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<p>Neeraj Thakur Biography</p>
The Indian power sector is going through a phase of consolidation whereby players with financing capabilities are acquiring projects from groups that have failed to manage their balance sheets.In this battle of consolidation, the Anil Dhirubhai Ambani controlled R-power managed to outbid other big conglomerates like Adani, Tata and JSW to enter in an exclusive deal with Jaypee Power Venture to acquire three of its operational hydro power plants with 1,791 mw generation capacity at a valuation of Rs 12,000 crore.According to industry sources, Adani group wanted to buy the same project for about Rs 11,000 crore. At the price of quoted by R-Power, it would not have been financially viable for Adanis to repay the debt and make returns on the project.As on March 2014, Adani Power had a debt of Rs 22,317.20 crore on its balance sheet. Its cash and bank balance were pegged at just Rs 412 crore at the end of FY14.For R-power, too, the deal will leverage the balance sheet of the country’s third largest private sector power generator by another Rs 9,000 crore by taking its debt to Rs 36,490 from 27,715 crore, reported in March 2014.The question here is how will R-Power fund this acquisition given that it has only Rs 3,000 crore worth of cash reserves. The company posted a profit of Rs 1,026 crore for FY14.According to industry sources, R-Power is already in talks with foreign banks for borrowing money to restructure their debt. In case the company raises money from Chinese banks for a low interest rate loan to fund its acquisitions, it will be the fifth time in three years, that R-Power will be knocking the door of Chinese banks.In January 2011, the company had taken a loan of $1,114 million from a consortium of Chinese banks to fund its Sasan thermal project. For the same project, the copany had raised funds from US Exim bank as well.In March 2011, R-COM had raised a debt of $1.93 billion from China Development Bank to fund its 3G spectrum acquisition. According to the group company, Reliance Communications saved more than Rs 500 crore ($111 million) annually by bringing down its cost of debt at 5 per cent.In January 2012, R-COM once again refinanced its foreign currency convertible bonds worth $1.18 billion dollars by a consortium of Chinese banks for the prominent Indian industrialist.The company saved an interest payment between 6-8 per cent for a loan of 7 years.While R-power has faced troubles for being aggressive in the past, as one of its UMPP (Krishnapattam) and a gas-based power plant (Samalkot) could not become operational for lack of fuel, the acquisition of the Jaypee’s already operational hydro project will be a positive for the company.
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When the NDA government set an ambitious target of building 30 KM of roads per day, its feasibility was questioned by the industry experts. However, the achievement of the newly set target depends on the approach of the government in figuring out the bottlenecks of the previous government’s policies. The ministry of roads and highways under Nitin Gadkari’s seems to be moving on the right path as the government now plans to invite bids only for projects which have all the environment and forest clearances. The project monitoring group (PMG) under the Prime Minister’s office is working with all the parent ministries to get environment and forest clearances for the projects within one month’s time of seeking approval. It may take some time before the projects start getting clearances within a month’s time, but the initial records of facilitating clearances of 155 projects, which entail an investment of around Rs 5.5 lakh crore, are encouraging. Of these one-third are road and port building projects. Under the UPA government, most of the infrastructure projects including Ultra Mega Power Projects, Highways, Airports, SEZs and captive coal mines faced delays on account of delay in various clearances related to environment and forest departments. Industry figures say, less than 10% projects awarded by the UPA regime had forest and environment clearances. The UPA government’s most ambitious The private sector was sandwiched between the warring ministries for lack of coordination. While the big players survived by the virtue of the size of their balance sheets, the smaller players were ruined as the lenders stopped giving them loans for other projects. Video: No Tender Without 80% Land Acquisition: Gadkari A study by the NDA government has indicated that 189 out of 332 NHAI projects across 20 States, involving Rs 27,210 crore, are stuck in various disputes. In the roads sector in 2013-14, the UPA government could award, only 2,000 KM of projects as against a target of 9,000 KM. The UPA government had started with an ambitious target of 20 KM of roads per day, however due to lack of funds, the Planning Commission opposed the ministry of roads and highways under Kamal Nath. To furnish more funds for the highways projects, the NDA government is considering to buy equity in the projects up to 26%, which would be funded from a national corpus which would raise funds from abroad at near zero percent interes. A similar model can be applied for power and oil & gas pipeline projects. Arvind Mayaram (BW Pic by Sapna Bhardwaj) Also, the government needs to put a check on the number of under construction projects a company can have in the roads sector. A similar decision was taken in case of UMPP projects in the power sector as R-Infra had bagged 3 out of four awarded projects that required Rs 20,000 crore of investement per projects. Such a large amount of investment requires huge debt raising capacity, which leverages the balance sheet of a company beyond manageable limits. Arvind Mayaram, Finance Secretary, rightly pointed out at a seminar in Ficci on PPP that there was an over exposure of companies in the road project construction, and 12 to 14 companies repeatedly bid for projects, stretching their resources thinly in the process. Whether the government is able to achieve its set target will be known after sometime, the roadmap laid by the government is definitely promising.
