The State budgets for 2011-12 reflected a fiscal stance generally consistent with the fiscal roadmap laid down by the
Thirteenth Finance Commission. Although a majority of States have revised their FRBM Acts, most of them do not
include provisions for additional disclosures for enabling transparent assessment of their finances. The recommended
restructuring of public expenditure system envisages doing away with plan-non plan distinction of budgetary expenditures
for not only improving the efficiency of expenditure management but also for attaining desirable outcomes. There is
also a need to rationalise the operation of Centrally Sponsored Schemes to address the issues of lack of flexibility in these
schemes, counterpart funding shortage from the States and low utility of large number of schemes with thinly spread
resources at the field level. Financial losses of State Power Utilities continue to be a drag on the finances of States, which
necessitates not only renegotiation of debt liabilities of distribution utilities but also undertaking necessary reforms for
enabling independent functioning of State Electricity Regulatory Commissions and addressing issues relating to tariff
revisions. The State finances should also capture both explicit and implicit liabilities associated with certain off-budget
activities including project financing undertaken through SPVs/public-private partnership mode. There is also a need
for greater focus on structural issues which pose significant fiscal challenges, particularly for those States which could
not undertake rule-based fiscal corrections prior to the crisis years of 2008-09 and 2009-10.
1. Introduction
2.1 As the second phase of rule-based fiscal
consolidation has commenced for the States from
2011-12, the underlying emphasis should not only be
on reverting to a sustainable fiscal path but also in
drawing lessons from the past and developing new
perspectives to address the key challenges. In
particular, while the incentivised approach towards
fiscal correction should continue, there is a need to
address the structural rigidities, especially for the
States which had missed out in the first phase of
implementation of rule-based fiscal discipline. Greater
fiscal transparency is also critical for monitoring the
quality, durability and effectiveness of fiscal correction
at the State level. The efficiency of expenditure
management systems for the public sector as a whole
needs to be improved for achieving desired outcomes.
From the perspective of fiscal stability, deterioration
in the financial conditions of State Power Utilities
(SPUs) may require a reassessment of the potential
impact on State finances. With increasing recourse
to public-private partnerships mode for project
financing, State governments need to recognise both explicit and implicit contingent liabilities in this regard.
Against the backdrop of an uncertain global economic
environment, prudent management of interest rate
and exchange rate risks associated with external
loans (on back-to-back basis) poses a new challenge.
This chapter raises key questions about the fiscal
challenges faced by the States and attempts to
provide an assessment on each of them.
2. Fiscal Consolidation
How does the budgetary stance of States for 2011-
12 compare with the revised road map of fiscal
consolidation of the Thirteenth Finance
Commission? Are there some structural issues
which still hamper rule-based fiscal correction for
the few States that missed it earlier?
2.2 The incentivised fiscal consolidation process
followed by the State governments under the
legislative framework of Fiscal Responsibility and
Budget Management (FRBM) prior to the global crisis,
had enabled most of them to not only attain surpluses
in their revenue account but also achieve impressive
reductions in their fiscal deficits. With the disruption in the fiscal consolidation process due to the
exceptional circumstances of 2008-09 and 2009-10,
the States needed to resume their fiscal consolidation
process at the earliest. In this context, the Thirteenth
Finance Commission (ThFC) had envisaged that the
States would be able to revert to their fiscal
consolidation path by 2011-12, allowing for a year of
adjustment in 2010-11.
2.3 According to the revised roadmap chalked out
by the ThFC for the States, all non-special category
States that had attained balance/surplus in their
revenue account in 2007-08 were to return to revenue
balance by 2011-12 and maintain it thereafter. These
States were also expected to achieve a fiscal deficit
of 3 per cent of GSDP by 2011-12. The State budgets
of 2011-12 show that barring two States (Goa and
Haryana), all other non-special category States, which
had attained revenue balance in 2007-08, have either
budgeted for balance or surplus in their revenue
accounts for 2011-12. The GFD-GSDP ratio was
budgeted to be within the stipulated 3 per cent for all
these States except Goa and Jharkhand.
