Strong political will needed for power sector reforms: Fitch

New Delhi: Global rating agency Fitch Thursday said that strong political will is necessary to achieve meaningful reforms in the power sector, even as the government has approved a debt restructuring plan for beleaguered state electricity boards.

Noting that debt restructuring for the SEBs would depend on meeting important conditions such as tariff revisions, Fitch Ratings said it should allow the entities to upgrade their infrastructure, curtail inefficiencies and improve credit profile.

"However, the long-term benefits will only materialise if the SEBs meet their milestones on tariff rises and reducing the large operational inefficiencies that lie at the core of the problem.

"In light of the political sensitivity of the issue, strong political will across the various state governments will be needed to achieve meaningful reform," it said in a statement.

The government, on Monday, approved proposal to restructure debt of power distribution companies -- whose accumulated losses were worth about Rs 2.46 lakh crore at the end of March 2012.

Going by estimates, debt to the tune of about Rs 1.2 lakh crore is expected to be rejigged under the plan.

Among others, the plan would see state governments converting half of the debt into bonds while the rest would be restructured.

According to Fitch, the previous restructuring of SEBs in 2001 set a discouraging precedent since political reluctance to allow tariff hikes and reductions in power subsidies largely prevented its successful implementation.

"...The resurgence of the problem nearly a decade later and in a greater magnitude indicates that the solution lies in restoring the financial viability of the distribution companies," the statement said.

Fitch said the largest benefit for the banks would be that state governments would convert all their loans to SEBs into equity as well as clear all their dues before the end of this year.

"Most funding is working-capital loans, so the most immediate effect of the reform will be to turn these short-term loans in to three-year balloon loans. It is not yet known whether banks will write down the net present value of these loans to reflect the longer maturities," it added.

On the debt restructuring plan, Power Minister Veerappa Moily had said it is linked to performance and that SEBs should take concrete measures to improve operational performance.

PTI