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Independent regulators are expected to safeguard the interest of industry from the selfish motivation of politicians. But there is hardly any regulator in India that has lived up to the principles on which they came into existence. In the electricity sector it has been proved once again that regulators have hardly any say independent of the state governments, points out the latest report from research firm Icra.The Icra report shows that the state governments are paying a lip service to the conditions set to opt for the financial restructuring plan that allows restructuring of the debt of the state discoms. The State Electricity Regulatory Commissions (SERCs) also have not played their role in ensuring that the discoms maintain their freedom in running their business. In the current financial year, most of the state discoms have filed tariff petitions but only 16 out of 29 states have issued tariff orders for FY 2014-15, so far. Clearly, general elections have influenced the decision making of the SERCs.SERCs in seven states namely Arunachal Pradesh, Bihar, Gujarat, Jammu & Kashmir, Odhisa, Uttarakhand and Madhya Pradesh have not approved any tariff revision for the distribution utilities.Interestingly, Bihar had sought special status along with Odisha, Jharkhand and Andhra Pradesh under the FRP scheme and was allowed to convert its outstanding loans till March 2013 into bonds as part of an amendment to the discom debt restructuring package. The other states were allowed conversion of their debts till March 2012.Tamil Nadu, Rajasthan and Uttar Pradesh have not even paid the lip service to the conditions of FRP and have not issued the new tariff order for state discoms, so far.In Uttar Pradesh, where the duration of power cuts ranges between 7 and 12 hours during summer months, saw the state discom posting a loss of over Rs 9,000 crore at the time of opting for FRP in 2012.The less than required or no tariff revision will lead to an increased subsidy dependence of state discoms to the tune of Rs 72,000 crore in FY15. It is unlikely that the state government will pay the subsidy amount to their discoms upfront, leading to more power cuts in the coming times as power producing companies are getting stricter with their payment schedules.In 2001, based on the roadmap drawn by the Montek Singh Ahluwalia committee, the government offered a bailout package for cash-strapped state power utilities. The package was given to ensure that the dues owed to central public sector enterprises such as NTPC, NHPC and Coal India, amounting to over Rs 41,000 crore, were repaid.The centre on its part waived almost 50 per cent of the interest due. The remaining 50 per cent plus the principal due about Rs 33,000 crore — was to be securitised through tax-free bonds issued by the state governments.The plan failed to get the state discoms out of the red and the government had to come up with another plan called FRP. However, the present state of affairs hints at a similar fate for the FRP if the government does not ensure complete independence of the electricity regulators.
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Dr Arup Roy Choudhury, the CMD of India’s largest power producing company, NTPC, brings out the paradox in India's electricity policy. On one hand the Central Electricity Regulatory Commission as well as the financing institutions are recommending increase in the power tariffs but there are no buyers for expensive power in the market. “The government should bring the cost of power down. Power, like any other commodity is a product and if it is not priced properly, it is not sold," says Choudhury. According to Choudhury, instead of increasing power tariffs, the power distribution companies should bring down the T&D losses to improve their financial condition. Choudhury also says that any increase in the price of natural gas will make it difficult for the already beleaguered gas-based power plants to sell their power.
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The Ministry of Power has fast-tracked the process of setting up new power transmission lines in the country by approving nine projects with an aggregate cost of Rs 12,500 crore. The projects would be open for the private sector and companies would be invited for tariff based biddings.The decision to approve such a huge investment for the next three years was taken after the newly incumbent NDA government got a feedback from the stakeholders of the Power sector that the country lacks transmission capacity.In May and June, southern and north Indian states suffered power cuts of more than 7-10 hours a day, despite power being available in the country.The transmission projects will benefit several states such as Haryana, Chhattisgarh, UP, MP, Maharashtra etc, by enabling high capacity 765kv lines carrying up to 2100MW each apart from construction of new 765/400kv substations.The new projects will help evacuate power from power stations such as 660MW Sipat of NTPC, 1600MW Gadarwara, 1320 MW Sassan UMPP.Congestion will also be reduced in Haryana Region by the strengthening of the Northern Transmission system.In the last five years, while power generation capacity has grown by 50%, transmission capacity has only increased by 30 per cent.According to a Ficci report released in 2013, in the power transmission sector, a competitive bidding process was mandated for all future projects from January 2011. Although private players have participated in 15 project bids since then, there are inherent disadvantages that the private players face as compared to their government owned Power Grid Corporation. “There is transmission constraint in certain regions of the country. For example. Chattisgarh (which is called the W3 Region) has added huge generation capacity in the last 7-8 years. Transmission evacuation capacity has not matched up with the generation capacity addition, leading to constraints, " said Debasish Mishra Senior Director, Consulting, Deloitte."Similarly the inter-regional transmission capacity to south is very limited, resulting in surplus capacity in certain Regions such as W3 and East and deficit in South. The move to boost invest in transmission systems will give a boost to the Indian power sector" added Mishra.These projects were mainly stuck in the approval process in the government since last several months. The approval to go ahead with implementation was granted immediately.At present, India has a transmission capacity of 38,000 Mw, which would reach 66,000 MW by 2017 a capacity addition of 28,000 over the next three years.
