 Hello and welcome to NewsClick. I'm Podanjoy Gohar Thakurtha and with me here in the studio I have Prabir Purokastho. He's the editor-in-chief of NewsClick and we are going to discuss the what seems to be an intractable problem of trying to deal with stressed assets or non-performing assets in the electricity sector. Even as we are talking, even as we are recording this interview on the evening of Friday the first, a committee of top bureaucrats are meeting in the cabinet secretary and in Rastavadivaman to try and sort out what seems to be a very, very, very big problem. Prabir, the Reserve Bank of India had issued a circular. That circular had been issued in February. And the Reserve Bank of India has been talking about it for a long time for 14 months. But there was a deadline it put. And that was the 27th of August. And they said, by that day, please classify every asset where the debt has not been repaid, either the interest or the principle, within that mandatory 190 days. And even if it's one day late, these assets should be called non-performing assets or financially stressed assets. Now what does this mean? As per the insolvency and bankruptcy code, all such companies with such assets go straight for adjudication to the NCLT, that is the National Company Law Tribunal. As soon as that happens, the promoters lose control over those assets. And the banks too can't do anything about it because the NCLT is legally mandated to appoint an interim resolution professional who within 270 days is supposed to give a plan. And if that plan doesn't work out, then the company goes into liquidation. Now there are only 60 odd defaulters which fall into this category. And their total stressed assets or non-performing assets are, I mean, all kinds of figures I'm hearing, but it's kind of about a third of the total NPAs in the system, which is about 10 lakh crores. So you can say it's over 3 lakh crores. But the single biggest chunk of this is the electricity sector and the power sector. And the power companies, the so-called independent power producers, they went to the Alabad High Court to seek a state that has not happened. And everybody is in a bit of a flap as we talk. How do you deal with this problem which has been accumulating over years? Well, Bonjai, I think the issue is actually even bigger than you are putting it when it comes to the electricity sector. One part of it is a financial crisis we are talking about which is led to certain sections. It's about 30,000 megawatts to 40,000 megawatts, which today are in this crisis because I'm going to look at it from the point of view of the generating companies where the major part of the power sector stressed assets are at the moment. Add to this the 2.32 lakh crores of the Uday scheme which has to bail out the distribution companies who are forced to buy power, more expensive power and sell it more cheaply. So you had that difference which boils down finally also to the crisis of the electricity sector. We're talking straight away about 4 lakh crore rupees of Uday plus 1.72 lakh crores. So you're saying it's the generating companies are roughly about 1.75 lakh crores. There were 34 companies that were power plants that were identified by the Parliamentary Standing Committee on Energy and you add to that another about 1.2 lakhs or thereabouts and you come to a figure 2.32 lakhs. So you really talked about 4 lakh crores already 2.3 and 1.7. You would put it together so 4 lakh crores straight away that you are talking about the crisis of the power sector. That's like 40 percent of the bigger NPA crisis. Let's park the NPA part of it outside. Let's just talk about the crisis of electricity sector. Now 4 lakh crore is what we are seeing is the accumulated shall we say losses which have now come home to us both in terms of the distribution companies and the generating companies crisis put together. Now if we see this let's look back on what was the promise of what was called the reforms of the electricity sector which said electricity sector is not functioning efficiently. It is creating deficits. So all we need to do is two things. One is separate distribution, transmission and generation. A handover generation to whoever wants to build a power plant. D-licensing. D-licensing generation completely and hand it over to power sector they will build more efficient plants. The distribution companies will become somehow more efficient. The transmission companies will still be held by the government. The plan was to make distribution private generation private having transmission with the government. Let me throw in some figures just to illustrate this point. As you know the Electricity Act came into being in 2003 but the share of the private sector in the install capacity has increased from 13 percent in 2007 to 44 percent in 2017. So almost half this is the last 10 years just to throw some figures at you. So there are again two parts to this install capacity. One is the what will be called the non-renewable sector where the amount of electricity you produce is not that much other is of course the coal generating plants which is the bigger chunk of it. Now here is the issue that if you put in say more expensive power into the system and really put their share up significantly you are going to make the whole sector sick. Why is that so? Because old power stations produce power cheaper because you have written off