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Rural Electrification Corporation - New Role - Virtually Unlimited Opportunities, Shri R V Shahi, Former Secretary, Ministry Of Power

Rural Electrification Corporation - New Role - Virtually Unlimited Opportunities
[R V Shahi's Weekly Column for Infraline, February 11, 2008]

Rural Electrification Corporation was set-up by the Government of India to facilitate extension of rural electrification works in the country. In over 35 years of its existence, no doubt, this corporation has made magnificent contribution towards this objective by way of providing financial assistance to various state controlled Electricity Boards. Yet electricity sector remains most deficient, and therefore most challenging, in rural electrification. According to census 2001, more than 56% rural households did not have even electricity connectivity let alone electricity supply. The remaining 44% which have been provided with connectivity to the distribution network do have supply theoretically, but it is highly erratic and irregular. Therefore, this area poses to be the biggest challenge, and hence also the maximum opportunity for growth of an organization like REC.

When in the beginning of the 10th Five Year Plan (April 2002), we were struggling to fix various loose ends of the power industry - obviously there was no dearth of such loose ends - we also started revisiting the role of REC. We found that if REC continued to remain restricted to its age old role of providing financial assistance to the State Electricity Boards, in the medium and long term, it may not adequately meet its objectives. After all, even in more than 30 years a large number of villages (almost 1,25,000) remained to be electrified out of over 6,00,000 villages that India has. It would be relevant to highlight here that the villages that had been electrified (about 80%), were defined as `electrified' even though there would be only one house given electricity connection in that village. This flawed definition obviously presented a highly distorted picture about rural electrification in the county. We changed this definition subsequently in the year 2004-05 and the new dispensation would now mean a more meaningful electrification of the village.

When we were reviewing the role of REC, we were also confronted at that time (2002-03) with a situation of Indian financial sector not being very kindly and positive to power sector. In fact most of them had abandoned this sector. Perhaps they had reasons to do so then. The two financial institutions under Ministry of Power viz. Power Finance Corporation and Rural Electrification Corporation, which were mainly focusing on power utilities, were persuaded to come forward and take the sector out of this stalemate. Accordingly, we considered the following strategy for a macro level approach of financing of power sector :

  1. The major central public sector undertakings viz. NTPC, NHPC, Power Grid etc., which have come of age and have a standing and good credit worthiness in the market, can organize on their own their financial needs. PFC and REC need not get into funding of these organizations.

  2. Rural Electrification Corporation should come out of its shell, discover its own strength and potential go beyond the job of rural electrification, have a vision of an accelerated expansion of its operations and accordingly cover, so far unchartered areas, generation and transmission projects.

  3. Power Finance Corporation and Rural Electrification Corporation, when freed from the burden of funding central power generating and transmission companies, could chanelize all their resources to assist state Government projects and private sector projects.

  4. Their approach on payment security mechanism should break the barriers created by various funding agencies which relied heavily and mainly on guarantees and counter guarantees. The new payment security mechanism should look into the mortgaging of assets created and claims on revenue generated as a more pragmatic - in fact more reliable - means to secure payment rather than seeking their payment through recourse to Government guarantees.

  5. This strategy, it was felt, may snowball into other financial institutions also revisiting their approach and aligning themselves to follow similar dispensation. Now, it is matter of historical record that this strategy worked. State Government guarantees and Central Government counter guarantees are now more or less forgotten instruments - neither developers ask for it nor do the lenders expect this. Payment security has, by and large, been internalized to the business through other instruments and mechanisms. Credit for this shift in mindset of bankers and financiers should, apart from other factors, must go to PFC and REC.

I recall when we were trying to restructure the role of REC, a concern was raised by the then Deputy Chairman, Planning Commission. I must say it was a genuine concern that if REC took on new roles, its focus from rural electrification might shift and that this area which needed so badly the maximum amount of attention, might get relegated to the background. We, in the Ministry of Power, were quite clear that the expanded roles of REC should be so structured that it aids and assists the rural electrification role rather than in any way dilutes or constrains the process. This approach and this confidence were built on the following premises :

  1. The restricted role of REC in fact disables the company to enlarge its operations, perceptively the agencies from which the company sources its fund has a different risk perception about its only role of village electrification and also that restricting to this activity its project management ability has not got empowered.

  2. Expanded role will enable the company to grow in size, acquire new areas of project appraisal and project management experience which can be a great support to the core area viz. rural electrification.

  3. In years to come decentralized generation can be a major solution to rural electricity supply. REC's expanded role can significantly contribute on this.

We assured the Planning Commission that rural electrification would receive much more attention than in the past. Therefore, from the year 2002-03, REC started expanding its operations to various segments of power sector. By the year 2006-07 out of total portfolio of sanction of over Rs. 32,000 crores for the year, power generation projects account for more than Rs. 10,000 crores - a radical change indeed. Let us examine the concerns listed above in the light of happenings of last five years.

