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In a move to help quicken the flagging pace of distribution reforms in the power sector, the Union finance ministry has approved the creation of a Rs 50,000-crore National Electricity Fund - first mooted in the 2008-09 Budget - for attracting investment in this area.
The ministry has also agreed to provide an interest subsidy for lending under the fund.
With this go-ahead, the power ministry is set to seek Cabinet approval for the scheme, after inviting comments from different departments.
"The in-principle approval by the finance ministry for NEF, including the interest subsidy mechanism under it, has been received. We will circulate a Cabinet note next week, seeking comments from all the ministries concerned," said power secretary P Uma Shankar.
He said the scheme could start with a smaller amount. "The size of the fund will be fixed at the level of the Cabinet. However, size is not so important. The scheme will attract investment in the distribution sector, which has not been taking place as desired," he said.
The idea for creating such a fund was originally mooted to help the perennially bankrupt State Electricity Boards (SEBs) to improve their finances and reduce distribution losses. The money raised by the NEF was to be loaned to these boards at low rates of interest.
After the 2008-09 budget announcement for creation of an NEF, a committee headed by the Member (Power) in the Planning Commission, B K Chaturvedi, was set up to work out details.
The panel had suggested an interest subsidy mechanism wherein the Centre would bear a part of the interest cost of funds raised by a state utility for distribution projects.
Based on the panel's recommendations, a note was circulated by the government in April last year, proposing an interest subsidy of Rs 18,438 crore (Rs 184.38 billion) over 14 years on loan disbursements of Rs 50,000 crore (Rs 500 billion).
The proposal had then gone to the Expenditure Finance Committee under the finance ministry.
"Any financial institution or bank that lends to distribution companies could be a part of the scheme. The interest subsidy to be provided by the Centre would depend on the size of loan. These loans will have a tenure of 14 years," Uma Shankar said.
Another senior official from the ministry said an announcement relating to allocation for the long-awaited fund could be made in Budget 2011-12, to be presented the coming Monday.
In the last budget (2010-11), the power ministry had demanded an allocation of Rs 5,063 crore for an NEF, recasting the scheme to make it applicable to loans from the banking sector and other financial institutions for distribution projects, along with non-Accelerated Power Development and Reforms Programme projects.
However, an amount of only Rs 227 crore (Rs 2.27 billion) was finally allocated. The ministry was allocated Rs 60,751 crore (Rs 607.51 billion) for the current financial year as against a proposed annual plan outlay of Rs 64,551 crore (Rs 645.51 billion).
Electricity distribution was identified as the "weakest part" in the country's power sector by the Planning Commission in its Mid-Term Appraisal last year, owing to heavy Aggregate Technical and Commercial (AT&C) losses.
The huge AT&C losses, which touched a record high of Rs 40,000 crore (Rs 400 billion) in 2009-10, ensured the disability of most SEBs to raise money or to do so only at very high rates of interest. The new fund will address this issue.
The distribution segment accounts for around 20 per cent of the overall annual investment of Rs 95,000 crore (Rs 950 billion) in India's power sector.
Around 40 per cent of India's overall annual power generation of 700 billion units is lost due to an inefficient transmission and distribution network.