their capital cost. Any new generating company that comes in your capital costs have to be paid in full. So effectively power generating companies if there are this proportion increases new companies increase you are going to distort the economics of the power sector by delicensing suddenly in the way you did. Suddenly you brought in a lot of new players banks gave them money and this was a problem that the banks were forced to give money because they were also designated as core sector lendings which they can give to private players. So you got the core sector lending from the banks and now you have expensive assets producing expensive power but finally you know electricity when you sell to the people there is only so much you can squeeze out of the people we are still a poor country. We need electricity for agriculture we need for commercial sector we need for industry we need for domestic consumption. You may squeeze the domestic consumer somewhat you may squeeze the commercial sector high you squeeze industry you have lack of industrialization you squeeze agriculture you have a crisis. As a consequence there is so much only that you can get out of the as revenue and if you increase the cost you create this huge gap and instead of the deficits decreasing as the 2003 electricity act presumed that has not happened we have in fact seen the reverse and by the way this had complete consensus with both BJP and the Congress when these reforms were made don't forget in fact UPA had started this shall we say unbundling and it was continued by NDA and the NDA is finally which introduced the 2003 act that that was under NDA's Vajpayee government correct let me draw your attention to some of the remarks that were made by the parliamentary standing committee on energy. Now this was a committee which looked specifically at stressed assets and non-performing assets of electricity companies. Now this report was prepared in March but it was presented in parliament in the last session of parliament which is in August. Now there are two points first it goes back and says in 2016-17 the official economic survey had clearly pointed out to what was called the twin balance sheet problem the balance sheets of the banks and the balance sheets of the company and you are having a problem in both of these it also pointed out that the power sector contributed the most to the non-performing assets of the banks. What is significant is that this parliamentary committee it highlighted its stress that the new guidelines of the Reserve Bank of India would only deepen the crisis in the electricity sector and why it says as its liet motive is distinct and sector specific without any generic underpinning with other sectors of the economy. In other words to simplify this is saying the Reserve Bank of India has adopted certain criteria which is in line with international criteria as soon as a particular bank is unable to pay its interest or the principle of its term loan for more than 90 days it's called itself a non-performing asset. In the case of leased assets it becomes non-performing when it ceases to generate any income for the bank but they said there should have been some sort of a special dispensation for the power sector and because of that this crisis seems to be not only it is not getting resolved it seems to be worsening and deepening. Yeah I think this is why I was saying there are two kinds of crisis we are dealing with one is the banks the financial sector looking at non-performing assets other is looking at fundamentally why is the power sector in a crisis and this crisis of the power sector is engulfed now the banks because of the non-performing assets which were also created by forcing the banks to lend money to the what under the core sector scheme to private companies it's important to understand which are these private companies shall I name some of them yes yes because out of these 34 coal based power plants which were identified in the parliamentary committee there were two companies of the Adani group in Corba West and the Maharashtra SR Power in Mahan GMR group companies GVK group companies JP group companies Jindal group companies Lanco group companies among others so we are clearly seeing that all these newcomers who entered are today facing a huge problem and especially you remember there was a Supreme Court judgment in 2017 early 17 as a result of which two of the biggest so-called power plants coastal power plant the Tata coastal Gujarat plant and Adani power they are in a bad shape why because the Supreme Court said you can't pass on the higher costs of Indonesian coal when you're pricing the coal uh pricing the electricity for the consumer yeah because you had received the contract based on a certain bid you cannot retrospect and this was a business risk whereas the companies argued that this was comes under a force major clause which is like an act of God or a natural calamity you see if you under you assume the coal price won't increase and you say this is act of God then obviously you have a wrong sense of understanding prices move not by the act of God by the act of the market now here was the issue that do markets do well when you come to infrastructure sector and the understanding is markets don't behave well when it comes to infrastructure sector this is a very old understanding not of left but of essentially what I would call old-fashioned