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Satnam Singh, Chairman and Managing Director, Power Finance Corporation (PFC)

06 Jan 2012

A central non-banking finance organisation, Power Finance Corporation is not only the key funding agency for the power sector, but it is also the nodal agency for R-APDRP (expand) that enables power distribution companies to reduce their losses. The power sector, however, is also grappling with other issues such as environmental clearances, land acquisition and fuel tie-ups. As a result of which, several banks such as Andhra Bank, Allahabad Bank have stopped lending to the power sector companies. Bank of India is restructuring its power loans. Chairman and Managing Director of this lending institution, Satnam Singh, shares his thoughts with InfralineEnergy's Jayashree Maji about the issues facing the power sector and PFC's role in shaping the future of the power sector in India.

Edited excerpts.

Apart from being the primary lending institution for electricity generation and distribution companies, you have also diversified to become a facilitator for fuel tie-ups and equipment manufacturing. How has been the experience so far?

We were only extending financial assistance for generating stations and generating companies, transmission companies and discoms. Having done that for a long time, we thought of expanding our business. So, we did backward and forward integrations. In backward integration, we would extend financial assistance for all those projects, which facilitates either power generation or power transmission or distribution, which means, if somebody is wanting to put up a mine or power project, we would fund that. If somebody is planning to put up power equipment manufacturing plant, we would fund that too. We would also fund gas transportation and manufacturing of transmission equipment. So, we have not taken up the responsibility of fuel tie-ups. We have kept our core business of financing, but extended financing to those projects, which facilitates power generation.

In the forward integration, we have participated in two of the three power exchanges, namely Power Exchange of India and National Power Exchange, of which we are equity partners with a view to facilitate power trading. Also, we have introduced financial products for power exchanges to further facilitate the power trading, which means any distribution company wanting to trade power or buy power through the power exchanges, they can make use of our financial products.

There is an increasing competition in power financing industry. The growth of these financing institutions depends on their competency to offer low effective cost of funds. How do you see PFC's future growth?

I don't think that the low cost is the only basis of competition. Need of the day is quantum of funds. For power projects, nobody bothers about small change in the rate of interest here and there. Suppose, for a Rs 20,000- crore UMPP project, I can give the project developer loan, but I will charge him 10 paisa more. And he goes to 10-15 institutions to collect the total required amount with smaller amounts of Rs 50 crore to Rs 100 crore from each of them. Nobody would like to do that. The purpose is to make the project happen. It can happen only by institutions that have the ability to lend more. While low cost is important, but it is not that important in power project implementation.

"Even though the Act was amended, it gave the power of revising tariffs to independent regulators, even without the discoms asking for it. But the regulators have been passive. So, when the structure has not changed and the actual implementation has not taken place, whom can we blame?"

PFC has been given the opportunity to have tax free bonds of Rs 5000 crore in the current year and at the same time Rs 6,900 crore of infrastructure bonds at the same time. Also, we have set up an MTN programme for foreign currency borrowing equivalent to one billion dollar. All these sources will help us reduce our borrowing costs to some extent, which will help us to lend more and fuel our growth rate.

Finally, you have got the nod for launching the private equity fund for the power sector with a target of the total fund size of US $ one billion (approx. Rs 4,948 crore). How are you planning to shape this up? What kind of partnership are you looking at from outside your organization to build the same?

We have got core competence in power financing. For establishing an equity fund, we need to have the capability to manage funds as well. So, we decided to join hands with a partner, who has core competence in fund management, which the board has approved. Once we select that partner, we will together create an asset management company and a trust that will have various funds. The first fund would be worth 300 million dollar, which is around Rs 1500 crore. Each of us would contribute five percent and for the balance, we will offer others to join hands with us. For the asset management company, we will be the partners. The ratio of company holding would be 51:49. But, first of all, we have to come out with the tender.

Discoms' financial losses are much debated. Competition doesn't work without economic freedom. What are the real problems with discoms? Credit rating is management tool to sensitise the stakeholders. What exactly needs to be done at ground level to free the discoms from losses, empowering them to realise a competitive electricity market place?