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India may turn to Iran this year for meeting its crude oil demand. The move has become necessary in the wake of attacks by al-Qaeda-inspired militants in Iraq who have seized a portion of the country posing a threat to the regional stability and crude oil exports from the Middle-East nation. Despite US sanction over imports from Iran, the Indian government is hoping to get the leeway because the Iraq crisis has brought US and Iran on the same table, giving hope of cooperation between the two nations.Iran was the second largest crude oil supplier to India till 2010, when India started reducing its imports from the country under US pressure.In FY14, India purchased 11 MT of crude oil from Iran, which was 50 per cent less than its peak import of 21.8 MT in 2008-09.“We will have to meet our demand from somewhere. Now that the US and Iran are ready to work together on Iraq issue, we are sure that we will also be able to meet our requirements by engaging with Iran,” said an official in the Ministry Of Petroleum working on the contingency plan for crude imports. Read Also: No Impact On Fuel Supply?Read Also: India Plans More Transparent Iran Oil PaymentAccording to the Ministry of Oil and Natural Gas, India imported about 13 per cent of its crude oil requirements from Iraq last year. In the current year, government owned Oil Marketing Companies (OMC) had planned to import 19.4 Million Metric Tonnes, (about 20 per cent of total requirement) of crude oil from Iraq. The strife torn nation is the second largest crude oil producer in the OPEC group. So far, the OMCs have imported 50 per cent of the planned quantity from Iraq. However, in case of increased tension in Iraq, India will have to increase have a contingency plan for meeting its crude oil requirement.Former chairman, Indian Oil Corporation RS Butola told BW|Businessworld, “ The crude from Iran can replace crude from Iraq because it is of the same quality. However, we will have to see if the US is ready to ease its control on the issue as allowing India will mean giving exemption to other countries like China, Japan and South Korea.India's oil purchases in the 2013-14 dropped 16.5 per cent to 222,000 bpd. In the wake of nuclear tension between the US and Iran, India was asked by the US to cut down its crude oil imports from Iran between 15 and 20 per cent per annum.India planned to import 97 million tonnes of crude oil in 2014-15.
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R S Sharma, former chairman of India's largest upstream company, ONGC, and currently heading Ficci's hydrocarbon committee, says the government should not double the price of natural gas to $8.4 per MMBTU. Talking to BW|Businessworld, Sharma said the price should be kept between $6 and $7 per MMBTU to make sure that the consumers are not hurt. What fiscal incentive should the govt provide for the hydrocarbon sector in the upcoming budget?Firstly, the government is charging Service Tax from companies engaged in hydrocarbon Exploration. Service Tax actually gets levied on revenue generating activities. Exploration per se is not a revenue generating activity. Investors should be exempted from paying Service Tax. The revenue department of the Ministry of Finance feels that why should they let go of their revenue? But they do not understand that if there is no incentive in the exploration sector, their would be no exploration activity and thus no revenue. It is a very short sighted approach of the government.Second, the definition of ‘mineral oil’ is a problem. When the New Exploration Licensing Policy (NELP) was started, the definition of 'mineral oil' was oil as well as gas. But finance mister Mr P Chidambaram in one of the budget announcements changed the definition to only oil. This was a serious mistake. We need more incentives for gas. It is a green fuel as compared to oil. India's energy basket has only 9 per cent gas as against the world average of 24 per cent. In a hydrocarbon block, the explorer does not know what will be the discovery, oil or gas. It makes no sense to tell investors that if you find oil, you will get tax incentive but if you find gas you will not get anything.Third, there is a lot of hue and cry that gas prices are being abnormaly hiked. One should understand that gas is a much cheaper fuel as compared to oil. The government should give more incentives to explorers in terms of gas pricing because its equivalent price is always cheaper than oil, despite proposed price increase.Fourth, the government gives exemption on customs duty to power producers for importing Liquefied Natural Gas. Now, no power producer in the country is using LNG because its cost is so high that the end product is unviable. Therefore, there is no meaning in providing exemption on customs duty to power produces, since they are not importing it. Rather this exemption should be given to anybody who imports it because it will help the industry grow. What kind of fiscal and production policy should the govt have for Coal Bed Methane (CBM) and other gases?I would like unconventional gas to be promoted. CBM, Shale and other such gases require higher cost of drilling. CBM is a low pressure gas and its volume is also less. Its production becomes viable only at a high price. Great Eastern Energy is one of the largest CBM gas producer in India. They are selling it at a market determined price but in small