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The Telecom Disputes Settlement and Appellate Tribunal (TDSAT) on Thursday gave a split verdict on mobile telecom operators providing third generation (3G) services outside out of their licence areas. Therefore, telecom service providers can continue to offer 3G services to their subscribers outside their licensed circles.The two-member bench comprising of TDSAT chairman Justice SB Sinha and member PK Rastogi differed in their findings. While Justice Sinha ruled that telecom operators should be given fresh notices by the Department of Telecommunications (DoT), Rastogi said that roaming pacts should be terminated immediately.The split verdict happened because the third member of the tribunal has since retired.The roaming problem arose because none of the telecom operators has 3G spectrum across the country. As a result, three large telecom operators Bharti Airtel, Vodafone and IDEA Cellular formed roaming agreements to offer 3G services outside of their circles. Last December, the telecom ministry told them that it was illegal to offer 3G services beyond their allotted zones through mutual pacts and wanted them to stop the services immediately. In the same month, the carriers, including Tata Teleservices and Aircel, challenged the government order before the Telecom Disputes Settlement and Appellate Tribunal (TDSAT), which told the government not to take any "coercive" action until it issues a verdict.The operators are now expected to appeal in higher courts.Agencies Add: The tribunal's decision was keenly watched by investors in Bharti Airtel, Vodafone's Indian unit and Idea Cellular - the country's top three carriers by revenue - which have effectively extended their 3G services to most parts of the country because of mutual roaming agreements.The government will take a legal view before deciding on its next move, Telecoms Secretary R. Chandrashekhar said.Bharti, Vodafone's Indian unit and Idea did not immediately comment. The companies previously said their roaming pacts complied with telecoms licensing rules.The carriers are allowed to continue their services until the government dispatches a new order, a lawyer on the case said on Tuesday.Shares in Bharti, India's top mobile phone operator, rose as much as 4 per cent, while those in Idea gained up to 5.5 per cent.India raised more than $12 billion from a 3G auction in 2010. No company managed to win airwaves in all of the country's 22 service zones as the bid prices were much higher than expected.Bharti paid $2.2 billion for 3G bandwidth in 13 service areas, while Vodafone India spent $2.1 billion for permits in nine and Idea gained access to 11 areas for about $1 billion. Many of their service areas overlap.The 3G Market3G services had been launched just last year in India and the mobile operators are still expanding their networks.Of the country's more than 900 million mobile subscribers, only about 15 million are estimated to have subscribed for 3G, which facilitates faster Internet browsing on phones and services such as video calls.Uptake of the premium services has been slower than expected as a majority of the mobile subscribers mostly use their phones to make calls, and also partly due to the high prices of such services.Fledgling 3G services currently account for a very small portion of mobile operators' revenue.The services are expected to account for 5 percent of revenue by the fiscal year ending March 2014, said a telecoms analyst at a foreign brokerage in Mumbai.Even if the roaming pacts were ended, companies' revenues will fall by less than 1 percent, said the analyst, who declined to be identified as he was not authorised to speak to the media.Also, a recent government plan for so-called liberalisation of airwaves would mean carriers can use their current 2G spectrum for 3G services in the future, making the roaming pacts "redundant," brokerage ICICI Securities said in a note to clients.
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It had been a point of debate for the last few weeks. Today, the suspense ended when an extension was denied to current Telecom Regulatory Authority of India (Trai) chairman, JS Sarma. Till date no Trai chairman has been given an extension. To do that would have meant amending the Trai Act.Till quite recently it was believed that Sarma would get an extension for anything between two to six months since he had just announced the reserve price for the auction of spectrum. But, the furore over the recommendations on spectrum pricing has apparently been so great that the government decided not to extend his term.As things stand, Sarma, who took over as chairman on 14 May 2009, will now sign off on Friday 11 May.There are two prominent names doing the rounds as possible candidates to replace Sarma as Trai chairman. This includes current commerce secretary Rahul Khullar and former secretary (defence finance) Indu Liberhan. The name is expected to be announced on Friday.Ever since the Telecom Regulatory Authority of India (Trai) came up with its recommendations on spectrum pricing, the industry has gone into battle mode. CEOs of four GSM-based mobile telecom service companies including Sunil Mittal, CMD of Bharti Airtel; Kumar Mangalam Birla, chairman, Idea Cellular; Vittorio Colao, CEO, Vodafone; and Jon Fredrik Baksaas, CEO, Telenor group, met five ministers of the Empowered Group of Ministers (EGoM) on telecom in one day. Trai had suggested that spectrum in the 1800 MHz band be auctioned at a base price of Rs 3,622 crore/MHz. Besides, while the Supreme Court cancelled eight licences, Trai has put up only 5 MHz of the 1800 MHz band spectrum in each circle for bidding initially. It plans to have another auction later based on the discovered price in the first auction. J.S. Sarma, had said then: "During this year itself, they would be in a position to have another auction of 1800 MHz band. So, new operators can come in there too."That remains to be seen as Trai has talked of only one auction. The moot point is that there is an average of 26 MHz of spectrum in each of the 22 circles across the country in the 1800 MHz band. Telecom operators argue that by creating an artificial scarcity of spectrum, it would mean that at best only one new operator would be able to get spectrum in a circle. Meanwhile, former telecom secretary Siddhartha Behura was granted bail by the Supreme Court on Wednesday, more than a year after he was arrested for his alleged involvement in improper allotment of telecom license and bandwidth in 2008. Post that, then communications minister Andimuthu Raja moved a bail application in a special CBI court. He has sought bail on grounds of parity. His bail plea will be heard on Friday.
