Their weak fiscal position is in dire need of a reform.
Fitch Ratings says in a new report that successfully addressing the weak financial positions of state distribution companies (discoms) is key to improving the health of India's power sector. The weak fiscal position of these entities has led to sustained delays in payment to market participants and weak off-take from power generators, in addition to increasing the risks associated with much-needed investment in the sector.
The agency sees the new restructuring package offered to the state discoms in November 2015 as a positive. However, the states opting for the package and delivering on the loss-reductions and efficiency improvements over the medium-term remains essential for the success of the programme.
Fitch forecasts substantial capex to continue in 2016 for the rated utilities in India, weighing on their financial profiles. However, Fitch maintains a stable outlook on the utilities sector and ratings of Indian utilities in 2016.
We see the debt relief package announced in November 2015 for financially distressed state electricity distribution companies (discoms) as a positive for the
electricity sector. However, we believe commitment by the state governments towards addressing inefficiencies at the discoms is key to successfully addressing the issue.
The package does not address tariff reforms directly – a very politically sensitive subject in India. The central utilities – PGCIL, NTPC and NHPC – have benefitted from tri-partite agreements (between the entity, state government and central government), which has helped them collect dues from discoms on a timely basis. These agreements lapse in October 2016; there is no clarity as to whether these will be rolled over.
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