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<p>Neeraj Thakur Biography</p>
Shut them down or privatise them because they gobble up tax payer money.Yes, this is said in the context of the loss-making PSUs, which were the jewels of the Indian socialist economy in the 1950s, '60s and '70s. Finance Minister Arun Jaitley on Wednesday (5 November) at the India Economic Summit Forum re-iterated this stand of the free- market economists who consider PSUs as an unnecessary evil in the era of liberalisation.According to government figures, there were 79 loss-making central public sector enterprises in 2012-13, of which 68 were referred to the Board for Reconstruction of Public Sector Enterprises. Till October 2013, the government had approved 44 revival proposals and had decided to wind up three -- Bharat Ophthalmic Glass, Bharat Yantra Nigam and Spices Trading Corporation.If post-liberalisation governments - be it NDA or UPA - want to get out of the business of doing business, then it is another matter, but even in a free-market economy, there is space for PSUs to not only survive but also compete fiercely with the private sector. The new age finance ministers should understand that PSUs play an important part in stopping cartelisation by the private sector. Their presence in today's economy is very much required to keep a check on the private sector’s nature of profiteering. A look at the sectors where cartels or anti-trust practices existed, according to the Competition Commission of India (CCI), are: pharma, cement, auto. In all these sectors there was no major government sector company. At the same time, the sectors where only government companies are the players have also been under the scrutiny of the CCI.If we accept the flawed argument of selling loss-making PSUs without realising the root cause of their losses, we will have to sell off all the PSUs in the coming decades because in the face of free market competition, there would be hardly any PSU that will be able to survive. Most of the profit-making PSUs are healthy because of three reasons: monopoly (in the case of Coal India Ltd), subsidy (oil marketing companies), or the private sector players have just started to enter the business as is the case with energy industry.Sooner or later, the government will have to reform all these sectors and there will be stiffer competition from the private sector companies that will push these so-far-cushioned PSUs against the wall. What will happen then? Will we sell Coal India Ltd, NTPC or Indian Oil Corporation if they start incurring losses in future?Quite possible, if the government does not address the root cause of the problem. At the bottom of the illness of all the PSUs is political interference, lack of accountability, absence of autonomy and delay in the appointment of key officials.In July 2014, as many as 34 PSUs were without full-time CMDs. Most of these PSUs were without a CMD for over 6 months and some of them were without a head for over four years.And those who head the PSUs say privately that their powers rest with the government and they are too afraid to take any important decisions for the fear of being scrutinised by the Comptroller Auditor General of India or Central Bureau of Investigation later.This is the reason most PSUs lose out in the race of winning projects where they have to compete with large private sector companies. This is the reason why no major PSU is present in the infrastructure sector where the competition from the private sector is fierce. In the coming years, as the government opens up more and more sectors to the private sector and do away with cost-plus models of giving return on investment, it will become very difficult even for the best of PSUs to remain profitable.The only way they can survive is by having the same kind of autonomy and freedom to take decisions which their peers from the private sector enjoy.That is why for the likes of Coal India, Indian Oil, LIC and NTPC among others to remain profitable in the next decade, it is very important that their managements get the freedom to take decisions without fear and they should be completely immunized from the influence of the parent ministries/ministers.Otherwise, one day we will see no PSUs in the country.neeraj@businessworld.inneeraj.epiphany@gmail.com @neerajthakur2
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The NDA government’s decision to price natural gas lower than what the UPA government had agreed upon has many layers to it. The price of $5.61 per million british thermal unit (mmbtu) — eligible for revision every six months — is applicable to existing fields that are onshore. So, gas produced from deep, ultra-deep and other high-pressure areas would get a premium, which has not been decided yet. As a consequence, companies like RIL that operate in deepwater blocks will command a higher price for their gas compared to others. This will apply to new production from the KG D6 block. It’s a tricky situation as it gives no incentive to RIL to produce more from its controversial blocks — D1 and D3, which failed to reach the proposed gas production level of 80 million metric standard cubic meters per day by 2012. The company will have to sell gas from these two fields at the previous price of $4.2 mmbtu until the resolution of the arbitration. However, it gives RIL incentive to produce from other fields where production has not begun yet. RIL had made 19 discoveries in the KG D6 basin, of which 18 were gas finds and one was an oil block. Of these, the company is producing gas from only two fields, the rest are under development. In the absence of any clarification from the ministry, the clause on a premium for deepwater blocks makes RIL eligible for a premium over $5.61 per mmbtu. The idea of a premium on gas from difficult terrains, however, should not turn into a way for companies to make more money. They should not stop trying to bring down the cost of production from such fields. The production sharing contract — signed between gas companies and the government for the New Exploration and Licensing Policy — had a clause on arm’s length pricing for gas, which essentially meant deciding on a price at which two unrelated and non-desperate parties would agree to transact. The mechanism promoted real competition in the market where sellers were incentivised to keep production costs low. In the absence of any such binding contract, the government should look at the cost of production to arrive at the quantum of premium to be given to the producer of gas. It should verify the investments that explorers claim to have made to start production. The government in mature economies, however, plays no role in deciding gas price. But since it is deciding for India, it should ensure that only companies that invest large amounts in gas fields, get a premium over their investments. (This story was published in BW | Businessworld Issue Dated 17-11-2014)