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It has been in the pipeline for awhile. Communication and information technology minister Kapil Sibal announced the broad direction of India's telecom policy that will come into effect from April 2012. It looks to simplify licensing, bring transparency to the sector and encourage consolidation. Most of the changes will help incumbent mobile telecom service providers.This is the third time that India has come up with a telecom policy. The first was in 1994, followed by the NTP '99.As a first step, all future licences will be unified licences and allocation of spectrum will be delinked from the licence. Spectrum will have to be obtained separately. However, Sibal has not gone into the issue of spectrum pricing since the Telecom Regulatory Authority of India (Trai) is currently in the process of finding a base price for the auction of 2G spectrum.To encourage consolidation in the industry, the government announced that ‘merger up to 35 per cent market share (subscriber base and adjusted gross revenue) of the resultant entity will be allowed through a simple quick procedure.' The earlier limit was 30 per cent. The government is also open to considering allowing mergers where the combined entities can hold up to 60 per cent of market share. However, the merged entity cannot have more than 25 per cent of the assigned spectrum in a circle. Says a Bharti official: "The announcement on merger & acquisition is an encouraging step from the point of view of the long-term health of the telecom industry and will pave way for consolidation in an over-crowded market."In a move that is welcomed by incumbent operators, it has hiked the prescribed limit of spectrum from the current 6.2 MHz to 8 MHz across the country. In Delhi and Mumbai, it has been hiked further to 10 MHz. As a result, operators will exceed the new limit in only a handful of circles.The government has specified a flat 8 per cent licence fee across the country—the current rates vary between 6-8 per cent depending on the circle. Bharti Airtel said the uniform licence fee across different telecom licences and service areas will help avoid any arbitrage opportunity. It hopes the government would consider lowering the licence fee to 6 per cent over the next couple of year, as recommended by the TRAI. Vodafone officials welcomed the introduction of a uniform licence fee across all telecom licenses and service areas regime starting from April 2012 saying that this has been a long standing request of the industry.The first steps to the clean-up have begun. Once Trai comes up with its recommendations, the auction of 2G spectrum should begin.
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The Delhi Government's decision to invest equity worth Rs 500 crore in Reliance ADAG's BSES Rajdhani and BSES Yamuna (provided the Reliance Group also brings in equal equity) sets a bad precedent. Now the Tatas also want a similar equity infusion. After privatising the distribution of power in Delhi, the government has no business in putting in more money in the loss-making companies that handle distribution; the step does not in any way solve the long-term problems of the sector in the state.The two BSES companies have held that they are making losses due to low tariffs, which has led them to defer payment to the power generating firms from whom they buy electricity.If that argument is true, the tariffs need to be revised. On the other hand, if the BSES companies are in a financial mess due to inefficiency, nothing needs to be done to help them. It is, after all, not the government's job to help private companies that cannot run their businesses properly. By putting in equity, the Delhi government is essentially using the tax payer's money — and using it inefficiently.Sure, the government needs to act urgently to make sure that consumers in Delhi do not suffer from a power crisis. But putting money in the form of equity in the BSES companies is not the correct step. STRICTLY BUSINESSHow to make Delhi a better place to live and work? Chief minister Sheila Dikshit has an idea — make the National Capital Region a common economic zone. Her logic: it will ensure uniform development of satellite towns, and de-congest the capital city. (This story was published in Businessworld Issue Dated 09-01-2012)
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India seems to be finally beginning to fix its broken power connections. The country has already added more than 10,000 megawatt (MW) of power-generation capacity in the current financial year (2010-11). This is the highest ever addition to the country's power-generation capacity in a single fiscal since Independence.By end-March, power ministry officials expect the total capacity addition during the fiscal to be in the region of 15,000 MW. That is almost 71 per cent of the total 21,180 MW of capacity added during the 10th Plan period (2002-07). The highest addition to power generation capacity achieved in a year earlier was 9,585 MW in 2009-10. The growth in power-generation capacity has been driven by an addition of close to 9,300 MW of thermal power capacity in the first nine months of the fiscal. This has been led by the private sector. The thermal capacity addition till now is already higher than the 9,100 MW capacity added in the last fiscal.A large chunk of the capacity addition this year has come from the private sector — 1,200 MW from Sterlite's plant at Jharsuguda (Orissa); 1,320 MW from Adani Power at Mundra (Gujarat) and 600 MW from JSW Energy at Ratnagiri (Maharashtra). At 3,120 MW, it accounts for almost a third of the total capacity addition.However, despite the seemingly positive performance in 2010-11, the country is still going to miss the reduced target of adding 62,374 MW of capacity during the 11th Plan (2007-12). The government had earlier lowered the target from the original 78,577 MW set at the start of the 11th Plan. Based on current additions, it is quite likely that the country will add close to 55,000 MW in the Plan period.Despite missing the target, the government has set an ambitious target of adding around 100,000 MW of capacity during the 12th Plan (2012-17) period. During the 12th Plan, 50 per cent of the power plants commissioned will be super critical. These plants operate at higher temperatures leading to greater efficiency.If the private sector continues to keep pace, that could be achievable. But meeting that target could become tough if industry faces problems in getting regulatory clearances quickly.(This story was published in Businessworld Issue Dated 07-02-2011)
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The past two months have seen the Indian power sector limp from one crisis to another. Last month Damodar Valley Corporation (DVC) threatened to stop power supply to two distribution companies (discoms) — BSES Rajdhani Power and BSES Yamuna Power — in Delhi. Much to the relief of DVC, the issue was resolved after the Supreme Court's intervention which instructed the distribution companies to pay Rs 45 crore by November out of the Rs 141.24 crore the companies owed. This is the second time in past few months that the Capital has been on the brink of a major power outage. Both times, it was a payment crisis. In September, state-owned National Thermal Power Corporation (NTPC) threatened to stop supply of power to BSES Rajdhani and BSES Yamuna if dues of over Rs 900 crore were not cleared. BSES, later, agreed to pay the arrears within a month. The power payments crisis is not restricted to Delhi. Across the country, state electricity boards (SEBs) have accumulated bad debts amounting to over Rs 75,000 crore. It is estimated that by 2014-15, this will rise further to Rs 125,000 crore. Five states — Rajasthan, Tamil Nadu, Uttar Pradesh, Haryana and Madhya Pradesh — account for close to 70 per cent of the bad debts today. In effect, the power sector is heading for a crisis similar to the one it faced in 2001. That year, the government bailed out the utilities by writing off Rs 41,000 crore. Thanks to the payment crisis, banks have now imposed an embargo on fresh loans to power utilities and distribution companies. The risk that banks face is due to two reasons: rising losses and debt levels in power distribution companies, and the shortage of fuel availability for power generation. Most banks have hit the cap on lending to the power sector. Already Bank of India is set to restructure a quarter of its power loans while Allahabad Bank has frozen lending to the sector. Owing to subsidised tariffs, the mounting losses of distribution companies have, in fact, put the country's financial system under strain. What is surprising is the fact that this is happening in an economy that is growing at over 8 per cent per annum. Insufficient Tariff HikePower demand is rising at close to 10 per cent per annum. However, distribution companies do not have the freedom to hike tariffs which are still regulated by the state governments. While in most states farmers are provided free power, bulk users like industry end up paying more. That is in sharp contrast to what happens in other countries where industrial power is cheaper. As state governments subsidise power to domestic and farm users, discoms face the music of such anti-economic policies. Power generation costs depend, to a large extent, on fuel costs. In India, it ranges from a low of 28 paise a unit (where power plants have access to captive mines) to Rs 2.60 a unit in the case of imported coal. Therefore, a power plant that survives on imported coal would seek close tariffs of at least Rs 3 per unit. However, tariffs across the country are much lower. In many states, power tariffs are revised after a gap of several years. A classic case is Tamil Nadu, which is one of the biggest defaulters. Tariffs in the state ranges from Rs 1.10 per unit to Rs 4.05 a unit. The state offers free power to farmers and power looms that consume less than 500 units in two months. The power tariff in Tamil Nadu is an average of Rs 2.35 per unit. The gap between cost to serve and revenues in the state is Rs 1.66 per unit. The power tariffs were hiked last in 2010 after a gap of seven years. In Delhi, power tariffs were increased by 21.7 per cent this August after a gap of five years. A BSES spokesperson points out that despite the recent hike in power tariffs in the capital, it is still incurring a loss of Rs 1.13 per unit.The problem of distribution companies gets aggravated because the power generating companies (most of which are run by private players) threaten to pull the plug in case of non-payments. These power-generating companies refuse to lose money simply because states consider free power to be a part of vote-bank politics. As a larger chunk of power in the country is generated by private power plants, the pressure on distribution companies to meet payment commitments is bound to rise. Over the past few months, many states have finally begun to bite the bullet and increase power tariffs. In September, Gujarat raised power tariffs by 22 paise a unit. Punjab hiked rates by 7-12 per cent. Others