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Mega Power Project Policy needs to stay unchanged, Shri R V Shahi, Former Secretary, Ministry of Power

In the last few days, it has been reported that the Government is contemplating major changes in the Mega Power Project Policy. In fact, if the reports are correct, it amounts to virtual abolition of this Policy. Since this is a serious matter and has the potential of highly adverse impact on the power sector, the proposal needs to be examined in entirety. It has also been reported that the current initiative is being move forward at the behest of the Planning Commission and that Ministry of Power is not entirely in favour of these major changes. In this context, it would be relevant to keep the following points in mind while examining this and before taking any decision.

(a)

The Mega Power Project Policy has evolved over last over ten years, and, from time to time, it was reviewed not only to further strengthen the Policy, but also to make it more effective and useful in the larger interest of power sector and power consumers. When it was evolved, for the first time, in 1998 it started with exemption of Custom Duty, Excise Duty, and Sales Tax (State Governments were advised to relax), for a specified number (about ten) of Mega Power Projects, and most of these projects were in the public sector. This exercise, initiated by the Ministry of Power, led to these concessions being announced as a part of the Tax Budget.

(b) Subsequently in the year 2002-03, the Power Ministry articulated that instead of this Policy remaining confined to about ten specific projects, should be extended to all such projects which qualify in terms of the size of the project, i.e., 1000 MW and above in case of thermal and 500 MW and above in case of hydro power projects. The thrust of the argument was that - (a) it would motivate developers to set up large capacities, and (b) consumers would benefit from the reduced cost of power because the duty waivers would lead to reduction in capital cost. These changes did have the desired impact. Electricity Act 2003, which delicensed altogether the power generation, coupled with these changes in the Mega Power Project Policy, apart from many other initiatives of the Power Ministry, led to a large number of developers coming back to the power sector.
(c) Sometime in 2005-06, the Mega Power Project Policy was further liberalized by removing some of the conditionalities, which had become irrelevant over a period of time. The change also aimed at further concessions for the power projects to be set up in North-Eastern States, in which cases the threshold limits were lowered from 1000 MW to 750 MW to boost development of power projects in the underdeveloped region.
(d) This Policy gave a powerful boost to the Ultra Mega Power Project Scheme of the Ministry of Power. The benefit of several preconstruction issues being addressed by the Government together with the concessions available under the Mega Power Project Policy led to, as we all know, highly attractive power tariff. Power sector utilities needed such competitive generation tariff in the larger interest of consumers including the industry. We need to recognize that the Mega Power Project Policy does reduce the cost of power generation by atleast 15 paise per Kwhr. When translated into distribution, this would mean atleast 20 paise reduction in consumer tariff, keeping in view the losses in transmission and distribution.
(e) Again in 2009, the Policy was further reviewed to remove some of the other conditionalities which had become irrelevant and to smoothen the process of recognizing large projects as Mega Projects for grant of benefits under this Policy.
(f) In the proposed scheme the whole idea of imposing Import Duty on the power plant equipment appears to be protection of the domestic manufacturing sector. This debate has always been controversial. Whenever Import Duty is reduced or waived, the issue of its effect on domestic manufacturing becomes relevant. This was true when this Policy was first evolved in 1998 and throughout last ten years when this Policy was refined from time to time to make it more convenient and smooth in implementation. Domestic manufacturing sector dealing with power plant equipment does have a point that for them to be competitive they will have to reduce the cost or would not compete. But, this limited manufacturing sector needs to recognize that Indian manufacturing sector in general (and not only power plant equipment manufacturers) needs to be competitive locally and globally. Over several years Indian industry has been demanding lower price of power, saying that India has one of the highest power tariff which, to a great extent, disables them to be competitive. The choice is simple - whether we want to protect power plant manufacturers or manufacturing sector in general.
