Concerns of Investors in Indian Infrastructure,
Shri R V Shahi, Former Secretary,
Ministry of Power
IDFC (Infrastructure Development
Finance Company) organised a three day International Conference on December 1-3,
2009. I had the opportunity to interact with the investors on three occasions
during this Conference - as a Panelist in the Session on "Core Infrastructure in
India", during luncheon interaction with a select group of investors and as a
Panelist on Power Panel - "Light at the end of the Tunnel".
In the Panel discussion on Core
Infrastructure in India, Panelists included, apart from me, the Secretary of
Ministry of Road Transport and Highways, Chairman Coal India and Managing
Director of Tata Tele Services. The salient points of initial observations by
the Panelists, comments and observations together with questions - answers, are
briefly summarised below:
Road Sector in India provides enormous investment opportunities. The pace of development is
being planned to be further intensified and accelerated many more times. Based
on past experiences, required modifications have been made in Policies and
Procedures. Investors would find it more comfortable now to participate in the
Public Private Partnership Model of development.
It was clarified
that, except for certain patches here and there, land acquisition has not posed
any major problem in so far as development of roads and highways is concerned.
However, keeping in view the large scale expansion of the road and highway
networks, which is proposed and targeted, one cannot totally rule out the
possibility of land acquisition issues. Therefore, we need to be dynamic in our
approach and evolve innovative solutions to these problems.
that was raised with reference to the highly optimistic programmes on highway
development, relates to the organisational structure of the National Highway
Authority. The general perception is that this organisation functions more as a
Government Department than as other professionally managed large public sector
clarification given by the Secretary, Road Transport and Highways, was
reassuring, I myself do feel that the National Highway Authority needs radical
restructuring, with required autonomy and commensurate accountability, for
performance. Highway development is indeed a promising business, particularly
in P-P-P Mode. In the public sector, we have a number of remarkably and
excellently performing organisations. In fact, only a few days back, it has
been reported that in last one year, stocks of major public sector companies
have performed better than private sector shares. Therefore, restructuring of
the top organisation, delegation of power, instrument of MOU (just as in case of
other public sector companies), Placement Policies etc. all need thorough
overhaul in respect of National Highway Authority.
at the level of Chief Executive of this Corporation, with tenure approximately
not more than one year, the Policy of tendering and Tender evaluations,
Government's indirect interference in such Tendering process, have not been
viewed positively, and rightly so, by the financial sector.
The silver lining
is that there are definite and positive moves on all these issues, because at
the highest level there are concerns for much speedier work and progress.
Industry is vital for propelling all the industrial activities, more
importantly the electricity generation. More than 80% of the coal produced in
India is used for power generation. The areas of concerns in the coal sector,
as deliberated, are outlined below:
While power sector
is moving forward, pursuant to several legislative and policy interventions
taken in last six years, coal sector is almost stagnant on reform. It is feared
that coal supply from domestic sources is bound to create difficulty for power
sector. Excessive import of coal to address the supply deficiencies will
obviously increase the price of power.
Captive coal block
Allotment Policy has been, no doubt, a good initiative. But the desirable
strategy would be to revive the Coal Mines Denationalisation Bill, which has
been pending in the Parliament for almost 10 years. Implementation of
Electricity Act can deliver much better outcomes if coal industry also takes up
commensurate reforms and restructuring initiatives including enactment of a
comprehensive Coal Act which would pave the way for opening up of the coal
sector. In the previous Government, since the support of the Left was
essential, the amendment to the Act could not be taken up. In the new
Government it should be possible to complete this process. It may be expected
that it will happen.
companies, including State power generating companies, have been allotted coal
blocks for captive coal mining. This has indeed been a major initiative, but
the following problems need immediate redressal:
In a number of
cases coal blocks have been allocated on joint sharing basis. Since these
organisations may not know each other, the combination is not working in some
cases. It would be necessary to provide guidance and facilitation, so that the
consortium is made to work.
operations by a number of companies in a particular area would require an
integrated dispensation in respect of a number of common infrastructures such as
road connectivity, railways network, electricity transmission system etc. These
cannot be done by individual coal mine developer. What is required is to
prepare Master Plans for each of these areas and implement infrastructural
development in a co-ordinated manner, cost for which can be reimbursed by each
of these captive coal block developers.
in respect of coal mining is governed by special legislation. Both Central and
State Governments need to provide required assistance, so that this process is
completed in a time bound manner.
