Request you to kindly drop in all your mails/queries to or call us at
+91-120-6799125 (D); +91-120-6799100 (B)

Foreign Investors have considerable interest in Indian Power Sector, Shri R V Shahi, Former Secretary, Ministry Of Power

Foreign Investors have considerable interest in Indian Power Sector
[R V Shahi's Weekly Column for Infraline, February 25, 2008]

On the 11th & 12th February, 2008, I had an opportunity to interact with about a dozen Equity Investment Funds/Companies at New York. The objective of these interactions was to give them the general outlook for Indian economy, an up to date information about Indian power sector, a prospective of long term growth scenario of power industry, short and medium term projections of expansion of power sector, challenges and investment opportunities etc. This week I propose to give a brief of the presentations made to them, a summary of various issues raised by way of securing clarifications, and their concerns and response given to them on these concerns. From these interactions it was very clear that foreign investors (equity funds as well as banks) have keen interest in investing in Indian power sector.

The salient points of the presentations made are highlighted below:

  1. During the period 1992-97, the compounded annual growth rate of GDP was of the order of 6.4%. During 1998-2003 the CAGR declined to 5.3%. During the period 2002-03 to 2006-07 there was substantial improvement and the CAGR has been of the order of 7.8%. If we take last two years viz. 2005-06 and 2006-07 the average growth rate is of the order of 9.5%.

  1. The index of industrial production has shown a remarkably increasing trend - 2003-04 - 7%, 2004-05 - 8%, 2005-06 - 8% and 2006-07 - 12%.

  2. The foreign exchange reserves which was almost negligible (about 1 billion U.S. dollars) in 1991 has continuously risen to more than 275 billion U.S. dollars as at the end of January, 2008. During the period 2002 to 2007 the increase has been sharper - from about 50 billion U.S. dollars to more than 250 billion U.S. dollars.

  3. An average growth rate of about 9.5% in last two years has given the Indian policy planners and other concerned players a confidence that India can definitely achieve 9 to 10% growth on a sustained basis over a long period of time. The 11th Five Year Plan document which was recently approved by the National Development Council (NDC) consisting of Chief Ministers of States, Union Ministers and Prime Minister, envisages an average growth of 9% over the plan period (2007-12).

  4. There is a unanimous realization and recognition of the fact that if India did not achieve a higher economic growth rate in the past it was primarily because of a low growth rate in electricity generation which was in the range of just 3.2% toward the end of Ninth Plan but increased to about 5.2 toward the middle of Tenth Plan. During the year 2006-07 (last year of Tenth Plan) the electricity generation growth rate was about 7.1% and therefore it contributed to industrial growth rate of over 12% and overall GDP growth rate of 9.6%. That, if the economy has to grow at the rate of over 9%, electricity generation needs to grow at 8 to 9%, is a fact which is now accepted by all concerned. Therefore maximum attention is being given to infrastructure and more particularly power.

  5. In the 11th Five Year Plan the estimate of capital expenditure is of the order of about 500 billion U.S. dollars. Almost 50% of this is for capital expenditure in the power sector and the balance is accounted for by railways, ports, airports, highways, state roadways, telecommunication etc. all put together.

  6. The growth in the Indian power sector has to be viewed not only from the point of supporting the overall economic growth rate, which no doubt is essential, but also from the fact that this sector suffers from the chronic problem of shortages of the order of 15% (of peak requirement) and almost 56% of the rural India is without access to electricity. Per capita consumption of electricity is one of the lowest in the world. An inclusive growth requires massive electrification of rural India.

  1. A long term prospective of power sector as articulated in the Integrated Energy Policy, which covers a period of 25 years (2007-32), recommends that the installed capacity of power should rise from 130 GW as in 2007 to 800 GW as in 2032. This expansion aims at providing the support required for a sustained economic growth of 9 to 10% as also for enhancing substantially the per capita consumption from present 618 KWH to around 2500 KWH in 2032.

  2. In the near term, for the 11th Plan and 12th Plan periods, the projected capacity additions as recommended by the Working Group on Power for Eleventh Plan, are of the order of 78,000 MW and 92,000 MW respectively.