quantities. Non conventional gas producers should have freedom to sell their gas at market price and there should not be any restriction on its pricing.Moreover, for CBM, currently there is revenue sharing model, the government should keep it like that. There should not be production sharing contract for the CBM gas, which will open the accounts to Comptroller & Auditor General of India for scrutiny of capital investment and cost of production.Why according to you foreign players have not shown interest in the Indian hydrocarbon sector?To invite investors in India, the government should treat them as their business partners with respect. Today, Arvind Kejriwal feels business men are looting this country. He accuses all of them of fraud and cheating. This way we will destroy investor sentiment in our country. Prosperity to Aam Admi comes when there is economic development in the country. Even post independence, India had big industrial groups like Tata and Birla that contributed to India's industrial development. That is why it is very important that we pay respect to our industrialists.But Arvind Kejriwal started accusing a few industrialists of corruption just a year ago. The NELP failed to attract foreign investors even before he came into picture. Who is to be blamed for that?Dr Manmohan Singh! He is a top class economist but has failed as a manager and administrator. Being the chairman of India's largest exploration company, if I had decided to keep quiet, it would have led to complete indiscipline, chaos and anarchy. In case of Manmohan Singh, he was CEO of the national economy. His continued silence meant that all the discipline got eroded and our democracy became free for all. Everybody thus rightly started criticising the government. This harmed the investor's sentiment the most. He should have taken charge of the economy as well as country as an exemplary leader in order to keep the faith of foreign investors in our country.Should the govt revise the Rangarajan formula for gas pricing or should it go with the same formula?Yes, as per me, the formula should be tweaked. See, when there used to be ad hoc hikes in diesel prices, there used to be public cry and the move was criticized. But when the UPA government tried the formula of having a 50 paisa hike per month, nobody took a serious note and small doses of increase got accepted.For natural gas, the price increase is imminent to honour the contractual commitment of the sovereign government. However, if we double the price in one go from $4.2 per unit to $8.4, it will hurt people and invite huge criticism. The natural gas in the country should be priced between $6-$7 per unit as of now. Government should think how the pricing of gas can be made more comfortable for the consumers, and also be acceptable to the producers. The instant price increase should be for five years. After five years we can deliberate on the pricing mechanism again. There is no need to have 100 per cent international parity for natural gas as of now in order to balance the expectation of the producer and acceptability of the consumer.
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Among all the suggestions the bankers gave during their recent pre-budget meeting with the Finance Minister Arun Jaitley, the one that came from Uday Kotak, vice-chairman and managing director of Kotak Mahindra Bank, was perhaps the most striking. Kotak wanted the government to list the country’s largest insurer Life Insurance Corporation of India (LIC) in the stock exchanges.Easier said than done, as any attempt to dilute the shares of the government in the LIC through a public listing will turn LIC more accountable and transparent, and in the process bring its future investment choices under public scrutiny.It should be noted that in FY13 the UPA government used LIC to bail itself out when its disinvestment targets were not in a position to be met. LIC bailed out state owned ONGC’s first ever stake sale of government equity through the auction route, by pumping in over Rs 12,000 crore and picking up 95 per cent of the total shares put on the block. Similarly, it also helped the government in re-capitalising state-run banks such as Punjab National Bank and Syndicate Bank and invested Rs 8,000 crore.LIC sees cash flow of over Rs 2.5-3 lakh crore every year. It invests Rs 2.5 lakh crore in various securities including equities.Once the company gets listed, management decisions to invest in the market would be accountable to its shareholders.Even though, NDA government is on a reform spree and plans to undertake a lot of bold reforms that the UPA government could not gather courage to implement, it would be difficult for the finance minister Arun Jaitley to not have a cash resource at its disposal.The UPA government missed its disinvestment targets in all five years due to bad primary market conditions. In 2010-11 and 2011-12 fiscals, the government had raised Rs 22,144 crore and Rs 13,894 crore through disinvestment, against the budgeted target of Rs 40,000 crore in each year,.Even these disinvestments were achieved with the help of LIC, as LIC used to be the last minute saviour for all government stake sales.The NDA government is likely to have similarly targets for disinvestment, if not more, in during its tenure. But will it make sense to disinvest in the firm that plays a major role in disinvestment of all other major firms? It is a million dollar question.