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The glass is half full, the glass is half empty. It all depends on the perception of the viewer. The revised natural gas price announced by the NDA government also falls in the same category. The price of $5.61 per million metric British Thermal Units (MMBTU), is 33 per cent higher than the current price but it is also 33 per cent less than the previously decided price of $8.4 by the UPA government under the Rangarajan Formula.Moreover, the decision seems to have gone against the Mukesh Ambani owned Reliance Industries Ltd, which was not allowed any hike forits D1 and D3 gas blocks in the KG basin till the final decision on the arbitration between the comgpany and the government came.“The operator (Reliance Industries) would be paid the earlier price of $4.2/MMBTU till the shortfall quantity of gas is made good. It is proposed that the difference between the revised price and the present price ($4.2 per MMBTU) would be credited to the gas pool account maintained by GAIL and whether the amount so collected is payable or not, to the contractors of this block, would be dependent on the outcome of the award of pending arbitration and any attendant legal proceedings,” read the government press release.To all the critics it is a perfect punishment for the company that has not only been indicted by the Comptroller and Auditor General of India for violating the production sharing contract but for also making wrong projections of gas reserves to get approval for higher recovery on capital investment in the gas field.Is the glass half empty for Reliance? A careful reading of the following lines presents a different perspective on the government’s pricing formula.“For all discoveries after this decision, in ultra deep water areas, deep water areas and high pressure-high temperature areas, a premium would be given on the gas price to be determined as per the prescribed procedure.”This means that the gas price decided by the government does not concern the deep, ultra deep and other high-pressure areas, which would be eligible for a premium on the current price.Deepak Mahurkar Leader Oil & Gas, PwC India interpreted the clause in following lines, “For the first time the government has decided that the selling price of gas will be based on the type of block or development. Which means the link to cost of development is given recognition. Deep water blocks will get more price than the onshore blocks."The KG D6 basin so far has been talked about as a deep water block, which makes it eligible for a premium over the decided price of $5.61 per MMBTU. Even though the definition of deep water block is not clear in the Indian context, worldwide it is accepted that gas being extracted from the depth of 400 meters or above is a deep water block.While the original PSC signed under the New-exploration and Licensing Policy (NELP) did not differentiate between the deep water and the onshore blocks for deciding the price of natural gas, the latest policy decision is likely to benefit RIL and ultimately give it a price quite close to the one decided by the Rangaranjan Committee, if not more. The government needs to make it clear whether RIL’s D1 and D3 and other blocks being operated on by the RIL in the KG basin are eligible for a premium over the price of $5.61 per unit of gas or it is for the future discoveries that would be made on the block bid in the next round of bidding.“EAS Sarma, former secretary to the government of India said,” the PSC does not make a distinction between deep water, ultra deep water and onshore blocks. According to article 21 of PSC the price of natural gas has to be arrived at through arm’s length pricing. The government is changing the PSC by bringing in new definition. According to the original PSC if the block is not viable at the arm’s length pricing, it should not be explored”.It would be interesting to know what would be the final price that a deep water or ultra deep water block would get for producing gas. Ideally, the government should have the mechanism and resources to arrive at the well-head cost (the cost of gas at the source of production) of natural gas before calculating the premium for any category of blocks.So long as the government does not reveal the criteria for giving a premium to deepwater blocks, the glass is half full for Reliance Industries.Neeraj@businessworld.inneeraj.epiphany@gmail.com
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It was an NDA government that had first proposed the deregulation of diesel and petrol prices in 2002. However, it took 12 years and another NDA government to make this finally happen in case of diesel.Aided by the weakening international crude oil prices (it touched a 4-year low of $83 per barrel), the de-control not only relieves the government of the burden of high fuel subsidy but also creates a level playing field for the private fuel retailing sector vis-a-vis the government-owned marketing companies.Interestingly, the government had de-regulated the petrol price in June 2010. However, the decision did not lead to any kind of competition in the market because of the monopoly of state-owned oil marketing companies which operate in tandem with each other and announce prices hikes on the same day and at the same level. This has robbed consumers of competitive pricing by the retailers. So far, because of the high subsidy provided by the central government