2.4 The ThFC had recommended a separate
adjustment path for three States (Kerala, Punjab and
West Bengal) which had revenue deficits in 2007-08,
so as to eliminate the same by 2014-15.2 While the
budgeted revenue deficit to GSDP (RD-GSDP) ratio
for 2011-12 is higher than the ThFC target in the case
of Kerala, it is lower than the target for Punjab. West
Bengal’s budgeted RD-GSDP ratio for 2011-12 is in
line with the ThFC target. While the budgeted GFDGDP
ratios for Kerala and West Bengal for 2011-12
are within their respective ThFC targets, the budgeted
GFD-GDP ratio for Punjab was marginally higher than
the target.
2.5 Non-attainment of the revenue account
targets by Kerala and Punjab precluded these States
from being granted debt relief (which is linked to progressive reduction in their revenue deficit) from
2008-09, although they continued to get interest relief
from the Centre. As West Bengal had not enacted
its fiscal responsibility legislation at the time, it was
not entitled to avail the benefit under the debt waiver
scheme, thereby losing out on both debt relief as
well as interest relief from the Centre. The basic
problem of the finances of West Bengal lay in its
own tax revenue (OTR)-GSDP ratio which was
substantially lower than that of other States. Apart
from not being able to fully reap its revenue potential
(with inadequate stamp and registration duty
collections even during real estate boom phases),
the low mobilisation of OTR reflected a lower tax
base or per capita income and lower potential for
certain tax collections, particularly in respect of motor
vehicles, whose number stood lower than that of
other States like Andhra Pradesh with a comparable
population size. Consequently, growth in West
Bengal government’s revenues could not match its
expenditure growth. In the case of Kerala, pensions
and salaries continue to be one of the main drivers
of revenue expenditure. Pension expenditure is also
high in the State for two reasons viz., (a) the lower
stipulated age of retirement than the other States
(b) the non-introduction of the new pension scheme
(NPS). While the State has constituted a cabinet subcommittee
to examine the issue of raising the
retirement age of its employees on par with the other
States, no decision has yet been taken on the NPS.
In the case of Punjab, although its own tax and nontax
revenues in terms of GSDP compare well with
the respective national averages, the revenue
expenditure-GSDP ratio is higher than the national
average. The average share of development
expenditure in total expenditure is significantly lower
than the national average as the State is weighed
down by high committed expenditure. In terms of
interest payments-revenue receipts ratio, Punjab ranks the second highest in the country. Concerted
efforts are being taken by the three States to improve
their fiscal positions and their progress is being
monitored by the Central government.
2.6 To address the problem of interest rate
asymmetry between the Centre and the States with
regard to loans to the States from the National Small
Savings Fund (NSSF), the ThFC had
recommended that the interest rate of NSSF loans
contracted by the States till 2006-07 and
outstanding at the end of 2009-10 be reset at a
common interest rate of 9 per cent in place of the
existing 10.5 per cent/9.5 per cent. A State will be
considered eligible for this interest relief from the
date of amendment/enactment of FRBM in
accordance with the recommendation of the ThFC.
The Union Budget for 2012-13 proposed that from
2012-13 onwards, the States will be eligible for
provisional relief, based on compliance with the
fiscal targets in their respective FRBM Acts, as
reflected in their Budget Estimates. If a State, after
getting the interest relief, breaches the FRBM in
Actuals (as per Finance Accounts), the benefit of
reduced interest on NSSF loans will be withdrawn
and the earlier interest rate will become applicable.
This excess interest relief availed by the State shall
be recovered in the next year. The State may revert
to 9 per cent interest rate as and when it complies
with its FRBM targets again.
3. Fiscal Transparency
What disclosure and dissemination requirements in State Budgets do amended FRBM Acts entail?