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The NDA government is likely to provide subsidy to states that take up the task of having separate electric feeder for domestic use and a limited agricultural supply of nearly eight hours a day. The model is currently at work in Gujarat. The segregation of the agriculture feeder line has been on the agenda of the Planning Commission as well, but the state governments have shown reluctance to adopt the policy fearing political backlash.“We will offer a subsidy to the state governments and convince them that segregation will lead to better utilisation of available resources, leading to lesser power cuts,” said a government official in the know of things.“The amount of subsidy is being worked out. If we look at the Gujarat model, the whole state spent just Rs 1,300 crore to implement the project. The subsidy for the whole country would not be very much if things are implemented with sincerity,” added the official.After setting up a separate agricultural electricity feeder, the Gujarat government has brought down transmission and distribution losses from 35 per cent to 15-19 per cent in five years.Studies conducted by the Ministry of Power and other state governments suggest that low cost or free electricity to agriculture sector leads to wastage and theft of power. If the government creates separate feeders for both sectors, it will help agri sector get constant and high voltage power during in the day, when agriculture activity is at its peak. The Bihar government had also begun a pilot project under the name 'Rainbow Revolution' on the same lines.The ministry of power is preparing a roadmap for improving the electricity supply in the country, and this model has been discussed in all the pre-budget meetings held in the ministry, so far.Union power minister, Piyush Goel had visited Gujarat after taking over the responsibility of the ministry to study the model. Gujarat was one of the first states to implement this model of electricity supply and it has improved the power situation in the state. Gujarat boasts of providing 24 hour electricity to all cities and villages.In an approach paper to the 12th plan, the Planning Commission had also proposed the segregation of agriculture feeder line saying “ The separation of agricultural feeders in the country will enable villages to get 24x7 three-phased power for domestic uses, schools, hospitals and village industries."
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Seven years ago, when the country’s largest power producer, NTPC, lost out the bid for Tilaya UMPP to Reliance Infrastructure owned R-Power, stock analysts as well as sector’s experts had castigated the management for not being aggressive enough. In fact, the public sector enterprise had already lost two previous bids for Sasan and Krishnapattam UMPPs (ultra mega power projects) - also awarded to R Power- and had not participated in the bidding for the Mundra UMPP which was awarded to Tata Power. But today, the Tilaya UMPP is yet to come on ground. Of the other three UMPPs, only Tata Power’s Mundra UMPP has begun commercial production of power and the company has incurred huge losses on the project. The NTPC management often quotes this example as the reason behind a good balance sheet of their company. Today, the company has received 30 expressions of interest from private sector companies to buy out their distressed projects. The euphoria over the power sector is over and only players with long-term strategies are in a position to continue in the business. While big business groups like R-Power and Tata Power are struggling to keep afloat, smaller players like Lanco Infra, GVK Infra, and JP Power ventures have damnable debt to equity ratio on their balance sheets in the range of 4 to 23. Sooner or later they will have to sell their power assets or the debt will impact their other businesses also. Experts say that power is a business of long gestation period and only companies with a horizon of 10-15 years can survive. Today, NTPC has a huge cash pile of Rs 17,000 crore and a debt to equity ratio of 0.9 only. NTPC has an installed capacity of 42,454 MW comprising of 22 Coal based and 8 Gas based projects. The company has massive ongoing capacity addition plans with around 20,000MW projects under construction. The company might add as much as 10,000 MW in the coming years by acquiring distressed thermal power assets according to market experts. NTPC’s strong growth is a result of focusing on the fundamentals of the power business. The company never went for Chinese power equipment, which were cheaper as compared to equipment provided by BHEL. But the quality of expensive equipment has helped NTPC maintain highest average Plant Load Factor, or capacity utilisation, in the country. NTPC’s coal plant PLF improved about 1.8 per cent in FY14. The PLFs of all thermal power generators fell by an average of 4 per cent in the same period. This reflects in the company’s financials as the company’s EBITDA from generation business has grown to Rs 17,348.24 crore from Rs 15676.21 crore registering a growth of 10.67 per cent year-on- year for FY14.
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