to the three government owned oil marketing companies (IOC, BPCL and HPCL), the private sector companies were not able to sell diesel at their shops, making them insignificant players in the business.But now, the private sector companies like Essar, Shell India and Reliance have announced their plans to start selling diesel from their outlets. The companies will have to offer competitive pricing to compete with the widely spread network of the government owned OMCs. Country’s largest fuel retailer Indian Oil Corporation (IOC) operates 23,993 outlets in the country, while BPCL has around 12,500 outlets across the country. On the other hand, Essar has just 1,400 outlets.IWho Gains & Who Loses Oil prices are in a free fall. They have fallen 15 per cent over the last quarter. This is great news for India. India imports 70 per cent of its oil requirements. India imported 185 million tones of crude oil in 2013-14MoreOC, which was anticipating the diesel price de-regulation, has already started to upgrade itself to compete with the private sector. It has brought around 6,077 of its outlets under automation. The de-control also brings in new players who will be hard-pressed to offer competitive pricing and lure the customers will other frills like cleaning up of car windshields, cheap pollution check up among others.However, the government will have to make sure that once the private sector makes investment in the business, there is no looking back.A pertinent question at this time of diesel price de-regulation euphoria is, will the government be able to stick to its decision of decontrol even if international crude prices were to spike again in the coming years? Analysts have projected that the oil prices in the international market will only go down in the coming years. According to a Crisil report, over the next five years the global oil demand is likely to increase by 4-4.5 million barrels per day, whereas crude oil supply is expected to increase by 8-10 mbpd. This, will lead to further fall in the price of crude oil.So far so good, but what if the analyst projections go wrong, as has been the case in the past? Will the government stick to its decision even if oil prices were to reach above $110 per barrel. The Geo-political reasons can turn the tide in the opposite direction anytime.“India will have to be watchful of global developments. Crude prices and therefore petroleum product prices are currently low because of low demand and appreciation of the US dollar in relation to its trading partners (measured by US Dollar index). In a scenario where even if global oil and petroleum products demand and supply remain same, depreciation of the US dollar may flare up both crude and product prices,” a report by Fitch India ratings said.The government is silent on the matter and the analysts have expressed their concern on the same.“Sunil Kumar Sinha, Principal Economist with Fitch India Ratings said that “the government should have been clear on the issue, because even though it looks highly unlikely that the crude oil prices will flare up in the near future, but it is important for the government to be clear on its future stance. The government allows the diesel prices to move in tandem with the market so that the consumers do not get a onetime shock”.Whatever be the future situation, the government will have to make sure that it does not backtrack from its decision to de-regulate the fuel pricing to ensure competition in the market and lower subsidy burden on the exchequer.
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Big names like the Ambanis, Tatas and Mahindras will be part of the National Democratic Alliance (NDA) government's "Make in India" campaign designed to make the country a global manufacturing hub. The "Make in India" slogan given by Prime Minister Narendra Modi is revolutionary in the sense that it seeks to compete with China, which has an economy five times larger than India's. Can India take on China as the manufacturing hub of the world? The world wants to buy in abundance and cheap. India has a massive labour force of 496.4 million people and average hourly wages of $2.1 compared to $4.5 in China. Yet, the Chinese are able to get all the business, and supply products at half the cost at which Indian companies can produce goods. While it is a fact that the manufacturing sector in China is highly subsidised by the Chinese government, to make exports cheap, it is also true that the Chinese companies have been able to take innovation to the grassroots. In India, big companies believe in bringing in foreign technology at high cost and earning a premium over it. The Chinese have been able to penetrate world markets not just technologically but also culturally. This is the reason why on Diwali, Indians prefer to buy fancy yet cheap Chinese lighting over the bland Indian bulbs to light their homes. Only the Chinese could think of making ceiling fans with a power inverter that would run for four hours without electricity in a power-deficit country like India. From kites to rakhis and toys to fire crackers, name a festival and products associated with it and Chinese companies produce them. The Chinese have been able to customise their products by going deep into the cultural aspect of a country. While the big companies in China have played a major role in building the infrastructure for producing massive amount of merchandise for the whole world, the Chinese government has promoted innovation by the small-scale industries that can match the research and development of large MNCs of the world. Today Indian start-ups in the technology sector are making headlines all over the world. However, there is no news of Indian small and medium-slace enterprises (SMEs) making a cut in terms of innovations. Prime Minister Modi needs to understand that while it is good to meet industry bigwigs like the Ambanis and Ruias to realise his "Make in India" dream, it is also necessary that he takes the manufacturing drive to the grassroots level. Otherwise, India will never be able to compete with China, where manufacturing accounts for over 40 per cent of GDP as compared to India's share of only 15 per cent of GDP.
