would offer an effective and relatively quick and less costly alternative funding source for them. On the other, mutual funds will have access to continuous cash flows latter when the dues mature.

The securitised instruments traded in the exchanges will also ensure liquidity and, if a healthy market is created for these instruments then it would mean a windfall for all concerned.

Vital requirements
However, there are many issues that need to be ironed out. So far as the mutual funds are concerned, not all the receivables of SEBs will be eligible for securitisation. That is, if a particular receivable due is from a user who is known to be tardy with payments, it would not obviously make sense for the mutual funds to securitise them.

Introducing a system of rating could solve this problem. That is, the receivables could be rated by at least two rating agencies based on past record of payments, their present financial status and so on.

The tenure of the receivables would also play a major role in their selection by MFs --mutual funds typically have maturity periods of a maximum of five years. So that would also be the tenure of the receivables --"We would not want any asset-liability mismatches to happen," says a chief of a public sector mutual fund. Since securitisation is in itself a niche activity, asset management companies (AMCs) would necessarily have to set up special purpose vehicles that would be responsible for administering the securitised dues of SEBs.

Another major aspect to be considered is whether a lock-in period should be imposed on the securities before they are allowed to be traded. According to the rough plan sketched out by the government (for securitising the dues of NTPC), the bonds issued will have a minimum lock-in period of five years.

Market valuation
But considering that the financials of the Boards are in a pathetic state, in this particular case it would make sense to waive this condition and let market forces dictate its valuations.

Both HDFC chairman, Deepak Parekh and ICICI supremo, K V Kamath have gone on record to say that in order to bring the SEBs out of their morass, these transmission and distribution entities should be privatised. In the event that the government does take a decision on privatising the SEBs, it would provide more incentives for the mutual funds sector to securitise their dues.

Larger perspective
Of course, securitisation has to be viewed in the larger perspective of what it means to the power sector as a whole and not only for the SEBs. The Central Government proposes to introduce privatisation measures in power distribution as a condition for securitisation of the power dues.

According to the Central Electricity Regulation Corporation (CERC), securitisation might not be the only answer to the power sector woes. In January, the CERC had notified a rationalised tariff system.

In fact, the power ministry intends to offer reduced transmission dues as an incentive to the states to accept the new package. The new package is aimed at reforming the states which have the largest stock of outstanding dues, while states with a better track record of meeting their dues could adopt the cash and carry mechanism.

The Cabinet decision on the Central appropriation of dues as on December 31, 1996 limits the amount to be recovered in any year to 15 per cent of the Central plan allocation of the state. However, in most cases the recovery extends much beyond four years.

Other issues that have to be sorted out are of a legal and regulatory nature. To develop a sound market for securitisation, a comprehensive regulatory system has to be set in place.

There is the Transfer of Property Act, which will govern the transfer or sale of the loan assets of the SEBs. The Indian Stamp Act is a notorious act, which has led to lack of liquidity in the debt market.