like Rajasthan have not revised tariffs for years due to political compulsions. Moreover, high technical and commercial losses which stand at 28 per cent and inadequate subsidy payments from states have led SEBs to incur losses to the tune of Rs 68,000 crore in fiscal 2011 as per the estimates of the draft Shunglu Committee report. break-page-breakOver the years, as the private sector added capacity, there has been a sharp rise in power generation. But payment problems are not restricted to distribution companies alone. The power payment crisis stems from the power generating companies which are bogged down by rising coal prices, burgeoning SEB losses and the inability of distribution companies to hike tariffs. Inadequate Coal AvailabilityOne of the biggest problems faced by power generating companies relates to inadequate supply of coal. Over the past few years, coal production by state-owned Coal India has been largely static. During 2010-11, Coal India produced 431 million tonnes, which is just marginally more than what was produced in the previous fiscal. As the country added 8 per cent to its generating capacity during the fiscal, the pressure on supply of coal has increased. After all, over 55 per cent of India's power generation is fuelled by coal. Therefore, the shortage of coal has begun to bite power generating companies. AT A LOW: Powergeneration companies are running short on coal (BW Archive) Getting adequate coal supply is critical for power generation because over half of India's 182 GW (182,000 MW) power generation capacity is coal-based. To cover up the shortfall in supply, many private power utilities have invested in acquiring coal assets in Australia, Indonesia and South Africa. Over the past couple of years, domestic power companies have invested over $8 billion in acquiring coal assets. However, blending imported and domestic coal raises the cost per unit to Rs 4 as opposed to just Rs 2.50 per unit in case of domestic coal alone. J. Suresh Kumar, chief financial officer, Lanco Infratech, says, "SEBs are aware that input costs are rising. That is why we are seeking an increase in tariffs." He adds that over the next 3-4 years, coal supply for power plants will continue to be an issue. The problem is not restricted just to the higher price of imported coal. As India seeks to tie-up with the coal assets abroad, countries are imposing restrictions on its exports. Recently, Indonesia has said it would not allow exporting companies to sell coal at prices below notified rates. Earlier, there were no restrictions by the Indonesian government on coal pricing. Australia, too, has issued a draft mining law to impose tax on coal and iron ore projects from next year. Says Anil Sardana, CEO, Tata Power, "For projects based on imported coal, we are exploring alternatives to salvage this situation. We believe blending of coal can control the price to some extent. Therefore, we are sourcing low-grade coal from Indonesia, Africa and other existing mines and will do trial runs to find if they would be capable of reducing the cost of power for our ultra mega power plants." WHAT IS THE WAY OUT? Initiate distribution reforms across states Stop provision of free power to farmers Allow distribution companies to increase tariffs Increase production of domestic coal Improve coal linkages to power plants Even if imported coal is available, there is no running away from the fact that fuel prices — be it coal or gas — are only going to rise. That will, in turn, lead to an increase in power generation costs. Currently, the power payment issues are largely restricted to five states. "We are experiencing delays in payment from Tamil Nadu and Uttar Pradesh. Andhra Pradesh and Karnataka are paying up," says Kumar. Here too, while earlier the states paid up within a fortnight to claim early payment discounts, now they seek a month-long credit period to make payments. For utility companies, while input costs are rising, margins are on the decline. Distribution ReformsThe acute payment crisis has prompted banks and financial institutions to stop disbursing credit to the state electricity boards. Sambitosh Mahapatra, executive director, PricewaterhouseCoopers says, "We are heading towards a crisis quite similar to what happened in 2001. Now the need is to extend distribution reforms to other states." In 2001-02, the Central government had bailed out state electricity boards after they defaulted on payments to NTPC and NHPC. Mahapatra points out that after distribution reforms in Delhi, aggregate technical and commercial (ATC) losses fell sharply from 60 per cent in 2002 to 17 per cent now. Once distribution losses come down, much of the problems of discoms will come down. Need To Hike Tariffs The answer to the crisis is quite simple. There is no choice but for power companies to hike tariffs. If need be, there should be a mandated annual hike in tariffs. However, as power is a concurrent subject, each state will have to take its own decision. It is unlikely that there will be consensus. But for the power distribution companies to survive, tariff hikes would be imperative. There are simply no short cuts here. Despite the current situation, the power sector is quite confident that all contentious issues will be sorted out by December. That could be quite a relief to the government, the power sector and the investors alike. anup(dot)jayaram(at)abp(dot)in(This story was published in Businessworld Issue Dated 21-11-2011)