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Everything in India is unreal, it seems. In February 2012, the Supreme Court of India undid the government policy on the allocation of 2G licences formulated in 2008 by declaring allocation of 122 licences illegal. In August 2014, the same Supreme Court went further back in the history and undid the whole process of allocation of coal blocks in the country since 1993 – when the sector was opened up for captive mining by the power sector.While the judgement on the 2G scam put in the dock the policy-makers of the UPA government, the decision on the Coal blocks allocations indicts all the governments that have governed the country in the past two decades.These two decades were the turning point in the Indian economy as India broke free from the clutches of the license raj. However, the decisions of the Supreme Court hints at the continuation of Licence Raj and the political mafia that appears to be at the helm of all policy matters. Yet, the decision of the supreme Court affects only those businesses that were forced to use the under-the –table-money-payment route instead of fair competition in the sectors. A significant amount of money was invested by these corporates - about Rs 35,000 crore to Rs 40,000 crore -- in 2G spectrum and about Rs 3 lakh crore in the power sector by those allotted coal blocks.Looking at the court proceedings and the affidavits filed by the CBI and other investigation agencies so far, there is no doubt that the procedure of allocating 2G spectrum as well as coal blocks was wrong. The Supreme Court is right in taking a tough stand on the issue of corruption and by cancelling all the deals it has given a clear message to the corporates that wrong policy decisions can be questioned and nullified even after two decades.However, the bigger question is what comes after this? Will competitive bidding of the cancelled coal blocks be above corruption in future? Certainly not, as the competitive bidding process in the country is equally susceptible to corruption and rigging. A recent draft report by the Comptroller and Auditor General of India on the 4G spectrum is just an example. In its report, CAG has questioned the bidding process for 4G by the government where Reliance Industries managed to own pan India spectrum by not even participating in the bidding.In most of the bids that take place, the bidding document suits only a few big players who keep on winning all the big projects. The infrastucture and the power sectors are an example of that. Many bids are challanged in the court by rival companies.What then is the solution?If India inc is responsible for all the rot in the way business is done in the country, the Indian politicians are the ones that benefit most out of this rot. However, they often go scot-free. In the coalition governments, the blame is easily put on the coalition partner for being corrupt and misusing their cabinet births. However, the fact remains that no scam of the magnitude of coal and 2G spectrum can take place without the consent and involvement of the heads of the governments. In case of the coal scam, the then 'prime minister was directly in charge of the policy making that has been declared 'Illegal' by the Supreme Court. The Supreme Court should have taken a tougher stand on the politicians as well. The legislature on its part should debate the responsibility of the incumbent governments during the tenure of the scams.If we do not fix up the root cause of the scams i.e. lack of accountability on the heads of the governments, the history of Indian policies will be negated again and again, eroding the trust of the Indian as well as foreign businesses in the India growth story.
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With the opposition stoking fears of inflation if there was an increase in gas price from $4.2 per million metric British thermal units (mmbtu) to $8.34 per mmbtu from June-end, the NDA government had little option but to defer the hike until the end of September. On 10 January 2014, the previous UPA government had approved the gas price hike, effective 1 April. However, it had to be postponed to June-end when the model code of conduct came into force in March ahead of the general elections.Come September, there will be a clamour once again. So, how much should the government allow gas producers to charge the domestic power, fertiliser and transportation sectors? Perhaps, there are clues to this question in what other gas producing nations charge their own consumers.There are 49 natural gas producing nations in the world: three in North America, seven in South America, 14 in Eurasia, 10 in the Middle East, four in Africa and 11 in the Asia-Pacific region. The price of natural gas ranges from $0.8 per mmbtu to $11 per mmbtu. Different countries have come up with different pricing mechanisms for their domestic industry, keeping in mind the long-term investment requirements of the sector as well as purchasing power of buyers. The hydrocarbons business is dynamic and every country has its own model. The price of natural gas itself depends on various factors, including the area of exploration — offshore or onshore — pipeline network, etc. The cost of offshore gas is five-six times higher than that from onshore fields.A look a what major gas producing countries charge domestic consumers: AlgeriaThe price for the domestic industry is $0.5 per mmbtu. As per the Oil and Gas Journal or OGJ, Algeria has 159 trillion cubic feet (tcf) of natural gas reserves — the tenth-largest in the world. According to the US Energy Information Administration (EIA), its production was 6.4 tcf in 2012, a 4 per cent decline from 2011. Gross production has been falling since its peak of 7.1 tcf in 2008. Algeria is in the process of developing its Southwest Gas Project, expected to start production by 2017. It is also an exporter of natural gas and was the first to export liquefied natural gas (LNG) in 1964. It has three transcontinental export gas pipelines: two supply gas to Spain, the other to Italy. Saudi ArabiaDomestic industry pays $0.8 per mmbtu — among the lowest in gas producing nations. According to EIA, Saudi Arabia had proven reserves of 288 tcf as of 2012, behind Russia, Iran, Qatar and the US. The majority of its gas fields are associated with petroleum deposits. The country is focusing on developing non-associated gas fields in the