economists who have always argued yes I mean it didn't matter whether they were left of center right of center this is too much of externalities involved in infrastructure sector so you shouldn't really deal with as if it's market now you see why I'm raising this if you take the power sector crisis as only a financial crisis then what's going to happen this 34,000 megawatts will be say with either go out of the market completely creating maybe a scarce scarcity of the power sector itself wasted a huge amount of money because these are actually functioning power plants the equipment works yeah I mean even if they're not working at 85% plant road factor or whatever yeah but there's a those are the economics of it which is making it difficult to function but your take would take out 30 to 40,000 megawatt out of your brain because you can't really run them not because of technical reasons but because of financial reasons so that's that would be a negative but apart from that the basic underlying crisis which cost periodic bailouts latest was the Uday which has only seen ballooning deficits of the power sector which manifest itself for a requirement of the bailout of the state-owned distribution companies because you really cannot privatize the distribution companies except only in pockets or of the generating companies because your banks get into a crisis yes so the crisis just moves on on and it balloons it's a kind of a rolling ball which seems to get bigger and bigger over time and you still are not looking today at addressing the power sector crisis and what's the solution being offered make the wires distribution wires separate from the electricity flowing through it it's an absurd argument it's like telling you know telling us that you can somehow artificially separate electricity from the wire it flows through and doing that what you are going to do you're going to say the electricity infrastructure will be maintained by the government state government and then of course the wires will be yours but electricity will belong to some private parties now I want to finish the other part of it for parenjay why is it that there is repeated developing crisis in the power sector because the central government does not distribute one unit of electricity only the state is dependent on the states and the private companies even private companies are small relatively small and the ones which are there orisa has packed up it's now come back to the state only deli discounts continue apart from small sections in bombastra and gujrat and gujrat amitabh but the only small pockets otherwise but today 90 if you take out the orisa there is a small state in terms of electricity if you take all of it out 90 percent of distribution is done by the state 10 percent by private sector not one unit by the central government so what does the central government think of the electricity sector crisis it's essentially an IPP ntpc is an independent power producer is no different than a tata or a mudra power plant run by adhanis and therefore their view of the electricity sector is absolutely skewed and they are passing the burden to the states the states cannot absorb it they are not able to buy expensive power they are themselves getting into a deficit and those who want to sell expensive power are not able to sell it as a consequence they are going into at the moment as stressed assets non-performing probably let's look at another dimension of this problem it's not today but for decades on end as far as i can remember donkeys years you've talked about lack of coordination among different ministries and departments of the government this parliamentary committee says exactly the same thing the exact words need for greater coordination among ministries and department primarily three you have the ministry of power you have the ministry of coal and you have the ministry of railways now they don't work together and they keep blaming one another at one point out of these 34 plans that have a total outstanding debt of about 1.75 crore lakh crore i stand corrected half of them 17 of them their main problem is coal linkages non-regular fuel supply arrangements now this government loves acronyms and they had a new acronym called Shakti which is an acronym for scheme to harness and allocate koela transparently in India now what we have a situation is coal India limited the big producer more than 80% of our thing they've allotted about 27 million tons for 25 year period in september 2017 about over one third of it has gone to an any group companies be that as it may it adopted for what it thought was a very innovative way of reverse auctioning but essentially what many of these companies did they said okay we'll reduce the the power paid by the consumer by a few paisa one paisa two paisa three paisa four paisa but at the end of the day many believe that we are not really dealing with the problem and you know you had coal gate one are we going to go again and have another coal gate two or something looming up because you're not able to solve this basic problem of supplying adequate coal to the power plants now you can import maybe 15 or 20% and we know that India has adequate supplies of coal but there are poor quality so this problem hasn't been resolved you know you can't resolve the problem if you don't believe that you need to plan you're warned of the planning commission so ultimately the