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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:

  • The 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.

  • Another concern 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 corporations.

  • While some 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.

  • Frequent changes 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.

  • The Coal 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:

  1. 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.

  2. 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.

  3. Almost 200 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:

  1. 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.

  2. Coal mining 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.

  3. Land acquisition 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.

  1. 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.

  2. 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.

  3. 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.

  • As regards Power Sector the following salient developments and areas of concerns were highlighted:

  1. 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.

  2. Regulatory 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.

  3. 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.

  1. Such massive 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.

  2. 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% PLF.

  3. 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.

  4. 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.

  5. 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.

  6. As regards 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.