Karnataka Power Sector Reforms
-Issues in Restructuring- (Finance & Accounts areas)
August 23, 2010
Bengaluru
Resource persons: H.L Mukunda DCA, KPTCL & Vasuki, Director, Dhiya consulting Pvt. Ltd.
Contents
• Understanding the industry structure
• Financial restructuring
• Balance sheet cleaning up
• Cash management issues
• Subsidy administration
Industry structure - Pre-August 1999
Government
of
Karnataka
KPCL KEB KREDL
Generation
Transmission
Distribution
& supply
3 small Hydro & 1 DG plants
Development
of Renewable
Energy
Reform working groups formation Formation of Working Groups for Restructuring
– Karnataka Electricity Board constituted eight Working Groups in May 99
– Chief Financial Adviser was nominated as Director (Reforms)
– Exclusive Reforms Directorate established
• Working groups :
1. Financial Restructuring Group
2. Corporatization Group
3. Asset Listing, Identification and Valuation Group
4. Technical Up gradation and Investment Planning Group
5. Human Resource Development Group
6. Communication Group
7. Tariff Rationalization Group.
8. Distribution configuration Group
ToR for FRP Group • Take steps that are necessary to transform the existing accounting
procedure and practices to suit the corporate accounting practices
• Review the existing book-keeping methods, financial statements, audit
procedures and suggest corrective measures
• Examine KEB’s financial statements, Balance Sheet and propose a
restructuring action plan
• Make financial projections (including resource mobilization for investment
programme with reference to borrowing caps as well as debt management
limits as worked out by the Budget and Resources Section) keeping in view
the restructured scenario.
• Study the existing administrative hierarchy in the accounts cadre and
suggest correctives, if necessary
Sub groups under FRWG • Fixed Assets
• Capital Work in Progress
• Stocks and Assets not in use
• Cash and Bank Balances
• Receivables against supply of power
• Loans and Advances to Staff
• Sundry Receivables and Security Deposit from Consumers
• Power Purchase and related Contingent Liabilities
• Advances to Suppliers and Liability for supply of Materials
• Staff Related liabilities including study of unfunded liabilities
• Debt Servicing Obligations of existing as well as future loans
ToR for sub groups • Matching of Accounts Balances with Subsidiary Registers in respect of each
item in the Books of Accounts
• Appointment of Actuary and actuarial valuation of unfunded liabilities
• Identification of Contingent Liabilities in general and Power Purchase in
particular
• Examine major receivables from consumers and propose action plan for
clearance
• Ways and Means of funding unfunded liabilities
• Analysis of Existing Debt Profile and propose Debt Restructuring
Key activities identified for FRP/BRP I (1st Transfer scheme)
• Make necessary changes required in Accounts to suit Corporate environment
• Diagnostic Study of existing Balance Sheet of KEB and evolving solution /
measures to overcome deficiencies
• Preparation of Closing Balance Sheet of KEB
• Segregation of Balance Sheet into KPTCL and VVNL Balance Sheets
• Develop Financial Projections for next five years and device alternate options
• Finding various funding options for new entities
• Take steps for maintenance of Transmission and Distribution Accounts
separately
Key activities identified for FRP/BRP I (1st Transfer scheme)
• To carry forward the realistic and correct balances of Assets and Liabilities to
the new entities.
• To reconcile the gross figures available at Head Office with subsidiary books
of accounts in respect of various accounts.
• To identify and list out the deficiencies noticed in the Balance Sheet which
are the contributing factors among other things for the critical financial
position of the organization
• To suggest the ways and means of correcting the deficiencies identified
besides quantifying the financial impact of such adjustments on the Govt. of
Karnataka in particular.
• Recast the Balance Sheet clearly depicting the existing status, adjustments
proposed and the revised figures incorporating the proposed adjustments.
Summary of recommendations • Write-back of power purchase liability of Rs.48.23 Crs.
• Recognition of contingent liability relating to power purchase Rs.581.05 Crs.
• Write-off of Rs.8.82 Crs. Assets not in use and write-back of Rs.5.93 Crs. stock
of materials.
• Assessment of Unfunded staff related liability by the Actuary Rs.2142 Crs.
• Write-back of Rs.7.60 Crs. and write-off of Rs.6.50 Crs. under Receivables for
sale of power.
• Suggested action plan for bringing down level of receivables through
securitization, cross-debt adjustment etc.
• Suggested action plan for clearance of huge arrears relating power purchase
through measures like cash payments, issue of Trade Bonds, cross-debt
adjustment, waiver of interest, etc.