  1. Expanded roles of REC have, in no way, stood as a hurdle in its task towards its core responsibilities. In fact in the 10th Five Year Plan maximum number of villages were electrified. What was done in five years had not been done in the previous two plans of ten years, put together. Similarly we could have maximum number of household connectivity also provided during this period. The historic scheme, with unprecedentedly large proportion of grant funding (to the extent of 90% of the project capital cost) from the Central Government was put in placed by the Government of India in March 2005. The scheme aims at creating Rural Electricity Distribution Backbone (REDB). REC was identified as the nodal agency for implementation of the Rajiv Gandhi Grameen Vidyutikaran Yojana.

  2. During the period of 10th Five Year Plan the size of operations of REC has increased many folds. In the final year of 9th Plan (2001-02) they sanctioned loans amounting to about Rs. 6,800 crores. This increased to about to Rs. 33,000 crores (almost five times in a period of five years) in 2006-07. Similarly they disbursed loans amounting to about Rs. 4,700 crores in 2001-02. It increased to more than Rs. 13,750 crores (almost more than three times during the period). Similar radical changes have happened in other financial parameters such as profit, networth etc. The whole profile and character of the company has changed. It has become a significant player. REC used to operate at a level which was approximately 80% of the size of operations of Power Finance Corporation. The new role of REC has not only enabled the company to catch up, within a period of five years, with PFC but in some ways it has surpassed - in the matter of sanctions as well as disbursements.

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  1. One of the objectives of enlarging and redefining their jurisdiction, as also accelerating the activities of PFC, was to motivate and enable these two organizations of the Ministry of Power to make a significant dent on power sector project funding. In the year 2006-07, PFC and REC together sanctioned for projects, loans amounting to more than Rs. 64,000 crores (compare it with Rs. 15,300 crores as in 2001-02). The amount of disbursements by both amounted to about Rs. 27,800 crores (compare it with Rs. 9,900 crores in 2001-02).

Loan Sanctions

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Loan Disbursements

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The transformation of REC in last four to five years could be seen on the basis of various developments and achievements of this period, which could be summarized as below:

  1. This organization has achieved in all the years the targets that were set under the Government of India instrument "Memorandum of Understanding (M.O.U)". It is normally perceived that M.O.U targets are fixed in a manner that companies could achieve even with efforts which may not be challenging. It needs to be, therefore, clarified that in the Ministry of Power we revisited our approach to fixing these targets and the parameters and the specifics for ranking particularly as "Excellent" were so determined that they do require tremendous amount of efforts to complete them, though they should be achievable and not impossible. REC has been able to consistently get ranked as Excellent under this scheme.

  2. In the year 2004-05, in fact, the company was identified as one of the top ten public sector undertakings in the country among over 250 such public sector organizations.

  3. During 2002-03 when the role of REC was enlarged, it was given a brief that the company should develop in-house project appraisal capability. Till then they could follow the appraisal undertaken by Power Finance Corporation. This objective was taken as a challenge by the organization and now they are Lead financial institution in a large number of projects and, considering both thermal and hydro groups, this position of leading the lenders consortium is for five such projects aggregating to a capacity of more than 4,200 MW.

  4. The diversification to generation projects during 2002-03 has taken the company forward on this path and it has already emerged as a major financier of generation projects. During the year 2002-03 they could not sanction any thermal projects. By the time they reached 2006-07 in the thermal category the loan sanctioned is more than Rs. 7,500 crores, as compared to about Rs. 3,000 crores in the year 2005-06.

  5. In the hydro sector, which really needs a major boost in the context of Indian power sector development, since 2002 REC has already financed over 40 hydro power projects located in various parts of the country. Both hydro and thermal projects put together, in five year period (2002-06), they sanctioned about Rs. 23,600 crores as lead or in consortium, in projects with total capacity of about 12,000 MW.

  6. Another diversification which commenced from 2002-03 has been in the field of renovation and modernization of old power plants. This has been a priority area for the Govt. of India inasmuchas it has been established that by investing only one third, the efficiency gains could lead to almost similar capacity as from a new project by renovating and modernizing old plants. During the 10th Five Year Plan, REC sanctioned twenty such projects. During the year 2006-07 itself almost Rs. 340 crores were sanctioned for these projects. If we consider the overall consortium arrangement the total loan sanctioned for these projects amounted to more than Rs. 10,000 crores for capacity addition of over 4,500 MW (2,800 MW Thermal and 1,700 MW Hydro).

  7. The company's thrust on distribution systems improvement may be seen from its efforts on reducing transmission and distribution losses and in this context they laid particular emphasis on development of High Voltage Distribution System (HVDS). These schemes were financed through loans by REC to the extent about Rs. 1570 crores in 2005-06 and over Rs. 2,900 crores in 2006-07.

  8. When the Ministry of Power got the approval of the Cabinet on a very ambitious scheme for creating rural electricity distribution backbone under the Rajeev Gandhi Grameen Vidyutikaran Yojana, the responsibility of overall co-ordination was given to REC. The company was able to co-ordinate implementation of more than 235 projects involving a capital cost of almost Rs. 10,000 crores and covering more than 67,000 villages. The thrust of the scheme has been not only electrification of villages but also providing connectivity to households.