  1. Why the investors in general and foreign investors in particular should consider investing in Indian power sector? This question was relevant in nineties. It is relevant now as well. The answer is that it is not only on account of the massive mismatches between demand and supply and therefore enormous opportunities for expansion of this sector that they should invest but primarily because of the fact that the sector has become worthy of being considered for investment. Shortages were there during 90's also. There were large requirements for expansion and the policy initiatives of the government provided for good returns as well. But after about 15 years, all of us recognized that perhaps the sector then did not merit adequate consideration for investing. Demands were there, opportunities were also there, but the number of loose ends that existed then, one could say, made the sector unworthy of investing.

  2. Since then, the electricity sector has been radically overhauled. A number of legislative and policy initiatives have been put in place and outcomes of these have also been highly positive. Major initiatives and their results are outlined below:

  1. The key Reform Initiative include Electricity Act 2003, National Electricity Policy 2005, Electricity Tariff Policy 2006, Electricity Rules (2004-06), Policy on Captive Plants (2005), Policy on Merchant Plants (2006), Ultra Mega Projects - 2006, Policy on Private Sector in Transmission 2006, 50,000 MW Hydro Electric Initiative 2003, 100,000 MW Thermal Initiative 2004, Accelerated Power Development Reforms Programme (2003), Rural Electrification Policy (RGGVY) -2005, Decisions on Central Power companies accessing equity capital market (2003-05,06), Scheme on Rating of States on Power Sector Reforms (2003).

  2. Regular follow-up and monitoring with state governments and state utilities on implementation of the Act, policies and schemes have led to major financial reforms in state utilities. Most of them are out of the situation of cash losses and some of them have even turned around. They have improved to the point that they are able to meet their working capital requirements almost fully. Obviously that is not enough. The next round of reforms and further action should see most of them, through a transition of about five years, reach a situation of total turn around.

  3. During the year 2001-02, state utilities were unable to pay, as an average for the whole country, more than 76% of the electricity bills of generating companies. In the last four years 2003-04 to 2006-07 and during the current year the payments by the state utilities to various generating companies and transmission companies are almost 100%. Practically there is no default.

  4. For Power Finance Corporation and Rural Electrification Corporation, more than 75% of their clientage is constituted by state power utilities. Both PFC and REC have practically nil Non Performing Assets (NPA). Both these organizations have emerged as the largest players for financing of Indian power sector. To give a sense of the size of operations of PFC and REC, in the year 2006-07, they together sanctioned almost Rs. 64,000 crores (16 billion U.S. dollars) and disbursed more than 34,000 crores (8.5 billion U.S. dollars).

  5. Non existence of NPA in respect of these two companies, together with the level of payment security, for generating and transmission companies, which has now been reached in Indian electricity sector, amply demonstrate the sharp distinction between what existed during 90's and the situation prevailing now.

  6. The perceptions of project developers, investors, lenders and other stakeholders started becoming just after Electricity Act 2003. Subsequently it has gradually got strengthened as more policy initiatives have been put in place with consequential outcomes. The positive perception climaxed when the Ultra Mega Project Scheme was brought in 2006 with an overwhelming response from developers and equally positive feedback from lenders.

  1. In conclusion I emphasized that (a) the power sector has taken-off strongly, (b) several legislative and policy initiatives have been put in place during the period 2002-06 and they are all under implementation, (c) the sector is expected to grow at the rate of 8 to 9% over a long period of 25 years, (d) full and prompt payments to generating and transmission companies are no longer issues of concern, (e) the sector does not only offer challenges and therefore enormous opportunities but these opportunities are adequately worthy of investments.

Now I summarise below some of the areas of concern expressed by the senior representatives of these Companies/Funds. Simultaneously alongwith each of these issues I would also explain the response that I gave.

  1. Most of them were happy and therefore positive about various policy initiatives. But some of them were concerned whether policy changes might get influenced and hence reversed or diluted with any change in the government.