2.7 The ThFC had stipulated that States amend/
enact their FRBM Acts, incorporating the targets set
by it as a pre-condition for the release of all Statespecific
grants and debt relief measures. So far, 27
States have amended their FRBM Acts/Rules setting
out annual deficit and debt ceilings in terms of GSDP
in accordance with the path set out by the ThFC. As
the GSDP series has been revised after the release of the ThFC report, the series used by the ThFC to
arrive at its targeted ratios are not comparable with
the deficit/debt to GSDP ratios worked out on the basis
of the new GSDP series. There is, therefore, a need
to develop an appropriate measure that is consistent
with the ThFC recommendation to monitor adherence
to the FRBM targets.
2.8 While amending their FRBM Acts/Rules, most
States have confined themselves to the minimum
requirement of specifying annual deficit/debt limits as
stipulated by the ThFC. The ThFC had also
recommended that all States incorporate the setting
up of an independent review/monitoring mechanism
in their FRBM Acts. It had also suggested that States
should attempt to incorporate statements on revenue
consequences of capital expenditure, public-private
partnerships (PPP) and related liabilities, physical and
financial assets and vacant public land and buildings.
Only two States (Karnataka & Arunachal Pradesh)
have included these disclosures within the ambit of
their amended FRBM Acts/Rules. Other States could
follow this example and increase their disclosures to
enhance fiscal transparency. In this context, it is also
important that the States provide information on
special purpose vehicles (SPVs) floated by them with
a view to enhancing fiscal transparency.
4. Classification of Expenditure
What is the rationale to do away with the Plan and non-Plan distinction for classifying budgetary
expenditures?
2.9 The distinction between Plan and non-Plan
expenditure has, over the years, rendered the entire
budgeting exercise complex and made outcomebased
budgeting difficult. The classification of revenue
expenditure and capital expenditure also requires a
fresh look in the post-FRBM scenario in view of the
need for substantial resource transfers to States and
local bodies. The transfer of Central resources to
States through various types of schemes and multiple
modes of transfer have posed problems in obtaining a comprehensive overview of transfers to the States
as well as in effective monitoring of expenditure. There
are also issues concerning the accountability of funds
directly transferred to implementing agencies in the
States. The Eleventh Plan document also referred to
innovative methods of financing projects such as
PPPs and new administrative mechanisms of
implementation. In this context, the scope of the public
sector plan needs to be clarified. To address these
issues, the Planning Commission set up a High Level
Expert Committee to suggest measures for the
efficient management of public expenditures
(Box II.1).
2.10 The Committee’s recommendation to do away
with Plan-non Plan distinction in budgetary
classification of expenditures envisages not only
efficient management of full expenditure which
envelopes various functions/sectors/services but also
helps in proper linking of outlays to outcomes. This
would enable transparent assessment of both costs
and outcomes achieved under various categories of
expenditure. Successful migration to the new system
would, however, entail that the new classificatory
expenditure structure gets assimilated across the
government machineries at all levels including the
roles to be played by the Ministry of Finance, the
Planning Commission, administrative ministries and
the State governments. Since the present system of
plan-non plan classification plays an important role
in determining grants-in-aid to the States
recommended by the Finance Commission (FC),
merging the plan and non-plan categories of
expenditure would also require a change in
assessment mechanism of the FC.
5. Central Transfers to States
How can the efficacy of Centrally Sponsored
Schemes be improved?
2.11 States are primarily responsible for major
sectors such as health, education and employment which often involve large public expenditures.
Recognising the higher resource requirements of the
States relative to their resource-raising capacity, the
Constitution mandates statutory transfers of tax and
grants from the Central government to the State
governments in accordance with the Finance
Commission awards. In addition, States also have
access to central Plan funds through centrally
sponsored schemes (CSS) and central assistance
to State Plans. The CSSs are operationalised by
Central ministries based on scheme-specific
guidelines and are implemented by State
governments or their designated agencies. The
Central assistance to State Plans has two
components, viz., normal Central assistance and
additional Central assistance for externally aided
projects and for special programmes based on
specific criteria and guidelines. Grants from the
Centre to the States as a proportion of total revenue
receipts of the States increased from 16.8 per cent
in the 1990s to 17.3 per cent during 2000-2010,
primarily during the second half of the decade (18.3
per cent) on account of higher non-Plan grants under
the Twelfth Finance Commission award as well as
higher transfers under State Plans and CSS.