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The $ 6.6-billion, Taiwan-based Delta Electronics is investing $15 million to set up a manufacturing facility for solar inverters at the SIPCOT Sriperumbudur Hi-Tech SEZ, near Chennai. The plant is expected to be operational by mid-2012. Close to 70 per cent of the output will be exported, while the balance will meet the rising demand for solar inverters in India. Says Bruce CH Cheng, chairman, Delta Electronics: "With global warming becoming a major issue across the world, this is a huge opportunity for us." With this plant, the total investment of Delta Electronics in India will exceed $ 60 million. The Chennai plant is the fourth plant of Delta Electronics in India after those at Gurgaon, Pondicherry and Rudrapur in Uttarakhand. These plants produce telecom power systems, uninterrupted power systems and display solutions. Cheng who is a votary of green buildings is bullish about the Indian operation of Delta. Says Cheng: "The rapid growth of the Indian economy means it will need solar solutions to raise power capacity." Delta which has been in India for close to a decade is looking to ramp u[ its operations here. During the last fiscal, the Indian operations had revenues of $ 154 million, which is expected to touch $ 200 million this year. The solar inverter is the heart of the photovoltaic (PV) system. The grid-tied inverter will not operate when they do not detect the presence of the grid. It contains special circuitry to match the voltage and frequency of the grid. These inverters shut down automatically upon loss of utility supply, for safety reasons. These will come in handy as India is looking to have a 20,000 mw solar power capacity under the Jawaharlal Nehru National Solar Mission.
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Asia's richest nation, Japan, is facing its biggest crisis since World War II. The triple whammy — the earthquake, tsu-nami and a nuclear crisis — has led to unimaginable deprivation. The stockmarket is bleeding, too, falling over 17 per cent since the quake. With ports and major manufacturing plants closed, trade will be hit in the next few weeks. The real cause for worry is the fear of a meltdown at the Fukushima-Daiichi nuclear power plant that has already had three explosions after the 11 March tsunami. Radiations from the plant have reached dangerous levels. Nearly a quarter century after the Chernobyl disaster, the Fukushima explosions were seen live on television screens across the world. It has once again raised the debate on whether the world needs nuclear power plants at all. The six boiling water reactors at Fukushima-Daiichi, installed in the 1970s, have an installed capacity of 4,546 megawatt (MW). In sharp contrast, the 20 nuclear power reactors that India has account for 4,780 MW. India has 18 pressurised heavy water reactors, while two units in Tarapur are boiling water reactors, like the ones at Fukushima. Currently, nuclear power accounts for just 2.2 per cent of India's installed power capacity. This is quite in sync with China (1.9 per cent) and Brazil (3 per cent). Globally, nuclear power accounts for 15 per cent of the installed capacity. The big consumers of nuclear power include France (75 per cent of installed capacity), South Korea (35 per cent), Japan (30 per cent), the US (20 per cent) and Russia (18 per cent). While India's nuclear capacity is marginal, it has drawn up ambitious plans to increase nuclear power generation manifold over the next decade based on the Indo-US nuclear deal of 2008. According to the plan, it is estimated that by 2020, India's nuclear capacity will be around 30,000 MW. So what happens post-Fukushima? The controversial debate over nuclear power will be reopened. The UPA government is likely to face immense pressure in Parliament and outside from the Left parties, NGOs and anti-nuclear groups on slowing down the growth of nuclear power. Prime Minister Manmohan Singh, the chief proponent of the Indo-US nuclear deal, has sought an immediate technical review of all safety systems at nuclear plants. There is local opposition, too. Residents are opposing the setting up of India's single-largest nuclear power plant (9,900 MW) at Jaitapur, 420 km south of Mumbai on the Konkan coast. The Fukushima crisis will only heighten worries. Ironically, the choices for India are limited. As the economy grows at over 8 per cent, demand for power is expected to rise at over 10 per cent per annum. In a scenario where nuclear power is scarce, the demand for import of coal and liquefied natural gas (LNG) is expected to rise sharply. That is not going to be either easy or cheap. The Japanese crisis has led to a hardening of global gas prices. However, it is not clear whether it would lead to a sustained rise in gas prices since Qatar and Russia have enough gas reserves to tide over the possible increase in Japanese demand. Another area of concern for India could relate to Japanese investments in the country. Japan has been instrumental in providing soft credit for large infrastructure projects such as the Delhi Metro and the proposed Delhi Mumbai Infrastructure Corridor. With the Japanese economy back to rebuilding, the volume of such credits could slow down. One thing is certain. The Japanese economic growth should pick up pace over the next few months. After all, this is a country that literally rose from the ashes after the World War II. But there is another certainty — it will be a long time before the world feels more confident about expanding nuclear power capacity. (This story was published in Businessworld Issue Dated 28-03-2011)
