The Hindu Business Line : Karnataka not to divest from profitable DisComs

Bangalore, Nov. 20 The Karnataka Government has declined to divest its stake from any of the five distribution companies (DisCom) for fiscal adjustment purposes.

Instead, the State Government has offered only some rural circles for private sector participation. The Managing Director of Karnataka Power Transmission Corporation Ltd, Ms Lata Krishna Rao, said: “We will not divest from any of the profitable DisComs. We are, however, prepared to offer some rural circles for private sector participation.”

The State Government’s stance assumes significance. This was because the original distribution privatisation efforts in Orissa and in Delhi were initiated when the BJP-led National Democratic Alliance was in power. The State Government’s changed stance stems from the belief that the DisComs would turn around and be a source of extra budgetary resources in the coming months as losses are cut back.

Already some circles have managed to cut back distribution losses. Aggregate technical and commercial (ATC) losses that were as high 30 per cent, when the separation was effected six years ago are down to about 18.73 per cent, with Mangalore DisCom having the lowest loss.

Cutting ATC losses implied improved revenues for the distribution companies. Despite the improved revenues, distribution companies continue to remain in deficit.

The increased costs were largely on account of the increased power purchase costs. For instance, in the case of the Bangalore Electricity Supply Company Ltd, the increase in purchase costs was about 23 per cent. In fact, all the DisComs have faced similar ranges of increases in the last financial year. Although the deficits were partly offset by the subsidies from the State Government, they were far from sufficient.

This year, for instance, the subsidy budgeted is Rs 2,430 crore for all the five DisComs operating in the State. Consequently, although the end tariffs were decided on the basis of a 15 per cent return on equity, almost all of them have landed in deficits.

Low valuations

Besides, officials said, the major factors hampering divestment were the low valuations offered and the high return on equity expectations by potential investors. Investors’ expectations are in excess of 22 per cent. This effectively implied that the tariffs would have to be raised substantially to conform to the ROE expectations. Alternatively, subsidies would have to be considerably raised, under the Distribution Margin method proposed.

Although this method was shelved in 2003 by the State Government, other methods of valuation would also result in a fiscal burden in the form of subsidies to meet the guaranteed ROE expectations of the private sector.

Consequently, the only system that was acceptable to the State Government was one that involved least fiscal impact. Accordingly, the State Government was now prepared to look at alternative methods of private participation for improving revenue collections and franchising methods instead of outright divestment from DisComs to private sector investors.

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