2.12 The proliferation of CSS and the need for
counterpart funds has led to the pre-empting of
the State government resources from their Plan
priorities. In several cases, it has also led to
difficulties in accessing CSS funds due to the
shortage of counterpart funds from the States.
States, particularly Bihar and Jharkhand and the
North-eastern States, have often represented that
they have resource constraints and are not able
to provide their share to enable them to access
the required funds under CSS. This is particularly
important for schemes such as Sarva Shiksha
Abhiyan (SSA) where the counterpart funds are
required to be provided to the extent of 35 per cent
and the sector is critical for every State.
Box II.1: Recommendations of the High Level Expert Committee on Efficient Management of Public Expenditure
In response to the conceptual issues relating to plan financing
raised in the Eleventh Plan document, the Planning Commission
constituted a High Level Expert Committee on Efficient
Management of Public Expenditure (Chairman: Dr. C
Rangarajan). The Committee submitted its report in July 2011.
The Committee has recommended that while the process of
preparing Five Year Plans may be continued, the distinction
between Plan and non-Plan expenditure may be removed
from the budgets of the Union and State Governments to
present a more holistic view of expenditure rather than the
present segmented view. Other recommendations of the Group
include:
• One-to-one correspondence between the annual budgetary
component of the plan of the Centre and States and
the government budgets of the Centre and States,
respectively.
• A shift in the budgeting approach from a one-year horizon to
a multi-year horizon and from input-based budgeting to
outputs and outcomes.
• Changes in organisational structure, mandates and
processes as well as appropriate interventions in human
resource development and information technology in order
to accommodate the shift to holistic view of expenditure.
• Defining and delineating the role of the Ministry of Finance,
the Planning Commission, administrative ministries and the
State governments.
• Changes in the Annual Budget process.
Comprehensive Framework of Transfers to States
A new multi-dimensional budget and accounting classification
to present a comprehensive view of Central transfers to
States.
• The proposed classification to provide uniform codes for
central programmes, sub programmes and schemes being
implemented in the States.
• The Central Plan Scheme Monitoring System (CPSMS) to
be extended to enable tracking of expenditure for all central
schemes using both treasury route and society route. This
may require interface of CPSMS with core banking solutions
of banks, systems of State treasuries and accountant general
offices.
• Empowering citizens with information on the flow of resources
and their utilisation through a portal, thereby promoting
transparency and accountability.
Accounting Concerns Arising from Direct Mode of Transfer
• The treasury mode of transfer of Central Plan fund is
recommended.
• A suitable accounting methodology to be worked out by
Controller General of Accounts (CGA) and Comptroller and
Auditor General (CAG) to distinguish between final
expenditure and transfer.
• The switchover to complete treasury mode may be made
from the Twelfth Five-Year Plan for all new schemes, with a
short transition period to allow for necessary adjustments to
the existing schemes.
• Until the switchover is complete, accounting and submission
of utilisation certificate under society mode to be rationalised.
Revenue / Capital Classification
• Revenue-capital classification to be continued. Capital
expenditure should relate to creation of assets and be
determined by ownership criteria.
• While all transfers should be treated as revenue expenditure
in accounts, the merit of classifying revenue expenditure by
end-use is also considered for FRBM compliance and grants
for creating assets may be classified as capital grant.
• An adjusted revenue deficit is recommended only for the
purpose of FRBM compliance. FRBM may require some
amendments to allow for adjusted revenue deficit.
Scope of Public Sector Plan
• The Central or State Plan should continue to include
investment outlays (funded by internal and extra budgetary
resources) of Central public sector enterprises and States
public sector enterprises, respectively. Consolidated
information on the resources and expenditure of rural and
urban local bodies may be provided as a special supplement
to the budgets.