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Nearly 20 years after he returned from the US, Lagadapati Madhusudan Rao heads India's largest private power-generating company, Lanco Infratech. He is a difficult man to meet since he is out of the country most of the time. Rao tells BW's Anup Jayaram that he is in the process of giving a professional touch to what has been a family-run business till now. Excerpts: What was the catalyst for Lanco to get into the power business? The opportunities in India came only after liberalisation in 1991. We were a small construction company in the early 1990s. There was an opportunity and we said let's look into it. The first experience that we had as a group outside construction was in the steel industry. From 1980-89, we were in Visakhapatnam. At the same time, we were looking for opportunities in other sectors. In 1993-94, seven power plants were given out through MoUs. In the second tranche, every state was motivated to develop independent power plants. We participated in the opportunity in Andhra Pradesh. Among the seven fast-track projects, two were from Andhra. Hundred letters of intent were given all over the country. Each state had given 6-7 letters of intent. Out of close to 100 MoUs signed in the late-1990s with independent power producers (IPPs), Lanco Kondapalli is one of the few successful IPPs. We got the letter of intent in December 1997 and we were able to bring the project to financial closure in December 1998. Many projects failed in the power sector in that period. Very few people were able to successfully convert the opportunities into a project. Some of the marquee names of Indian industry are there in the power business. How do you compare to them?We are benchmarking ourselves from where we stand in capability in the construction business. We do not have to worry that the brand Lanco is not up to the big names. What is more important is that we realise where we have to go. Focusing on the best practices in the industry and on human resources are the only answers to remain a winner in this game. That is where our focus is. We are very unique to what corporate India is doing. There are a few things. Lanco is a family business. We — three brothers and a brother-in-law — decided that we needed to grow Lanco in a professional way. Most important is to separate ownership from management. In the past two years, the four of us went through multiple sessions along with the family business practice of PricewaterhouseCoopers Dubai to structure a constitution on how we need to position Lanco as a global operation. Second, we are developing initiatives in terms of people capability. The question is: do we have the right person at the right place? We have a very structured formal concept called LEO — leadership, entrepreneurship and ownership. As part of taking this forward, we are setting up the Lanco Academy. We have worked with Accenture to give shape to the Lanco Academy. A few years from now, 80-85 per cent of the senior leadership should be able to come from within Lanco itself. Do you see a shake-out in the power business? Are you looking to acquire new assets?Yes, we do see a shake-out. I would say that there could be one around 2015-16. Over the past two years, lots of people have set up projects with the intention of selling them. I do not think we will buy out. There are at least 10 companies that are serious and are here for the long term. All these companies, including Lanco, have a good portfolio of assets at different stages of development. We may not acquire any new assets.(This story was published in Businessworld Issue Dated 11-07-2011)
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The control room of the 600-MW Udupi Power Corporation in south Karnataka has a staff of just 20. With the monsoon hitting the Konkan coast, demand for power in the region has fallen sharply. The imported coal-based plant of power and engineering, procurement and construction (EPC) major Lanco Infratech is generating only a little over 400 MW. It has also synchronised its second 600-MW unit, which is expected to start commercial operations once the transmission link is ready by end-2011.The fifth floor of Lanco House in Gurgaon is also sparsely populated. The floor that houses the board room and offices of the top management of the company, is lined with waist-high green granite. The off-white walls are peppered with dozens of paintings including M.F. THE LANCO GAME PLAN Join hands with a global company for power equipment manufacture in India Setting up solar photovoltaic equipment manufacturing plant in Chhattisgarh with an investment of Rs 1,370 crore Establish power plants in emerging markets Acquired Griffin Coal in Australia to ensure fuel security Wants to establish solar power ventures in Europe Setting up Lanco Academy to train key employees Husain's and Souza's. In 2009, Lanco Infratech did a King George V when it moved its corporate office from Hyderabad to Gurgaon. It shifted 700 employees to the Millenium City. Two years later, almost a quarter of Lanco Infratech's 7,000 employees are based in Gurgaon. Being close to the power centre is quite important, even if you are a power utility.The Rs 8,000 crore-Lanco is among a clutch of companies that are investing in expanding India's power generation capacity. It has an installed capacity of 3,300 MW and will add another 6,000 MW in the next few years. By 2015, it will invest Rs 35,000 crore to add another 6,000 MW, raising the total capacity to 15,000 MW. By then, Lanco will be present across 20 states and is