(g) The consideration of lowering the price of power occupied such a high priority that in the year 2005 the Union Cabinet approved a proposal of the Power Ministry to exempt power sector from the Policy of Purchase Preference for power plant equipment manufacturers. This approval was accorded after considerable amount of deliberations including thorough examination of all the issues by Empowered Group of Ministers chaired by the then Finance Minister, Mr. Chidambaram. Obviously, Ministry of Heavy Industry opposed the proposal of Power Ministry, because they did want 10% purchase preference for BHEL and such other public sector companies as would supply equipment to power industry. Power Ministry, through facts and figures, could conclusively establish that, even without such purchase preference - (a) there would be enough orders for BHEL, and (b) price for power plant equipment would reduce. Accordingly, based on the recommendations of the EGOM, the Purchase Preference Policy was changed.
(h) Time has shown that in spite of the concessions under the Mega Power Project Policy, and in spite of removal of purchase preference, order book position of BHEL saw exponential increase. They always have had more orders than they could cope with. Presently, it is understood that, BHEL has orders worth more than 150,000 crores. In spite of recent expansions in their capacity, there are several cases of prolonged delays in scheduled deliveries of plant and equipment, leading to delays in project commissioning.
(i) Another argument that is being advanced is about the new manufacturing facilities which are coming up. Indeed, it is a fact that considerable amount of persuasions and pressures were exerted by the Power Ministry on the domestic manufacturing sector to come forward, expand their capacities, set up new factories, so as to participate in the massive expansion of Indian power sector. Gratifyingly a number of them come forward. But, it needs to be underscored that it is not the protection by virtue of imposition of Import Duty which will enable them to fetch orders, but it will be only by virtue of their own productivity and efficiency. As mentioned above, though BHEL and Ministry of Heavy Industry did have apprehensions about the BHEL not getting enough orders in the wake of the Policies mentioned above, time has shown that their apprehensions were misplaced. One needs to recognize that Indian power sector is poised for such a massive expansion that in spite of certain proportion of imports, there would be enough orders for the domestic manufacturers. Right from beginning BHEL's share has been of the order of less than 60%.
(j) In last few years, in accordance with the National Electricity Policy, in order to promote renewable power supply, several incentives, including higher tariffs have been given to the power generated through these sources. Also, in accordance with the Electricity Policy, the electricity distribution companies have been obligated to purchase a specified proportion of their total purchase from renewable power generation. To address the concerns of climate change, solar power generation is being given an appropriate push. All these, in effect, would lead to much higher cost of power to be purchased by the electricity distribution utilities. It looks unlikely that the distribution companies would be able to pass on the entire burden to the consumers. As it is, the annual losses of State owned distribution companies and Boards have, in the recent years, shown an upward trend. Various figures have been floated, some say it has crossed Rs. 40,000 crores, others say it is beyond Rs. 45,000 crores. What is important is to consider that any Policy initiative which can further increase the burden and, therefore, the loss of the power sector needs to be examined very carefully.
(k) There are a number of concerns, which the investors and lenders have started raising in recent months. These include mismatch about fuel and environmental activism. But at the top of the list of these concerns is the deteriorating financial health of the electricity distribution sector. We need to ensure that the situation which prevailed in 2001, which also caused the exit of power project developers and lenders, is not allowed to come back again. With a lot of efforts which included legislative initiatives, policy instruments and series of actions, developers and lenders were persuaded and inspired to come back to the sector. It would be a pity that they start turning back from the sector again.

Ministry of Power needs to see that a Policy which was evolved, reviewed on several occasions to make it more effective and useful and which has achieved the desired objective, is allowed to stay. The objectives of this Policy are so important that less than an year ago, several irrelevant conditionalities were removed through a Cabinet decision. Planning Commission also needs to revisit its conclusions in the light of facts mentioned above. Predictability of Policy is a sine-qua-non for the developers to feel positive and for the lenders to feel comfortable. We must appreciate that uncertainties in Policies could be the biggest enemies of investors.