  9. One of the essential elements of the rural electrification scheme is the implementation of Franchisee System. This requirement was introduced in the scheme by the Ministry of Power with the objective that the rural electricity distribution undergoes an institutional restructuring aimed at revenue sustainability and commercial viability of electricity supply in rural India. It was clearly understood that massive extension of rural electrification to uncovered villages and to uncovered households may prove to be an unbearable financial burden on the states if the business - as - usual approach in such supply continues. Massive expansion and augmentation of rural electricity system with huge capital investments can succeed only when the institutional framework is able to deliver sustainability and viability. For this, short of privatization, Franchisee arrangement was considered essential. It was a difficult task. In spite of several rounds of meetings in the Ministry of Power and in States this change process was slow because of the reluctance on the parts of many states. With concerted efforts of the Ministry and REC it was possible to make franchisee arrangements in over a dozen states covering over 50,000 villages. Just as APDRP Scheme is a powerful instrument to transform urban electricity distribution both technically and commercially, the franchisee arrangement has the strength of transforming technically and financially the rural electricity supply. It is reported that more than 60,000 villages have so far been electrified under the RGGVY and more than 13 lacs families under BPL have been given new connections.

  10. REC has a number of agreements on International Co-operation and Development. It entered into a loan agreement with Japan Bank for International Co-operation for Rural Electrification Distribution Projects in March 2006 for an amount of approximately Rs. 820 crores. Another agreement of Indo-German Bilateral Co-operation for HVDS Projects for an amount of Rs. 416 crores was signed in August 2006 with KFW (Germany).

  11. During the period of five years (2002-03 to 2006-07) the company paid to the Government a dividend of Rs. 960 crores.

From 2004-05 onward serious efforts were made to professionalise this company. At the level of Board as also at other levels a number of professionals were inducted to ensure that the company succeeds in the new roles given to it. This is an on going process and further efforts are on to place in the company more professionals.

One of the other important strategic changes, which were considered necessary for transformation of REC, is with regard to empowering them with implementational capability. In over 30 years of their existence they had primarily focused their attention from the point of view of financing rural distribution projects. What was, however, also essential that necessary inputs were provided by way of quality of execution and schedule of execution. In most states, distribution projects, over several decades, were implemented with much less than required attention on these two vital requirements and as a result in these states distribution systems which were created were invariably sub-standard. During the 10th Five Year Plan special efforts have been made to enhance the implementation and project management capability of REC. And, I must say they have covered substantial ground on this score and the process of further up gradation of these skills continues.

During the period of transition of Indian power sector from a highly supply deficient and shortage situation to self-reliant and surplus situation, a process which may take at least ten years, rural electricity supply might continue to get a subordinate treatment. One of the effective solutions to address this predicament, Ministry of Power considered, could be a chain of decentralized distributed generation facilities with dedicated distribution system also linked to the grid. This challenge can be transformed into a great opportunity, and REC could perhaps be the main claimant to avail of this enormous potential.

By and large REC has remained confined to financing through debt portfolio. Time has come that it also enters into financing the sector through equity portfolio. This will have the dual advantage of last mile assistance to such promoters and developers as need equity support and facilitate such projects to fructify on the one hand and also create and upside on returns for REC on the other.

With the types of empowerment which were provided to REC and its success on diversified portfolios of activities together with the achievements on various parameters, REC adequately qualified to be upgraded from its status of Miniratna to Navratna. It more than met the various requirements for this ranking. Therefore, when the Ministry of Power took up the matter of REC's getting Navratna, with the Ministry of Heavy Industries, there was absolutely no difficulty in getting through this proposal and it was decided in principle in November 2006 to give them Navratna status. This status further empowers the Public Sector Company Boards to take a number of decisions for which they are otherwise required to approach the Government. Though this decision was taken way back towards the end of 2006, there has been delay in granting the status for a procedural requirement of a certain number of Independent Directors on the Board of the company, whose placements have taken sometime.

REC's performance and growth in recent years have been remarkable. The company has remained a fully owned public sector organization with the entire equity capital of Rs. 780 crores held by the Government of India. One of the targets that we had set for ourselves in the Ministry of Power, under our overall reform initiatives and agenda, was to get various Government companies under the Ministry of Power into the equity capital market. We were of the considered view that even though the company may not require the financial resource as such, for which one of the ways could be to access equity from outside, for improving governance and for sharpening managerial skills, accessing equity market will provide the required insights and inputs, appraisals and perceptions, threats and opportunities and therefore will further facilitate the progress and growth of the company. Accordingly, starting from Power Trading Corporation and then following with NTPC, Power Finance Corporation and Power Grid which have already gone into the market, the Ministry of Power had secured the decision before the end of 2006, for even REC and NHPC to get into IPO process. For variety of reasons, it has taken about a year for REC and more than a year for NHPC. While REC is going to launch its IPO in about a week's time, NHPC will also do so very shortly. IPO's of all the Government of India power companies were heavily subscribed, the last one viz. Power Grid was oversubscribed more than seventy times. Fundamentals of REC are strong and opportunities are virtually limitless. The company is well positioned to tap its potentials and derive maximum benefits of growth from these opportunities. Their IPO will, therefore, I am confident, be responded equally overwhelmingly by the equity capital market.