Government Approval • The GoK approved the Balance Sheet Restructuring Plan – I (BRP-I) along
with the Financial Restructuring Plan, which was a significant step in the
direction of cleansing up the balance sheet of the erstwhile KEB
• The burden of cleaning of KEB Balance sheet on Government was Rs.819.28
crs
• Besides, as an one time measure, the outstanding dues of urban local
bodies were defrayed through a securitization programme
• A mechanism was also introduced to recover the local body dues on a
monthly basis
Key points
• Bridge consultants who later reviewed the Balance sheet cleansing
proposal fully agreed with the recommendations
• Almost all the recommendations of FR Group was accepted by GoK
• World Bank team placed on record the good wok done by FR Group
Reconstitution of Working group • In May 2001 working groups were constituted and 1o Groups
were formed:-
• Financial Restructuring
• Distribution configuration
• Revenue Improvement
• HRD and Change management
• Corporate Planning
• Commercialization
• Tariff Rationalization
• Technical Interface and Demand Supply Planning
• Social Assessment and Communication
• Asset Listing and Identification
ToR for FR Group • Disaggregation of the Karnataka Power Transmission Company Limited (“KPTCL”)
(post-corporatisation T&D Company) balance sheet in to Transmission and
Distribution Company’s (four Discoms) Balance sheet and proposing balance sheet
clean up process for each of the new entities
• Preparation of financial transfer scheme for transfer of assets, liabilities, and
personnel from KPTCL to distribution companies
• Assist the consultants in audit of accounts receivables and allocation to each
distribution company
• Developing mechanisms for improving the financial and accounting system in the
context of corporatisation and unbundling
• Make financial projections keeping in view the restructured scenario
FRP and BRP II Recommendations
• FRP Working group and the FDP consultants made the following
recommendations to GoK for BRP II adjustments before notifying the
opening balance sheets of new discoms:-
• Write off KPTCL’s receivables up to Rs 866 Crs. and retaining the same in
Government books as receivables
• Tripartite adjustment of Rs. 878 Crs. between GoK, KPTCL and KPCL to clear
off KPCL long term debt to GoK, GoK’s subsidy dues to KPTCL and KPTCL’s
power purchase dues to KPCL
• Government to take over servicing of long term debt of Rs 1050 Crs.
• Funding of terminal benefits as per “Pay as you go” concept
• Total support of Rs. 12140 Crs for power sector for next 10 years
Government approval • Government of Karnataka accepted all the recommendations and approved
the FRP and BRP II
• The principles observed for FRP and BP were in line with the Detailed Policy
Statement announced by the Government of Karnataka (GoK) during
January 2001, wherein it was mentioned that:
“Efforts will be made to ensure that as far as possible the newly formed
utilities are not burdened with historic liabilities. It is the intention of the
Government of Karnataka that the utilities particularly distribution
companies, start their operations with a clean balance sheet”.
Post unbundling issues (to make the Escoms fully independent)
• Setting up of Finance and Accounts Co-Ordination committee
• Commercial Arrangements – Power Purchase and cash transfer issues
– Banking arrangements and ESCROW issue
– Loan segregation
– Shared assets arms length arrangements
• Accounting issues
– Closure of accounts
– Notifying the final opening balance sheets with in the provisional period
– Building capability in ESCOMs especially in corporate office functions
• Inter unit issues including inter ESCOM issues
• Terminal Benefits administration
BRP III Pre-BRP III -
KPTCL BRP III
Post BRP III -
KPTCL
Assets
Fixed Assets
- Gross Block 5,426 - 5,426
- Less: Accumulated Depreciation 2,121 - 2,121
- Net Block 3,304 - 3,304
- Capital work in progress 691 - 691
Total fixed assets 3,995 - 3,995
Investments 46 - 46
Current Assets
- Interest accrued on investments and deposits 2 - 2
- Inventories, stores and work in progress 232 - 232
- Sundry debtors 1,381 (709) 672
- Receivables from trading of power - - -
- Cash balances 36 - 36
- Bank balances 251 - 251
- Loans and advances 422 - 422
- Subsidy receivable from GoK 814 - 814
- Other assets 535 - 535
- Miscellaneous exp not written off 27 - 27
- IUA (57) 57 -
Total Current Assets 3,642 (652) 2,989
Less
Total Current liabilities
- Liability for supply of power 1,633 - 1,633
- Liability for supplies / works 405 - 405
- Staff related liabilities and provisions 437 - 437
Unpaid Salary and Other liabilities 34 - 34
Borrowing for working Capital - - -
Security deposits from Contractors in Cash 50 - 50
Security deposit other than Cash 71 - 71
- Other liabilities and provisions 327 - 327
Total Current liabilities 2,956 - 2,956
Net Current Assets 686 (652) 33
Total Assets 4,727 (652) 4,075
Rs. In crs.