My response was as follows. We have seen the developments now over last ten years. We have had two governments - one led by National Democratic Alliance (NDA) during 1998-2004 and the present United Progressive Alliance (UPA) 2004-08. In general, the core and directions of economic reform policies have continued - in fact, in many ways they have been strengthened. As regards power sector, I myself had the opportunity of being Secretary to the Govt. of India for five years in both these governments and therefore had the opportunity of working in the government led by Shri Atal Bihari Vajpayee and then by Dr. Manmohan Singh. We got the Electricity Bill passed as Electricity Act 2003, when NDA was in power, but with the support of the Congress in the Rajya Sabha where NDA did not have adequate majority. Subsequently, a number of statutory policies required under the Act were approved by the present government. These include major policies viz. National Electricity Policy, Electricity Tariff Policy etc. This amply demonstrates that the power sector reforms are not sensitive to political changes. They have continued, and in many ways, with further vigour and commitments.

  1. What would be the impact of slow down in U.S. economy and in a number of other countries, and consequently on the demand of electricity in India? Whether this will significantly change the demand projections?

My response was as follows. Indian economic growth is primarily driven by domestic consumption and activities. Export contributes less than 20% of our growth. We have huge backlogs on creation of infrastructure. In each of the infrastructure sectors there is a need to further step up and accelerate the process of their build up. Even those who have a conservative approach, and believe that the slow down effect would be more than negligible, have put the figure of growth at around 8.5%. Optimistic scenario is 9.5%. As regards electricity, the base line is a huge shortage and we need to make up for the backlog and then further contribute toward growth. Therefore, the projections of electricity demand may not get affected, even marginally, on account of any slight variation in general economic growth rate.

  1. A general concern was that a large number of project developers are making efforts to set up power plants on the basis of merchant capacity. It is apprehended that they will have serious difficulty in having the transmission arrangement for their plants.

My response was as follows. Over last several decades, new capacities have been planned through long term Power Purchase Agreement for 100% of the capacity. This arrangement may have its own merit and perhaps its genesis may have valid reasons on account of situation prevailing when this approach emerged. However, this blanket approach has not allowed electricity market to develop - no free play, no features of competitive market structure, everything well tightened under steel jacketed arrangements. So much so, that in spite of power trading being recognized as a distinct licensed activity, hardly 3% of total power is being traded beyond power through PPA. In last 6 years this proportion has hovered around 3 to 3.5% with no visible increase. There is a growing recognition that the situation must change. Unless about 15% of power gets out of tied capacities through long term PPA, electricity market is unlikely to develop and provide a matured competitive structure. In fact the poor trading volume has led to absurdly high rates of Rs. 8 to 10 (20 to 25 U.S. cents) per kwh. Central Electricity Authority and Central Transmission Utility are providing for an additional 30% cushion in the transmission system for maintenance and to take care of such trading and short term arrangements beyond long term PPA. This should adequately address the concern about the merchant plants being able to transmit their power. Merchant capacities have a good future. In fact they are badly needed for developing electricity market.

  1. For the type of ambitious expansion programmes in the next ten years, adequacy of fuel may prove to be a serious area of concern. The concern is that not much is being done by way of restructuring Indian coal industry.

My response was as follows. Indian power sector has grown and commensurately the growth has been supported by Indian coal industry. At present about 400 million tonnes of coal is supplied annually by the Indian coal industry to power sector. It has been duly recognized at the highest level in the government, more particularly by the Energy Co-ordination Committee chaired by the Prime Minister himself, that coal sector has to perform at much higher levels than in the past. As a result, almost 20 billion tonnes of coal reserves have been identified for captive mining by the utilities. This would be sufficient for almost 75,000 MW capacity. The process of allocating coal blocks to power project developers has already started. The procedure is being further strengthened to make it faster. The second strategy is to also develop a chain of coastal power stations based on imported coal or domestic coal blended with imported coal. This process has also started. Out of three Ultra Mega Projects of 4,000 MW capacity each, two are coastal stations based on imported coal. The third strategy is to encourage and facilitate Indian power project developers to acquire coal mines abroad. A number of public sector and private companies are already active on this and quite a few of them are at advanced stage.

There were a few other issues of minor nature which were clarified and I am not narrating them here. On balance, my assessment is that the foreign investment Funds are very positive about Indian power sector and, in fact, the slowdown in economy in U.S.A. and some other western countries may help getting these Funds for Indian Infrastructure sector and particularly for power.