• The budgets and accounts of the implementing agencies
should be shown as a supplement to the Budgets till funds
are transferred through direct route.
• As regards public-private partnership (PPP), the annuity
commitments may form a part of committed expenditure of
the budget of the concerned Ministry/Department and annuity
payments may be treated as capital expenditure.
• Viability gap funding is a grant provided to concessionaire of
the PPP projects and may be treated as capital grant.
• There should be supplements to the budgets providing
project-wise, ministry-wise and sector-wise information on
the PPPs.
Source : Report of the High Level Expert Committee on Efficient Management of Public Expenditure, Planning Commission, Government of India, July 2011.
Simultaneously, it is also important to ensure
that States have adequate financial participation
to ensure a sense of ownership of the scheme. It has been argued that if 100 per cent grants come
from the Central government, ownership gets
diluted.
2.13 Other issues of concern to policy makers and
implementing agencies over the years include lack
of flexibility, accountability, enforceability and
implementation. To address some of these concerns,
the Planning Commission had constituted a subcommittee
to look into the restructuring of CSS to
enhance its flexibility, scale and efficiency. The
Committee has recommended that the interdistribution
amongst States needs to be based on
equitable notified criteria. It has also recommended
that the linkage between Centre and State funding needs to be kept in mind while devising the criteria
for distribution (Box II.2).
2.14 The ThFC had recommended that Central
loans to States for CSS/Central Plan schemes
through ministries other than the Ministry of Finance
that were outstanding at the end of 2009-10 be
written off. Accordingly, the Central government
would be writing off the outstanding debt under these
schemes amounting to around `21 billion during
2011-12.
Box II.2: Report of the Committee on Restructuring of Centrally Sponsored Schemes
The Central government has over the years introduced several
centrally sponsored schemes (CSS) in areas that are national
priority such as health, education, agriculture, skill development,
employment, urban development and rural infrastructure. Several
of these sectors fall within the sphere of activity of the State
governments. States have been raising concerns at various
forums about lack of flexibility in these schemes, the adverse
implication of counterpart funding requirement of CSS on State
finances and the questionable utility of operating large number
of CSS with thinly spread resources at the field level. To consider
the concerns of all stakeholders, the Planning Commission
constituted a Sub-Committee in March 2011 (Chairman: Shri
B.K. Chaturvedi) to suggest restructuring of CSS to enhance its
flexibility and efficiency. The main recommendations of the Sub-
Committee which submitted its report in September 2011 are
given below.
• CSS with an average annual outlay of less than `1 billion
(which at present accounts for 44 per cent of the total CSS)
should either be weeded out or merged for convergence with
larger sectoral schemes or alternatively be transferred to
the States, which can then continue with these schemes
based on their requirements.
• The existing CSS should be restructured into three
categories, viz., (a) flagship schemes which will address
major national interventions required on education,
health, irrigation, urban development infrastructure, rural
infrastructure, skill development, employment and other
identified sectors, (b) major sub-sectoral schemes to
address developmental problems in sub-sectors of major
sectors like agriculture, education and health, and (c) sector
umbrella schemes, which will address the sectoral gaps to
help improve effectiveness of Plan expenditure. Such
restructuring will reduce the total number of schemes from
147 to 59.
• The distribution of CSS funds amongst different States should
be based on transparent notified guidelines that should be
put on the website of the concerned ministries. To incentivise
the States to provide larger funds for certain sectors such as
health, education, urban development, skill development and
rural infrastructure, 50 per cent increase in the budget amount
of the Central government department will be distributed
amongst those States that have provided for an increase in
their budget over the previous year in the concerned sector
(excluding Central CSS/ACA funds).
• New CSS should focus only on major interventions required
by national development needs. Such schemes should be
flagship schemes (Category-I) and have a minimum Plan
expenditure of `100 billion over the five-year Plan period.
New schemes less than this stipulated minimum should either
be part of the major sub-sectoral schemes (Category-II) or
sector umbrella schemes (Category-III).