Quite apart from the
specific issues concerning captive coal blocks, the clearance from the Ministry
of Environment and Forest is a real challenge for development of coal mines even
by Coal India Subsidiaries. The CMD, Coal India, emphasised that, the fact of
the matter was that every coal mine block did receive clearances, but it took
not months but years in many cases to secure the forest clearance.
Criticality in respect of coal supplies need to be viewed keeping this approach
of the Ministry of Environment and Forest in mind. This indeed is a major issue
and this is solvable. For once Ministry of Environment and Forest could map the
entire country, identify such coal mining areas where mining cannot be allowed
from the point of view of the Ministry. These areas could be declared as
"No-Go-Areas". In all other areas, the sanctions could be made a much easier
and smoother process. With required conditionalities, clearances could be given
in all these cases within weeks if all the studies have been done and procedures
have been complied with.
In the recent weeks,
another important issue, which has become the cause of a serious concern,
relates to the tenure of Coal Supply Agreement and the percentage of guaranteed
supply. As per the standard document, finalised earlier between Coal India and
CEA, tenure of supply to be 25 years and guaranteed supply to the extent of 90%,
had been agreed. Any uncertainties in respect of these two aspects are bound to
make financial closure for power projects much more difficult.
In spite of
several constraints and issues in relation to coal for power projects, the
overall picture, if we look at in a balanced way, is satisfactory. One must
recognise that, by and large, power plants, with only marginal and supplementary
input of imported coal, have been able to manage well and perform at
substantially high levels of Plant Load Factor. India has almost 100,000 MW of
coal based capacity including captive power plants. There has hardly been any
case of closer of a plant for want of coal supply. Since the issues mentioned
above are all solvable, the pressure from power industry, I am optimistic, will
lead to resolution of all these problems progressively. These should not cause
any major road block and, therefore, investors need to look at power project
development in a more positive and balanced manner.
Almost 50% of the
capital investments, required for entire infrastructure sector, is needed for
power sector alone. Gratifyingly, in the last few years, activities in power
sector have picked up. At present, after commissioning of about 18,000 MW
capacity in last about three years of the current Five Year Plan, more than
80,000 MW of capacity is already under execution. They will be commissioned in
next 3 to 4 years. What is remarkable is the increasingly greater role of
private sector, which accounts for almost one third of the capacity under
construction. This proportion may rise further in the Twelfth Plan.
institutions, which were further empowered as per the Electricity Act 2003, have
fully stabilised their operations and a number of pending issues, necessary for
electricity market development, have got resolved and are getting resolved. On
line Power Trading through two Power Exchanges is the latest addition in the
series of market development initiatives.
Major areas of
concern include - (a) Inadequate availability of fuel, (b) Inadequacies about
equipment supply, (c) Sustainability of huge investments in the face of slow
distribution sector reform, (d) Merchant capacity, (e) Cold hearted approach of
State Electricity Distribution Utilities and State Governments towards Open
Access, (f) Insufficient availability of fund.
expansions of generating capacity may entail criticality in fuel supplies, as
mentioned above. While it will require multiple efforts, which will include
expansion of coal development by Coal India, expeditious mining by captive coal
block developers, imports to supplement supplies, further expansion of domestic
gas production and expansion of LNG terminal capacities to augment gas supplies
through imports, we have made the point, in the previous paragraphs, that on
balance it would be reasonable to assume that the criticality of fuel supplies
would be addressed adequately.
Till the Tenth
Plan (March 2007), Indian power sector did suffer severely on account of poor
deliveries by suppliers of main plant as well as Balance of Plants. During the
last two years of the Tenth Plan, sufficient noise was made to put pressures on
the existing manufacturers and also to facilitate development of new
manufacturing facilities. Outcome ` of these action has been positive.