BRP III Liabilities
Networth 1,571 (300) 1,271
Service line and security deposits
- Security deposit from consumer 1,246 - 1,246
- Service line deposit from consumers 336 (288) 48
Sub-total 1,581 (288) 1,294
Total Loans (a+b+c) 1,575 (65) 1,510
Total liabilities 4,727 (652) 4,075
Long term debt to equity ratio 1.00 1.19
Long term debt to equity ratio (security deposit as ST debt) 0.50 0.59
Total debt to equity ratio 2.01 2.21
Fixed asset coverage ratio 2.54 2.65
Rs. In crs.
BRP III Transco Escoms Bescom Mescom Hescom Gescom
Assets
Fixed Assets
- Gross Block 2,195 3,230 1,209 806 718 497
- Less: Accumulated Depreciation 742 1,379 479 352 325 223
- Net Block 1,453 1,851 730 454 393 274
- Capital work in progress 508 183 81 38 46 18
Total fixed assets 1,961 2,035 811 492 439 292
Investments 46 - - - - -
Current Assets
- Interest accrued on investments and deposits 2 (0) (0) - - -
- Inventories, stores and work in progress 80 152 48 39 38 26
- Sundry debtors 43 629 311 122 128 68
- Receivables from trading of power - - - - - -
- Cash balances 2 34 15 7 9 2
- Bank balances 203 47 32 5 4 7
- Loans and advances 374 48 16 14 14 5
- Subsidy receivable from GoK 814 - - - - -
- Other assets 520 15 8 3 3 1
- Miscellaneous exp not written off 27 0 0 0 0 0
- IUA - - - - - -
Total Current Assets 2,065 925 430 190 196 108
Less
Total Current liabilities
- Liability for supply of power 1,633 - - - - -
- Liability for supplies / works 144 261 123 69 42 27
- Staff related liabilities and provisions 438 (1) - - (1) (0)
Unpaid Salary and Other liabilities 3 31 12 7 10 2
Borrowing for working Capital - - - - - -
Security deposits from Contractors in Cash 43 7 3 2 2 1
Security deposit other than Cash 71 1 0 0 - -
- Other liabilities and provisions 284 43 7 3 5 28
Total Current liabilities 2,615 341 145 80 58 58
Net Current Assets (550) 583 285 110 139 50
Total Assets 1,457 2,618 1,097 602 577 342
Rs. In crs.
BRP III Liabilities
Networth 539 732 233 138 247 114
Service line and security deposits
- Security deposit from consumer 0 1,245 632 307 176 130
- Service line deposit from consumers 48 - - - - -
Sub-total 48 1,245 632 307 176 130
Total Loans (a+b+c) 869 641 232 157 154 98
Total liabilities 1,457 2,618 1,097 602 577 342
Long term debt to equity ratio 1.61 0.88 1.00 1.13 0.62 0.86
Long term debt to equity ratio (security deposit as ST debt) 1.48 0.32 0.27 0.35 0.36 0.40
Total debt to equity ratio 1.70 2.58 3.72 3.35 1.34 2.01
Fixed asset coverage ratio 2.26 3.18 3.50 3.14 2.85 2.98
Rs. In crs.
Implementation issues Management of existing Loans
• Loan allocation criteria
– End use – Transmission, Distribution, General capex, Corporate loans – Security offered – Escrow, Mortgage, Guarantee – Loan term
• There was objection from the lenders for transfer of disaggregated loans to
the books of ESCOMs
• KPTCL entered into a back to back arrangement with ESCOMs
• Depending on the Loan repayment schedule for each loan, KPTCL serviced
the loan and ESCOMs contributed their portion till all the loans were repaid
in 2009
• Further drawls for the already sanctioned loan came to KPTCL books initially
and was later transferred to ESCOMs by KPTCL
• Only fresh loans were drawn by ESCOMs
Implementation issues Cash management
• Unbundling happened w.e.f. 1st June 2002
• From 1st June 2002 to 30th Sept. 2002, KPTCL managed all cash management
issues of discoms
– All existing Bank accounts continued – Both operative and non-operative
– Separate cash book for each discom was opened by KPTCL
– Treated as receivable and payable in KPTCL books. Net balance was set off
against the BST
• From 1st October 2002, discoms took over the management of cash on their
own
– New disbursement bank accounts opened at Headquarters
– Collecting bank and disbursement bank accounts at field level changed to the
name of discom
– Fund transfer from HO and remittance to HO ( as per erstwhile practice)
continued at discom level also
Implementation issues Subsidy management
• Initially (till June 2005) the subsidy for the sector as a whole was received by
KPTCL
• Subsidy receivable comprised of :-
– Cash releases
– Electricity tax collected and retained
– Tripartite adjustments
– Other adjustments
• This was allocated by KPTCL on the basis “Gap” approved by KERC in the ERC
order
• Amount payable to each ESCOM by KPTCL was set off against the BST and
other receivables like loan repayment, interest on loans etc., from ESCOMs
• Post June 2005 subsidy is being received by ESCOMs directly from
Government of Karnataka