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Economic Slowdown and Support Needed for Ensuring Power Capacity Additions , Shri R V Shahi, Former Secretary, Ministry of Power

Global economic slowdown has started showing its significant impact on Indian economy. We are already reconciled to a GDP growth rate of about 7% during the year 2008-09 and it is apprehended that the growth rate would be lower in the range of about 6% in the year 2009-10. Though these rates are lower than what we have been able to achieve in last few years, in the context of global situation, they are much higher than those in most of the countries. In fact, the developed economies like U.S.A., U.K., Germany, Japan etc. are faced with not only a drastic decline in their growth rates, but in the years 2009 and 2010 they are likely to have negative growth.

In the various economic and industrial sectors in India the effect is becoming more and more pronounced. Automobile, Steel, Cement etc. have been facing, in last 6 to 7 months, significant reductions in sales volumes resulting in increases in their inventories. Many of them have already taken steps to reduce their production. This phenomenon is true for almost all the sectors of economy. However, power sector, even in this situation, is faced with the problem of power shortage rather than excess. We still continue to have peaking shortage of the order of around 15%, and in many parts of the country in the range of 18 to 20%. Sometimes it is difficult to explain as to why these shortages persist inspite of slowdowns in manufacturing and service sectors. The reason is that the baseline of power sector itself is characterised by inadequate supply capability, which is significant lower than the demand. This was the situation ten years ago and this is the situation prevalent even now. It is not that new capacities have not been added and that the electricity generation has not increased but the fact is that the rate of increase in demand has been more than the rate of increase in supply. Several efforts are also continuing to effect significant savings by way of energy efficiency measures. But, it is unlikely that in coming few years power sector could present a picture of surplus supply, though regional variations may exist. Therefore, it is essential that our efforts on capacity additions not only continue but they should be seriously intensified. Any approach that economic slowdown, including declining pace of manufacturing, might mean reduced requirement of electricity and, therefore, it may not matter that capacity addition programmes slowdown, may not be a desirable strategy. In fact, during the lean period of next two to three years, created on account of global situation with its impact on India, we may set right our baseline in the power sector. The situation of power supply being significantly behind, in the range of 15% plus, as compared to the requirement, should be set right for once, and thereafter its growth could be aligned to the growth of economy, so that perfect compatibility is established. And, next two to three years provide a good opportunity to eliminate the misalignment, that is the baseline mismatch, by intensifying our efforts on capacity additions.

Ever since the new economic policy of India formulated in 1991, which indeed was the turning point in the history of Indian economic development, power sector remained deprived of the benefits of that Policy for ten to twelve years in view serious structural deficiencies in the power industry. In last few years, post Electricity Act 2003, both public sector and private sector have mobilised and mounted efforts for a radical expansion of the sector. Preparations of Tenth Plan led to more than 50,000 MW of capacity under construction. In the last two years of the Eleventh Plan there have been further new starts. Large business groups and a number of medium size entrepreneurs are all enthused to come to power sector, even though they have been operative in various other sectors of industry. We need to appropriately channelize their interests, enthusiasm and efforts and facilitate development of new capacities. At present, almost 60,000 MW capacities in various projects are at different stages of development. Considering the boom in economy during the period 2003-07, a number of project developers started projects, with the hope that after initial risks are appropriately addressed, they could count on the capital market. They expected that national and international FI's, corporates and individuals would provide equity support, and that too at appropriate valuations, so that they could complete their projects. Situation in last one year has drastically changed and many of the projects, therefore, may suffer the problem of not being able to mobilise required capital support.

An analysis of projects under construction, and projects which could be brought under construction with the initial activities having progressed sufficiently, indicates the following three broad classifications of projects already under development.

  1. There are projects which are financially closed, all clearances are in place, land has been acquired, fuel and water linkages have been established and construction is in progress. Projects aggregating to approximately 25,000 MW fall in this category. By and large, public sector entities may not face the problem of infusing equity at required stages and, therefore, may not face the problem of the commensurate loan being made available. In the private sector group also there are a number of developers who may be capable to infuse equity as required and therefore the project could progress smoothly. There would be, however, a few private sector developers in this category which may face problem as they proceed further when larger amount of equity infusion would be necessary.