• The normal Central assistance to States should not be
reduced to below 10 per cent of gross budgetary support
(GBS) to enable States to have adequate, flexible and untied
resources for their Plans.
• To enable State governments to meet their special needs,
the design of CSS should be flexible and 20 per cent of budget
allocation in all the CSS (10 per cent in flagship schemes),
to be called ‘Flexi Funds’, should be earmarked in each
scheme for this purpose.
• The evaluation of the CSS may be done by (a) professional
institutions; (b) visits of experts to major project implementing
States; (c) other individual experts by field visits. In addition,
sample surveys may be carried out in selected States across
the country to assess the impact and outcomes of the
individual CSS. The Planning Commission should prepare a
list of organisations that can conduct such monitoring and
evaluation in States.
Source : Report of the Committee on Restructuring of Centrally Sponsored Schemes, Planning Commission, Government of India, September 2011.
6. External Borrowings
Why do States need to give special attention to their foreign currency denominated debt?
2.15 State governments cannot access external
sources of finance directly. Based on the
recommendation of the Twelfth Finance Commission,
transfer of external assistance to non-special category
States is being made on a ‘back-to-back’ basis3 from April 1, 2005. For special category states (Northeast
States, Uttarakhand, Himachal Pradesh, and
Jammu and Kashmir), external borrowings are in the
form of 90 per cent grant and 10 per cent loan from
the Central government.
2.16 The present arrangement entails the exposure
of States to uncertain movements in both international
interest rates on which the lending agencies
benchmark their interest and currency exchange
rates. As per the ‘back-to-back’ loan transfer
arrangement, States have to bear the currency risk
since principal repayments and interest payments on
such loans to external agencies are denominated in
foreign currencies. In case of significant rupee
depreciation, larger provisions may be required to
meet debt service obligations that may negatively
impact the fiscal health of the State concerned. Three
States (Andhra Pradesh, Tamil Nadu and Madhya
Pradesh) accounted for over half the outstanding
loans denominated in foreign currency as on February
29, 2012, with Andhra Pradesh alone accounting for
over one-fifth.
2.17 The recent increase in global uncertainties
has raised both interest rate and exchange rate risks,
with the latter assuming more serious proportions in
the light of the sharp depreciation of the rupee in the
during September – December 2011. This underlines
the need for capacity building by the State
governments to ensure that debt denominated in foreign currency is prudently managed. The currency
risk needs to be factored in while weighing the costs
of domestic borrowing vis-a-vis that of external
borrowing.
7. Losses of State Power Utilities
What are the factors affecting financial conditions of power utilities and how do they impact State Finances?
2.18 A growing area of concern for the States is
the significant increase in financial losses of the State
power distribution utilities which carry both a direct
as well as an indirect burden on the finances of State
governments. Besides budgetary support to the SPUs
through subsidies, grants and loans, the States also
extend guarantees for loans taken by the power
utilities from financial institutions. SPUs are making
huge cash losses due to non-revision of tariffs over
extended period of time on the one hand, and nonrealisation
of subsidies from the State government,
on the other. The deterioration in financial
performance of SPUs is expected to have significant
implications for the finances of States.
2.19 Power sector reforms and the unbundling of
power utilities have not had the desired impact on
the financial position of the power utilities or the State
governments. Subsidies to SPUs/State Electricity
Boards (SEBs), which have been rising over the years,
were high in 2009-10 for Gujarat and Karnataka which
had unbundled utilities as well as for Tamil Nadu
where the power utilities had remained in bundled
form until 2009-10. Net loans to SEBs/unbundled
SPUs were high for Madhya Pradesh, Bihar and
Jharkhand. Only a few States separately reported
guarantees extended to SPUs.
2.20 The gap between the average cost of supply
and average revenue (with and without subsidy)
realised has widened in several States as the tariff revisions to close the gap do not take place regularly.