slated to have 20,000 employees.In contrast, in 2005-06, it was a Rs 152-crore construction company with profits of less than Rs 10 crore. In 2010-11, profits are Rs 446 crore. Today, Lanco is among the biggest private power companies in India. Rivals include Tata Power (generation capacity 3,120 MW), Reliance Power (1,033 MW), Adani Power (1,980 MW) and Jindal Power (1,000 MW). State-owned NTPC leads with close to 35,000 MW capacity. Lanco, however, believes that for its private sector rivals, power is just another business, while it is focused on the entire power value-chain.Can Lanco pull it off over the next four years? It has incurred a net debt of Rs 23,733 crore. Around 85 per cent of the debt is long-term and repayable over 15 years. It is currently setting up eight power plants including at Amarkantak, Anpara, Kondapalli expansion and Vidarbha. Barring power, EPC and infrastructure, Lanco has identified two new verticals — solar power and natural resources. Infrastructure includes roads, metro rail and port projects. It also plans to enter power equipment manufacturing to counter the restrictions on import of power equipment, and is identifying an international partner for the venture, as have many others. Lanco also plans to enter Bangladesh, Indonesia and West Asia. It has just bagged an EPC order for an Iraqi power plant. It is also looking at projects in Nigeria, Ghana, the Philippines and South Africa. Gaining PowerLanco is in a sector where demand will continue to rise for many years. In the 11th Plan period (2007-12), India will add around 55,000 MW capacity. That is more than double the 21,000 MW added in the 10th Plan. At 174 gigawatts (174,631 MW), India has the fifth largest power generation capacity globally — after the US, China, Japan and Russia. This should reach 300 GW by 2017, making it the third-largest power generator globally. The private sector is slated to add 100,000 MW in the 11th and the 12th Plan periods."We are bullish on power," says Lanco Infratech chairman Madhusudan Rao. He agrees that there will be ups and downs, but a country that is growing at 8 per cent needs a sustained increase in its power generation. Despite increase in capacity, India is way behind China that already has 900 GW capacity. In the past six years alone, China added 400 gigawatts.break-page-breakThe biggest independent power producer, Huaneng Power China, has a capacity of over 54,000 MW. It is one of six such companies in China. Huaneng develops, builds and operates power plants — a model that Lanco, too, has adopted. Unlike other power utilities, Lanco is present across the entire power value-chain — construction, EPC and operating power plants. Says Rao: "You cannot be successful in the infrastructure sector without having a strong construction base. Since we are an integrated company, we have the skills to successfully complete projects on time." It commissioned the Lanco Kondapalli project almost two years before the other companies that had got approvals at the same time. But will such big plans of increasing capacity stretch the company? Says J. Suresh Kumar, the company's CFO: "We will fund all the projects from internal accruals. At an appropriate time, we will raise capital by listing the power business. But there is no hurry to do this." He adds that all projects have achieved financial closure and the debt sanctioned will be drawn. THE LANCO NAME Lanco started off as a construction company in 1986. In the mid-1990s, as the government opened the power sector to private competition, it entered power.The name Lanco is an abbreviated form of Lagadapati Amarappa Naidu and Company. Naidu was the paternal uncle of the Lanco Infratech's top management team. Lanco's running is controlled by three brothers — L. Rajagopal, L. Madhusudan Rao and L. Sridhar — and brother-in-law G. Bhaskara Rao. Though founded by L. Raja-gopal, the company is now being run by Madhusudan Rao and G. Bhaskara Rao. Younger brother Sridhar is in the entertainment business, while Rajagopal quit the management when he became a politician in 2002. He is now a Congress MP from Vijayawada. Lanco is moving towards being a professionally-run firm. Family members will exit when they turn 60. Already professionals head various divisions. When Bhaskar retires in four years, Madhusudan may be the only family member involved in Lanco's day-to-day operations. A senior executive in a rival power company agrees with that logic but does not think Lanco will be able to meet its 15,000 MW target as it takes 3-4 years to commission a power project. Two other problems that could affect Lanco are getting linkages and ensuring fuel security. It has taken care of the latter to an extent by acquiring the Griffin coal mine in Australia.New Ventures, Old ProblemsIn solar power, Lanco aims to be a global player. It already has a corporate office in London and is present in Germany, France, Italy, Canada, Spain and the US. The company's solar expansion plans fit in with the central government's National Solar Mission with a target of 20 GW of solar power generation by 2020. By 2013, India should have 1 GW of solar capacity. Says V. Saibaba, CEO of the solar division: "The future is solar. As solar volumes rise, costs will fall." To meet the rising demand for solar power, it is setting up a solar PV cell manufacturing project in Chhattisgarh. The first phase will involve an investment of Rs 1,370 crore. Saibaba says during 2014-19, thermal and solar power production costs will merge. That could see the beginning of a surge in global solar