  2. In a large number of projects, the initial activities of land acquisition and other important linkages have been established, infrastructural developments at the project level have also started. Issues like Open Access on transmission system for power evacuation, transportation of fuel etc. are moving parallely, but financial closure has not happened. In this category projects aggregate to about 25,000 MW. This is the group of projects which will need support so that they are made to happen. Most of these developers would have issues connected to availability of sufficient amount of equity. This is the category which expected to have equity from the market at later stages, but the market situation has changed the equation. These developers - definitely not all of them - will not be able to demonstrate that they would be able to bring the total equity required for the project. Therefore the lenders would find it difficult to complete the financial closure. These projects are likely to remain struck up under the situation of stalemate. Somehow, in the opinion of lenders, this expectation has prevailed that equity arrangement will have to be conclusively established by the developers. It is not quite usual that promoters bring entire equity in other sectors of industry. But, because of the previous background of the power sector, lenders have been apprehensive and therefore reluctant to accept the position of the developers that in due course they would be able to organise equity from the market. Without going into the merits of the arguments of either side we need to resolve this problem if we have to salvage these projects.

  3. There are a few projects approximately 5,000 MW total capacity, which have achieved financial closures, but have problems of other types. These may relate to transmission, finalisation of EPC Contracts etc. As they progress, some of them may also face the issue concerning inadequacy of equity.

The problem is genuine. We are planning to add 78,000 MW capacity in the Eleventh Plan. We are preparing for about 100,000 MW capacity in the Twelfth Plan (2012-2017). These targets are aligned to the overall perspective plan as brought out in the Integrated Energy Policy upto the year 2032. As mentioned, the lean period opportunity must not be allowed to be missed. While there a number of negatives, there are a few positives as well. Because of overall slowdown across the globe one could expect cheaper plant and machinery, cement and steel and therefore cost of project could come down. Of course, the negative is associated with hardening of interest rates. In any case, what is required is an institutionalise arrangement to salvage all such projects which could, with required support be executed and commissioned. Following steps may facilitate the process of development of these projects :-

  1. Ministry of Power may consider reviving the Inter Institution Group (IIG) which had been set up in 2004 to regularly meet and resolve various issues faced by project developers. This group which consisted senior representatives of Financial Institutions, Banks and Ministry of Power proved very effective with fast and positive outcomes.

  2. In 2005, we had, in principle, agreed that Power Finance Corporation would set up a Fund which will provide equity. This should not only do that, but should expand this portfolio to a reasonable size.

  3. Similar approach could also be considered by Rural Electrification Corporation. Both PFC and REC together may be in a position to fund 30 to 40% of equity in such projects which are facing the problem of equity gaps. Government may consider incentivising these organisations to enable them to create such Funds.

  4. Organisations like LIC, UTI, GIC IDBI, IDFC and Banks may also be approached to part fund equity. IDFC and Indian Infrastructure Finance Co. Ltd. (IIFCL) may play a leading role in catalysing this process.

  5. Government may consider creating a large fund to be mobilised through schemes which may be incentivised by tax concessions and other benefits, this fund could support equity gaps. A part of Foreign Exchange reserves could also be chanelised through such a Fund. World Bank, IFC, ADB etc. may also be approached to participate in such a Fund.

  6. IREDA could also consider expanding its portfolio and support projects in renewable group through part funding of equity. IREDA may also be incentivised by Government for setting up such a Fund.

  7. A well conceived and comprehensive guideline, including eligibility, terms and conditions etc., to select deserving projects for such equity support, will lead to transparency in approach and projects which have better possibility of coming up will happen.

If we follow the above, it should be possible to salvage most of the projects. We will also need to interact with the developers so that reasonable approach on terms and conditions are formulated for a consistent implementation.