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Government has to be careful in picking transmission developers, Pratik Agarwal, Head - Infrastructure Business, Sterlite Technologies Limited

24 Dec 2012

Pratik Agarwal, Head - Infrastructure Business, Sterlite Technologies Limited says that transmission’s sector is the core focus of the company at the moment. In a candid conversation with InfralinePlus, he emphasises that lenders must not club power transmission and power generation together and instead consider transmission as a separate entity. He insists that planners should carefully look at the quality, background and transmission experience of the developer before allotting the project. He also says that transmission is a growing opportunity in India and anyone who has a good capital access and an expert project management team in place, can quickly scale up in this business.

What is the present situation of the transmission sector in the country? Have the recent reforms been of any help?

The regulatory framework under which we operate is quite progressive and supportive of competition in the transmission sector. The regulators have recently implemented a pooling mechanism by which all the transmission tariffs in the country are getting pooled and all the transmission developers like us would get a part of that pool every month. This reduces the revenue risk for transmission developers substantially, given the current issues faced by the power sector. Also, the government has notified that all future transmission projects would be awarded under the competitive bidding route, which has given the much required boost to investments in this sector. We have found that through the competitive bidding route, tariffs have reduced by 20-40 percent compared to the erstwhile cost plus route. This will help the overall health of the Indian power sector.

What are the measures you expect from the government to remove present roadblocks in the sector?

Although the cost of a transmission line project is a fraction of the cost of the entire power system, it is the most crucial link as it can evacuate thousands of megawatts of power. An important project getting stalled could lead to thousands of megawatts of power getting bottle-necked. The Government, while awarding projects, needs to be careful in selecting only those developers who have demonstrated sound project management and execution skills so that the projects are implemented in time. Huge transmission investments are required in the country in the next 5-10 years and the right developers can give a fillip to the much needed investments in this sector.

There are certain apprehensions among lending institutions for the sector; can you throw light on these and going forward, how do you plan to address them?

There are a few concerns, but we believe these will be allayed over a period of time. Sometimes we find that people do not view power transmission and power generation differently and consider them as similar although their risk profiles are vastly different. For example in generation during construction, there are issues relating to environmental clearances, land and water availability; during operation there are fuel issues as well as issues relating to payment security.

Transmission is relatively risk free. Once constructed, all the risks in a transmission project are eliminated. The only remaining risk, i.e. payment security has now been taken care of by the transmission tariff pooling mechanism, making transmission projects completely risk free. Because of pooling, even if some of the customers associated with the network have financial difficulties or face project delays, it has a minimal effect on the transmission developers. Many of the lenders have understood this, which is why we have been able to financially close all our projects in record time.

The other typical concern is the execution risk. Many believe that the Right of Way & clearances is a serious problem. However, this is not the case always. First and foremost, we must remember that the Government allows transmission providers (under Section 164 of Telegraphy Act) to put the line in someone’s land as long as the crop compensation is paid as per the given guidelines. What then remains to be dealt with, are the local issues which can be dealt with in a favourable manner.

Forest clearance isanother thing that people worry about. First of all, all lines typically don’t have forest. For lines that do have forest, on day one itself, we take all the necessary steps to apply for clearances.As the typical construction period is for 36 months, this gives us a 20-month bufferto get a clearance. This also gives us enough time to complete the part of the line within the forest and do the compensatory afforestation, which is very important. We strongly believe in long term sustainability of our operations and take measures to protect and conserve the environment in all possible ways.

Could you throw light on a few of the projects that you are working on currently? Has the investments been lined up?

Sterlite currently has a portfolio of three projects with a total value of about `40 Billion (~US$ 0.9 Billion). These transmission systems would evacuate and transmit power through a network of about 2,200 km of transmission lines and 2 substations; in the states of Maharashtra, Gujarat, Madhya Pradesh, Chhattisgarh, West Bengal, Bihar and Assam. The first project was awarded to us in 2010 and it will be completed in March 2013. The other two projects were awarded in 2011 and will be completed in March 2014. All the debt has been fully tied up with banks and the equity would be coming from the internal accruals of the group.

Apart from the lenders’ apprehensions, what are the other challenges people in this sector are facing?
Bidding for a transmission line, typically requires around six months of pre-bid work. Sometimes scores of people have to survey the area to estimate the project risks and costs so as to be able to bid in a realistic manner. Those players who do not perform sufficient studies pre-bid can end up submitting an unviable bid and abandoning the project mid-way. So, as mentioned earlier, the government should be careful and select only capable developers.
What is the importance of renewable energy for transmission sector? Do you see the focus of your sector shifting towards renewable energy now, considering the dwindling coal sources?
Firstly, renewable energy in general – regardless of transmission or not – is extremely important and India, in particular, has taken a very strong potential for renewable energy. Being a cleaner source of energy than thermal, we feel that adequate investments in generation and transmission of renewable energy can go a long way in meeting India’s energy requirements. I am sure that the grid planners are taking measures to ensure transmission investments in areas where wind or solar capacities are coming up.
Tell us something about your company? What are its business verticals? What is the contribution of transmission business in your total turnover?

Sterlite Technologies Limited is a leading global provider of transmission solutions for the power and telecom industries. The company is equipped with a product portfolio that includes power conductors, optical fibers, telecommunication cables and a comprehensive telecom systems / solutions portfolio. Sterlite is also executing multi-million dollar power transmission system projects, pan-India, and it’s just early days in this vertical. We entered this segment two years ago, so our first revenues will start in March 2013.

Can you give us an estimate about the size of the sector and the rate at which this sector is growing?

In the transmission space, investments to the tune of `35-40 thousand crore are required every year over the next five years. Around 50% of this would be done by Power Grid and the State Transmission Utilities. The balance would be done by private sector players like us. So, in the twelfth plan (2012-17), aggregate investments to the tune of `2,00,000 crores are being planned in this space.

Are you also planning to diversify into other business models?

Currently, transmission is the core focus of my team as the scale and the opportunity size available is quite huge. As I mentioned earlier, we have good access to capital and have world class project management expertise in-house, which makes it easier for us to focus on projects involving infrastructure building. As a group, we keep looking at other infrastructure opportunities as well. Currently, we are also exploring opportunities in building broadband infrastructure, which we believe would be the next revolution in the country.

(InfralineEnergy thanks Pratik Agarwal, Head-Infrastructure Business, Sterlite Technologies Limited for sharing his valuable insights with our readers. The column 'In-Conversation', is a platform to engage experts from various sectors to share their views on the different transformations happening in the Indian energy sector.)