The Expert Committee, under the Chairmanship of Shri Deepak S. Parekh, Chairman, IDFC submitted - in September 2002, the report on the first part of the terms of reference suggesting measures for structuring of the APDRP and outlines the reform framework and principles of financial restructuring that could form the basis for devising state-specific reforms programme. A summary of the Committee's recommendations with regard to Structuring APDRP for Supporting Reform, Reform Framework and Broad Principles for Financial Restructuring of SEBs are given in the following paragraphs.

Structuring of APDRP for Supporting Reform

APDRP Fund

* Union Government should ex-ante commit to a level of funding
* The existing (APDP) Committee under the chairmanship of the Union Minister of Power be vested with broader responsibilities such as establishment of guidelines and periodical review, and, accordingly, be streamlined with the reduction in the total number of members.

Eligibility Criteria for accessing assistance under APDRP

Assistance under APDRP should be made contingent on a State -
* signing off on the SEB Dues Settlement Scheme
* agreeing to an ex-ante audit of incentive related parameters, viz, Energy input, Cost of energy, Cash Collections from Energy Sales of the present period, and Average Revenue Realisation

Support under APDRP

There would be two streams of support from the APDRP Fund -
* one for investment; and
* the other as an incentive based on reduction of the gap between unit cost of supply and revenue realisation (calculated based on the number of units purchased).

Support for Investment

* To enable the States to begin to effect improvements, 50% of the first year's allocation of APDRP funds, i.e., Rs. 1,750 crore be made available to the states.
* For subsequent years, the decision to retain or alter the share of support for investment should be based on experience.

Support for Incentive

* The remaining assistance from the Fund, i.e., Rs. 1,750 crore from the first year and the allocations for the remaining years under incentive stream should be disbursed as a one-for-two matching grant based on reduction of the gap between unit cost of supply and revenue realisation.

Reform Framework

* Irrespective of the reform path chosen, the state governments will continue to have a role in policy making pertaining to the sector. It is the prerogative of each state to determine how it wants to run and fund its power sector. However, it was considered useful to have a framework to serve as a starting point for devising state-specific reform programmes. For this, the Committee has drawn upon the experiences of power sector reform in India and abroad, and recommended the choices to be made with regard to the four key elements of a Reform Framework, viz., Market Structure, Distribution Zoning, Regulation and Ownership. The framework outlined in this Report is only "a" template to initiate discussions with the States as part of the Committee's subsequent work on state-specific reforms. The reform framework that is finally agreed upon for each state participating in the process may differ from this template based on the needs of the state. Furthermore, in case any of the States taken up as part of the subsequent work seeks to propose an alternative reform framework or plan, the Committee would use that framework as a starting template, based on its merits, limitations, and feasibility.

Broad Principles of Financial Restructuring

The general financial debility of SEBs has been addressed by classifying it into two broad types of deficits -
* deficits from the past and
* deficits pertaining to the future
The past liabilities can only be serviced with the help of surpluses from the sector in the future and additional government (both Central and State) support from the budget. At the same time given the precarious financial condition of the sector, servicing past liabilities solely from the sector's returns in the future appears well nigh impossible. Hence, while evolving broad principles of financial restructuring, a combination of pruning the liabilities and re-financing at concessional terms in addition to ploughing back a portion of both future profits and the proceeds from further divestments ahs been espoused.

Liabilities from the Past

The role of the State Government: The State Government should consolidate these liabilities, take them over and transfer them to a Power Sector Reform Fund. The State should then write off its own loans to the SEB.

Power Sector Reform Fund :

The state government should ring-fence both the liabilities and the inflows earmarked for the sector restructuring into a Power Sector Reform Fund (PSRF). All existing liabilities of the sector should be transferred to the PSRF and, concomitantly, existing receivables, privatisation proceeds, grants from the Government of India and other donor agencies and a portion of the surplus from future operations (say, in the form of a PSRF Surcharge) should be transferred to the PSRF to defray these liabilities.

The role of Existing Creditors:

The existing creditors - including power and fuel suppliers as well as financial institutions - may be requested to write-down their claims, in view of the fact that they would be the principal beneficiaries of the financial restructuring exercise that is aimed at facilitating sector reform. While continuance of the status quo would mean that the assets of the creditors are likely to turn sour, reform is expected to enhance the sector's capacity to meet its liabilities and consequently make it more creditworthy.

Role of the Central Government :

The Central government should carry the process of agreeing to write-down the liabilities owed to some CPSUs by the SEBs further, if required, by extending such an approach to other CPSUs as well as working out mechanisms to extend low-cost long-term financing to the States for servicing the written-down liabilities, as for example, through concessional multilateral or donor credit.

Deficits Pertaining to the Future

The extent of deficit on account of the losses during transition, i.e., until the sector turns around, could be reduced through the following contributions from various stakeholders.

Consumers:

The government, in consultation with the regulator and consumers, could agree to divert a portion of these efficiency gains to meet the liabilities from the past through a transparent surcharge. Given that efficiency gains arising out of a successful reform programme are normally expected to be passed on to the consumers in the form of lower tariffs, the Committee regards the agreement to divert a portion of the efficiency gains as a major contribution from the consumers.

The Utility:

The sacrifices by the consumers and other key stakeholders would go in vain and will become increasingly untenable if the utility does not improve its efficiency to the maximum extent possible in terms of reducing both technical and commercial losses and controlling outright theft and pilferage and undertaking optimal investments.

Regulatory Commissions:

In order to induce the Utility to aggressively pursue efficiency gains and also to attract private investors in the fist instance, a multi-year regulatory regime is a sine qua non. The regulatory commissions are to endeavour to institutionalise a credible multi-year regulatory regime, based on realistic targets, prior to privatisation, with appropriate incentives for the utilities to pursue loss reduction and also agree to divert a portion of the surplus from future operations to service liabilities from the past.

State Government:

In mitigating deficits pertaining to the future, the Committee has envisaged three primary contributions from the State government:

* expedite the process of distribution privatisation beginning with the Concentrated Zones, so as to enable the achievement of substantial efficiency gains, quickly.
* during the transition period, extend subsidy support at least at a level equivalent to its current transfers to the power sector and also provide assurance of such support by quantifying the same and committing it ex-ante.
* foster commercial discipline by ensuring prompt payment of electricity bills by its own undertakings and also by providing law and order support to the utilities to check theft and pilferage.

Power and Fuel Suppliers:The Committee has recommended that the "contribution" from the power suppliers could be operationalised through vesting contracts, wherein existing suppliers agree to supply power at pre-specified prices, over a limited period of time. Such an agreement is also in the best interest of the suppliers as it makes a viable reform possible, without which, as at present, the suppliers will not be able to recover their dues from their customers and will continue to run up large notional receivables.

Ex-ante Commitment:

The process of financial restructuring entails significant contributions by various stakeholders. In order to induce mutual faith among the stakeholders, the Committee has recommended that all the stakeholders and regulators should ex-ante pledge their commitments as part of the Financial Restructuring. If agreeable to the stakeholders, the Committee would be willing to co-ordinate this effort as part of the state-specific reform process.

The first report has been accepted by the Government and sent to the State Governments with a request for implementation. The