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Financing 11th Plan Projects in the Energy Sector, Shri R V Shahi, Former Secretary, Ministry Of Power

Financing 11th Plan Projects in the Energy Sector
[R V Shahi's Weekly Column for Infraline, August 27, 2007]

Whenever discussions about development of infrastructure sector are held, invariably financing issues become predominant areas of concern. It is true that the 11th Plan projections for all segments of energy are on a significantly higher pitch. While in the past these segments have experienced a growth in the range of 4 to 6%, they are expected to now grow in the range of 8 to 10%, i.e. almost at double the rates of what they have achieved in the past. In the energy segment which consist of Power, Coal, Petroleum and Natural Gas the most dominant role, in so far as the size of expansion is concerned, would be that of power. Within power the sub-sets would be constituted by investments in power utilities, captive power plants, merchant plants, nuclear power, and non conventional energy sources of generation.

Since discussions about financing the projects in the power group will have to be inevitably more extensive, first we may discuss about the issues in the related segments namely petroleum and natural gas and coal. Petroleum sector provides significant amount of input by way of liquid fuel as well as natural and liquefied natural gas. The structure of this industry over last 5 to 7 years has evolved in a manner that funding as a constraint for growth has not posed any visible problem. Both government sector and private sector companies have played and are playing the required roles. If expansions needed have not taken place, particularly in the gas sector, they may be entirely on account of other reasons and not due to any lack of finance for capital projects. Some of the major organizations which have been responsible for undertaking expansion in this segment include IOC, HPCL, BPCL, IOL, ONGC, GAIL, RIL, GSPC etc. All of them are engaged in growth of this industry and are sufficiently well placed in so far as organizing and accessing the financial resources is concerned. Therefore, in the 11th Five Year Plan, for the targeted expansion of this group of energy, it is felt that they would not have any problem of financing their new capital schemes. I recall, in a different context, when we were discussing about Gas Authority of India Ltd. (GAIL), it was revealed that GAIL had practically no debt. Their networth is so large that there is tremendous scope for leveraging sufficient amount of loan and this Navratna Company would obviously not have any financing issues for taking care of their expansion requirement. Fortunately, in the petroleum sector almost every central public sector undertaking is in the category of Navratna, are excellently performing, financially well off and sufficiently strong in terms of undertaking any type of expansion. The Gujarat State Petroleum Company which also has found large quantity of gas in KG Basin Reliance Industry, Petronet, Cairn Energy etc. are few other players in the sector. All of them are financially strong enough to take care of the financing needs in the current five year plan as also in the future.

Coming to the Coal Sector, the Coal India Subsidiaries, particularly Northern Coal Fields, Western Coal Fields, South Eastern Coal Fields, Mahanadi Coal Fields and Central Coal Fields, and also Singareni Coal Co. which is joint venture Company of Government of India and Government of Andhra Pradesh, are all doing very well financially. In one of the recent Round Table Discussions, the Coal India Chairman happened to mention that most of the Coal companies are highly under leveraged and therefore there is significant scope for mobilizing financial resources through borrowings, which will also appropriately balance the debt-equity ratio. It would also be relevant to mention that most of these companies are also making significant amounts of profits. Thus, profits and depreciation put together lead to generation of sufficient internal resources to take care of the expansion needs of these coal companies. One more factor which has remained untouched so far is the scope that today's capital market provides for such good companies by way of their participation in their equity capital. All the coal companies have remained totally indifferent to this so far untapped potential for raising fund. Similar was the case with power companies under Ministry of Power even till the end of 9th Five Year Plan. It is only in the 10th Plan that the success of IPO's launched by Power Trading Corporation, NTPC and Power Finance Corporation have inspired confidence and it was decided that almost all the central public sector companies under ministry of power would go in for raising equity fund through IPO's. The results have been rewarding. There is no reason why excellently performing coal companies in the public sector should not access equity capital from the market to finance their expansion projects. This would lead to a win-win situation. Besides mobilization of finance and resources, the management control continues to remain with the government even if the extent of equity in the market increases first to 10% then to 24% and subsequently upto 49%. It is relevant to mention that companies in the equity market also improve their corporate governance practices, which in itself a major gain of such an initiative. Development of coal mines by power companies, as captive mines, has further added to financing capacity for the coal sector.

Among all the infrastructure activities, power perhaps is the most vital and also most highly capital intensive. The Govt. of India had set up a committee in December 2006, to study and report on infrastructure financing. This committee chaired by Mr. Deepak Parikh submitted its report in May 2007. The estimated capital expenditure for infrastructure, according to this committee, would be of the order of 320 billion US $, which is equivalent to Rs.14,50,000 Crores. This estimate, which was based on 2005-06 price level, has been further updated keeping in view the price level as also the latest estimates of infrastructure programmes and hence the amount now estimated is of the order of 475 billion US $. Power and Railways, as per the Committee, constitute almost 60% of the total (Power - 40%, Railways - 20%). In the balance 40%, the infrastructure sectors covered include National highways (15%), Ports (4%), Civil Aviation (3%) and other residual sectors which include telecom, SEZ, urban infrastructure, water, state and rural roads etc.

In the power sector the huge capital requirement is on account of a massive expansion of the order of 68,000 MW which has been planned. Obviously, associated with this generation capacity would be the requirement meant for transmission, distribution, rural electrification etc. The Working Group on Power for 11th Plan, which I had the opportunity of chairing, made a comprehensive estimate of the fund requirement for the power sector during the plan. The amount is a staggering figure of Rs. 10,31,600 Crores, of which Rs. 4,10,896 Crores is meant for generation projects alone.