Persian Gulf. It neither imports nor exports natural gas. Production was 9.9 billion cubic feet in 2012.ArgentinaIn price-sensitive domestic sectors, natural gas costs around $2.3 per mmbtu. The South American nation meets 51 per cent of its energy needs through natural gas. This includes 9.4 per cent from LNG. Its norms require industries that can pass on the cost of expensive fuel to its customers to buy gas from producers and traders at the market price. For price-sensitive sectors and small businesses, the government decides the pricing. To boost production, the government started the Excess Natural Gas Injection Incentive Programme in February 2013, under which gas producers who ramp up production in five years get $7.5 per mmbtu for any additional volume of natural gas delivered to the local market. Any difference between the price paid by the customer and the $7.5 per mmbtu will be paid by the government.VenezuelaDomestic industry pays $2.3 per mmbtu. Venezuela, which follows the government-owned socialist model, came up with a Gas Hydrocarbons Law in 1999 to diversify the economy by facilitating non-associated natural gas development and expanding its role in the energy sector. This law lets private operators own 100 per cent of non-associated (standalone) projects, in contrast to ownership rules in the oil sector. Venezuela has the second-largest natural gas reserves in the western hemisphere after the US. It had 195 tcf of proven reserves in 2012. break-page-breakUnited StatesThe price charged from domestic industry is $2.9 per mmbtu. It is the world’s most developed natural gas market and its prices are linked to Henry Hub. The government does not need to intervene in deciding prices as market forces keep them in check. EIA estimates 2,203 tcf of technically recoverable reserves. Going by the rate of natural gas consumption in the US in 2011, of about 24 tcf a year, 2,203 tcf is enough to last 92 years. In the US, gas is transported to and from nearly any location. The grid comprises 305,000 miles of interstate and intrastate transmission pipelines. The US produced 65.7 bcf of natural gas in 2012.RussiaThe price for domestic industry is $3.3 per mmbtu. Russia has the world’s largest natural gas reserves and is the second-largest producer of dry natural gas. According to the OGJ, Russia held 1,688 tcf of reserves as on 1 January 2013 and accounted for a quarter of the world’s proven reserves. EIA estimates that most of these reserves are in Siberia. About 74 per cent of the output comes from state-owned Gazprom, which controls 65 per cent of the country’s gas reserves. With limited scope for the private sector in the country’s upstream sector, Gazprom has enjoyed total monopoly in exports. Russia has a robust domestic and international pipeline infrastructure. Gazprom operates 104,000 miles of high pressure pipelines. AustraliaThe price for domestic users is $4.3 per mmbtu. The country is a major natural gas producer. Natural gas production in Australia reached 1.6 tcf in 2011. According to OGJ, Australia had over 43 tcf of proven reserves as of January 2013. Oil and gas prices are market-driven and not fixed by regulation. However, the Australian Competition and Consumer Commission regulates competition and promotes fair trade. It has a robust domestic gas transmission pipeline network covering 15,000 miles.ColombiaThe average cost for domestic consumers is $5.2 per mmbtu, as per data provided by consulting firm EY. According to EIA, Colombia had proven reserves of over 5.7 tcf as of 31 December 2012. It has attracted huge foreign investments in the hydrocarbon sector and witnessed a rise in natural gas and oil production in the past few years. It allows easy export subject to contractual and regulatory curbs. MalaysiaThe price for the domestic industry is $6 per mmbtu. Malaysia is vital to the global energy chain as it is en route to important energy trade destinations. It is South-east Asia’s second-largest oil and natural gas producer and the second-largest exporter of LNG globally. Malaysia’s tax and investment incentives, starting in 2010, aim to promote oil and natural gas exploration and development. These are part of its economic programme to become one of Asia’s top energy players by 2020. According to OGJ, Malaysia had 83 tcf of proven reserves as of January 2013, and was the third-largest natural gas reserves holder in the Asia-Pacific region. Upstream production is dominated by state-owned company Petronas. Any foreign firm seeking to participate in exploration and production must enter into a production-sharing pact with Petronas. BrazilThe price for the domestic industry is $10 per mmbtu. OGJ estimated Brazil had 14 tcf of proven reserves as of January 2013. In 2012, it produced 601 bcf of dry natural gas and 1.7 bcf of natural gas — less than India. The Campos basin in Rio de Janeiro accounts for the largest share of Brazil’s natural gas production. The country imported 470 bcf of dry natural gas in 2012, a 27 per cent rise from 2011. Government-owned Petrobras controls most of the reserves and also imports gas from Bolivia. The nation has a network of over 5,000 miles of pipelines.ChinaThe price for domestic users is between $9 and $20 per mmbtu. The country held 155 tcf of proven reserves as of January 2014. The government plans to produce 5.5 tcf of gas by 2015-end. While residential users paid $9 per mmbtu, public services, industry and transport sectors paid $12.48 mmbtu, $12.48 mmbtu and $20.79 per mmbtu, respectively, in 2011. neeraj@businessworld.in twitter: @neerajthakur2(This story was published in BW | Businessworld Issue Dated 08-09-2014)