Pending tariff revisions, the SPUs resort to borrowing
from banks and financial institutions to cover their
losses. The accumulated borrowings and interest
payments add substantially to the average cost of
supply and create further pressure on the financial
position of the SPUs. The non-payment of subsidy to
SPUs by some State governments also complicates
the situation. Although the share of loans from the
States as a proportion of total borrowings of the power
utilities and subsidy realised (subsidies received as
a proportion of subsidies booked) have been declining
in recent years, the increase in State government
guarantees to these utilities has increased the
contingent liabilities of the States.
2.21 As SPUs have increasingly financed their
losses through short-term borrowings from banks and
other financial institutions, these borrowings have
assumed alarming proportions. In this context, the
Planning Commission had appointed a High Level
Panel (HLP) on ‘Financial Position of Distribution
Utilities’ in July 2010 to look into their financial
problems and to identify corrective steps. According
to the report submitted by the HLP in December 2011,
over 70 per cent of the accumulated loss (adjusted
for subsidy) of `820 billion of the distribution utilities
between 2005-06 and 2009-10 was financed by public
sector banks, 42 per cent of which was backed by
State government guarantees. The cushion available
in the form of States’ guarantee redemption funds at
`40 billion to meet the commitment arising from
possible default is grossly inadequate. The HLP has
made several recommendations which inter alia
include setting up of a special purpose vehicle to
address the issue of repayment default by SPUs
(Box II.3).
2.22 Arrears on subsidy are not captured in the
State Budgets as the budgets follow cash accounting
as opposed to accrual-based accounting. Information
on unpaid subsidies, loans extended against State
government guarantees/letters of comfort as also guarantees invoked, if any, should be transparently
reported by the State governments.
8. Public Private Partnership (PPP) at the State Level
With policy emphasis on removing bottlenecks
and incentivising the implementation of PPP
projects, what disclosures should the States make
for transparent assessment of the associated
liabilities?
2.23 Recourse to the PPP mode for project
financing is generally encouraged because it frees
valuable fiscal space for the provision of public
goods in areas where such financing may not be
forthcoming. PPP projects in sectors that come
under the purview of the State governments such
as urban amenities, State highways and minor
ports have increased in recent years. Some States
like Maharashtra, Andhra Pradesh, Karnataka and
Gujarat have undertaken far more PPPs than
others. While there has been a concentration of
PPPs in the road sector across the States, there
is greater diversity of PPP projects in certain States
like Andhra Pradesh where, besides roads, PPPs
cover sectors such as education, energy, forestry,
health, information technology, minor ports,
tourism and urban development. In terms of the
main types of PPP contracts, almost all contracts
have been of the build, operate and transfer (BOT)
type or build, own, operate and transfer (BOOT)
type (either toll or annuity payment models) or
close variants.
2.24 With a view to incentivising PPP, the
Government of India has formulated the draft Public
Private Partnership (Preparation, Procurement and
Management) Rules, including rules for regulating
expenditure, appropriation of revenues, and
contingent liabilities in PPP projects and proposed
delegation of powers in this regard. The draft rules
have been placed on the website for wider
consultation with the stakeholders.
Box II.3: Report of the High Level Panel on Financial Position of Distribution Utilities – A Brief
The Planning Commission had appointed in July 2010 a High
Level Panel (HLP) under the Chairmanship of Shri V.K. Shunglu,
former Comptroller & Auditor General, to look into the financial
problems of State Electricity Boards and to identify corrective
steps. The terms of reference of this Committee included
reviewing the accounts of state electricity boards and state
distribution companies as at end-March 2010 and to project their
losses by 2017; reviewing the electricity tariff and examining the
role of the State governments, Electricity Regulatory
Commissions and distribution companies in periodic tariff
revisions; assessing system improvement measures
accomplished in distribution of power and recommending a plan
of action to achieve financial viability in distribution of power by
2017. The HLP presented its report to the Deputy Chairman,
Planning Commission on December 15, 2011. The salient
features of the Report are as follows :
• The accumulated losses of the distribution utilities during
2005-10 amounted to `820 billion after subsidy, of which
nearly a third was incurred in 2009-10 alone.