instrument to coordinate the different ministries was your planning commission you warned of the planning commission you have a nithi ayog which is basically quote quote unquote a think tag with absolutely no pass you have made each of the shall we say ministries independent they don't bother about the they don't have to bother about the fact that how they will transact quote unquote business with each other you believe that a market mechanism reverse auction being one of them can somehow magically solve the problem that each sector will produce exactly as much as other sector means you forget there is a gestation period for all of these things and you also forget there is something called railways you have to move the coal from one place to another these three ministries are very very critical and you cannot make it function like a market it's stupid to think that you have a market mechanism to coordinate three ministries the last part I'll I'll I'll I'll I still remember that Vedanta for instance had a functioning coal a functioning power plant they're moving coal in trucks because there was no railways linkage at that point of time and it destroyed all the villages around it as well as the roads on which this coal was transported the consequence of lack of coordination that you're pointing out is huge externalities which destroy a huge amount it's a huge cost on the environment okay the last theme on which I want to have a little discussion with you as you have rightly pointed out the policy the whole issue is having a policy and more importantly not just having a policy but also have a body to ensure proper implementation of that policy as you pointed out the electricity act the new electricity act came into being in 2003 but it wasn't until 2015 February 2015 that the national electricity policy was notified now this parliamentary committee in august tells us that you need to revisit that policy it also tells us there's need for greater consistency and uniformity with respect to orders relating to the legal status of various agreements now you have here coal india often willing to unwilling to sign fuel supply agreements especially if this fuel supply agreements are for a long-term period say 20 years 25 years then you have the different tiers you have the state electricity regulation regulatory commission then you have a central electricity regulation committee then you have aptel which is the appellate tribunal or electricity and then you challenge it further at the supreme court level now not only are these long-term power purchase agreements are not being signed the sanctity of these power purchase agreements are today in being questioned and therefore you see this crisis further deepening on this account as well on this count as well you're absolutely spot on when you are talking about all these issues that creating these instruments what are called regulatory instruments has not solved the problem and I would come back to it that why doesn't it solve the problem because essentially infrastructure sectors don't function as market or as markets they are not or cannot be driven by the market so the regulatory structure was supposed to be put in place to create a pseudo market it's what I call a regulatory market because really in that there is no market now obviously when you try to create artificially something that does not exist then you are trying to play god okay and unfortunately you don't have omnipotent powers to be able to do that and this is how it's all unraveling at the moment I like to point at one thing when in 2003 the electricity act was put in place what were the total deficit at that point of time accumulated deficit at the point of time which is the losses of the accumulated losses the stateless divorce was probably the range of 20 000 crores okay today we have come to a situation already 4 lakh crores we are talking the financially stressed assets of the banking sector 4 lakh crores Uday plus 1.75 as you talked about we are already at 4 lakh crores we have had write-offs in the middle all told we have already from 20 000 crores increased our losses to at least 4 lakh crores if not 5 lakh crores so we've already had a ballooning loss of 4 lakh crores isn't it time for us to look at what were the reforms why have they failed and what should we do again and I will I will say that the time has come for us to talk about not reforming the electricity sector and the electricity stateless divorce which is what the slogan earlier but reforming them we have to integrate a complete kind of overhaul of the system we have to integrate distribution transmission and generation we have to look at the sector holistically we have to coordinate with railway so we get coal to be moved and we need to also see how the coal mines will have to be done we need coordination even at that level so we need to bring back some elements of planning without which it won't work I come back to what I started with infrastructure cannot be done the quote unquote okay thank you so much Praveed for sharing with the viewers of Newsclick your views and what we've tried to do is try and demystify this very very complex and difficult problem of dealing with the financially stressed of the non-performing assets of the banking sector which have a lot to do with the crisis in the electricity sector in the country thank you for being with us and keep watching Newsclick