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At a time when the private sector power players are aggressively acquiring distressed power plants, a government panel has asked NTPC to act fast to acquire the right assets available in the market. The panel has also asked the company to increase its renewable energy portfolio to 10 per cent of the total capacity in the next five years.As much as 50,000 MW of distressed generation capacity is on the block, ready to be acquired due to bad financial position of the owners of those plants. NTPC currently has an installed capacity of 43,000 MW.“NTPC’s recent initiative to acquire stranded power projects under construction is indeed laudable. However, NTPC needs to complete this exercise at the earliest, say in six months or so, to get over the uncertainty on other new projects which the company should be implementing. It should not happen that the company slows down other new projects and also does not decide on taking over stranded projects due to one reason or the other,” read the minutes of the meeting of the advisory group for integrated development of power coal and renewable energy. Read Also: Adani Buys Lanco Asset In Rs 6000-cr DealRead Also: How R-Power Outbid Adani For Jaypee ProjectsNTPC was the first company that received expression of interest from over 30 companies wanting to sell their distressed assets to the largest power generator of the country. However, NTPC, like many other Public Sector Undertakings (PSUs) in the past, has been accused of going slow in decision making leading to missing out on opportunities.In the past few weeks, private sector players, Reliance Power and Adani Power have acted aggressively in acquiring distressed assets in the market. While R-Power entered an exclusive memorandum of Understanding to acquire Jaypee Infratech’s three operational hydro power plants having 1,791 MW generation capacity at a valuation of Rs 12,000 crore, Gujarat-based Adani Power, which is also India’s largest private sector power generator, bought 1200 MW Udupi power plant by shelling out Rs 6,000 crore from Lanco Infratech.Interestingly, both these companies have acquired assets despite having highly leveraged balance sheets. While Adani Power has a debt of Rs 22,317.20 crore and a cash surplus of only Rs 412 crore as reported on March 2012, Anil Ambani owned R-power has a debt of Rs 27,715 crore and cash of Rs 3,000 crore on its books. On the other hand, NTPC had Rs 15,311.37 as cash and bank balance on its balance sheet as on March 2014, whereas the company reported a debt of Rs 62,405.75 crore on March 2014.The panel headed by former power minister Suresh Prabhu has a mandate to ensure 24x7 electricity to consumers in the country.
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With the change of the government at the center, there is new hope among power plant developers. BW| Businessworld spoke with the CEO of Essar Energy, Sushil Maroo at the 15th Regulators and policymakers Retreat 2014 organised by the Independent Power Producers Association Of India (IPPAI). Excerpts from the interview.What is the biggest problem for the power sector today?Today there are stranded power plants with a generation capacity of 35,000 MW in the power sector. For these plants, fuel availability was the biggest issue. Some could not sign the Fuel supply agreement (FSA). Some who signed FSA did not get fuel even after that. Some got stuck because of environmental issues. Companies had made large investments in these plants but because of all these issues they could not pay back the debt to the lenders. This led to stress on banks. The situation for the gas-based power plants is worst. Most of the gas-based power plants were set up keeping in mind gas supply from the government. However, the gas never came and even those plants which were getting gas earlier saw they supply decline after a few years. This has resulted in bad financial condition for power developers.Do you think the government will be able to increase the gas production by increasing price of gas?See, higher price for gas does not mean higher production as well. The government needs to ensure that companies make investment in the gas fields. The gas business is a high risk business and the companies should get good investing environment to put in money in the sector.You have gas-based power plants as well. Do you think you would be able to sell power if its fuel costs above $5 per unit?Gas-based power plants are used for peaking power time. At that time industrial users are ready to pay higher price for power. So even if the cost of power goes up due to expensive gas, the customers will be able to buy it.Industry has shown apprehension over the new ‘standard bidding document’ for the ultra mega power projects (UMPPs). What are the problems with the new bidding document?In the old document, developers used to take all the risk and run the plant. The new document has converted developers into small contractors like you have in the infrastructure sector where they have to build the power plant and transfer it to the distribution company. There are many issues with that model. The land belongs to the distribution company for which you set up the power plant. Besides, after a few years, the plant goes back to the buyer of power. This may compromise the wellbeing of the plants as the seller will tend to overlook maintenance after some years, thus shortening the life of the plants.As a power developer, I feel developers will have problem raising debt for the project, because the plant would not belong to them. Same problem would be faced in getting equity from the market because after some years when the plant starts making money, it goes back to the buyer. And of course there will be a lot of interference from the buyer.Do you think the UMPPS will face problem ?My point is that there are already so many power plants which need coal. Instead of giving coal to those stranded power plants, why is the government keeping coal for power which will come up in 6-7 years.Do you think that in the Indian power sector the sanctity of contracts has been lost as you any agreement can be changed later?In the past, neither the Indian government nor the bidders knew about the impact of long-term power contracts. But over a period of time, everyone has became wiser. It is very difficult to figure out what would be the price of fuel in the next 25 years. If there is uncertainty in the bid, people will either go for higher tariff or will not bid at all. The government had to allow the developers to pass on any increase in the fuel cost to consumers. Because wiothout it, the plant would have become unviable.There are a lot of companies willing to sell their power plants in distress sale. Are you looking forward to acquire some of them to increase your portfolio?We suffered in the past due to fuel shortage and environmental issues, So, at the moment, our priorities are to complete under construction power plants and make running plants profitable. Once our existing portfolio gets streamlined, we can think of buying other distressed plants. But at the moment we are thinking of managing the existing portfolio.