• These losses are primarily on account of poor managerial
and operational practices of distribution companies
compounded by irrational tariffs fixed by regulators. There
was a gap of about `0.60/kwh between average cost and
revenue realised.
• Around 70 per cent of the financial losses of distribution
companies during the past five years has been financed
through loans from public sector banks. Of the total bank
loans outstanding at `585 billion, only 42 per cent is backed
by government guarantees.
• Recognising the limited scope for borrowings by the State
governments to meet the debt obligations of distribution
utilities to public sector banks, the HLP has suggested that
to start with, banks need to jointly re-negotiate with
distribution utilities/State governments the outstanding
amount as also the recovery schedule taking into account
the reform measures likely to be initiated by the distribution
utilities and State governments. It is also suggested that the
Reserve Bank should allow State governments to draw down
the amount available in guarantee redemption funds (`40 billion) to meet the liabilities of distribution companies to
banks which are guaranteed by them.
• To address the issue of repayment default despite best
efforts, it is suggested that a Special Purpose Vehicle (SPV)
be set up for purchasing the loans of public sector banks to
discoms, subject to several conditions which, inter alia,
include periodic tariff revisions. However, if it is subsequently
found that repayment default to banks occurred for reasons
which were under the control of the distribution utility, the
SPV mechanism would still be used to repay the bank but
would entail concomitant debit of the account of the
concerned State government with the Reserve Bank.
• It is recommended that 76 per cent of the share capital of
the SPV would be held by the Reserve Bank while the Power
Finance Corporation and the Rural Electrification Corporation
would hold the balance. The Reserve Bank is also expected
to extend a line of credit to the SPV.
• State Electricity Regulatory Commissions should be made
independent financially as well as in their functioning. The
selection of Chairman and members of Electricity Regulatory
Commissions needs to be fine-tuned and further, their
functioning should be scrutinised by an Expert Group to
determine to what extent the Commissions have discharged
their statutory duties such as timely and regular revision of
tariffs.
• In areas where losses are high, a loss surcharge should be
imposed over and above the basic tariff.
• Other recommendations include introducing input-based
franchise models in about 255 more towns as listed in the
Report, the cautious use of Section 108 of the Electricity
Act, 2003 relating to the issue of policy directions and proper
energy accounting of all consumers.
• Distribution losses are projected to decline from around `280
billion in April 2010 to around `220 billion at end-March 2017.
These projections are based on a number of assumptions
including the expectation that States will make concerted
efforts to eliminate losses and that commercial losses would
be substantially reduced by the end of the third year of the
Twelfth Five-Year Plan.
Source : Report of the High Level Panel on Financial Position of Distribution Utilities, Planning Commission, Government of India, December 2011.
2.25 As noted by the ThFC, PPPs create explicit
and implicit obligations of the public entity that is
involved in them. While explicit contingent liabilities
in the form of stipulated annuity payments over a
multi-year horizon may be spelt out, implicit
contingent liabilities are obligations to compensate
the private sector partners for contingencies such
as changes in specifications, breach of obligations and/or early termination of contracts which may be
difficult to quantify. As recommended by the ThFC
for the Central government, there is also a need
for the States to quantify expenditure obligations
relating to PPP projects in their medium-term fiscal
policy statements with an increasing number of
them adopting the PPP mode of project
implementation.
9. Conclusion
2.26 The budgeted fiscal stance of the State
governments during 2011-12 is generally in
consonance with the revised road map of the ThFC.
There is, however, a need to deal with the different
structural constraints, particularly for States which
could not achieve fiscal consolidation. The strategy
towards integrated management of the overall
expenditure enveloping various functions of the
government for facilitating desired outcomes, as recommended by the High Level Expenditure
Committee on Public Expenditure, is welcome.
Successful restructuring of the public expenditure
management system would, however, call for
appropriate assimilation of the new system across
the government machineries at all levels. An important
fiscal challenge for the States is significant increase
in financial losses of the State power distribution
utilities which carry both direct and indirect burden
on the finances.
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