We have been lending for the past 25 years and ever since, the discoms are making losses. There is nothing new about it. What is to be done is that the problems have to be seen along with other initiatives, which are currently under implementation. Are they having some impact or not? Is the government taking any action or not? If you look at the past data, the losses of the discoms have come down from 38-39 percent to 27 percent. Even though the Act was amended, it gave the power of revising tariffs to independent regulators, even without the discoms asking for it. But the regulators have been passive. So, when the structure has not changed and the actual implementation has not taken place, whom can we blame? The action has been initiated.

The Act provides for the compensation of fuel escalation on automatic basis. But all these have not been implemented so a power minister's conference was organised in July 2011, wherein, all the power ministers of the states, who were present has unanimously passed 14 resolutions which include all these actions. We have asked the states to give us a time bound implementation plan for these resolutions. Three of the states, Madhya Pradesh, Rajasthan and UP have responded and the rest we are in correspondence.

"The power minister's conference has taken place and regulations have been passed, which are meant for implementation, wherein all issues such as tariff increase, the time of the day meter introduction, payment of fuel escalation, the payment of balance subsidy and bidder's segregation are included."

The Ministry has also taken up with Appellate Tribunal to ask the regulators why they have not revised tariffs when they have the authority. Also, came up the issue that banks are lending to these discoms without any strict condition.

The Ministry of Power took the issue up with the Reserve Bank and the Ministry of Finance. Some of the banks have probably stopped lending now. That has caused another problem. But we along with the Ministry are working on deciding a uniform rating mechanism for lending both for long-term as well as for short-term.

This credit rating mechanism is just a tool to position these procurers for the purpose of lending. How will this help in reducing the financial losses?

No. Suppose, there is a criteria based on which I have to lend to the discoms. So, when I say no to them that means they haven't fulfilled the criteria. The discoms also know the reason behind that. Then, of course, they will have to make corrections in their organisations and come back. But this is not the only action which is being taken. Simultaneously, the power minister's conference has taken place and regulations have been passed, which are meant for implementation, wherein all issues such as tariff increase, the time of the day meter introduction, payment of fuel escalation, the payment of balance subsidy and bidder's segregation are included.

PFC has been nominated as 'Bid Process Coordinator' by Ministry of Power, Government of India for the development of Independent Transmission Projects. Where is this segment of the power industry heading to? How has been the experience so far?

Our experience is similar to the experience with the UMPP initiative. We have so far successfully awarded two ITPs and we are working on two more, which has been assigned to us by the Ministry of Power. Our experience has been that the prospective bidders floated tariff transmission, which was almost 60 per cent of what was quoted earlier. And the objective here is to create competition and bring privatisation.

RAPDRP is an ambitious central scheme. What is the progress/ success rate so far? Working Group on Power in its XII Plan report is recommending for six pilot projects for IT implementation in Indian towns. What is smart grid vision for India?

We are the nodal agency for RAPDRP and we are implementing it aggressively. Whatever was our role as far as selecting a consultant, making of various contracts to be awarded, all that has been done. The states have also awarded Part A projects and for Part B, it is in the process of awarding. As far as implementation is concerned, the first thing is that the amount envisaged regionally in this scheme was pretty high- Rs 10,000 crore for Part A and Rs 40,000 crore for Part B.

In Part A, we have been able to award about Rs 7000 crore, a saving of Rs 3000 crore because of huge competition. Part B may be completed in about Rs 25,000 crore- Rs 27,000 crore. There will be some saving. For the first time in the history of the Indian power sector, the IT companies have been involved to bring down the electricity losses. However, they have been facing certain problems with respect to the asset mapping as well as consumer indexing. They probably did not envisaged that it will involve such kind of huge work.

The whole objective is to integrate the various towns with the datacenter. As of now, about 64 towns have been integrated. Integration of town means that the authorities can start controlling the losses with administrative measures itself because you can find out which line, what the loss level is and which group of consumers is actually stealing the power.

Is it not that R-APDRP, an IT initiative, is the first step towards injecting a smart grid in India?

Yes, of course. Firstly, you have to achieve complete networking solution, before you can take on smart grid because it is an improvement of the network.

(InfralineEnergy thanks Satnam Singh, CMD, PFC 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.)