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India has an installed power generation capacity of 2,43,000 MW as of March 2014. But only 1,30,000 MW is available to meet peak demand. So, the immense capacity is merely on paper. Again, peak power deficit is touted to have dipped to 5.4 per cent in 2014 from 16.6 per cent in 2008. Yet, large parts of the country continue to reel under power cuts, ranging between four and six hours daily.So what is the reason for this paradox in the Indian power sector? Put simply, it is the inability of power generation companies such as National Thermal Power Corporation (NTPC) to sell power to distribution companies or discoms, which prefer to resort to load-shedding than purchase power from power generation companies. NTPC, on its part, failed to sell 30 billion units of power in FY14, suffering a loss of Rs 90 crore. A Crisis ExplainedDiscoms have their own reasons for preferring to cut power supply to lakhs of homes than purchase adequate power from generation companies. Here are some of them:Costly power: A shortage in the supply of domestic coal and gas has led power producers to use 15-20 per cent imported fuel to run plants, adding to expenses. When this cost is passed on to discoms, the latter find it difficult to charge higher tariffs from consumers. Experts believe the average consumer in India is not used to paying more than Rs 5 per unit of power. However, in the past two years, the final cost of power, including generation and transmission costs, has touched Rs 6 a unit. At this level, either the state governments subsidise transmission companies or discoms resort to power cuts.Poor financial health: As on 31 March 2012, eight state discoms had liabilities of Rs 2.46 lakh crore. Discoms enjoy a 3-4 month credit cycle with power generation companies. But such high debts restrict their capacity to purchase power as they are unable to make payments even after the grace period. According to a report by the Indian Brand Equity Foundation, eight state electricity boards had stopped making payments to NTPC in 2011, despite being offered discounts of up to 2 per cent on immediate payment, and 1 per cent on payments made within a month’s time.Lack of transmission infrastructure: According to the Planning Commission, in the 11th Plan (2007-2012), power generation capacity grew by 50 per cent, whereas transmission capacity increased by only 30 per cent. In 2012-13, plants supplying electricity to state electricity boards under long-term power purchase agreements lost 1.93 billion units to transmission capacity bottlenecks. In the same year, domestic power exchanges — Indian Energy Exchange (IEX) and Power Exchange of India (PXI) — failed to complete sales-purchase deals worth Rs 1,350 crore, amounting to 15 per cent of the total traded volume of power, due to transmission constraints.The congestion was in evidence as recently as May 2014, when IEX failed to sell 210 million units of power due to the unavailability of an inter-state transmission corridor. “Several participants in the southern states refrained from bidding on the exchange due to the unavailability of the transmission corridor. The southern states of Tamil Nadu and Kerala were the worst affected as power could be supplied for only 10 days in the entire month and that too an insignificant quantum, resulting in an increased area clearing price (ACP) of Rs 11.01 per unit,” says Rajesh Mediratta, director of business development, IEX. “States like Madhya Pradesh, Chhattisgarh and Himachal Pradesh have surplus power but they are not in a position to sell this excess power to states that need it,” adds Mediratta.In a recent report, the Central Electricity Authority (CEA) said the country is expected to see a power shortage of 5.1 per cent this fiscal. While the all India power deficit figure may look minuscule, its break-up tells a different story. The shortfall in the north-eastern region comprising Assam, Arunachal Pradesh, Nagaland, Mizoram, Manipur, Meghalaya and Tripura will be the highest, at 17.4 per cent. Next is the southern region which includes Andhra Pradesh (Seemandhra and Telangana), Tamil Nadu, Karnataka and Kerala, with a power shortage of 12.7 per cent. At 3.4 per cent, the eastern states of Orissa, Jharkhand, Bihar, Sikkim and West Bengal are better off. Punjab, Haryana, Rajasthan, Delhi, Uttar Pradesh, Uttarakhand, Himachal Pradesh and Jammu & Kashmir constitute the northern region which, at 3.1 per cent, has the lowest power shortage. break-page-breakAccording to CEA, only the western region comprising Chhattisgarh, Maharashtra and Gujarat will have a surplus, of 0.3 per cent. But lack of adequate transmission infrastructure will come in the way of electricity being drawn from the western region. Selling power at exchanges: State discoms prefer to sell to power exchanges — even at a loss — to get payment upfront, rather than to retail consumers, who often default on payment. Even power-deficit states like Uttar Pradesh, Punjab, Haryana and Rajasthan are selling to power exchanges (see tables). Haryana sold 100 MUs to power exchanges in March 2014 at Rs 2.60 per unit, though it buys electricity at between Rs 5 and Rs 6 a unit. Harry Dhaul, chairman of the Independent Power Producers Association of India, attributes the phenomena to India’s bail-out culture. “Discoms know that they will be bailed out by the central or the state government every 10 years or so. So they prefer getting upfront money from the exchanges instead of realising actual tariff from customers.”