BHEL has expanded its capacity from about 5,000 MW to about 10,000 MW annually,
it is further expanding its capacity to 15,000 MW and later to 20,000 MW. In
addition, four new factories for turbine and generator are coming up. In the
next five years, India's domestic manufacturing capacity may exceed 25,000 MW
per year. Similar actions are in progress in the Balance of Plant group as
well. Effect of inadequacies is being experienced even in the current five
year plan. However, it could be expected that progressively this problem may be
behind us. A point was made about quality of Chinese Equipment. It was
clarified that there is no quality problem as such. After initial teething
problems, which are common to all cases, these sets are performing well. For
example, first 300 MW unit of Adani Power, with a few months, is opening at 98%
It is true that
for a sustainable development of power sector which will encompass much rapid
expansions at a substantially higher level of capacities, distribution of
electricity has to be managed in a manner that these investments are
appropriately serviced. There are a number of States where distribution sector
reform actions have not been brought to a satisfactory level. There are a
number of States where substantial improvements have been achieved. On the
whole, these reforms have reached a stage that, in the last six to seven years,
practically there has been no default on the part of distribution utilities in
respect of payments to generating and transmission companies. Obviously, they
have not been able to reform themselves to a stage that would enable them to
generate surplus and plough back their surplus to take care of their needs to
expand, augment and modernise. This is overdue. Privatisation of distribution
in Delhi and Orissa provides successful stories. Similarly, Franchisee
arrangements in Bhiwandi gives a lot of hope for revival of distribution through
this type of initiative. Even non-performing States like U.P. have decided to
go for such Franchisee Contracts Agra and Kanpur have already been covered, more
towns may fallow suit. In the country we could see revival of distribution
through this Model of private participation. The success of Delhi Model is
slowly getting disseminated. We may also see Delhi initiative being followed
elsewhere. The mindset of the political system has indeed changed to a point
that today nobody even thinks that a generator can supply power without paying
for it. On this score, I can state, with conviction, that if we incorporate
Ultra Mega Project type of payment security mechanism for large projects, there
should be absolutely no need for any concern.
Lenders and equity
providers need to be more pragmatic in appropriately assessing the emerging
trend in the Indian power sector. Unless we assist in the process of
development of merchant plants, beyond the purview of long term Power Purchase
Agreement, electricity market cannot develop. We have seen month after month
and year after year that payments by distribution utilities, even at much higher
rates for power, under Trading dispensation, have not posed to be a problem.
Proactive and supportive interventions even by the capital market, for
development of merchant capacities, would further strengthen the power sector.
One of the
important pending items of Agenda for the Regulatory Commission has been about
the effective implementation of Open Access in distribution. There have been
mixed experiences in this regard. There are States in which Open Access has
been effectively discouraged - in fact blocked - by using certain provisions of
the Electricity Act in a wrong manner. Misinterpretation of the emergency
provision of the Act by certain States has been criticised everywhere. In fact,
Union Power Minister has gone on record saying that if these States continue to
misinterpret this provision and block Open Access, Government may not hesitate
even to make necessary amendment to the Act to ensure that Open Access is freely
allowed. The message has gone home, and I am convinced that through the
intervention of Forum of Regulators the issue would stand resolved. The
concerned State Governments would also better realise the need for open access.
availability of fund, it is indeed a challenge. This issue was well recognised
by the Deepak Parikh Committee in the beginning of the Eleventh Plan. This
Committee made several suggestions relating to External Commercial Borrowing (ECB),
enhancement of limits on sectoral lending, enhancement of limits on group
lending, activation of Bond Market etc. Some of these have been implemented and
some of these have been partially implemented. What is required is to correctly
assess the needs of finance for the expansion that is being planned and align
various Policies to facilitate achievement of these targets. There are reasons
to believe, based on proactive and dynamic re-visiting by the Government of
various policy instruments in the past that these issues would be constantly
reviewed to make the policies and procedures more and more effective.
This brief write-up summarises
the issues which were discussed in the two Sessions that I had the privilege of
attending as a Panelist and a Luncheon Session. On overall basis, I can only
state that Indian power sector today provides unparalleled opportunities.
Various policy initiatives have considerably and satisfactorily mitigated the
risks which, ten year back, appeared to be too big and too serious to even
thinking of investing in power sector. Perception of these risks compelled the
Indian Government to provide guarantees for payment, an instrument which had a
flawed approach and, therefore, it did not work. Finally, what works and what
will continue to work is the internalisation of payment security mechanism.
This is what was deployed in the case of Ultra Mega Project and it is for all of
us to see how overwhelmingly it was responded to. Even more importantly, large
scale expansions of the sector would be sustainable only if Distribution segment
continues to reform and improve. Its commercial viability is the sine-qua-non
for expansion of power sector. I am convinced that we have more reasons to be
optimistic than to be apprehensive about these reforms.