Rs. Crores







Transmission, Distribution & Rural Electrification








Total Power


Renewable & Captive


Merchant Plants




It may be relevant to mention that this estimate is for additional capacity of about 68,000 MW. It does not include about 10,000 MW already under construction which was due to be completed during the last year of 10th Plan and got shifted to the first year of the 11th Plan. While the capacity addition programme appears so ambitious, it is heartening to note that at the end of the 10th Five Year Plan in March 2007, in addition to spill over projects (10,000 MW), additional projects totaling to about 49,000 MW were already under construction with complete financial tie-ups.

The Working Group on Power had also made a number of recommendations which would lead to availability of adequate amount of fund for the power sector. A few of these recommendations are outlined below:-

  1. Central public sector ugndertaking and state generating companies could go in for accessing equity capital from market through IPO's. This would not only fetch a reasonably good amount of equity capital needed for their expansion programmes but since their networth will also increase, they would also be able to mobilize larger amount of borrowings.

Experience of this initiative launched in 10th Five Year Plan for central power undertakings has been encouraging. It should extend to state generating utilities. Wherever the state electricity boards have been restructured, the generating companies could proceed with this initiative. In case of other boards restructuring would facilitate this process. If not in all cases at least 15 electricity generating companies at the state level, we could definitely expect positive to highly encouraging response from the equity capital market. At the state level we have about 70,000 MW capacity. In the following 15 states the capacity is of the order of 55,600 MW. Except Jharkhand, Kerala, Punjab and Tamil Nadu all have reorganized with their generating companies doing reasonably well. The IPO initiative could lead to generation of enormous amount of fund both for equity requirement and borrowing needs of expansions in these states.


Andhra Pradesh





















Madhya Pradesh












Tamil Nadu



Uttar Pradesh






West Bengal




Total State

70,000 MW

  1. The Working Group on Power also made a number of recommendations in relation to changes in policies and procedure by Ministry of Finance and Reserve Bank of India. These are concerning capping on loans for individual companies, business groups, external commercial borrowings, development of primary market on bonds, external commercial borrowing guidelines to cover even intermediaries like PFC, REC, IDFC etc., tax concessions for ultra mega power projects, venture capital etc. if these policy and procedures are effected the likely gaps in financing of infrastructure projects in general and power projects in particular could be matched.

Subsequently, the Deepak Parikh Committee (Report in May 2007) has covered all these points suggested by the Working Group on Power (Report in January 2007) and has included a number of other suggestions relevant for the entire infrastructure segments. The Report has detailed its recommendations on the following:

  1. Development of domestic bond market

  2. Tapping the potential of insurance sector

  3. Rationalising the participation of Banks and Non Banking Finance Companies.

  4. Recommendations relating to fiscal issues.

  5. Facilitating inflow of equity.

  6. Inducing foreign investment in infrastructure.

  7. Utilising foreign exchange reserves.

Some of the important policy initiatives, which this Committee has emphasized, are briefly outlined below :-

  1. Robust debt capital market is essential for long tenure borrowings.

  2. It is necessary to consolidate various regulations relating to corporate debt securities, under the jurisdiction of SEBI, to reduce multiplicity of regulators.

  3. TDS on corporate bonds should be removed in line with Govt. of India Securities.

  4. Rationalization of Stamp Duty, Reduction of Stamp Duty amount and uniformity across the states on debt instruments and on securitization transactions.

  5. The Private placement should be confined only to qualified institutional buyers (QIB) and a number of restrictions that exist should be removed. If this is done inline with international practices and if the scope is reduced to legitimate and qualified agencies the present restrictions would automatically be redundant.

  6. At present regulations with reference to investments in bonds are highly restrictive as compared to those required for granting of loans. There does not seem to be any valid reason for this differentiation. Bonds have a high potential and could be used to fund these projects. Therefore there is a necessity to do away with this dissimilarity.

  7. Throughout the world, for infrastructure projects long term liabilities have been used to finance long term assets. Insurance companies were under the Govt. jurisdiction in the past. Now there are a number of private insurance companies as well. It has been seen that insurance companies have funded infrastructure projects only to the extent of about 10% of their total investments. Therefore it is necessary to widen the scope of infrastructure financing by insurance companies in terms of sectors. It is also necessary that investment guidelines in terms of quality and types of investments and instruments are liberalized. In this regard it is also relevant to mention that the scope of infrastructure as defined by insurance regulatory authority is rather narrow and it may be better to follow the definition given by the Reserve Bank of India.

  8. Since the infrastructure fund requirement is enormous, larger amount of funding by banks, FI's and large NBFC's should be facilitated. In this regard the guidelines on norms, relating to exposure limits both for individual company lending and for groups, needs to be revised upwards.

  9. The existing guidelines do not allow financial intermediaries (Banks, FI's and NBFC's) to raise foreign borrowings for on-lending to infrastructure sector. This restriction needs to be removed and these intermediaries should be allowed to raise long term fund (minimum 10 years) from overseas market.

  10. The foreign borrowings by infrastructure companies or by special purpose vehicles (SPV's) should be exempted from the requirements of withholding tax.

  11. In case of ultra mega power projects, tax rebate on investments for a reasonable period should be allowed. To facilitate equity flow into infrastructure projects, changes may be necessary on policies relating to -

  1. buy back regulation

  2. venture or private equity funds as bidding partners.

  1. To attract foreign investments steps required are -

  1. Separate treatment for infrastructure holding companies

  2. Refinancing through ECB's

  1. About 10 billion US $ for F.E. reserves can be loaned to a company which should invest in infrastructure projects.

Infrastructure development is a national imperative. Energy sector holds the key to every aspect of development. Fund requirements are huge. But they can be organized. We need to act on various suggestions. They are all doable and so are the projects.

Copyright : R.V. SHAHI