“Ten years ago, Montek Singh Ahluwalia had drawn up a bailout package for state power utilities. When that scheme was nearing its end, the government came out with another. Why should discoms think of becoming profitable,” asks Dhaul.In 2001, based on the roadmap drawn by the Ahluwalia committee, the government offered a bailout package for cash-strapped state power utilities. The package was meant to ensure that dues owed to central public sector enterprises such as NTPC, National Hydroelectric Power Corporation and Coal India, amounting to over Rs 41,000 crore, were repaid.The central government waived almost 50 per cent of the interest amount due. The remaining 50 per cent plus the principal — amounting to around Rs 33,000 crore — was to be securitised through the issue of tax-free bonds by state governments.In 2012, the government came out with a similar carrot for state discoms that provided for conversion of 50 per cent of the accumulated debt of discoms till March 2012 to bonds.The bonds are issued by distribution companies to participating lenders, backed by the state government. The balance 50 per cent of debt is restructured by providing a moratorium on the principal and best possible terms for repayment.Light At The End of The TunnelWhat is the way out of this tricky situation? Debasish Mishra, senior director, Consulting, Deloitte, says it is essential that state discoms have the financial ability to procure adequate power to avoid load shedding. However, he says, this is possible only with annual tariff increases. “In the past, owing to political considerations, some states have postponed tariff increases for years together, pushing the distribution utilities into bankruptcy,” he observes.Mishra adds that given a choice, consumers would prefer to pay and enjoy regular power supply. Consider this: diesel-based power (such as that from generators) costs Rs 17 a unit, whereas power from the grid costs a mere Rs 3 per unit for coal-based power and Rs 6 per unit for gas-based power. “If people are given a choice, they would rather pay more for power from the grid.”Power exchanges can also play a role when there is surplus power available. According to Mediratta of IEX, currently, power generation companies cannot sell more than 15 per cent of their capacity at exchanges. This means, even if they have surplus power, like in the case of power plants in Chhattisgarh, they cannot sell it to power exchanges. “The government needs to not only improve transmission infrastructure but also relax the cap on short-term power contracts for power generation companies. The competition will only bring down the cost of power for customers,” he says. break-page-breakFormer power secretary R.V. Shahi emphasises the need for open access — where people can buy power from any source in the country. Right now, many states do not allow open access.The Electricity Act 2003 mandates that all states allow open access to industrial consumers (those with more than 1 MW demand) from January 2009, to the transmission lines of any utility across the country, subject to the payment of a wheeling fee by the user. Consumers opting for open access have to shell out a cross-subsidy surcharge, or a monetary penalty, to the state distribution company for each unit of power contracted from outside the state.However, states like Gujarat, Haryana and Karnataka have disallowed electricity transactions under open access for industrial consumers. On May 14, the Haryana government used Section 37 of the Electricity Act 2003, denying consumers in the state the discretion to buy power from outside the state.Earlier, the Karnataka and Gujarat governments had disallowed the sale of electricity through open access ahead of the general elections. Industrial consumers in Gujarat were forced to buy power from within the state at Rs 6-7 per unit as against Rs 4-4.5 per unit quoted on power exchanges. The government of Karnataka, on its part, restricted power sales to the state, curbing the freedom of power generators to sell power to consumers outside state limits.Shahi also calls for a change in mindset as well as the law. “For 24x7 power supply to become a reality, it is essential that state discoms purchase additional power through the bidding process. The present mindset of not purchasing power and resorting to load shedding has to go.” He adds, “State load dispatch centres must be out of the state transmission company’s control. Then alone can power reform initiatives, including non-discriminatory open access and competition in retail supply, succeed.”Union power minister Piyush Goel wants states to segregate electric feeder lines for domestic and agricultural use. The model is currently operational in Gujarat, and is often quoted by the minister in conferences. Having separate feeder lines for agriculture and retail consumers controls wastage of electricity which, according to a report by the Planning Commission, is a norm in all states where farmers get free or subsidised electricity.Mishra is optimistic about the future of the power sector as he believes that even politicians are recognising the fact that they need to provide uninterrupted electricity to people.In the past, discoms did not file tariff applications before state electricity regulatory commissions (SERC) because of political pressure. However, a judgment by the Appellate Tribunal for Electricity in 2011 said an SERC could suo moto consider a revision in tariffs without any prompting by a state distribution company if it believed there was a revenue gap.According to a report by Deloitte, in 2012, 23 states and five Union territories raised their power tariffs while, till May 2013, as many as eight states and one Union territory had increased power tariffs in the range of 3.6 per cent to 24 per cent. The hike in electricity tariffs is likely to continue in the current year, improving the health of discoms. With the financial health of discoms improving, there will, hopefully, be more power for the people. neeraj@businessworld.in twitter@neerajthakur2(This story was published in BW | Businessworld Issue Dated 25-08-2014)
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