power capacity addition. break-page-breakAlready, there is a case for solar power in the telecom tower business. The 360,000 telecom towers need 3,500 MW of power. While solar power can be provided at Rs 12/KW hour now, diesel costs Rs 13-15/KW hour. As diesel rates rise and solar power rates decline, the balance will shift. It is estimated that in the next few years, solar will be as big as information technology was a decade ago. However, unlike IT, many projects in the power sector have failed to take off. That is attributed to high capital expenditure, long gestation period and complicated pricing models. Lanco regularly gets offers from companies looking to exit the business. But the valuation sought in most cases is too high. Naga Prasad Kandimalla, CEO of business development at Lanco Infratech, says: "On an average, we get an opportunity to acquire a power utility every fortnight. But we have not acquired any project." While there are many power projects in the pipeline, Kandimalla foresees a shakeout after 2014. Says CFO Kumar: "Many bidders took a risk on power projects. They were assured that Coal India will meet all linkages. With that not happening, a shake-out is imminent."Like most power companies, Lanco's focus is mostly on thermal power. But it has set its eyes on hydel power, too. Says S.K. Mittal, CEO of the company's hydro division: "Hydel power is a risky business. So, while companies have projects worth close to 30,000 MW on the books, work is happening only on 3,000 MW." FAIR SHARE OF CONTROVERSIES Lanco Infratech, which was under the radar for quite some time, has had its fair share of controversies. It came into prominence in 2006, all of a sudden, when it won the bid for the Sasan ultra mega power plant (UMPP) in Madhya Pradesh. The Lanco-Globeleq bid was for Rs 1.19 per unit, the lowest price ever quoted for a thermal power project in India. However, within months, Lanco Infrastructure and Jindal Steel & Power acquired the joint venture partner, Globeleq Singapore. As a result, in July 2007, the Empowered Group of Ministers (EGoM) cancelled the Lanco bid as it was alleged to have violated norms by quoting the financial and technical strength of its foreign partner's parent company at the time of bidding. The Sasan UMPP was then allocated to Reliance Energy. It will initially supply power to seven states across north and west India. Around the same time, Lanco's managing director, G. Venkatesh Babu, was allegedly apprehended at the Hyderabad airport with Rs 36 lakh in cash. Initially it was perceived that the money belonged to Lanco Infratech. The controversy died soon after Babu admitted that the cash was his own and not that of the company. However, it does help when Lanco founder L. Rajagopal is a member of Parliament elected on the Congress ticket from Vijayawada. (BW Pic By Tribhuwan Sharma) While power capacity can be set up, having the talent to manage it is critical. Though there are enough engineers graduating each year, their quality is questionable. To counter the manpower shortage, Lanco is setting up the Lanco Academy to train employees. It has also devised a formal training process — called LEO (leadership, entrepreneurship and ownership) — to build people capabilities.While people issues can be sorted out at the company level, policy and regulatory issues — fuel supply, land acquisition, pollution control, water supply, evacuation of generated power and distribution — require the government's help. TroubleshootingThe logistics of fuel supply is complicated. Coal in India has a high ash content. So, companies look to import coal, which raises costs. Lanco has recently acquired the Griffin coal mine in Australia, which produces 4 million tonnes annually. This can be ramped up to 15 million tonnes. Acquiring coal mines is critical as India is expected to import 200 million tonnes of coal annually by 2017. While fuel can be imported, land and water supply is domestic. Land acquisition is a problem, although land costs form less than 5 per cent of the total cost of a thermal power project. Moreover, once power is generated, it needs to be distributed. The poor financial state of the distribution companies in India is a big choke point. As many distributing companies are in the red, power companies are not able to raise tariffs. Second, political compulsions hinder any hike in tariffs — many states, for example, provide free power to farmers. Says Kumar: "It is not as if there is a complete breakdown of the discoms. There are enough state electricity boards (SEBs) willing to buy power at Rs 4-4.5 per unit." Three SEBs — Tamil Nadu, Rajasthan and Uttar Pradesh — account for 70 per cent of SEB losses. In Tamil Nadu, power tariffs have fallen over the past 3-4 years. Also, at a macro level, while power is a state subject, regulation and policy are central subjects. Says G. Venkatesh Babu, managing director, Lanco Infratech: "While everyone agrees that power brings in development, there is a lot of activism in the sector. Just 10 people can bring a project to a halt." But can a company get into solar, thermal and hydro power together and not feel stretched? Yes, says Kumar, since there are independent management teams with CEOs for each business.One thing is for sure. As the demand for power rises, Lanco will be among the few private companies in a position to fulfill the need. There is a powerful case ahead for Lanco. anup(dot)jayaram(at)abp(dot)in(This story was published in Businessworld Issue Dated 11-07-2011)
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