politics and bad economics destroy value

The growth story
There have been a number of issues affecting economic growth in India in recent times. For the last several years there has been a decline in all aspects generally. However, instead of trying to resolve critical matters the game of politics coupled with lack of economic sense has resulted in a situation which is laughable. 

The recent news on power tariffs and recovery puts us on the spot - laugh, or sit back and ponder. Power companies generate power and sell it to the distribution companies who sell it back to the consumers. Due to the (subsidized) lower power tariffs, it is argued by the distribution companies, payments to the power companies have not been possible. The overdue payments have become significant. 

Profit or not as a goal
If the goal of a firm is to provide social benefits and not make profits it is understandable by everyone. Here irrespective of economic profits operations are carried on. The funding comes from the sponsors whether state or private. The investors, at least, will be cautious enough when supplying capital. 

Instead, if a firm's goal is to maximize its value as it is generally argued and accepted in corporate finance, the decisions taken by the shareholders, managers and other stakeholders should reflect that goal. If not, it is only going to destroy value in which case the whole point of incorporating a profit-making enterprise becomes futile. 

The power sector
In the case of power as a utility, the regulators usually guarantee a certain rate of return on equity to the generating companies. There is also a cap on this return so that super-normal profits are not achieved. This is fine because these utilities also enjoy certain benefits. 

If the power tariff goes down to such a level that the distribution companies are not able to recover their costs, and thus turn defaulters, and consequently, the generating companies are denied their dues, there is heavy cost on both working capital requirements in the short term, and on capex program in the long term. If reinvestment is not adequate it is a matter of concern for the shareholders. 

It is not fair for the minority shareholders who suffer because of the majority shareholder's irrational decisions. For instance, NTPC is already suffering due to poor policy making. 

The culprits - lower tariffs, poor managers or the regulator
It is common sense that the distribution companies should be allowed to recover their costs first, and then some profits, however capped they might be.

If it is not the case because of lower tariffs it is the regulator's responsibility to set the tariffs right. On the other hand, if it is due to poor management decisions it is again the regulator's responsibility to ensure that the licence to generate or distribute is taken away from poor operators.

Correct corporate finance decisions not votes create value
It is also common knowledge that utilities, if managed and regulated properly, provide adequate, if not super-normal, returns to the shareholders. The business itself is good enough to ensure that. 

In the final analysis, whether a firm is in the business of providing a key utility or selling tulips the value to the shareholders accrues only when economic decisions relating to investing, financing and dividends are taken in a business-like manner.

It might appear unfortunate to some, nevertheless, politics and votes have no role here.